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Article: August 2018: France: Adoption of Trade Secrets Law

Business Litigation Reports

On June 21, 2018, the French Senate finally passed a law that creates a specific regime for the protection of trade secrets, a legal concept that, until now, had remained undefined in the country. This law, which was the subject of over four months of parliamentary discussions, results from France’s legal obligation to comply with the Directive 2016/943 of the European Parliament and of the Council on the protection of undisclosed know-how and commercial information against unlawful obtaining, use and disclosure before June 9, 2018. This tight calendar and the failure of the last attempt to introduce a protection of trade secrets (The Macron Act of 2015) led the deputies of the National Assembly supporting the law to propose a bill containing the exact same wording as the European directive.

An animated parliamentary debate and subsequent constitutional review (see Decision No. 2018-768 DC of July 26, 2018) ultimately led to the adoption of a law that became effective August 1, 2018 (subject to the adoption of implementation decrees for the application of certain provisions). While remaining similar to the European legislation, it specifically responds to the needs of French companies to have (I) a clear definition of trade secrets and (II) adequate procedural tools and civil remedies. Nevertheless, it unfortunately lacks a criminal law provision, which would have the ability to deter economic operators from fraudulent misappropriation of sensitive economic information (III).

A Much-Needed Protection

One of the main objectives of European Directive 2016/943 is to harmonize Member States’ legislation on trade secrets, in order to limit the risk of “fragmentation of the internal market” and to “lower the incentives for businesses to undertake innovation-related cross-border economic activity” because of their reluctance to invest in a country that does not guarantee good protection of their strategic information.

Until now, France was off-track since existing legislation provided no definition of trade secrets, even though France is bound by Article 39.2 of the WTO TRIPS Agreement (Trade-Related Aspects of Intellectual Property Rights), which requires its members to take effective measures to protect trade secrets.

Although preexisting French law did not define the notion of trade secrets, it did recognize its existence in national provisions and case law (See for instance, Article L. 463-4 of the French Commercial Code relating to the production of exhibits containing trade secrets before the national Competition Authority). Companies wanting to ensure the protection of their sensitive information had to juggle with fragmented and often unsuitable provisions, in order to find a legal basis for an action. This usually took the form of either a contractual claim where the parties had inserted a clause protecting trade secrets, or a tort claim on the basis of unfair competition or parasitism, or sometimes even a criminal complaint relying on the offenses of theft or breach of trust.

By adopting a law that provides a clear definition of trade secrets and an array of measures to preserve it, France is at last offering its companies greater legal certainty.

Sound Procedural and Civil Remedies

The new law creates a Title V within Book I of the French Commercial Code entitled “De la protection du secret des affaires,” which is subdivided into three main chapters relating to the object and conditions of the protection of trade secrets (1), legal proceedings that may be launched against infringements of trade secrets (2), and procedural measures for their protection that civil and commercial courts may order in the course of legal proceedings (3).

  1. Definition of Trade Secrets

The new Article L. 151-1 of the Commercial Code defines the notion of trade secrets by taking up the three criteria provided for by the European Directive. First, it must be information which is not, in itself or because of the configuration of its components, generally known or easily accessible to persons familiar with this type of information because of their sector of activity. Second, it has to have a real or potential commercial value because of its secret nature. Lastly, it must be the subject of special measures intended to ensure its secret nature. If these three cumulative conditions are met, then the information will be eligible for protection under the new trade secret provisions.

Article L. 151-2 reproduces the European legislation by defining the legitimate holder of a trade secret as “one who has lawful control over it,” while Article L. 151-3 then specifies the various lawful methods of obtaining this secret, which are the discovery or independent creation as well as the study of a product already distributed on the market, which therefore includes reverse engineering cases.

Furthermore, the new provisions list the cases in which the obtaining, use, or disclosure of trade secrets are illicit. This includes any information obtained without the consent of the legitimate holder of the secret, whether it results from unauthorized access to a document or material containing the trade secret, a breach of an obligation not to disclose the secret, or inappropriate conduct contrary to commercial practices. The marketing of products resulting from an infringement of secrecy is also considered to be an unlawful use of secrets, where the person marketing

them should have known that the trade secret was obtained unlawfully.

