November’s newsletter published an article on prohibition of competition by management board members written by Annika Jaanson and Maarja Kärson, our specialists in the area of disputes. This topic is also closely related to the obligation of management board members to maintain company business secrets.
During their time in office, management board members are permitted access to important information concerning the company, including data on company clients and employees, information on suppliers, production secrets, marketing tips, and so on. It is mainly up to the company to determine which part of that information set should be regarded as company business secrets.
Statutory obligation
Both the Commercial Code and the Law of Obligations Act require management board members to maintain the business secrets of a company. However, neither of these acts explains the concept of a business secret. On the basis of law, it may be said that a business secret should be generally understood as circumstances that a management board member has become aware of and in which the company has a legitimate interest in maintaining confidentiality. Therefore, the general concept of a business secret is quite broad and ambiguous, and may therefore lead to disputes.
In judicial practice, a business secret is understood as circumstances related to entrepreneurship which are known to a limited set of persons and the entrepreneur’s intention to maintain their confidentiality must be either documented or clearly recognisable. Therefore, it is advisable to specify what a business secret is in a specific company – anything else might not be protected.
Clarify in writing
Although management board members are required to maintain the business secrets of a company irrespective of whether any document has detailed their content, it is reasonable that a company should clarify what it regards as a business secret in order to avoid a situation where a management board member discloses (perhaps unknowingly) information that is important for a company.
This may be achieved by a management board member contract as well as by a resolution of shareholders or the supervisory board. The definition must be made known to management board members. Practice has shown that uncertainty concerning the scope of business secrets renders relevant disputes complicated and often leads to litigation.
Time limit
Although the Commercial Code requires management board members to maintain business secrets only during their time in office, general regulation of contract law should also be taken into account. Under the Law of Obligations Act – unlike the prohibition on competition – the obligation to maintain business secrets remains in force after expiry of the term of office of a management board member, even without an agreement covering this aspect. At the same time, a company has to take into account that the statutory confidentiality obligation will not continue in force forever, but only so long as the company has a legitimate interest in maintaining confidentiality of particular circumstances.
Although the duration of legitimate interest varies from one company to another and also depends on the nature of information, it is advisable to agree upon the effective period of legitimate interest in a contract after expiry of the term of office of a management board member in order to avoid disputes over the effective period of the confidentiality obligation.
Remuneration
As maintaining confidentiality of a company’s business secrets is an important part of the general loyalty obligation of a management board member, no separate fee is generally payable to a management board member for complying with the confidentiality obligation. Consequently, the validity of the confidentiality obligation after expiry of the term of office of a management board member does not depend on payment of remuneration.
Violation of the obligation
Clearly, violation of the confidentiality obligation involves failure to maintain a business secret. More specifically, violation may lie in disclosure to third parties by a management board member of circumstances of which the management board member became aware in relation to the management of a company, use by a management board member (e.g. as a management board member or employee of a competitor) of the information in the interests of third parties or in his or her own interests.
Liability
Violation of the confidentiality obligation leads to liability of a management board member towards the company, more specifically the obligation to compensate for damage caused to the company by violating the obligation. To enforce liability, the company has to prove that the obligation has been violated, that it caused damage to the company, and that the violation caused actual damage. A management board member is released from the obligation to compensate in damages if the member acted in accordance with a lawful resolution of shareholders, a general meeting, or the supervisory board, or the member is able to prove that he (she) performed his (her) obligations with due diligence.
Judicial practice has confirmed that in the event of a dispute over unauthorised disclosure of a business secret the company is required to supply proof as to how the management board member unlawfully disclosed and used a business secret. Concerning the concept of business secrets in a particular company, the obligation to supply proof is divided among the parties. Although a company has to prove which information was a business secret, a management board member has to prove his (her) objections – e.g. the given information was not business information or he (she) did not know and could not have known the confidentiality of the information. In the case of litigation, a company can more easily prove a violation if circumstances regarded as business secrets have been previously defined in writing and each management board member is aware of them.
In practice, it may prove difficult to quantify damage caused by violation of the obligation and to claim compensation for this. Damages incurred by a company often do not lie in tangible monetary loss, but in unearned income or other indirect loss which is difficult to calculate in money terms.
To avoid that problem, it is useful if the contract of service of a management board member stipulates a contractual penalty for violation of the obligation. In that event, payment of a fixed penalty may be claimed from the management board member and the company does not have to separately prove and quantify damage. If damages incurred by the company are larger than a contractual penalty, the company has to file a claim for – and prove – damages.
Failure to maintain business secrets may lead to criminal liability. This does not depend on whether a company actually incurred or did not incur damage due to disclosure of information, but a management board member is already liable if the objective of his (her) activities was to cause damage to the company by disclosure of information.
