TY - JOUR AU - R, Neethu, AB - The author Dr R. Neethu, B.A.L, LL.B, LL.M (LSE, London) Ph.D. (University of Copenhagen) is a fellow at the Faculty of Law, University of Copenhagen. This article Competitiveness in the fashion industry is based on innovation and value created through the creative products emerging from the industry. It is therefore essential to protect creative elements effectively. To this end, the fashion industry invests in protecting intellectual assets through different regimes. While the fashion industry is synonymous with creativity, it has all features of business. Digital transformation is also increasingly changing the fashion industry with information and data modulating the industry. In this context, the success of fashion concerns also depends on protecting confidential information. This article examines the role of trade secrets in the fashion industry and considers the major challenges for trade secret protection in Europe. It also examines the recent changes in the European Union (EU) trade secret law and the recent study published by the EU Intellectual Property Office (EUIPO) on protection of innovation through trade secrets. In undertaking this assessment, the article finds an expansive role for trade secrets in the fashion industry. I. Introduction The growing significance of information and data analytics in business has elicited greater attention be paid to protecting resourceful data in different fields. Innovation drives the fashion industry and the level of such innovation is often flexible, competitive and rapid.1 Just as in most industries, the protection of intellectual capital of the fashion industry in the form of intangible assets serves to boost income through sale, licensing, commercialization and to improve market share of the innovator.2 Although much of the focus of protection of intellectual assets tends to consider rights such as trade marks, designs patents or copyrights, there also exists an acknowledged presence for trade secrets in the fashion sector.3 This is because innovation in the fashion industry, more than in certain other sectors, is very much dynamic and proceeds through competition, even in the absence of intellectual property protection. Fashion innovation may involve several baseline intellectual assets, tangible or otherwise, which may still be confidential. One of the oldest known secrets from textile industry is the manufacture of silk and silk-based products that was closely guarded secret by the Chinese as early as the 5th-century BC.4 Trade secrets are information kept as a secret. Know-how, interchangeably used with trade secrets, includes knowledge and experience of a technical, commercial, administrative, financial or other nature, which is practically applicable in the operation of an enterprise or the practice of a profession.5 Know-how per se may not be protected unless it acquires the status of a trade secret. Under Article 39 of TRIPS, information must possess a commercial value being a secret and the person lawfully in control of the information must have taken reasonable steps, to keep it a secret.6 The person lawfully in control of such information must have the possibility of preventing it from being disclosed, acquired, or used by others without his or her consent in a manner contrary to honest commercial practices. The approaches contrary to honest commercial practices includes breach of contract, breach of confidence and inducement to breach, as well as acquisition of undisclosed information by third parties who knew, or were grossly negligent in failing to know, that such practices were involved in the acquisition.7 Unlike patent law, there is no hurdle of demonstrating the eligibility of subject matter or a novelty requirement for protecting information as a trade secret in comparison to obtaining a patent.8 Some information may not be patentable as such, eg mass of information as to designs and specifications or detailed process information or Big Data, which may not contain any invention but which, nonetheless, may be very valuable as a resource for the specific industry.9 Further, the range and scope of protection of trade secrets make it the most practical and efficient means of protecting fashion industry’s assets.10 Such assets in the fashion sector may range from chemical compositions, processes, raw materials, information on suppliers or buyers, software tools for fashion designing, information pertaining to logistics management, data analytics or any other information related to the creation or development of the fashion house designs or fashion accessories such as perfumes. For instance, ZARA the fashion chain uses a proprietary information technology system with trade secret protected software to shorten its production cycle.11 Zara also use Big Data deriving technologies to seek valuable information for developing its fashion styles.12 Other fashion giants such as Louis Vuitton, Nike, L’Oréal, Chanel and Adidas have also been aggressively protecting their trade secrets. Nike, for instance, has sued three ex-employees for passing confidential information about a footwear design studio to its rival Adidas.13 Nike also sued Ralph Lauren for breach of contract in 2015 when one of its former employee involved in sports apparel designs moved to Ralph Lauren, as the employee had access to sensitive trade secrets and other confidential and proprietary business information, such as detailed product designs, technical specifications for Nike’s new product range.14 These instances demonstrate the importance and relevance of trade secrets in the fashion industry. However, whether and in whatway the fashion industry will benefit from trade secrets is hard to ascertain. II. Challenges