The Trade secrets Act of July 30th 2018

In the intellectual property field, trade secrets, which are not protected by any title issued by an office, has long been the poor relation of the intangible assets of companies. In French law, in particular, the protection of confidentiality existed, to a certain extent, but used to be divided into many different concepts, according to the areas of law (administrative law, competition law, trade secrets, etc.).

This situation was all the more damaging as, as the European Union notes referring to the illicit appropriation of business secrets: “recent developments such as globalization, increasingly relying on outsourcing, extending distribution chains and intensifying the use of information and communication technology, contribute to increasing risks associated with these practices”.

It is in this context that, after several years of negotiation, the European Union has finally managed to draw up the EU 2016/943 directive of June 8th 2016 on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use and disclosure.

For more information about the adoption of this directive, you can read our communications of May and June 2016.

This directive has been transposed into French law by the Protection of Trade Secrets Act no.2018-670 of July 30th 2018, followed by the implementing decree no. 2018-1126 of December 11th 2018.

The directive and the law are innovative because they create a unified notion of trade secrets (i), improve the judicial mechanisms aiming at its protection (ii) while adjusting its disclosure in case of a trial (iii).

I. THE DEFINITION OF TRADE SECRETS

According to the law, any information which meet the following requirements is protected as a trade secret (art. L.151-1 of the French Commercial Code) :

– It is not commonly known or easily accessible to persons familiar with this type of information because of their business sector;

– It has a potential or effective commercial value, because of its secret nature;

– It is subject to reasonable protection measures from its legitimate holder, according to circumstances, to keep it secret.

Secret information

In accordance with the directive, the law is very broad regarding the type of information likely to be protected: first, it has to be confidential. As a non- exhaustive example, it can be technical information (like expertise, an unpublished patent application), but also any commercial or financial information, etc. Likewise, the information medium does not matter.

Such information may also be subject of intellectual property rights or titles (when they are not published, for instance; copyright, unregistered designs and models, patent put in secret for national defense reasons). Then, the legal protection offered by the latter can be combined with the specific provisions on trade secrets, with different aims: on the one hand, the reservation of a right with the exercise of a monopoly of exploitation, and on the other hand, the sanction of unfair commercial practices.

An effective or potential commercial value

If all type of information fall within the scope of the law, its legitimate holder still has to justify, because the information is confidential, why it has commercial value. This is assessed in particular with regard to the harmful nature that their removal, use or disclosure is likely to cause their legitimate holder, particularly in terms of competitiveness, strategic, financial and commercial interests. Any information giving or likely to give a competitive advantage to its legitimate holder is covered by this definition and can belong to the technical, technical commercial, economic, financial or strategic and organizational sector of the company. Examples include sales methods, consumer profiles, supplier lists, customer files, manufacturing processes, product evaluations, etc.

Reasonable protection measures coming from the legitimate holder

Finally, the third legal criterion requires the implementation of protective measures ‘reasonable given the circumstances’ to maintain confidentiality of information supposed to be covered by trade secrets.

If the use of the term ‘reasonable’ is not legally defined, the first comments about the law consider that companies may plan different levels of protection for the information covered by trade secrets, depending on the nature of information itself, whether it is more or less strategic for the company, but also on the size and budget of the company as well as on therisks of more or less high appropriation of the information.

Finally, the law protects the legitimate holder(s) of the information: depending on the contractual relationship, this may include several companies within a group, a researcher and his institution, a business partner, a licensor and his licensees, etc.

Recommendations

The company needs to take an active approach. The first thing to do to make the identification of confidential information easier is to indicate explicitly it on every relevant document. For example, this can be done by stamping “Secret” or “Confidential” on the digital documents, making sure that this stamp cannot be deleted (using software functions restraining modification, such as function “Protection” for the pdf documents). For the paper documents, it is essential to use an ink stamp with the same features as the digital one.

