Trade secret. Protection and consequences of disclosure

By Ekaterina Kalinkina, Head of Branch Office Intercomp Ryazan

Although everybody knows the term “trade secret”, in practice, many do not fully understand what it refers to and exactly how to protect the confidentiality of information constituting trade secret.

We, at Intercomp, work with our clients’ confidential information every day (payroll calculations, employee hiring and dismissal) as it would be impossible to provide legal support without such information. This is precisely for this reason that we pay great attention to trade secret and confidential information. Below we will review ways to protect trade secret and the consequences of its disclosure.

Trade secret or confidential information?

First, the notions of “trade secret” and “confidential information” should not be confused. Confidential information is a broader concept, while trade secret is in fact a particular type of confidential information

Personal data, secrecy of investigation, professional confidentiality (for example, medical confidentiality), professional secret, secrecy of proceedings, data on inventions or discoveries before their official publication and, of course, trade secret are all confidential information.

All information classified as trade secret is confidential information, but not all confidential information can be a trade secret.

What can be classified as trade secret?

The right to classify information as trade secret is conferred to the holder of such information, and the holder of information is the entity who owns information on legal grounds.

It should be noted, though, that such information must also meet certain criteria and should not be in the list of information which by law cannot constitute trade secret.

Federal Law No. 98-FZ On Trade Secret (further “Law No. 98-FZ”) is the main document regulating matters of trade secret.

Criteria for information that may constitute trade secret:

  • Information whose actual or potential commercial value is derived from the fact that it is unknown to third parties;
  • Third parties do not have lawful free access to such information;
  • The holder of information has put in place a procedure for its non-disclosure.
List of information that may constitute trade secret:
  • Information from management reporting
  • List of clients and potential transactions
  • Budgets
  • Contract terms and conditions
  • Methodology and pricing principles
  • Strategic plans
  • Investment projects
  • Marketing research
  • Business correspondence
  • Staff salaries

Information that may not constitute trade secret (Article 5 Law No. 98-FZ):

  1. Information from foundation documents, from documents confirming the recording of legal entities and individual entrepreneurs in the relevant state registers;
  2. Information from documents granting the right to engage in entrepreneurial activities;
  3. Information about environmental pollution, fire safety, sanitary and radiation conditions, food safety and other factors with a negative effect on safety;
  4. Number and composition of employees, remuneration system, working conditions, including health and safety, figures of work accidents and occupational diseases, number of vacancies;
  5. Amounts owed by employers for payment of wages and other social benefits;
  6. Amounts and structure of income derived by non-profit organizations, amounts and composition of their assets, expenses, staff number and employee salaries, information on the use of volunteer work;
  7. List of persons entitled to act on behalf of a legal entity without power of attorney;
  8. Terms of tenders and auctions for the privatization of state or municipal property;
  9. Assets owned by state or municipal unitary enterprises, state institutions and how they use public funds.

It should be noted that sectoral laws and regulations may set out certain restrictions on information constituting trade secret. For example, Article 13(11) of Federal Law No. 402-FZ On Accounting provides that no non-disclosure procedure may be put in place in regards to financial statements.

Protection of trade secret

Let’s move onto the main point: How is trade secret protected under the law?

One effective way of protecting trade secret is to introduce a non-disclosure procedure. To do so, it is necessary to draw up the required documentation and put in place a number of measures intended to protect confidential information.

Companies may protect the rights conferred by law only if they have put in place a procedure for non-disclosure of trade secret in compliance with the requirements set out in Law No. 98-FZ.

What needs to be done?

Companies develop on their own their non-disclosure procedure taking into account the specificity of their own activities and set it in internal documents (bylaws, regulations, orders, etc.)

To set up a non-disclosure procedure, most companies, as a rule, choose to draw up a Trade Secret Policy which is subsequently approved by their head.

