Equitable duties of confidence and the Trade Secrets Directive – where are we now?
In a recent case, Trailfinders Ltd v Travel Counsellors Ltd & Ors  EWHC 591 (IPEC) (12 March 2020), the High Court has confirmed that the equitable duty of confidence is not affected by the EU Trade Secrets Directive. We take a step back and look at where the law around confidential information comes from, what the Trade Secret Directive meant for UK law, and why this clarification is helpful.
Directive (EU) 2016/943 on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition (the Trade Secrets Directive) came into force in 2016 and was implemented in the UK in June 2018, to the extent that was thought necessary.
Where were we before the EU Directive?
Under UK common law, the protection of confidential information arises from an equitable principle, independent of statute or contract. Where information that is secret or confidential in nature is given by one person to another, and the recipient is either expressly told by the discloser, or ought reasonably to understand from the circumstances surrounding the communication, that the discloser wishes the recipient to keep the information confidential, then equity acts on the conscience of the recipient to prevent them from making an unauthorised use or disclosure of the information.
Generally for trade secrets or other information to be protected under the common law of confidentiality, three requirements must be met:
- the information itself must have the necessary quality of confidence;
- the information must have been imparted in circumstances importing an obligation of confidence (either expressly, or which ought reasonably to have been understood by the recipient); and
- there must be an unauthorised use of that information to the detriment of the rights holder.
So usually an NDA is used in a commercial setting as it is useful from an enforcement perspective, but it is not legally necessary to enter into an NDA as the duty of confidentiality arises independently from equitable principles.
Why was the Trade Secrets Directive necessary?
The Trade Secrets Directive sought to address the different measures and remedies for trade secret infringement across EU member states, by creating a minimum level of protection in and across all EU states. Although the UK's common law framework for protecting trade secrets as a form of confidential information is robust and well established, this was not the case everywhere.
Consequently the Trade Secrets Regulations are intended to run in parallel and supplement rather than replace the protection afforded to trade secrets under the UK common law of confidence.
One of the key outcomes of the new statutory regime, in addition to procedural issues and limitations, is a new statutory definition of "trade secret", as opposed to the alternative 3 stage common law test discussed above.
Under regulation 2 of the Trade Secrets Regulations a "trade secret" means information which -
- is secret in the sense that 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,
- has commercial value because it is secret, and
- has been subject to reasonable steps under the circumstances, by the person lawfully in control of the information, to keep it secret.
As the Trade Secrets Directive does not replace common law, the overall effect is said to be that a trade secret holder can apply for remedies under the common law of confidentiality either in addition, or as an alternative, to the remedies provided under the Trade Secrets Regulations where the common law provides wider remedies than those provided under the Trade Secrets Regulations (and those remedies comply with Article 1 (Subject matter and scope) of the Trade Secrets Directive).
Article 1 for example provides that the Directive shall not affect the exercise of the right to freedom of expression and information nor offer any ground for restricting the mobility of employees. This interplay has not yet been expressly addressed by the courts.
Why is this case helpful?
This case is thought to be the first judicial reference made to the Trade Secrets Directive and its interplay with the common law of confidence and therefore provides useful clarity on how the parallel regimes work in practice.
Specifically in relation to breach of confidence, Hacon J found that former employees of the travel agency Trailfinders were in breach of their duty of confidence owed to Trailfinders when setting up in competition with their former employer. They had also committed unlawful acts within the meaning of the Trade Secrets Directive.
The judge acknowledged that the substantive principles governing the protection of confidential information under English law, including that afforded by equitable obligations of confidence and terms implied into contracts of employment, are unaffected by the Directive, further stating that "the Directive shines an occasional light on those principles".
Interestingly it was also stated that the Trade Secrets Directive provides a definition of trade secret (article 2(1)) which is now the "best guide" to the distinction between information which is confidential and that which is not. This is interesting again as the Trade Secrets Regulations include a requirement for a business to take "reasonable steps" to protect its trade secrets to fall within the statutory definition of "trade secret" (referenced above). There is currently little to no case law or government guidance on what constitutes reasonable steps under the Trade Secrets Regulations.
In the Trailfinders case Hacon J noted that “The protection may not have been as rigorous as it should have been but Trailfinders clearly took steps to ensure that the Client Information was not openly available to anyone by requiring the use of a password or, in the case of Viewtrail, limiting access to information to clients only if their name and booking reference was known”.
So in the UK at least, it would seem that little much has changed since the coming into force of the Trade Secrets Directive, but how the common law and statutory regimes fully work in practice is still emerging.
It also remains to be seen how the UK courts will interpret the Trade Secrets Regulations after Brexit. Technically the UK will no longer be under an obligation to harmonise UK law with EU law. However, from a practical standpoint and in order to retain the benefits of consistency with the EU approach, the courts may consider it beneficial for UK persons and businesses to have the same protection of their trade secrets in the UK as throughout the EU.
News & Insights
Conditional payment clauses in the UK and Middle East
Niel Coertse writes for Practical Law Construction on how conditional payment clauses help to prevent cash flow difficulties.
The latest edition of our regular competition law update