All you need to know about Confidential Agreements, NDAs and/or Trade Secrets in Mexico

Kudo y Niño de Rivera Abogados owner

A confidentiality agreement (CA) is also called a non-disclosure agreement (NDA). It refers to the legally binding document signed by individuals, legal or natural entities, employees, investors, startups, and contractors to show that they are intent on keeping sensitive information, trade secrets of the disclosing party confidential and the other party promises to keep it confidential. Confidential information is often sensitive, technical, commercial, or valuable in nature (e.g., trade secrets or proprietary information). Besides trade secrets, the document, once signed, covers sales information, client/ customer lists, marketing strategies, and any other important that is crucial for the success of your business. This information is regarded as confidential.

Both parties sign the Confidentiality Agreement, creating a binding contract to keep the information secret. Be sure you understand how to write an NDA before intend drafting your own. Also known as a CA and/or NDA, confidentiality agreements can be mutual, where both parties are required to maintain secrecy, or unilateral, where only one party must maintain secrecy.

Mexican Legal Framework

In Mexico, CA´s or NDAs are based on Article 16 of the Constitution. It states that no one may be disturbed in his person, family, home, papers or possessions unless a competent authority determines a procedure. For this reason, personal data protection laws and the National Institute of Transparency, Access to Information and Protection of Personal Data (INAI) have been created and the contractual and criminal legislation in force.

Use in business

In the case of companies and organizations, it is common for them to have access to personal data of third parties in the search for partners, investors, or new employees. This information is often available to some employees, collaborators, and others who could make inappropriate use of it. To avoid that and comply with Article 16 of the Constitution, there is a legal framework.

That is the reason for the employees or the participants of the projects, companies, businesses, they usually sign non-disclosure agreements. In this way, they can comply with the provisions of the Federal Law on the Protection of Personal Data in Possession of Private Parties, which states that those who intervene in any phase of the processing of personal data must keep them confidential, even after ending their relationship with the owner or responsible party.

…” The controller or third parties involved in any phase of the processing of personal data must maintain confidentiality with respect to them, an obligation that will continue even after the end of their relationship with the data subject or, where appropriate, with the controller” …Article 21 of the Federal Law on the Protection of Personal Data in Possession of Private Parties.

CA and/or NDA to avoid penalties or sanctions

Article 63 of the aforementioned law lists the situations that are considered to be infringements of the protection of personal data. A violation of Article 21 is included in that list. In that case, article 64 states that the person responsible will receive a fine of 200 to 320,000 days of minimum wage. That is why many individuals and companies seek to protect themselves with confidentiality agreements.

Content of a CA and/or NDA

Parties involved:These are the persons or entities that establish the confidentiality agreement, which may be the company and the recipient, the latter being the worker.

The purpose of this agreement:Is to protect the information from disclosure to third parties.

Duration:Establishes the specific time frame or period in which the confidentiality agreement is established, which binding the parties to comply with the obligations.

Penalties:These are those sanctions that, according to the Criminal Code, can be activated if any of the parties does not comply with the provisions of the confidentiality agreement. This section should include the type of penalties and when they are incurred.

Causes of termination of the agreement:Either due to breach, termination of contract, this part indicates what causes will cause the agreement to come to an end and what legal actions must be carried out.

Special clauses:These are those sections that can only be assigned to the company you work for. In these sections, it must be very well specified what type of sections they are so as not to incur damages caused by the lack of information.

Signature and date:These types of contracts can be authenticated electronically by means of the e-signature (e-firma).

Why and when to sign a CA and/or NDA?

When an employment or commercial relationships are initiated in which sensitive information is shared for one of the parties. The idea is to protect confidential information and the interests of the company, safeguarding data such as:

·Ideas and research carried out by your company.

·Patents and trademarks, intellectual property rights and industrial property rights that have been created in your company.

·Business plans that are beneficial not only for your company but for others.

·Data from third parties with whom your company establishes a business relationship.

·Metrics that establish the KPIs and goals that your company follows.

·Innovations and any content of novel value that may be susceptible to being copied.

·Financial data that must be kept safe and that is sensitive to being tapped.

·The company's image.

·The company's know-how or how it is managed internally.

Types of CAs and NDAs

The information that is covered under a confidentiality agreement is always unique. There aretwo main typesof confidentiality agreements:

Unilateral:This is where one party, such as a prospective licensee or investor, agrees that they won't disclose information from another party.

