Trade secret in Russia
Introducing a trade secret regime in a company can help avoiding financial risks, in particular, unfair competition.
For example, the management of a company noted a significant decline in sales. An investigation showed that many regular customers had left for the company’s main competitor which offered better terms and conditions. It turned out that this was all due to a company sales employee who gave information about the company’s clients and prices to this competitor. The litigation to resolve this case lasted 7 months. In the end, the company had to reinstate the employee, pay him his salary for these 7 months and change the dismissal for gross misconduct in his employment record book to resignation.
Introducing a trade secret regime helps minimizing the risks outlined above as such regime sets out certain rules for employees and lists the sensitive information that should be handled carefully. Employees are expressly prohibited to perform certain actions, and the company is entitled to apply methods to restrict access to important information in order to avoid its dissemination as well as methods to figure out information leakage.
If a company has no trade secret regime in place, then it will not be able to demand safekeeping of sensitive information from its employees and counterparties, and if such sensitive information is disclosed, the company will be unable to seek recovery of damages (Article 6.1 Federal Law On Trade Secret). In the absence of trade secret regime, anyone who has received sensitive information can act on the principle that “everything that is not forbidden is allowed” and thus freely transfer, sell and use such information for their own benefit.
What is trade secret?
Companies acquire certain knowledge, skills and technologies such as, for example, recipes, program code or methodology to stand out among competitors as well as provide cheaper or better services and products. If competitors find out about this knowledge or these skills, the company that developed them could lose its market advantages.
To protect their business, the holders of special competitive knowledge may introduce a confidentiality regime to protect such important and especially valuable information, and such regime is what is called trade secret.
What information may be protected by a trade secret regime?
- The law on trade secret provides criteria that information protected by a trade secret regime should meet: such information should not be publicly available or cannot be determined through legal processes (for example, a program script that performs a particular function);
- Such information should confer a competitive advantage or have an economic value (if, for example, a program script determines the solvency of potential borrowers with a high degree of accuracy and predicts that they will fulfill their credit obligations, then such program script will certainly help the bank that uses it to strengthen its market position and has therefore an economic value);
- Reasonable efforts should have been exercised to preserve the secrecy of such information by introducing a trade secret regime (for example, only a limited number of people are entitled to access such information; such information is stored in a secure safe; in case of program script, the persons who have access to this script must understand that it is a trade secret).
Any valuable information conferring a business advantage over competitors, contributing to revenue increase or expense reduction, helping maintaining market position or conferring other commercial benefits may qualify as trade secret.
- Product definitions and specifications, project documentation;
- Product development agreements;
- Business plans, development strategies;
- Financial forecasts;
- Research data;
- Marketing plans;
- Unpublished promotional materials;
- Customer lists;
- Products pending patent applications;
What does not qualify as trade secret?
The law provides that the following information does not constitute trade secret:
- Information contained in foundation documents and documents granting the right to engage in business activities;
- Information about any violations of environmental pollution and people’s safety;
- Employee number and composition, wage system, working conditions and job vacancies;
- Information about any violations of the law and actions against the offenders for these violations;
- Privatization terms and conditions for state property;
- Salary arrears payable by employers;
- Details of the persons entitled to act on behalf of their company without power of attorney;
- Information that must be disclosed by law.
How to put a trade secret regime in place?
The law requires taking a number of reasonable and sufficient measures intended to protect sensitive informationin order to set up a trade secret regime.
Such measures must:
- Prohibit access to information constituting trade secret to anyone who has not the consent of the information owner; and
- Ensure that such information can be used by employees and transferred to counterparties without violating the trade secret regime in place.
What needs to be done?
The law requires to perform the following actions to introduce a trade secret regime:
- Prepare a list of information constituting trade secret;
- Restrict access to such information;
- Record the details of the persons who have access to information constituting trade secret;
- Regulate the use of information constituting trade secret by people engaged under employment and civil law contracts;
- Affix the mark “Trade Secret” on material media and specify the owner of such information.
How is it done in practice?
1. Prepare a list of information constituting trade secret
The information owner must compile a listof confidential information constituting trade secret. The list may consists of one or several entries. It should be noted that this list is to be compiled as carefully as possible. It should be specific and clear. Vague and overly broad wording should be avoided.
The law expressly requires to bring such list to the attention of the company’s employees who should sign it. An order for introduction of secret trade regime should be issued to approve the list of confidential information and the list of employees entitled to access trade secret as well as confirm that trade secret regulations should be developed.
The list can be revised by including or removing information from it at a later date if, for instance, some information has lost its commercial value or new important information needs to be protected. In such case, the revised list should be brought the attention of the company’s employees.
2. Restrict access to information constituting trade secret
Access is restricted by establishing a procedure for handling information constituting trade secret and monitoring compliance with this procedure. The procedure should be described in detail in trade secret regulations.