for trade secret protection in Europe In Europe, the legal framework for protecting trade secret and business information has been traditionally diverse and followed a combination of contracts and market practice, as well as unfair competition and criminal law. The protection of business secrets was also recognized under EU law.15 Notwithstanding the TRIPS Agreement, and the general recognition of business secrets under Treaty law, there were important differences in the Member States’ legislation as regards the scope of protection of trade secrets against their unlawful acquisition, use or disclosure by other persons.16 In 2016, following, a proposal from the European Commission, the European Parliament and the Council adopted a Trade Secret Directive with the aim of standardizing the national laws and practices in the EU against the unlawful acquisition, disclosure and use of trade secrets.17 Under the Directive, trade secrets are information meeting the following requirements namely: that it 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; it has commercial value because it is secret; it has been subject to reasonable steps … by the person lawfully in control of the information, to keep it secret.18 This definition reflects the wording of Article 39(2) of the TRIPS Agreement.19 Both natural as well as legal persons can hold trade secrets under the directive. Thus companies, irrespective of their organization form, size, market share, area of activity, can seek to protect commercially valuable information.20 Further the new directive is aimed at balancing the needs of industries in the light of new technology based business methods, computer programs, cloud storage and other data driven information that are valuable to different industries.21 The directive has the objective of promoting collaborative development; facilitate collaborative innovation and the sharing of valuable know-how.22 Fashion and creative industries,23 such as the textiles clothing, footwear and leather sectors, operating at the crossroads between arts, business, and technology also benefit from the protection of trade secrets.24 However, there may be a few challenges for the fashion sector, which will be discussed herein. Reverse engineering Reverse engineering involves discovering a trade secret by starting with the known product and working backward to find the method by which the product was developed.25 Reverse engineering may be purely on account of academic curiosity or by a concern for seeking to competitively consider the product of its opponent. Apart from the aim of copying the product, it may also enable identification of possible violation of any of their intellectual property rights.26 The provision under Article 39 (2) TRIPS stresses that there is no absolute property right in undisclosed information. Further, the TRIPS only considers breach of contract or confidence as dishonest commercial practices.27 Thus, it does expressly consider reverse engineering within its purview. It has long been disputed as to if reverse engineering is a fair or unfair practice.28 However, the Trade Secrets Directive makes it clear that ‘reverse engineering of a lawfully acquired product should be considered as a lawful means of acquiring information, except when otherwise contractually agreed’.29 Further the directive consciously recognizes that reverse engineering may lead to parasitic copying or slavish imitations that free ride on the reputation and innovation efforts of the originator. However, it has been left for the European Commission to consider Union action in that area.30 The acquisition of trade secret will be regarded as lawful where such secret is obtained through: Observation, study, disassembly or testing. Or the product was made available to the public or lawfully acquired. Or where the product was free from any legally valid duty to limit the acquisition of the trade secret.31 This may have implications for high-end fashion products, including chemical, fabric or perfume industries because the nature of such materials used in the fashion sector is easily deducible through the process of reverse engineering. In addition, the relatively cheap availability of analytic technologies make the job of reverse engineering fairly easier at the cost of the huge investment and efforts for secrecy by the holder of such information.32 While reverse engineering may prove useful in some instances to revive lost fashion trends, eg the reverse engineering of a Balenciaga vintage dress,33 it may not always be the case. It has been reported by the European Chemical Industry Council, that reverse engineering may lead to loss of turnover of fashion related industry. This may range from 30 to even 100 per cent where trade secrets end up in the hands of a competitor or of a potential new market entrant who would thereby gain an unfair advantage by not having to invest the time and money to develop such knowledge.34 The directive explicitly permits contractual limitations on the freedom of reverse engineering. However, this may require closely knitted contracts with focus on the terms of conditions of the lawful use of such trade secrets. Further, while contractual limitations may work in certain cases such as lawful access for inspection of orders, it may not be possible to extend such restriction to market oriented fashion products. The directive’s liberal stance on reverse engineering is particularly troublesome to industries that depend upon innovative products embodying intellectual investment, which may not be protected as intellectual property rights, as is the case of the perfume sector.35 Conditions of employment The geographical spread of fashion firms offers challenges for protection of