Moreover, it is necessary to set up mechanisms to limit the access to those documents to a certain number of people, who must be identified. Digital documents should at least be placed in a folder protected by a password, this password being only shared with the persons with access rights. The paper documents must be locked up and, likewise, only the identified persons shall have access to the key.

To limit the risks, it is useful to secure the computer system of the company against the risks of hacking, as the law does not define what a “reasonable” protection is.

In case of particularly sensitive information, the use of anonymization, code names or encryption of information is highly recommended.

With regard to the internal use of confidential information, it is essential to explicitly provide for a confidentiality obligation in all employment contracts of employees who have access to such information, by means of an amendment if needed.

If confidential information is transmitted to third parties to the company (in the context of commercial exchange, for instance, but also of outsourcing, etc.), this transmission has to be subject to a contract in proper form, including a confidentiality clause. Signing mere purchase orders is not enough to ensure adequate protection.

If it is desired to avoid the reverse engineering of a product by its commercial partner, it is necessary to provide for an express prohibition by a contractual clause, otherwise this is authorized by Article L. 151-3 of the French Commercial Code.

In case of a litigation, it will be up to the party claiming a trade secret to demonstrate that the three cumulative conditions of Article L. 151-1 of the French Commercial Code are satisfied. Therefore, it is wise to file a Soleau envelope (which can be electronic) to provide proof that the information is held; in any case, a record should be kept of all protective measures taken to be able to justify them to a court.

II. JUDICIAL MECHANISMS TO ENFORCE TRADE SECRETS

Article L.151-3 of the French Commercial Code defines the lawful acquisition of a secret, which is:

– An independent discovery or creation

– The reverse engineering, provided that the product or object has been made available to the public or that it is lawfully held by the person holding the information, unless otherwise stipulated in the contract.

Conversely, article L. 151-4 of the same code states that the acquisition is illicit when it is made without the consent of its legitimate holder (the one who lawfully controls it), and is the result of:

– An unauthorized access to any document, object, material, substance or digital file which contains the secret or from which it can be inferred

– Or any other behavior considered as unfair and contrary to the commercial practices, given the circumstances.

Furthermore, the use or disclosure of a secret obtained unlawfully is also unlawful.

The law goes further because, as it is said in the article L. 151-5 paragraph 2, the production, offer, placing on the market, import, export or storage for these purposes of ‘any product significantly resulting from an infringement of business secrecy’ is considered illicit, if the person who carries out these activities knew or should have known that the secret was being used unlawfully.

Last, article L. 151-6 provides that obtaining, using or disclosing a secret is illicit when the person knew or should have known that the secret had been obtained, directly or indirectly, from another person who was unlawfully using or disclosing it.

The use of trade secret by an indelicate third party is therefore not the only action that the law seeks to punish, as it also makes it possible to incriminate its use by successive third parties and its incorporation into a product.

Regarding judicial remedies, the law goes far beyond the measures formerly accessible, as it is now possible to obtain:

– The prohibition of the use or the disclosure of the secret

– The prohibition of the production, offering, placing on the market, use, import, export or storage for these purposes of products resulting significantly from breach of secrecy,

– The recall of commercial channels, as well as their modification to remove the infringement, or their confiscation for the benefit of the injured party, or even their destruction

– The destruction of the documents or material supports containing the secret.

In case of a prohibition, the law explicitly provides that the settled duration should be enough to “eliminate any commercial or economic advantage that the author of the infringement could have drawn from its acquisition, use or disclosure”.

It is therefore clear that far from being limited to the mere compensation for damage, the law now seeks to restore the legitimate holder of the secret in his original state, by “deleting” the undue advantages derived from the violation of secrecy by a third party.

That being said, the compensation for the legitimate holder is not left out: article L. 152-6 now provides that the calculation of damages shall now be based on infringement laws, which means that the judge henceforth has to take into consideration, distinctly 1/the negative economic consequences of the infringement, among which are the shortfall and the loss suffered, including the loss of opportunity, 2/ the moral damage, and 3/ the benefits made by the author of the infringement, including investment savings. Alternatively, it is possible to request a lump sum that ‘takes into account’ the fees that would have been due if the infringer had requested permission to use the secret (on this point, however, the text does not specify that the amount must be higher than these fees, unlike the texts on counterfeiting).

