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New French law on the protection of trade secrets: opportunities and risks for businesses and investors

  • France
  • Competition, EU and Trade

06-07-2018

Trade secrets have not been subject to any specific regime so far. Until now, the protection of trade secrets has been governed by ordinary law rules on civil liability or been addressed by certain criminal offences, which effectiveness has been found insufficient. The new French law on trade secrets will greatly improve the protection of such secrets. In doing so, the new law creates new opportunities, but also new risks for both businesses and investors.

Pursuant to the application of a European Directive, trade secrets will now be protected by measures that are strongly inspired by the measures that come within the intellectual property regime (patents, trademarks, etc.). Those measures are the purpose of the French law on the protection of trade secrets, which was finally adopted on 21st June 2018. The law has nevertheless been referred to the French Constitutional Council (Conseil Constitutionnel) which is to ensure that this law complies with the French constitution. A décret en Conseil d’Etat will set the rules governing the application of such law.

1. Enhanced protection for trade secrets

In the event of the unlawful acquisition of a trade secret, the legitimate trade secret holder shall be entitled to arrange for the prohibition of the use or disclosure of such secret, as well as for the prohibition of the production, or the placing on the market, of goods that significantly result from a breach of such secret, without prejudice to the awarding of damages.

As regards the amount of those damages, and as it is also the case in IP infringement matters, the court may notably take into account any profit made by the author of the trade secret infringement, including any savings on intellectual, tangible and promotional investment, which the infringer will have drawn from the infringement.

Nevertheless, the final text of the law does not contain any of the criminal measures, which the Senate would have liked to add to the law in the event of the breach of a trade secret. During the discussions of the joint committee of the National Assembly and Senate, it was however agreed between the National Assembly representatives and Senate representatives that the possible creation of a specific criminal penalty would be considered by both houses of Parliament later on.

Certain conditions have to be fulfilled in order to benefit from this new legal protection of trade secrets. First of all, the trade secret holder will ensure that the corresponding piece of information meets the following three legal criteria: first, the piece of information is not, either in itself or in the precise configuration and assembly of its components, generally known or readily accessible to persons who are familiar with this kind of information given their business sector; second, the piece of information has commercial value, whether actual or potential, because it is secret; third and last, the piece of information has been subject to reasonable protection measures to keep it secret.

In addition, the infringement of a trade secret will require establishing the misconduct of the person who directly acquired the trade secret. Contrary to what happens with the exclusive right that is granted to the holder of an intellectual property right, the mere use, by a third party, of the same information cannot in itself constitute an infringement of trade secrets. It may notably be that such third party developed equivalent know-how in good faith.

On the contrary, in the event of an unlawful acquisition of the trade secret, the trade secret holder can obtain the cessation of the use of that trade secret by the relevant third party, and obtain remedies. The acquisition will notably be unlawful when the acquisition results from unauthorised access to the relevant piece of information or from any other conduct which, under the circumstances, is considered unfair and contrary to commercial practices. The use or disclosure of a secret will also be unlawful if it constitutes a breach of a confidentiality duty or a breach of an obligation to limit the use of the relevant information.

To enforce its rights against a secondary user, i.e. any other third party than the one who unlawfully used or disclosed the trade secret originally, the legitimate trade secret holder will be required to establish that secondary user’s knowledge (whether actual or purported under the circumstances) of the original breach. One may infer therefrom that, once such original breach is brought to the knowledge of that secondary user, the continuation of the use of that trade secret by that secondary third party will then constitute a breach of that secret. The same rule already exists for patents. So, the new law introduces a real right to follow the relevant information, thus notably setting aside the principle of the privity of contract. Such principle is one according to which, in contractual matters, no party may enforce the provisions of a contract against a third party to that contract. The new law nevertheless contains some provisions that are aimed at mitigating the potentially catastrophic consequences of such a situation for a third party who acted in good faith.

So, the regime applicable to trade secrets is a hybrid regime combining elements from the law applicable to intellectual property assets and elements from the civil liability regime based on a misconduct (as in unfair competition cases), when it relates to unlawfully acquiring the information or to breaching a confidentiality duty.

The new law will accordingly enable the legitimate trade secret holder to defend its rights in a more effective way. To that effect, the law also provides for a set of measures that are intended to protect the secret nature of the relevant information when in front of civil or commercial courts. In the absence of such measures, it would indeed be possible that the trade secret holder gives up taking legal action, merely in order to avoid that the relevant information definitively lose its confidential nature.

2. Avoiding abusive legal actions

However, one should not ignore the risk that this new body of legislation be used abusively in certain cases. The new law provides for the payment of a fine in the event of dilatory proceedings or of proceedings taken abusively. The amount of the fine may be up to 20% of any damages claimed. One may however wonder about whether such fine is constitutional. The French Constitutional Council had censored the fine, which was provided for in the law of the duty of care of parent companies, as well as the penalty that had been created by the so-called “Florange” law in the event of a non-compliance with the obligation to look for a purchaser in some circumstances. So, one should keep a close eye on what the Constitutional Council will decide on this issue.

With the adoption of this new law, the companies, which business is strongly dependent on their know-how, will now have the means to better protect their intangible assets and hence to better value them. Those businesses can therefore only be pleased with a such a change, the European scale of which will contribute to its effectiveness.

But, to that end, the information that those undertakings would like to see protected by the new legal regime, will have to meet the three aforementioned legal criteria. So, the undertakings will be required to identify those pieces of information, which original and confidential nature, and which commercial value (even if only potential), would justify the implementation of the protection measures imposed by law to keep such information confidential. Identifying and protecting this information will require resources, which may be allocated in priority to the information that is considered the most strategic information.

Undertakings would be well advised to formalise the information, ensure such information is dated, draw up internal policies and procedures to protect the confidentiality of such information, review and amend, if need be, the employment contracts of those people, who will need to know of such information, or the partnership contracts or non-disclosure agreements the undertakings enter into with third parties, etc.

In the event an investor acquires a shareholding in an undertaking, which know-how forms a significant part of its valuation, checking the measures, which the undertaking took to protect its know-how, may reveal as useful to the investor as checking the intellectual property rights.

Reciprocally, if the acquisition of a shareholding in a company gives rise to the disclosure of information that comes within the definition of trade secrets, it would be in the transferor’s and the target company’s interest that they clearly identify what falls in the category of trade secrets, in the non-disclosure agreement, or that they enter into a specific agreement in relation to such secrets. The potential purchaser should also try to limit the risk that proceedings be taken abusively against it, notably in the event the negotiations fail or in the event the potential purchaser holds, or could hold in the future, a shareholding in a competing company. Non-disclosure agreements should accordingly be re-examined to take account of this new law and the risks and opportunities inferred by such law.

The new law comes in addition to other French recent laws that also deal with the collection or processing of information (data protection, anti-bribery policy, duty of care of parent companies, etc.). All those laws may also affect, in some respect, M&A operations. The management of information, whether for operational or regulatory reasons, is therefore more than ever at the centre of corporate life.

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