When establishing a non-disclosure procedure, companies should consider the following points and:

  1. Make a clear list of confidential information constituting trade secret.
  2. Set out a procedure for handling such information.
  3. Specify the persons who are granted access to such information.
  4. Indicate how the material carriers of trade secret should be marked, who is entitled to handle them and how this should be recorded.
  5. Indicate how it will be protected and how will be in charge of monitoring protection.
  6. Specify the liability for disclosure of trade secret.
  7. After development and approval of the policy, it is then necessary to make appropriate changes to other internal documents (employment contracts, job descriptions, department regulations, provisions on work with counterparties, etc.)
  8. Ensure that employees have acknowledged and signed newly approved documents (for example, by signing an employee acknowledgement log).
  9. Obtain from each employee a written commitment to keep information confidential.
  10. Put in place all necessary conditions for employees to follow the non-disclosure procedure established by the company (for example, store documents containing confidential information in lockable cabinets, safes, ensure access to computers through a personal login and password, etc.)
  11. Provide in contracts with counterparties that all information related to contract performance is confidential and may be transferred and disclosed to third parties only by mutual agreement of the parties with the exception of regulatory agencies, courts and other state authorities.

It is also possible among companies as well as with certain counterparties to sign a non-disclosure agreement (NDA). The conclusion of an NDA confers additional protection of confidential information and prevents its dissemination.

The introduction of a procedure for non-disclosure of trade secret will not provide maximum protection if the company’s software and hardware packages are not reliable. The software products in use should be of the highest level of security for data transfer, processing and storage. It is important to protect commercial data from viruses or remote access, prevent unauthorized copying, deletion, ensure identification of users with access, etc.

Consequences of trade secret disclosure

Trade secret is especially valuable, and the law provides various sanctions for its disclosure. Article 14(1) of Law No. 98-FZ sets out that an offender may be brought to disciplinary, civil, administrative or criminal liability.

The main penalties for disclosure of trade secret are presented in the table below.

 

Liability

Ground

Offense

Penalty

Administrative

Article13.14 Russian Code of Administrative Offenses

Disclosure of information access to which is restricted by federal law (except in cases where disclosure of such information entails criminal liability) by a person with access to such information for performance of work or professional duties

-Fine from RUB 500 to RUB 1,000 for individuals;

- Fine from RUB 4,000 to RUB 5,000 for company officers

Civil

Article 11(3 and 4) Federal Law No. 98-FZ

Article 243 Russian Labor Code

Disclosure of information constituting trade secret by a person with access to such information for performance of work duties, whether employed or dismissed, if this information is disclosed during the validity term of the non-disclosure procedure in place

Disclosure of trade secret by an employee with whom a full material liability agreement is entered into

-Compensation for damages caused by violation of the rights of the holder of information constituting trade secret

-Full material liability for damage caused;

Disciplinary action

 Article 81(6) Russian Labor Code

   

Disclosure of information constituting trade secret which became known through performance of work duties

-Termination of employment contract by employer

Criminal Article 183 Russian Criminal Code

1)Collection of information constituting trade secret by stealing documents, bribery, threat or other unlawful means                     

2)Unlawful disclosure or use of information constituting trade secret without consent

3)If the above actions caused major damage (over RUB 2,250,000) or were performed to a self-serving end

4) If the above actions resulted in serious consequences

- Fine of up to RUB 500,000 or the offender’s salary or other income for a period of up to one year;

- Correctional work for a period of up to one year;

- Community service for up to two years;

- Imprisonment for up to two years.

- Fine of up to RUB 1,000,000 or the offender’s salary or other income for a period of up to two years with disqualification to hold certain positions (engage in certain activities) for up to three years;

- Correctional work for a period of up to two years;

- Community service for up to three years;

- Imprisonment for up to three years.

- Fine of up to RUB 1,500,000 or the offender’s salary or other income for a period of up to three years with disqualification to hold certain positions (engage in certain activities) for up to three years;

- Community service for up to five years;

-Imprisonment for up to five years.

- Community service for up to five years;

- Imprisonment for up to seven years.

How we can help

  1. We can draft regulations on trade secret.
  2. We can review and revise internal documents so that they provide for a procedure for non-disclosure of trade secret.