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Keeping your trade secrets safe – a European perspective for franchisors

15/07/2019
The EU Trade Secrets Directive (2016/244/EU) (the "Directive") sets out to harmonise the protection of trade secrets in all Member States in the European Union. This update will examine how the Directive has been implemented across a number of jurisdictions and comment on what this means for franchisors, or indeed any party, which is engaging third parties to sell their products and services.

The EU Trade Secrets Directive (2016/244/EU) (the "Directive") sets out to harmonise the protection of trade secrets in all Member States in the European Union.

This update will examine how the Directive has been implemented across a number of jurisdictions and comment on what this means for franchisors, or indeed any party, which is engaging third parties to sell their products and services.

  1. What is a trade secret under the Directive?

A trade secret is defined as any information which:

  • is secret, in the sense that it is not generally known among, or readily accessible to, persons within the circles that normally deal with the kind of information in question;

  • has commercial value because it is secret; and

  • has been subject to reasonable steps under the circumstances, but the person lawfully in control of the information, to keep it secret.

This is a reasonably broad definition. Although there are some areas of ambiguity (how much must information be worth to be recognised as having "commercial value", for example), this definition is likely to broaden the protection of confidential information – particularly across jurisdictions that had limited protections previously. The Directive is also a minimal rule and allows for countries to legislate beyond its provisions.

  1. Has the Directive been implemented?

Largely, yes. Below is a summary of the legislative position in seven key European jurisdictions:

  • United Kingdom

The Directive was implemented in the UK on 9 June 2018 by the Trade Secrets (Enforcement, etc.) Regulations 2018 (the "Regulations"). Before this, trade secrets were protected in the UK through the common law of confidence. The case law has not been superseded by the Regulations, but instead runs in parallel. The Regulations, therefore, do not impose any significant deviations from the common law system, but instead provide additional detail. The main changes are procedural and enable trade secrets to be enforced independently of contractual agreements (e.g. non-disclosure agreements). This includes new remedies that are available for any unauthorised use of a trade secret, such as being able to obtain an injunction against unauthorised use.

  • Germany

The Directive was implemented by the new Trade Secrets Act which came into force on 26 April 2019. German law previously had protections in place in unfair competition legislation and in the German Civil Code. The new act mirrors the definition of trade secret as set out in the Directive and provides additional penalties and available remedies (such as a claim for the destruction of trade secrets).

For more information on the new German trade Secrets Act please see here.

  • France

There was no specific protection in relation to trade secrets before the Directive. France implemented the Directive though the Trade Secrets Act. The provisions of the new act came into force in French law on 1 August 2018 but the act was only formally adopted on 11 December 2018, due to constitutional challenges to the provisions. The act closely mirrors the provisions of the Directive. However, the act does not provide comprehensive legislation as it does not provide for certain important practical points, which are anticipated to be addressed in upcoming regulations.

  • Belgium

The Directive was implemented in Belgium on 22 August 2018. Before this, trade secrets were protected in criminal law, employment law and laws relating to unfair trade practices. The new legislation does not impose significant changes to the existing law (although employment law has been revised to include the definition of trade secret) but adds new protections, such as a specific cause of action that arises from the unlawful obtaining, use and dissemination of a trade secret.

  • Italy

The Directive was implemented in Italy through the Legislative Decree n. 63 of May 11, 2018 and this was published in the Italian Official Journal on 7 June 2018. There were already significant protections in Italian law in criminal law, unfair competition, intellectual property rights and employees duties so the Directive was not fully adopted. Instead, the Intellectual Property Code and Criminal Code were amended in line with the provisions of the Directive. In particular, the new Decree introduces the following key changes:

  • The Decree strengthens the position of franchisors by including sanctions for negligent disclosure by third parties.

  • The new rules are subject to a 5 year limitation period for bringing a claim, which is 5 years shorter than the limitation period for general contractual claims.

  • The Criminal Code has been updated to include new sanctions, including up to 2 years' imprisonment for unauthorized acquisition or use of trade secrets.

  • Spain

The new Business Secrets Act was approved on 20 February 2019, and it came into force on 13 March 2019, implementing the Directive in Spain. The act is the first law in Spain that specifically regulates business secrets (i.e. trade secrets), although there were previously some protections contained in criminal and competition law. The new act incorporates the entirety of the Directive and also adds some additional provisions regarding various aspects of business secrets, such as their transferability and co-ownership. It also regulates licences of business secrets and its transferability. The new law foresees for the first time in Spanish law civil actions for the defence of trade secrets and injunctive relief measures. 

  • Netherlands

The Directive was implemented on 23 October 2018 by the Law on the Protection of Trade Secrets. For the most part, this law replicates the Directive although it does contain additional provisions and clarifies that there is sufficient legal basis for the judicial appropriation of property for the enforcement of trade secrets.

  1. What does this mean for franchisors?

In general, the Directive is a good thing for franchisors as the protection of trade secrets and confidential information is key to the success of a franchise system. The level of impact varies from country to country depending on what previous protections were in place. Although the Directive does not replace any existing local laws, and different jurisdictions have implemented the Directive in different ways, there are some consistencies. The primary example of which is the definition of a trade secret. As discussed above, despite some ambiguity, the definition generally makes it easier to protect trade secrets; however, a key element of the definition is that franchisors will need to demonstrate that they have taken "reasonable steps" in order to rely on the statutory protection. It is therefore prudent for franchisors to consider taking steps such as the following:

  • Internal procedures – consider implementing procedures for separating and securing trade secrets, this could be done through an internal database, and creating an internal policy.

  • IT security – ensure that you install appropriate electronic security measures such as firewalls, secure passwords and encryption.

  • Franchise agreements – review terms and consider revising in line with the new legislation. As best practice, it is advisable to limit disclosure of confidential information to staff of the franchisee to the extent strictly necessary for the operation of the franchised business, and require those key staff to enter into a direct undertaking with the franchisor. For other employees who will come into contact with confidential information, it is important to place an express obligation on the franchisee to ensure their employment contracts contain robust confidentiality clauses, and that the franchisee accepts liability for any unauthorised use by their employees.

  • Employment contracts – review contracts to ensure that confidentiality provisions are up-to-date, clear and workable.

  • Training – ensure you provide relevant training for employees and franchisees on the protection of confidential information.

  • Disclosure – ensure that disclosure of confidential information is staggered throughout the negotiation process and that it is highlighted adequately as being confidential.

  • Audit – build into any existing audit process an audit of a franchisee's security measures, training programmes and procedures for ensuring that confidential information is safe.

  • NDAs – ensure that non-disclosure agreements are entered into which are effectively drafted (and not too broad) and also encompass discussions both before the contract is entered into and post-termination.

  1. Conclusion

Franchisors should continue to take appropriate steps to protect their confidential information. It is important for franchisors to keep evidence of any unauthorised access or use of trade secrets and to act swiftly should this arise (in the UK this is particularly important should the franchisor wish to take advantage of an injunction).

While the Directive does provide an additional layer of protection for trade secrets, the statutory definition – and additional provisions and remedies – does not dilute the importance of contractual terms and protections. Nothing in the Directive undermines or overrules commercial agreement.  Although franchisors may well be able to rely on the statutory definition of trade secret, they should nonetheless continue to ensure that their confidential information is safeguarded contractually.

Co-authored by Rachel Bowley.

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