Finally, the new legislation enshrines certain exceptions to provided by the Directive. In addition to the general exception that a secret is not enforceable in the event of a disclosure ordered or foreseen by national and international law, in litigation trade secrecy yields to the exercise of the right to freedom of expression and communication, including freedom of the press and freedom of information. Neither can one use a trade secret to prevent the disclosure in good faith of a misconduct, a reprehensible act or an illegal activity for the purpose of protecting public interests. This provision explicitly refers to the protection of whistleblowers as defined by the Sapin II Act of December 9, 2016. Moreover, employees and staff representatives are also protected when the acquisition of a trade secret results from the exercise of employees’ right to information, or the legitimate exercise of the functions of staff representatives.

  1. Legal Action Against Infringement of Trade Secrets

In order to give real effectiveness to the legal protection created, the new law has provided the Commercial Code with comprehensive civil remedies and procedural measures specially adapted to the specific nature of trade secrets.

Civil courts will now have the power to order – including under penalty and at the expense of the perpetrators of the infringement – any measure likely to put an end to the infringement of the trade secret, such as the prohibition of the continued use of the secret, the prohibition of production and marketing of products resulting from an infringement or the destruction of any document containing the secret.

Alternatively, the law allows the Courts to allocate compensation to the victim instead of the measures mentioned above (Article L. 152-5 of the Commercial Code). This scenario would apply when the infringer did not know that the use of the trade secret was unlawful and where the payment of compensation therefore appears to be the reasonable and proportionate measure.

With respect to compensation for injury caused by the infringement of trade secrets, it is provided that the calculation of damages shall take into account the loss of profit and any other loss suffered by the injured party including his moral injury. The compensation for the loss suffered will also have to include the loss of an opportunity. This provision replaces the European text, which provides that compensation for the infringement should include the profits and investment savings made by the offending party. In doing so, French lawmakers intended to align the compensation regime with the legal provisions on copyright infringement and to facilitate the work of future victims and judges by enabling them to rely on the principles of reparation already developed with regard to infringement of intellectual property rights (see the Report of the Senate parliamentary session of June 21, 2018).

The main contribution resulting from the parliamentary debate is the inclusion of a provision aimed at discouraging dilatory and abusive proceedings – an option the European Directive left to Member States. Article L. 152-6 thus grants courts the power to order any party who brings a dilatory or abusive action on the basis of the new provisions to pay a civil fine of up to 20% of the damages requested (or €60,000 absent such a request). In doing so, the Parliament wanted to address the concerns of civil society and journalists about SLAPP proceedings initiated by big corporations that could use the new law to prevent the disclosure of sensitive information concerning them, but whose disclosure would be legitimate for the public’s right to information.

  1. Procedural Measures to Protect Trade Secrets

Chapter III of the law deals with procedural adaptations to preserve secrets. It allows a judge to decide that the hearing will take place behind closed doors. The judge may, in addition, redact the written judgment to protect the secret or alone be given access to a document containing it or limit the communication thereof. Finally, Article L. 153-2 imposes a general obligation of confidentiality on each person (parties, legal representatives, lawyers, etc.) who accessed a document or the content of a document considered to be covered by trade secrecy.

Absence of Criminal Provisions

French parliamentarians have chosen not to create a specific criminal offense against the fraudulent use of trade secrets, thereby depriving companies of a mechanism capable of deterring attempts at economic espionage. Yet they had the possibility of doing so, since Article 1 of the European Directive states that it is of minimal application and cannot prevent Member States from legislating for a more extensive protection of trade secrets.

This omission is perhaps the most surprising aspect of the new law. During the last attempt to offer a legal framework to protect trade secrets, a crime of violation of trade secrets had been foreseen by the Macron Act of 2015.

