Trade secrets and their protection

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Confidential information related to business practices, i.e., trade secrets, constitutes an important part of a company’s business operations. Such information gives the company a competitive advantage over competitors who do not have access to it. Companies also invest significant amounts in product development and innovation, which is why it is important to keep the results of these efforts from competitors. A company’s success in the market may depend on keeping its most valuable information confidential. Safeguarding trade secrets is important in many different relations, such as those between companies and between employers and employees.

Finnish legislation provides various forms of protection for trade secrets. The protection of trade secrets is primarily regulated by the Trade Secrets Act, but many other laws, such as the Employment Contracts Act, the Criminal Code, the Code of Judicial Procedure, and the Act on the Openness of Government Activities, also contain provisions protecting trade secrets.

The definition of a trade secret

Section 2 of the Trade Secrets Act contains the definition of information considered to be a trade secret. Many other laws are interpreted in accordance with the definition of a trade secret provided in the Trade Secrets Act, which therefore functions as a general definition. A trade secret is established when all three criteria mentioned in the section are met. The first requirement is that the information is not generally known or easily accessible to persons who normally process such information, regardless of whether the information is treated as a whole or as a precise combination and compilation of its parts. Secondly, due to the above-mentioned characteristics, the information must have economic value in business operations. The third requirement is that the lawful holder of the information has taken reasonable measures to protect the information.

The first requirement refers to the fact that the information is not known, for example, based on general professional knowledge. The second requirement, i.e., the economic value of the information, concerns the fact that disclosure of the information could cause financial damage by, for example, weakening the market position of the holder of the trade secret. The third requirement, reasonable protection measures, may include non-disclosure agreements with employees, technical protection measures in information systems, and physical security measures in premises to prevent outsiders from accessing the information. In addition, training and instructing personnel on the processing and protection of trade secrets is considered a protective measure. To meet the criteria for a trade secret, a company must, if necessary, be able to demonstrate that it has actively sought to protect the information. The purpose of this requirement is to ensure that the protection of trade secrets only extends to information that the holder has deemed important enough to protect.

In which situations are trade secrets typically breached?

According to the Trade Secrets Act, anyone who has information containing another party’s trade secrets may not unlawfully use or disclose such information. Furthermore, information protected as a trade secret may not be unlawfully acquired or attempted to be acquired. These prohibitions apply not only to completely uninvolved persons but also, for example, to the company’s own employees. The importance of safeguarding trade secrets is often emphasised in the relationship between employer and employee. Questions that must be considered include who owns the rights to trade secrets resulting from an employee’s work, or what kinds of rights or restrictions apply to an employee after the termination of employment.

A breach of trade secrets, therefore, refers to a situation in which a person unlawfully obtains a trade secret, or a person bound by confidentiality unlawfully discloses or exploits information classified as trade secret. Breaches of trade secrets do not typically occur as an external data breach or similar high-profile incident, but rather in mundane and seemingly harmless situations, often due to negligence. One of the most common scenarios is when an employee transfers to a competing company, taking with them information that they should not use to benefit their new employer. This may include lists of clients, pricing lists, contractual terms, or product development results. Issues may also arise in cooperative relations, for example, in projects carried out with a subcontractor or consultant, where confidential information is shared across organisational boundaries. Various joint projects can rapidly drift into a grey area if roles and access rights are not precisely agreed upon. Occasionally, it can merely be a simple mistake: an employee shares a document with the wrong party or publishes information on social media without understanding its confidential nature.

What are the consequences of breaching trade secrets?

Breaching trade secrets can lead to both civil and criminal sanctions. According to the Trade Secrets Act, a person who intentionally or negligently acquires or discloses a trade secret is liable to pay damages to the holder of the trade secret to compensate the holder for any damage caused by the breach. Additionally, a person who intentionally or negligently uses a trade secret is liable to pay the holder of the trade secret reasonable compensation for its use and damages for all damage caused by the infringement. Compensation for use is a payment for the exploitation of the trade secret, and the amount may be linked, for example, to the licence fee that would have been payable if the person had requested permission to use the trade secret. Damages, on the other hand, are compensation for any damage caused to the holder of the trade secret by the acquisition, disclosure, or exploitation of the trade secret.