trade secret and know-how associated with such firms. As shown by the Nike case, moving jobs often causes tensions between an employee and their former employer. This is because when the employee has worked in a firm over a prolonged period of time the skill set of the employee and the knowledge gained at work become indistinguishable. The Trade Secret Directive tries to ease the tension of employee mobility by providing that does not affect the employee’s use of information gained in the course of the work other than any trade secret protected under the provisions of the directive.36 This apart the directive does not limit any experience and skills honestly acquired in the normal course of their employment.37 This would be a challenge for creative industries where employees are highly specialized working within set patterns, functions or models. It will also be difficult to distinguish and identify what skills are ‘honestly acquired’ and those, which are not. In Vestergaard Frandsen A/S v Bestnet Europe Ltd & Ors,38 the claimant companies appealed against a reversal of their judgment against a former employee that she had misused confidential trade secrets after leaving their employment. According to the claimants, the defendant had continued to use the information imparted to her in her previous employment even after the termination of her contract of employment. Dismissing the appeal the UK Supreme court held that: in a modern economy, the law has to maintain a realistic and fair balance between (i) effectively protecting trade secrets (and other intellectual property rights) and (ii) not unreasonably inhibiting competition in the market place. The importance to the economic prosperity of the country of research and development in the commercial world is self-evident, and the protection of intellectual property, including trade secrets, is one of the vital contributions of the law to that end. On the other hand, the law should not discourage former employees from benefitting society and advancing themselves by imposing unfair potential difficulties on their honest attempts to compete with their former employers.39 The acquisition of a trade secret is regarded as unlawful where there has been unauthorized access to, appropriation of, or copying of any documents, objects, materials, substances or electronic files, lawfully under the control of the trade secret holder, containing the trade secret or from which the trade secret can be deduced.40 In addition, any other conduct, which is contrary to honest commercial practices, would amount to unlawful acquisition of such trade secret.41 The use or disclosure of a trade secret shall also be considered unlawful whenever carried out, without the consent of the trade secret holder, being in breach of a contractual or any other duty to limit the use of the trade secret.42 In the modern fashion business, prominent brands out-source or sub-contract the creation of their designs to other business units. These creations may involve the know-how of such sub-contractors who are involved in the creation of a trendsetter. For instance in the case of World Tricot v Chanel, the Paris Court of Appeal ordered Chanel to pay damages for counterfeiting the pattern of its sub-contractor WorldTricot.43 The difficulty in such cases is that once a trendsetter is developed and widely associated with a given brand, it may be difficult to rescind even though it involves the subcontractor’s know-how.44 Digital economy and trade secrets Another emerging challenge for trade secrets is the EU’s evolving move towards digital economy. The growing importance of the digital environment creates new opportunities for the fashion industries. Use of digital technologies in wearable fashion and innovative fabrics containing information and communication technologies applied across sectors, such as sports, health, aeronautics etc are increasingly gaining attention. For instance, the wearable D-Shirt of Cityzen Science is made of intelligent textiles. Such technologies involve numerous elements including software and other technological tools that benefit from the protection under trade secret law. In addition, internet-based sales of fashion goods create a strong online presence that may also help create a modern and dynamic image and build more commercial opportunities for fashion firms.45 However, illicit business practices often discourage fashion companies from taking full advantage of digitalization. It was not long ago that Louis Vuitton reported digital theft of trade secrets by a senior VP.46 Such instances require attention to digital tools that ensure encryption and monitoring of a company’s commercial secrets. Even though the Trade Secret Directive does not refer to digital environment, it sets the minimum standards applicable to it. However, it is ultimately the responsibility of the industry to take definitive steps and measures for the endurance of its trade secrets. III. Conclusion Trade secrets have been gaining importance within highly competitive business environments such as in the creative industry that responds to the new and evolving needs and wants of current and potential customers. This requires improved goods and services by protecting valuable information that is key to the industry. In a study conducted by the EUIPO in July 201747 in 23 EU Member States, it was noted that the use of trade secrets for protecting innovations is higher than the use of patents by most types of companies, in most economic sectors. The report analysed around 73 core industrial sectors. Among these the textile industry held around 46 per cent of trade secrets. Wearing apparel had comparatively lesser use of trade secrets: around 34.3 per cent use. The highest