In the course of the parliamentary discussions of the present law, the Senate also introduced a crime of misuse of protected economic information for exclusively economic purposes (see the Report of the Senate parliamentary session of April 18, 2018). Having as actus reus “the deliberate circumvention of protective measures intended to preserve the secret nature of the information”, this offense was punishable by three years’ imprisonment and a fine of €375,000 (see the Bill of the Senate relating to the protection of trade secret of April 18, 2018).

The explanation for this omission in the final text can be found in the opposition of the National Assembly

and the Government, which considered the new civil provisions sufficient to meet the needs of companies, on the assumption that it is already possible to punish fraudulent appropriation of trade secrets through other criminal offenses (see the Report of the Senate parliamentary session of April 18, 2018).

However, existing offenses only imperfectly cover the potential misappropriations, in part because data protected by trade secrecy is essentially immaterial and therefore not suited to offenses created long before the advent of the information society.

For instance, if the offense of theft makes it possible to punish the misappropriation of confidential documents (Article 311-1 of the French Criminal Code), it is necessary for the stolen trade secret to be a “thing” and be materialized through a physical medium (USB key, paper document, etc.). Without this physical medium, the offense may not be prosecuted, as case law and the majority doctrine consider that intangible assets not protected by an intellectual property right cannot be appropriated. Similarly, the offense of breach of trust (Article 314-1 of the French Criminal Code), which represses the misappropriation of something given for a specific purpose and is sometimes used to prosecute the substitution of sensitive data by employees, will also be difficult to characterize in the absence of a physical medium. This is because the definition of the material element of the offense also refers vaguely to a “thing.”

Other offenses, which at first may appear more adequate, have proven ineffective in punishing fraudulent breaches of trade secrecy, such as the offense of disclosure of a manufacturing secret (Article L. 1227-1 of the French Labor Code), which punishes only the disclosure of the secret by an employee and not its exploitation, or economic espionage (Article 411-6 of the French Criminal Code), which is punished only if it benefits a foreign State and harms the interests of the nation (thus excluding purely commercial appropriations).

French lawmakers may have been inspired by the US Economic Espionage Act (18 U.S.C. § 1831 et seq.). This law which was enacted in 1996 adopts a very similar definition of trade secrets and criminally penalizes its theft for economic purposes. The offense has three elements: (1) misappropriation of information (by stealing, taking it without authorization or by fraud and deception), (2) knowledge that the misappropriated information is a trade secret, and (3) the fact that this information actually is a trade secret (18 U.S.C. § 1832). To establish the offense, the prosecution will also have to prove the criminal intent by showing that the defendant planned to obtain an economic advantage from the theft and injure the owner of the trade secret (18 U.S.C. § 1832). Trade secret theft is punished by a sentence of up to ten years of imprisonment and fines can reach up to $5,000,000 or three times the value of the trade secret if the offense is committed by an organization (18 U.S.C. § 1832).

It appears however that the offense of theft of trade secrets is rarely prosecuted because of budget constraints, the complexity of trade secret investigations and the fact that the victims will often rely on civil remedies, either at the state level or at the federal one (Federal Prosecution of Trade Secret Theft, Quinn Emanuel Business Litigation Report). It should be noted that the recently-passed Defend Trade Secret Act of May 2016 (18 U.S.C. § 1836, et seq) has created a federal civil cause of action for trade secret misappropriation, making it easier for plaintiffs to bring their trade secret claim in federal courts.

France would nevertheless benefit from having similar criminal provisions. The mere deterrent effect of criminal prosecution – which has previously been observed by Quinn Emanuel with its American clients – explain its existence. Practice has also shown that civil and criminal proceedings can be complementary for protecting trade secrets. When a public prosecutor is reluctant to pursue an offense relating to the misappropriation of trade secrets, either because it is complex or by lack of financial means, the evidence that can be obtained through a prior civil suit may induce them to charge offenders with trade secret theft.

The law on the protection of trade secrets is definitely a step in the right direction because it will allow companies to better defend themselves against the risk represented by the appropriation of commercial information. The creation of a specific criminal offense on the model of the U.S. Economic Espionage Act would however have been preferable in order to reach the highest level of protection for businesses.