Major problems of contribution of the rights to the knowhow (trade secret) as an investment in the charter (share) capital of a Russian company.

Corporate INTL, April 2011

Artem Sirota, partner

 
1. Problem of definition

1.1 There is no generally accepted definition of the term “knowhow”.Few jurisdictions (for example Russia) have the statutory definition of the knowhow.

1.2 “Knowhow” under Russian law is information that:

• is not generally known to the public and public does not have legitimate access to this information;
• confers economic value on its holder;
• is subject to measures of maintaining secrecy.

1.3 The measures of maintaining secrecy must meet the minimum requirements set by the Russian law on trade secrets in order to trigger protection. The owner at least must define the scope of trade secret, mark the media sources, implement access and utilization procedures and maintain control over the persons received the access to this information.

1.4. Before contributing the knowhow in the charter (share) capital, the primary task for the investor is to make sure that the information constituting the knowhow satisfies the requirements set by the Russian legislation. Otherwise such contribution can be later challenged by the Russian company. In a noteworthy case JugraNeft v. Norex Petroleum the plaintiff (Russian company) demanded more than 8,000,000 dollars paid as dividends to be returned, contending that the contribution of know-how did not conform to the main requirement – its uncertainty to the third parties.

2. Problem of contribution procedure

2.1 There are two ways to contribute knowhow to the charter (share) capital: to alienate the rights to the third party (which is a rare case for obvious reasons) or to grant the rights of use (license). Below we will discuss only the second option.

2.2 The parties of the license agreement are free to choose the law applicable to their rights and responsibilities under the agreement. But their choice will not affect neither the operation of the civil law provisions defining the knowhow itself nor the minimum secrecy requirements.

2.3. License agreement for knowhow is not subject to registration with Russian state authorities, therefore there will be no double - check on the part of the Russian authorities.

2.4. In order to invest the rights for the knowhow in the charter (share) capital of a company the rights for the knowhow must be appraised (this procedure is compulsory for all in-kind contributions). Foreign appraisers can be engaged to avoid the risk of secret leak.

           
3. Problems of protection

3.1. Foreign investor must carefully negotiate provisions setting a duty of licensee to maintain secrecy of the knowhow by (a) limiting the number of employees having access to the information (b) split of the information among employees (c) non-compete and non-disclosure agreements made with employees.

3.2. At the same time, even carefully drafted agreement does not guarantee confidentiality in trade secret utilization by the licensee’s employees. Often, foreign investors dealing in Russia face low standard of ethics and responsibility adhered by Russian contractors and employees. Russian labor law is not flexible enough to ensure effective protection which foreign investors may expect. The remedies for trade secret infringement are limited to direct, real damages incurred as the result of the trade secret infringement. Lost profit cannot be recovered.

3.3. The burden of proof of trade secret protectability and unlawfulness of the infringrer’s actions rests upon the plaintiff (licensor). It may present a problem since often the evidence presented by the plaintiff considered insufficient without disclosure of the trade secret information. In such situation the plaintiff may prefer to lose an action than to disclose the trade secret.