percentage of use of trade secrets was found in the chemical and chemical product based industries, which was around 64 per cent. Other fashion sectors such as leather and leather products had the smallest percentage of trade mark use amounting to around 21.7 per cent only. Overall this clearly demonstrates the growing importance of trade secret protection within the fashion industry in Europe. There is a growing domain of trade secret law and evolving jurisprudence for trade secret protection for the coming years, especially in the light of the fairly new Directive on protection of undisclosed know-how and business information. Nonetheless, the fashion sector needs to take up active measures in alignment with the directive with a view to strengthening its business information. In this regard, the creative industry and fashion houses need to pay closer attention to employee procedures, which must highlight the company’s policy for trade secret protection. Attention must also be paid to non-disclosure or confidentiality clauses with both employees and potential clients with whom business information may be shared for the purposes of the concern. Every employee contract must be updated to involve any new trade secret that the company may have in place. Digitally transmitted trade secrets must be encrypted. This must involve confidential marking to alert the handler of the nature of such information. At the same time, care must also be taken to share such information to limited employees on a need-to-know basis. Fashion houses must also proactively consider trade secret audits from time to time just as IP audits.48 Such efforts will reinforce the strength the fashion industry in protecting its confidential information through trade secret law. Footnotes 1 A Wulf, ‘A Comparative Approach to the Protection of Fashion Innovations, Paper 39’ (Berkeley Center for Law and Technology 2007). 2 WIPO, A Stich in Time, Smart Use of Intellectual Property by the Textile Companies (2005). 3 ibid. 4 accessed 13 May 2018. 5 Question 53 A, The know-how—Definition—Legal regime, AIPPI. 6 ibid. 7 WTO, TRIPS overview. 8 Navigating the protection of big data, Intellectual Property Magazine’s December/January 2017 issue, 54. 9 Study on Trade Secrets and Parasitic Copying (Look-alikes) MARKT/2010/20/D. 10 ‘Valuable Yet Vulnerable Trade Secrets in the Fragrance Industry’, IFRA position paper for EU Commission (2010). 11 Supra note 2. 12 (accessed 31 July 2018). 13 WIPR News, (accessed 31 July 2018). 14 . 15 Varec v Belgium, [2008] 2 CHLR 24 . 16 Recital 6, Directive (EU) 2016/943. 17 Directive (EU) 2016/943 of the European Parliament and of the Council of 8 June 2016 on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use and disclosure. ELI: . 18 art 2 (1), Directive (EU) 2016/943. 19 See also 18 US Code s 1839. 20 Recitals 2 and 3, Directive (EU) 2016/943. 21 See n 19. 22 See n 16. 23 Also referred to as CCIs or Cultural and creative industries which are knowledge-intensive, based on individual creativity and talent, they generate huge economic wealth and preserve European identity, culture and values. CCIs include a number of subsectors, such as architecture, archives and libraries, artistic crafts, cultural heritage, design, fashion, film, high, end, music, performing and virtual arts, publishing, radio, television and video-games. accessed 13 May 2018. 24 European Commission, Growth in Sectors, Textiles, Fashion and Creative Industries. 25 . 26 A Ohly, ‘Reverse Engineering: Unfair Competition or Catalyst for Innovation?’ in W Prinz zu, Waldeck und pyrmont and others (eds), Patents and Technological Progress in a Globalized World: Liber Amicorum Joseph Straus (Springer 2008) 535–52. 27 footnote 10 under art 39, TRIPS. 28 ibid. 29 Recital 16, Directive (EU) 2016/943. 30 Recital 17, ibid. 31 art 3(1) (b), ibid. 32 See n 11. 33 accessed 10 May 2018. 34 CEFIC, Trade Secrets—Facts & Figures on the Chemical Industry in Europe (14 March 2013). 35 Comments of the Max Planck Institute for Innovation and Competition On the Proposal of the European Commission for a Directive on the Protection of Undisclosed Know-how and Business Information (Trade Secrets) Against Their Unlawful Acquisition, Use and Disclosure of 28 November 2013, COM (2013) 813 Final, Max Plank Institute for Innovation and Competition Research Paper No 14-11, para 11 (2014). 36 art 1(3) (a), Directive (EU) 2016/943. 37 art 1(3) (b), ibid. 38 [2013] WLR(D) 200, [2013] ICR 981, [2013] IRLR 654, [2013] EMLR 24, [2013] UKSC 31, [2013] 1 WLR 1556, UKSC 2011/0144. 39 ibid fn 40, para 44. 40 art 4(2) (a), Directive (EU) 2016/943. 41 art 4(2) (b), ibid. 42 art 4 (3) (c), ibid. 43 World Tricot v. CHANEL, Paris Court of Appeal, September 14th 2012, accessed 13 May 2018. 44 Trade Secrets EU Challenge in a Global Economy, IFRA Position Paper, 09/02. 45 Policy options for the competitiveness of the European Fashion Industries , SWD(2012) 284 final/2. 46 . 47 ‘Protecting Innovation Through Trade Secrets and Patents: Determinants for European Union Firms’ accessed 10 May 2018. 48 WIPO Trade secret teaching materials. © The Author(s) 2018. Published by Oxford University Press. All rights reserved. This article is published and distributed under the terms of the Oxford University Press, Standard Journals Publication Model (https://academic.oup.com/journals/pages/open_access/funder_policies/chorus/standard_publication_model) TI - The hush-hush in the fashion closet and EU trade secret law JO - Journal of Intellectual Property Law & Practice DO - 10.1093/jiplp/jpy126 DA - 2018-11-01 UR - https://www.deepdyve.com/lp/oxford-university-press/the-hush-hush-in-the-fashion-closet-and-eu-trade-secret-law-eEBTLfIlXp SP - 896 VL - 13 IS - 11 DP - DeepDyve ER -