Mutual:This type of confidentiality agreement is typically used when multiple parties, such as two businesses, begin working together and acknowledge that they will not share one another's information.

While there are two primary types of confidentiality agreements, they can be further divided into other categories depending on the situation:

Standard nondisclosure:This is the most common type ofconfidentiality agreementand can be used in almost any circumstance.

Employee nondisclosure:Companies use this type of confidentiality agreement when they hire new employees to ensure they will not discuss proprietary information outside of work.

Inventor:This type of confidentiality agreement is commonly used by inventors to protect their unpatented inventions when they are discussing what they created with relevant parties.

Interview:Companies use this type of NDA prior to interviews so they can speak more openly with candidates without worrying about information being later shared by rejected candidates.

Consequences of Not Using a Confidentiality Agreement

In the event that you do not use a confidentiality agreement, the worst-case scenario is that your company could lose potential earnings, brand recognition, or possible business opportunities, as another party might profit off your confidential information and ideas. While a confidentiality agreement cannot guarantee that someone will not try to profit off your information or ideas, it does ensure you will be legally compensated if it does happen.

Are there any other applicable sources to protect the information in México “Trade Secrets?

On 5 November 2020, the Federal Law for the Protection of Industrial Property (New Industrial Property Law) was enacted in Mexico as an effort to modernise and complement the former Industrial Property Law, which had been in force since 1994, and to comply with new standards and commitments accorded by Mexico under the United States-Mexico-Canada Agreement (USMCA).

Furthermore, it is important to consider that there are several laws related to different practices of Mexican Law that contain confidentiality obligations that may relate to trade secrets, such as the Federal Civil Code (attorney client privilege), the Regulatory Law on Professions (Professional behavior), Federal Law on the Protection of Personal Data in Possession of Private Parties (for information provided to private entities), and the Federal Labour Law.

How are trade secrets defined?

In accordance with the New Industrial Property Law, trade secrets are defined under article 163 as:

…“any information of industrial or commercial application kept by the person exercising legal control over it on a confidential basis, that implies obtaining or maintaining a competitive or economic advantage over third parties in the conduct of economic activities and in respect of which the person has undertaken sufficient means or mechanisms to maintain the restricted access and confidentiality of the information”…

In accordance with the law’s definition, trade secret information may be supported by any present or future means (e.g. physical, digital, optical, etc.). There is no specific trade secret protection for computer software and/or technology. General trade secret rules apply to computer software and technology.

It is important to consider that the New Industrial Property Law establishes exceptions on what information may be considered a trade secret. In this sense, the law establishes that information of the public domain, which is defined as “information that is generally known, of common knowledge or that is easily accessible to persons within the same circles in which such information is normally used or any information that must be publicly disclosed by a legal provision or court order”, will not be considered a trade secret.

Nevertheless, the same article also establishes that any information provided to an authority by the person who exercises legal control over it to obtain licenses, permits or authorisations will not be considered public domain information or information disclosed by legal provision and, therefore, can still be considered a trade secret.

In addition to all of the above, the New Industrial Property Law establishes that any person granted access to a trade secret by virtue of its work, employment, labour position, professional exercise, business relationship, or granting of a license, has the obligation to abstain from disclosing or using such information without the consent of the person that exercises legal control over such information or without the consent of an authorised user.

Do specific measures or protections need to be put in place for information to benefit from protection as a trade secret?

Although no specific measures are contemplated in the New Industrial Property Law, the definition considers that the person exercising legal control over the information must undertake “sufficient measures” to restrain access to the information or maintain its confidentiality.

In addition, it is important to consider that the New Industrial Property Law does not contemplate a temporal restriction upon the confidentiality of trade secrets. For example, article 248 establishes that a franchisee is obliged to maintain confidentiality over the information provided by the franchisor for an indefinite time.

Duration of Protection for Trade Secrets

A trade secret will be valid for as long as the requirements for its protection remain in force and the information does not enter the public domain. The law establishes that information that is in the public domain or that turns out to be generally known or easily accessible to persons within the circles in which said information is used will not be considered a trade secret. The law does not distinguish between deliberate disclosure by the person who has legal control of the information or accidental disclosure.

What actions constitute infringement of trade secrets?

Misappropriation is the main action that constitutes infringement against trade secrets under the New Industrial Property Law.