Management board member and company business secrets
November’s newsletter published an article on prohibition of competition by management board members written by Annika Jaanson and Maarja Kärson, our specialists in the area of disputes. This topic is also closely related to the obligation of management board members to maintain company business secrets.
During their time in office, management board members are permitted access to important information concerning the company, including data on company clients and employees, information on suppliers, production secrets, marketing tips, and so on. It is mainly up to the company to determine which part of that information set should be regarded as company business secrets.
Statutory obligation
Both the Commercial Code and the Law of Obligations Act require management board members to maintain the business secrets of a company. However, neither of these acts explains the concept of a business secret. On the basis of law, it may be said that a business secret should be generally understood as circumstances that a management board member has become aware of and in which the company has a legitimate interest in maintaining confidentiality. Therefore, the general concept of a business secret is quite broad and ambiguous, and may therefore lead to disputes.
In judicial practice, a business secret is understood as circumstances related to entrepreneurship which are known to a limited set of persons and the entrepreneur’s intention to maintain their confidentiality must be either documented or clearly recognisable. Therefore, it is advisable to specify what a business secret is in a specific company – anything else might not be protected.
Clarify in writing
Although management board members are required to maintain the business secrets of a company irrespective of whether any document has detailed their content, it is reasonable that a company should clarify what it regards as a business secret in order to avoid a situation where a management board member discloses (perhaps unknowingly) information that is important for a company.
This may be achieved by a management board member contract as well as by a resolution of shareholders or the supervisory board. The definition must be made known to management board members. Practice has shown that uncertainty concerning the scope of business secrets renders relevant disputes complicated and often leads to litigation.
Time limit
Although the Commercial Code requires management board members to maintain business secrets only during their time in office, general regulation of contract law should also be taken into account. Under the Law of Obligations Act – unlike the prohibition on competition – the obligation to maintain business secrets remains in force after expiry of the term of office of a management board member, even without an agreement covering this aspect. At the same time, a company has to take into account that the statutory confidentiality obligation will not continue in force forever, but only so long as the company has a legitimate interest in maintaining confidentiality of particular circumstances.
Although the duration of legitimate interest varies from one company to another and also depends on the nature of information, it is advisable to agree upon the effective period of legitimate interest in a contract after expiry of the term of office of a management board member in order to avoid disputes over the effective period of the confidentiality obligation.
Remuneration
As maintaining confidentiality of a company’s business secrets is an important part of the general loyalty obligation of a management board member, no separate fee is generally payable to a management board member for complying with the confidentiality obligation. Consequently, the validity of the confidentiality obligation after expiry of the term of office of a management board member does not depend on payment of remuneration.
Violation of the obligation
Clearly, violation of the confidentiality obligation involves failure to maintain a business secret. More specifically, violation may lie in disclosure to third parties by a management board member of circumstances of which the management board member became aware in relation to the management of a company, use by a management board member (e.g. as a management board member or employee of a competitor) of the information in the interests of third parties or in his or her own interests.
Liability
Violation of the confidentiality obligation leads to liability of a management board member towards the company, more specifically the obligation to compensate for damage caused to the company by violating the obligation. To enforce liability, the company has to prove that the obligation has been violated, that it caused damage to the company, and that the violation caused actual damage. A management board member is released from the obligation to compensate in damages if the member acted in accordance with a lawful resolution of shareholders, a general meeting, or the supervisory board, or the member is able to prove that he (she) performed his (her) obligations with due diligence.
Judicial practice has confirmed that in the event of a dispute over unauthorised disclosure of a business secret the company is required to supply proof as to how the management board member unlawfully disclosed and used a business secret. Concerning the concept of business secrets in a particular company, the obligation to supply proof is divided among the parties. Although a company has to prove which information was a business secret, a management board member has to prove his (her) objections – e.g. the given information was not business information or he (she) did not know and could not have known the confidentiality of the information. In the case of litigation, a company can more easily prove a violation if circumstances regarded as business secrets have been previously defined in writing and each management board member is aware of them.
In practice, it may prove difficult to quantify damage caused by violation of the obligation and to claim compensation for this. Damages incurred by a company often do not lie in tangible monetary loss, but in unearned income or other indirect loss which is difficult to calculate in money terms.
To avoid that problem, it is useful if the contract of service of a management board member stipulates a contractual penalty for violation of the obligation. In that event, payment of a fixed penalty may be claimed from the management board member and the company does not have to separately prove and quantify damage. If damages incurred by the company are larger than a contractual penalty, the company has to file a claim for – and prove – damages.
Failure to maintain business secrets may lead to criminal liability. This does not depend on whether a company actually incurred or did not incur damage due to disclosure of information, but a management board member is already liable if the objective of his (her) activities was to cause damage to the company by disclosure of information.