Trade secret regulations may be adopted by an organization as a whole and some departments, in particular, for more detailed regulation of the tasks to be fulfilled by certain employees. Protective measures such as, for example, access and storage rules, are included in trade secret regulations, as well as special rules for provision of information to counterparties, a list of employees who have access to trade secret, the rights, obligations and prohibitions for trade secret handling as well as liability for disclosure of such information.
For example, trade secret regulations may provide that it is prohibited to print confidential information as well as forward it to personal email address and copy it to a flash drive. They may also provide that documents should be kept in a key-protected box, and computer access should not be possible without password.
Trade secret regulations should be approved by an order issued by the company head.
This document should also be brought to the attention of employees who should acknowledge it by signing it. If at all possible, it would be very good to ensure that employees understand how to work with trade secrets, that they know what information is protected and that they will do what is required to protect such information. Ensuring that the employees have been made aware of the liability for violation of trade secret regime would also be very good.
Once employees are familiarized with trade secret regulations, it is necessary to set up all the conditions required to comply with the trade secret regime in place (get a safe, develop software to control information distribution and protection, etc.) If such conditions are not provided, the secret trade regime will not be deemed put in place.
3. Record the details of the persons who have access to information constituting trade secret
The information owner should coordinate the recording of the details of the persons who have access to information constituting trade secret and/or the persons to whom such information was provided or forwarded. This may be done by maintaining a register of persons, record book, log in which the details of the persons who have access to confidential information are recorded.
4. Regulate the use of information constituting trade secret
Provisions on compliance with trade secret regime and familiarization with the list of information constituting trade secret should be included in employment contracts with employees. Employment contracts may also provide that employees may not disclose confidential information even after their dismissal. The law provides no period for the duration of such obligation so it is up to employers to set it, and it therefore could be three, five and even 10 years at the employer’s discretion.
As soon as a trade secret regime is put in place, the information owner is entitled to demand that legal entities and individuals who have access to information constituting trade secret comply with confidentiality obligations. A Non-Disclosure Agreement (NDA)should therefore be signed to ensure that such information is kept confidential. This agreement should describe as accurately as possible the information constituting trade secret that will be forwarded. We therefore recommend avoiding any vague wording when describing such information in an NDA.
5. Trade secret marking
The law also requires affixing the mark “Trade Secret”on material mediacontaining information constituting trade secretand also indicating the details of the information owner. If a contract with a counterparty contains information constituting trade secret, such contract should also be marked as Trade Secret with the full name of the company owning such information.
What is the liability for disclosure of trade secret?
The disclosure of trade secrets may entail various types of liability depending on the damage caused and disclosure purposes (unlawful receipt of information).
- When employees have violated the trade secret regime in place in their company, they may be:
- Dismissed, i.e. subject to disciplinary actions.Upon disclosure of information constituting trade secret, employees may be dismissed by their employer under Article 81(1(6(c)) of the Russian Labor Code. In such case, the employer must provide evidence that (i) the information disclosed by the employee is a state, official, trade or other secret protected by law or another employee’s personal data, that (ii) the employee has become aware of such information in the performance of his/her job duties, and that (iii) the employee undertook not to disclose such information. If the employee appeals against the employer’s disciplinary action in court, the employer will have to prove that the disclosed information indeed constitutes trade secret.
- Brought to material liabilityif their actions have actually caused direct damage to their employer.
- If someone discloses know-how, then the affected party may seek recovery of losses from that person under Article 1472 of the Russian Civil Code.
People who unlawfully obtained information constituting know-how and disclosed or used such information and people who undertook to keep know-how confidential are among the infringers of the exclusive right to know-how.
Damage compensation for disclosure of information constituting trade secret may be demanded even from former employees if such information is disclosed while the relevant trade secret regime is in place.
- When information is forwarded for personal gain (for example, an employee passes on sensitive information to a competitor), then the following liability arises:
- Administrative liability under Article 13.14 of the Russian Code of Administrative Offenses (disclosure of information to which access is restricted by federal law, disclosure of information by a person who obtained access to such information in the performance of work or professional duties). Fine of up to RUB 1,500 for individuals and RUB 5,000 for company officers.
- Criminal liability under Article 183 of the Criminal Code (unlawful receipt and disclosure of information constituting trade, tax or banking secret). Such liability varies from a fine of RUB 500,000 to imprisonment for up to 7 years and depends on the circumstances of the offense.
- If trade secret is used to gain the upper hand in competition, then the legal entity deriving gain from the secret information may be held administratively liable (unfair competition is subject to a fine of up to RUB 500,000).
How may we help?
Our lawyers have gained extensive experience in preparing the documentation required to put in place trade secret regimes in companies. We would be pleased to advise on or assist with the preparation of documents necessary to introduce such regimes, in particular:
- Order establishing trade secret regime and approving a list of information constituting trade secret
- Trade secret regulations
- Regulations on how to handle documents and information classified as trade secret
- Non-Disclosure Agreement
- Employment contracts with employees working with information constituting trade secret
Feel free to contact us.