Misappropriation is defined as “the unlawful or illegal acquisition, use or disclosure of a trade secret in a way that is contrary to the standards practices and uses of the industry, trade or commerce that implies a disloyal competition, including the acquisition, use or disclosure of a trade secret by a third party that knew or had reasonable grounds to know that such trade secret was acquired in a way contrary to such standards, practices and uses”.

Moreover, the New Industrial Property Law also contemplates specific confidentiality obligations regarding trade secrets received expressly under virtue of an agreement, employment, provision of professional services or relationships and even for governmental employees and public servants (including judicial and administrative officials and authorities).

When such actions are purposed to obtain a competitive or economic edge for itself or a third party or cause damages to the person in possession of the trade secrete or an authorised user, the actions can be considered a prosecutable criminal offense.

In accordance with the New Industrial Property Law, liability can also be imposed against (i) persons (natural or legal persons) that hire present or past employees, professionals, consultants or advisors that had previously rendered services for another person with the purpose of obtaining trade secrets from such person; or (ii) against any person that acquires trade secrets through any illegal means.

It is important to consider that the aforementioned law also establishes the following exceptions to misappropriation:

·The independent discovery or creation of the information that is later considered or claimed to be a trade secret.

·The observation, study, or testing (reverse engineering) of a product or object that has been made available to the public or that is under the lawful possession of the person that keeps the information, provided that such information, product or object is not subject to any confidentiality obligation regarding the trade secret.

·The lawful acquisition of information from another person without confidentiality obligations or without the knowledge that the information was considered a trade secret.

What specific interim and final measures and remedies are available in the event of infringement of trade secrets?

The IMPI or the courts have the authority to impose the following interim measures if it has become aware of infringements or crimes committed related to the Industrial Property Law:

·order the seizure of merchandise of infringing products;

·prohibitions on commercialising them;

·order the cessation of activities;

·suspend the distribution of merchandise intended for imports, exports or transit of infringing products;

·order the suspension and removal of digital or electronic content;

·order the suspension of the provision of infringing services or the temporary closing of establishment and other ex-officio measures considered necessary.

Furthermore, as an infringement against Industrial Property, including trade secrets, may give rise to administrative, civil and criminal liability, each of these courts or tribunals is enabled to establish the interim or final measures and remedies they see fit.

Are there circumstances in which damages or other financial compensation may be available in place of an injunction and other measures?

Yes. In regard to administrative liability, the New Industrial Property Law contemplates the imposition of a fine against persons that transgress the law’s dispositions and obligations.

While injunctions can be imposed through civil proceedings, civil liability is remedied through compensatory damages (punitive damages are not contemplated in the Mexican legal system).

Furthermore, while criminal liability under the New Industrial Property Law contemplates imprisonment, monetary remedies in favour of the aggravated party can also be applied to the prosecuted party.

How is financial compensation to the trade secrets holder calculated?

The New Industrial Property Law establishes that the proceeding for the determination of indemnities for infringements of industrial property rights (which include trade secrets) may be initiated before the Mexican Industrial Property Institute (“IMPI”) or directly through a civil court, provided that the amount of any indemnity is never less than 40% of the rightful and evidenced value of the Industrial Property rights affected.

Are any measures available where proceedings concerning trade secrets are manifestly unfounded and / or found to have been initiated abusively or in bad faith?

While the New Industrial Property Law does not contemplate such a scenario, an unfounded claim will most probably be dismissed, entitling the accused party to file a counter claim for such actions. Under civil procedural laws, the counter claim is often filed by the accused party as part of its defence against the claims brought forward against it.

Are separate legal proceedings required for such measures?

In regard to criminal law, filing an unfounded claim before a state prosecutor in bad faith may constitute a prosecutable criminal offense.

In addition to any statutory protection of trade secrets, what protections can employers put in place to avoid misuse of trade secrets by its workforce?

It is standard practice in labour and employment agreements to include confidentiality clauses in order to protect trade secrets.

Furthermore, it is also possible for companies to include non-compete clauses for officers or directors in specialised sectors.

Are there implied rights of protection for employers regarding misuse of trade secrets by its workforce?

Yes. Employees are obliged to maintain confidentiality of trade secrets whenever they are granted access to such information by virtue of their work or position. In this sense, they can be held liable for any misappropriation of trade secrets or other industrial property rights of the employer.

What other means can employers use to protect misuse of trade secrets by the workforce, particularly when staff leave?

As mentioned above, it is not uncommon to include non-compete clauses or to execute non-compete agreements for certain officers or directors of companies in specialised sectors or industries in order to protect trade secrets of the employers.