Even if the parliamentary works specify that this article only aims to ensure full compensation (already guaranteed by ordinary law), it is clear that by providing a more precise method of calculation than that of ordinary law, the legislator has sought to improve the amount of damages awarded by the French courts (as was explicitly the objective for the 2008 law on counterfeiting).

It should be added that the law also provides for the possibility of measures to publish the decision, like in the case of counterfeiting (article L 152-7), such measures obviously having to protect secrecy.

Thus, the Trade secret Act n°2018-670 has established a much more protective regime for trade secrets.

Probably for fear of seeing the number of litigations increase sharply, the legislator had initially provided two important limits for action in breach of secrecy.

First, this an action was subject to a 5 years limitation period which ran from the commission of the facts causing it (Article L. 152-2). Such a starting point could greatly complicate the possibility of prosecuting the “discreet” violation of trade secrets, because if the holder of the secret discovered the infringement after five years, the action was lapsed. Since the Growth and transformation of companies Act n°2019-486 of May 22nd 2019 (PACTE Act), the limitation period has been aligned with that in industrial property matters, namely five years from the day on which the legitimate holder of the business secret knew or should have known the last fact that caused it: thus, from now on, conversely, the limitation period can extend over a much longer period than 5 years, because the period only starts from the day on which the violation of secrecy, and especially the last violation, was known.

Moreover, the legislator has expressly provided in article L. 152-8, that in the event of dilatory or abusive action based on secrecy, the plaintiff may expose to a civil fine of a maximum of 20% of the damages claimed in court. Even though civil fines are in practice very rare, this kind of risk should be taken into account before taking legal action.

III. PROTECTING YOUR TRADE SECRETS DURING PROCEEDINGS

Measures protecting the confidentiality of trade secrets disclosed during a trial

Previously, there was no mechanism guarantying the confidentiality of information provided during proceedings and the judges often sought a balance between preserving the confidentiality of a document and its usefulness in resolving the dispute. From now on, new prerogatives are offered to them to protect trade secrets before civil or commercial courts while allowing the parties to obtain the communication of useful exhibits to the solution of a case. This opens prospects for economic actors who could previously be reluctant to bring legal action against an unscrupulous third party fearing to see the disclosure of their trade secret worsen.

Thus, in the course of a civil or commercial proceeding aiming at obtaining a measure of inquiry before a trial on the merits or in connection with a proceeding on the merits, if a document is mentioned or if the communication or the production of a document is requested, and if it is alleged by a party or a third party or if it has been judged that this document is likely to harm trade secrets, the judge may implement certain measures designed to arrange the communication or the production of that document. In this circumstance, according to Article L.153-1 of the French Commercial Code, the judge may:

– Read the document alone or order an expert opinion and seek the advice of the parties’ counsels;

– Decide to limit the communication or the production of this document in the form of a summary (redacted of information covered by the trade secrets) and / or to restrict the access to this document to certain persons;

– Decide that the debates will take place and the decision will be held in the Council Chamber (ie in the presence of only the parties concerned and their counsels);

Adapt the statement of reasons of the decision and the terms of its publication to the necessity to protect trade secrets.

With regards to Intellectual Property, the French courts had the opportunity to apply these provisions in a dispute concerning essential patents. By orders of the Pre-Trial Counsel on October 9, 2018 and January 26, 2019, the parties have put in place a mechanism to ensure the protection of trade secrets consisting, among other things, (i) in communicating a restricted access to license agreements, only accessible to counsels, the court and individuals who have signed confidentiality agreements (interpreters, economic experts) and (ii) in submitting to the court two versions of their written submissions. One, with references to the contracts disclosed in full while highlighting the references to the confidential information in order to draw the attention of the court to the passages to be avoided in its decision, and the other version, redacted of any reference to confidential information. It was also decided that some debates would take place in the Council Chamber to avoid the disclosure of confidential information and that only certain authorized persons could attend (besides the parties, their French and foreign counsels, the parties to the disclosed contracts, experts and economists).

