Business secrets

Protection of business secrets

Kristel Tiits Kristel Tiits

Compared to agreements on competition restrictions, the obligation to keep business secrets has not been dealt with as widely, yet it needs significantly more coverage. In this article, the author deals with the various nuances related to business secrets, defines business secret and discusses why keeping business secrets is important for every company.

Pursuant to the Law of Obligations Act (LOA) and the Employment Contracts Act (ECA), employees are obliged during the term of validity of their employment contract to maintain the confidentiality of any circumstances which were learned in connection with performance of job duties and which the employer has an entitled interest to keep confidential on condition that

  1. the employer has clearly specified the information as to be kept confidential and
  2. the employer has disclosed this information to the employee in writing 

The employee becomes obliged to keep the secret only if the employer has clearly specified the information as confidential and made the information known to the employee in writing. If the employer has not done so, the employee has no obligation under subsection 6 (9) of the ECA to maintain confidentiality.

Still, it is important to note that notwithstanding the existence of an agreement to keep the secret, the employee must discharge his or her duties to the employer loyally and act in good faith, refraining from actions that harm the employer’s interest pursuant to Section 15 of the ECA, i.e. the absence of an agreement on maintaining confidentiality does not mean that the “bird has flown” with no recourse. If damage was incurred to the employer, the employer can demand compensation for damage on the grounds set forth in Section 74 of the ECA, but in case of a violation it is much simpler to demand the agreed contractual penalty than to ascertain the size and extent of the damage and prove it before a labour dispute board or court.

The employer can specify information that is to be kept confidential and enter into agreement on maintaining confidentiality either at the start of and during the employment relationship, which means that the employer should periodically consider whether all of relevant information about the employer’s activity is actually specified as information to be kept confidential and whether all employees who come into contact with the information have been signed to confidentiality agreements.

It is no less important to enter into relevant agreements on keeping secrets and maintaining confidentiality with key person and persons employed on other contractual grounds such as management board members and proxies.

Unlike agreements on competition restriction, employers have no legal obligation to pay employees compensation for performing the obligation of maintaining confidentiality upon the end of the employment relationship, nor is there the obligation to pay a special fee during the employment relationship.

It is important to draw attention to the contractual penalty clause upon entering into the agreement. Namely, it is expedient to include in the contract to be signed between the parties a contractual penalty provision at a reasonable amount as a measure to prevent disclosure of business secrets. If the employer does not set forth an obligation to pay the contractual penalty in the contract, the employer is not entitled to present a demand to the employee for payment of a contractual penalty; nor does the employer have the right to ask a court to determine the amount of the penalty. It is much simpler for the employer to demand payment of the contractual penalty pursuant to the provisions of a contract than to start proving the extent of damage caused by the employee on the basis of Section 74.

One of the most common disputes involving violation of the obligation to keep a business secret is cases where employees leave a company, taking with them important data from the company’s information system, such as the customer database, along with other strategic and valuable information related to the company that can be used to set up and manage a new company. In this case – in the case of a dispute – the burden of proof is on the employer, who must prove that a violation has taken place, what the business secret was, and wherein lay the unjustified use or disclosure of the business secret.

There is a different kind of case where a future employer is “tempted” to use a competitor’s business secret. How should an employer act if a candidate at a job interview takes out a folder or several containing strategic information and business secrets belonging to a competing enterprise?

Should the employer accept such an offer and immediately sign the candidate to an employment contract?

Or should the employer try to see the big picture, immediately turn down the offer and act in a legally correct manner to prove, in the event of a dispute, that there was no complicity in misuse and/or theft or a business secret?

A foresighted business person looking to ensure protection of a business secret can do the most through his or her own, judicious actions. Above all, the precondition for ensuring the effective protection of a business secret is the fact that the entrepreneur has taken the preventive steps even before the violation of confidentiality.

The following are a few guidelines for employers and companies for protecting business secrets:

  • define the business secret as precisely as possible and in writing and notify employees of this also in writing;
  • mark information classed as business secret in a comprehensible manner with keywords such as confidential, for internal use only etc;
  • establish in-house rules of conduct and procedures;
  • enter into corresponding confidentiality agreements;
  • stipulate a contractual penalty for violation of the obligation;
  • specify that the burden of proof lies on the counterparty to the contract.

To sum up, it must be impressed on business people that companies cannot put all their hopes merely on legal provisions; employers also need to take specific steps: define business secrets as precisely as possible, set forth the internal rules for handling business secrets at the company and specify restrictions on access to business secrets.