What kind of protection/provisions are to be included in supply or similar contracts with respect to trade secrets?

It is common practice in Mexico to include one or several clauses in order to regulate the following:

·Determination of what information is shared as confidential information and/or trade secrets and how it may or will be shared between the parties.

·Non-disclosure and confidentiality obligations, including the term of such obligations, determination of personnel of the receiving party authorised to manage and use this confidential information and the establishment of mechanisms to guarantee the confidentiality of the disclosed information or trade secrets.

·Exceptions to cases where the receiving party of the information may share the confidential information or trade secret (e.g. when required by a competent authority or if required to file for a permit, licence, etc.).

·Specific penalties and mechanisms to mitigate a breach of a confidentiality obligation or a misuse or misappropriation of confidential information.

What are typical pitfalls in contracts regarding protecting trade secrets?

Usual pitfalls may include confusing exclusivity obligations with confidentiality obligations, poor definition of what type of information may constitute a trade secret or trying to impose unrealistic and/or impossible obligations that may affect any of the parties in the future (e.g. extremely long non-compete obligations) or deprive the parties from performing their obligations under the agreement.

Are there any important aspects regarding protecting trade secrets cross border?

In regard to cross-border agreements, it would be recommendable to specify the applicable law of the agreement in order to avoid interpretation issues and to define or specify what information is shared as trade secrets. Furthermore, it is recommended that a specific jurisdiction be determined for any possible dispute resolution proceeding in order to avoid competence issues. As an example, under Mexican Law, contracts are usually governed and interpreted under the law upon which the obligations of the agreement are to be executed.

Are there any penalty clauses in contracts with regards to trade secrets?

Yes. Specific conventional penalties or indemnities related to a breach of confidential obligations such as misuse of trade secrets are often included.

Moreover, it is possible (and common depending on the type of the agreement) to include breaches of confidentiality obligations contained in agreeents as causes for the immediate rescission of agreements without liability to the rescinding party.

Prosecution Process, Penalties and Defences of the disclose of a Trade Secret

Like its predecessor statute, the New Industrial Property Law recognises criminal offences of trade secret theft, misappropriation, unauthorised disclosure, and unauthorised use – requiring the presence of an additional element: that the illicit activity took place with ill-intent, which must be proven beyond any reasonable doubt. This evidentiary burden makes it more difficult to sustain criminal charges against trade secret defendants in practice. Additionally, the success of any criminal action depends on the prosecutor’s expertise and skill set to prepare the case; unfortunately for victims of trade secret violation, federal prosecutors tend to prioritise prosecuting other kinds of criminal complaints having a larger impact on society. Consequently, criminal enforcement is rarely used in practice.

It is likely that these same defences and arguments available in civil trade secret actions may apply in practice to criminal claims. From an evidence preparation perspective, the National Code of Criminal Procedure foresees a broad array of investigation techniques that can be devised and implemented through the federal prosecutor, with and without court orders, to investigate trade secret misappropriation or economic espionage offences. However, for more sophisticated and invasive techniques – such as wiretapping and data extraction from platforms, servers and devices, electronic apparatus, computers and storage devices – it is necessary to obtain a court order, which will be very limited in scope and time.

Finally, for criminal trade secret violations, the New Industrial Property Law imposes penalties, from two to six years; as well as economic penalties, from the equivalent of USD5,460 to USD1.638 million, in addition to compensatory damages.

Alternative Dispute Resolution (ADR)

To date, while the possibility of encouraging the use of ADR mechanisms through contractual clauses is anticipated in Mexico, this option is seldom used for intellectual property cases, as it was not expressly authorised under the former statute. However, this changed recently due to the New Industrial Property Law enactment, which now foresees the parties’ right to open a conciliation procedure, before IMPI, to explore the possibility of reaching a settlement in infringement cases. This right is available to both parties until IMPI reaches a decision in the first instance.

New Industrial Property also contemplates a conciliation procedure in which IMPI will be conciliator, holding the infringement proceeding in abeyance while the conciliation is ongoing. The party requesting the conciliation must present a written proposal to settle the claim. The other party will have the right to accept it, present a written counterproposal, or reject it. If a counterproposal exists, an IMPI officer will summon the parties to in-person meetings at IMPI’s premises to discuss potential settlements. Due to statutory restrictions, the conciliation procedure is limited to two meetings. If the parties do not reach a settlement, IMPI will resume the infringement proceeding.