In addition to financial sanctions, actions that infringe on trade secrets can be addressed with different court orders, such as a prohibitory injunction to refrain from engaging in an act infringing a trade secret or from continuing or repeating such an act, a mandatory injunction to withdraw a product infringing a trade secret from the market or to have it modified or destroyed, as well as a mandatory injunction to destroy all materials containing trade secrets or to hand them over to the holder of the trade secret. These orders may be enforced by a fine. However, under certain conditions, the defendant may request that, instead of such an order, the defendant be ordered to pay compensation to the holder of the trade secret.

Disputes concerning trade secrets are resolved in district courts or in the Market Court. Civil claims, such as claims for damages against a former employee, are examined in general courts. Civil claims against legal entities or natural persons engaged in business operations may also be examined in the Market Court.

In the most severe cases, a breach of trade secrets can lead to criminal liability. A breach of trade secrets can simultaneously constitute both an infringement of the Trade Secrets Act and a criminal offence. The Criminal Code criminalises corporate espionage, breach of corporate secrecy, and misuse of corporate secrets, as well as attempts to commit these acts. The penalties under the Criminal Code include fines, imprisonment and other sanctions such as confiscation of proceeds, a ban on business operations, and corporate fines.

Additionally, breaching trade secrets may result in consequences beyond those explicitly set out in legislation. Infringement of a trade secret may constitute a breach of contract, in which case the contracting party may, for example, have the right to terminate the contract or demand a contractual penalty or damages based on the terms of the contract. In an employment relationship, a breach of trade secrets may entitle the employer to terminate or cancel the employment contract.

How to protect trade secrets and prevent disputes?

Protecting trade secrets should be incorporated into everyday business practices. The first step is to identify what information needs to be kept confidential and why. After that, it is important to ensure that the information is properly documented and safeguarded. One of the most effective ways to protect trade secrets and prevent disputes is to use non-disclosure agreements.

Non-disclosure agreements are significant instruments for safeguarding a company’s trade secrets, particularly in situations where confidentiality remains important after the termination of an employment or other form of cooperation. It is advisable to consider non-disclosure agreements in employment, with executive personnel, and in business relations. In certain situations, a non-disclosure agreement may also be entered into with a public entity.

Non-disclosure agreements primarily define which information is to be kept confidential, how it should be processed, and for what purposes it may be used. This ensures that clear rules are in place regarding what information is confidential and how it may be handled. A non-disclosure agreement may offer broader and longer-term protection of information than legislation does. For example, the protection provided by the Employment Contracts Act covers trade secrets obtained with permission only for the duration of the employment, and the protection provided by the Criminal Code lasts for two years after the termination of the employment. A non-disclosure agreement can provide longer-lasting protection.

A non-disclosure agreement is particularly relevant, for example, when a company’s technology is licensed to another company. A non-disclosure agreement is also essential if the business relationship is international, as the protection of trade secrets under the law applicable to the agreement between the parties may not necessarily correspond to the protection provided by Finnish legislation. A non-disclosure agreement between companies may also cover confidential information other than trade secrets as defined in the Trade Secrets Act.

Non-disclosure agreements can simplify the process of filing claims in the event of potential breaches, provided that the agreement clearly defines certain information as a trade secret and stipulates a contractual penalty for breaches that does not require proof of the amount of damage. A carefully drafted non-disclosure agreement can also be effective in preventing breaches, as the confidential nature of the information is explicitly stated at the very beginning of the cooperation, and the penalty clause agreed upon may also have a deterrent effect.

In addition to non-disclosure agreements, companies must also take measures to safeguard their own trade secrets. It is essential that employees are given clear instructions on the confidential nature of information and the appropriate processing thereof, and that this is maintained throughout the employment relationship through reminders and training. The company must also ensure that its information systems meet the necessary technical requirements to prevent potential data breaches.

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