Decree No. 2018-1126 of 11 December 2018 has completed in more detail the applicable procedure to communication or production of documents requests. It is thus provided that the party or third party to proceedings invoking trade secrets in respect of a document for which the production or disclosure is requested, shall give the judge, within a period fixed by him,(i) the full confidential version of the document, (ii) a non-confidential version or summary and (iii) a memorandum setting out, for each piece of information or part of the document, the reasons that give it the character of a trade secrets (Article R.153-3 of the French Commercial Code).

,In order to rule his decision, the judge may hear separately the holder of the document, assisted or represented by any authorized person, and the party requesting the communication or the production of this document (Article R.153- 3). Without hearing, he decides on the fate of this document (Article R. 153-4), and refuses its communication or production when it is not necessary for the resolution of the dispute (Article R. 153-5). On the other hand, it orders its communication or production in its full version when it is necessary to the solution of the dispute and even if it is likely to infringe trade secrets. In this case, it will limit the access to the document by designating who can have access to it in its full version (article R.153-6). He may also order the communication or production of the document in a non-confidential version or in the form of a summary when only certain elements of the document are likely to harm a trade secret without being necessary for the resolution of the dispute (Article R.153-7).

The decision relating to the communication or production of the document may be referred, withdrawn or appealed (depending on the case, Articles R.153-8 and R153-9) within 15 days. In the context of a proceeding on the merits, if the party requesting the disclosure or the production of the document has its application dismissed, it may lodge an appeal against that decision only with the decision on the merits (Article R. 153- 9 I).

These new mechanisms are very useful particularly for obtaining the proof of the existence of a license agreement in the context of an infringement lawsuit (in the presence of third parties to the license). Indeed, most license agreements contain confidentiality clauses prohibiting disclosure to third parties, so that a production before court without any confidentiality measure would run the risk of suffering an action for contractual liability or even a termination of the contract. The law now allows to provide proof of their existence while protecting the confidentiality of such contracts.

Let us guarantee that they will also be very useful to facilitate the demonstration of the prejudice of the aggrieved party who will now be able to produce its financial documents in order to demonstrate its margin to justify its prejudice, while minimizing the danger of seeing such sensitive information being used by the author of the damage.

Measures preserving the confidentiality of trade secrets during a probationary measure

Another contribution of the new law (Article R153-1 of the French Commercial Code and R.332-1, R.521-2, R.615-2, R.716-2 and R.722-2 of the Code de la Intellectual Property) is the establishment of a provisional escrow that the judge can order to preserve trade secrets, as part of a probationary measure. Indeed, to prove an infringement, the right holder may proceed to a seizure-counterfeiting measure or request a measure of inquiry on the basis of Article 145 of the Code of Civil Procedure. Instead of leaving to the discretion of the bailiff, the sequestration of documents that may be trade secrets, the new text allows the judge to order ex officio a provisional escrow of the documents seized. In practice, the judges already ordered it when sensitive information had to be seized.

The real novelty is that if the judge is not seized of a request for modification or withdrawal of his order within a month of its service, the escrow is lifted and the documents sent to the applicant. This temporary escrow will potentially allow the claimant to quickly access the information seized if no action is introduced within one month. Nevertheless, at present, it is still too early to know whether the judges will systematically provide for the provisional escrow of the documents seized in their orders on request 145 or seizure-infringement.

The new law thus opens up broad prospects and considerably strengthens the legal arsenal existing in French law for the protection of trade secrets. It is particularly innovative in that it offers a real legal protection for mere information which, unlike patents, does not enjoy a proprietary right of intellectual property that could ensure a monopoly to its holder.

For any further information, please feel free to contact us by email at: avocats@loyerabello.fr