Trade secrets laws should offer protection against reverse engineering, says Max Planck Institute

The Max Planck Institute for Innovation and Competition said that proposals for a new EU Trade Secrets Directive should be amended (18-page / 441KB PDF) to give better protection to product developers that have invested in their products but who do not have protection from traditional intellectual property (IP) rights.

"The use without restrictions of trade secrets obtained through reverse engineering appears problematic, in particular in sectors where – other than in the case of software – no intellectual property protection is available, although considerable investments are made in the development of new products," the Institute said. "Notable examples include the cosmetic industry, which regularly invests quite heavily in the development of perfumes, but where the know-how generated thereby can be decoded with relative ease through reverse engineering."

"The unrestricted use of such know-how raises concerns that it could pose a substantial threat to the companies concerned, eventually leading to market failure whereby such goods would no longer be produced. Accordingly, it must be assessed whether the existing (quite problematic) prohibition on advertising such products as imitations or replicas should be replaced by other measures that are directly aimed at protecting the relevant interests," it said.

Intellectual property law expert Iain Connor of Pinsent Masons, the law firm behind Out-Law.com, said that providing protection against reverse engineering is not a simple issue to address.

"IP rights and protection for trade secrets needs to strike a fair balance between the protection afforded the creator and the rights of others to compete fairly," Connor said. "The perfume example is a poor one from my experience having acted in the leading case on smell-a-like perfumes – L’Oreal v Bellure – where the evidence showed it is impossible to recreate the exact fragrance of a perfume by reverse engineering.”

“The perfume example is also poor because the evidence in the L’Oreal v Bellure case showed that rather than leading to market failure the presence of smell-a-like perfumes actually served as a feeder to the luxury market perfumes and brands, enhancing rather than detracting from their cache, and leading to a new market sector at the bottom end of the market increasing customer choice," he said.

Earlier this year, Paris-based intellectual property law expert Emmanuel Gougé of Pinsent Masons highlighted industry lobbying against plans that could legitimise reverse engineering of trade secrets.

"The rules, as currently drafted, consider the acquisition of trade secrets to be lawful if that acquisition occurred as a result of ‘observation, study, disassembly or test of a product or object that has been made available to the public or that it is lawfully in the possession of the acquirer of the information who is free from any legally valid duty to limit the acquisition of the trade secret’. A number of industry bodies are heavily lobbying against that provision," he said.

In autumn 2013 the European Commission published plans for a new Trade Secrets Directive in an effort to harmonise the legal framework around the unlawful acquisition, disclosure and use of trade secrets across the EU.

To qualify for protection under the Commission's plans, information would have to be secret, have commercial value because of its secrecy and have been the subject of "reasonable steps under the circumstances, by the person lawfully in control of the information, to keep it secret". Information would be said to be 'secret' if "it is not, as a body or in the precise configuration and assembly of its components, generally known among or readily accessible to persons within the circles that normally deal with the kind of information in question".

In May this year, EU law makers within the Council of Ministers gave their backing to proposed changes to the Commission's proposals. Among the amendments recommended by the Council was the extension of the maximum limitation period that the Commission proposed to set for initiating legal action over the infringement of trade secrets from two years to six years.

However, in its paper assessing the Councils' proposals, the Max Planck Institute said it supported a maximum limitation period of three years. The three year period in which claims can be brought against alleged trade secrets infringers should not be said to start until the end of the last in any sequence of actions relating to that infringement, it said.

"While unlawful acquisition and disclosure usually take place in the form of individual actions, unlawful use regularly occurs in the form of a sequence of similar actions," the Institute said. "In particular, in the different stages of production and marketing of the good in which the impugned trade secret is embodied, claims brought in litigation do not concern one individual action, but rather a series of acts. Hence, either a different limitation period commences after each action or the limitation period for all of them starts running only after the last of the relevant actions begins."

"By solely referring to awareness of the last fact giving rise to the action as the event triggering the commencement of the limitation period, [the draft Directive] does not provide for a clear rule in cases in which infringing goods have been marketed during an extended period of time. In view of this, the proposal should clarify … that the limitation period for continued actions begins when the last action ends. Furthermore, the limitation period should be three years instead of the proposed two-year period," it said.

The Institute also said that the Trade Secrets Directive should refer to civil infringements of trade secrets only and prevent "the application of criminal rules that are premised on a higher protection level" than those laid out under the new framework.

It also said that the new Directive should explain that existing EU rules relating to the enforcement of intellectual property rights cannot be applied to trade secrets.