This year marks the fifth anniversary of the full entry into force of the Contract Register Act, which (to simplify somewhat) introduced relatively strict rules for the conclusion and disclosure of contracts between the private and public sectors.
This year marks the fifth anniversary of the full entry into force of the Contract Register Act, which (to simplify somewhat) introduced relatively strict rules for the conclusion and disclosure of contracts between the private and public sectors.
This article seeks to examine the issue of individual prices in the thus published contracts, with an emphasis on the perspective of the (private) supplier who has a commercial interest in not disclosing their prices both to other (public or private) customers and to their (private) competitors.
General remarks on the business secret
According to the provisions of Section 504 of the Civil Code, the business secret is composed of information and facts that are of competitive relevance, determinable, appraisable and generally inaccessible in the relevant business circles, and that are related to the enterprise and whose owner in their own interest ensures their secrecy in an appropriate manner. Legal practice is quite uniform in concluding that these aspects, i.e.
– Competitive relevance, i.e., when the information brings a certain competitive advantage and a better market position;
– determinability, i.e., when the information is adequately captured and recognizable;
– Appraiseability, i.e., the ability to at least approximate the commercial value of the said information;
– General inaccessibility, i.e., the information does not represent generally known facts;
– A connection to the enterprise, i.e., there is some connection to the organized set of assets created by the entrepreneur (i.e., assets, receivables, payables, employees, contractual relationships, or even internal processes); and
– Confidentiality, i.e., when the disclosure of such information must be prevented;
must always be fulfilled simultaneously. It should be noted that the business secret is not something that is unilaterally designated by the undertaking as a business secret or jointly agreed with the contracting party; the objective non-fulfillment of even a single criterion leads to the conclusion that the facts in question cannot ex lege be a business secret.
Typically, business secrets are considered to be, for example, customer lists and databases, business plans and strategies, marketing analyses and strategies, production processes and methods, new technical solutions and technical drawings, but also, for example, the internal organization of an enterprise.
All the parameters mentioned above are in a number of cases also satisfied by the pricing policy of the undertaking in question, especially in those cases where it applies different prices to its customers and clients, or just a different level of discount than in the official price list, or other price-related aspects (e.g. the due date of invoices, the level of default interest, etc.). It is in the pricing policy in particular that relatively valuable “know-how” of the undertaking in question is or may be made manifest in terms of the customer’s payment behavior, its solvency, its economic stability, the security of long-term business relationships, the willingness and ability to settle disputes amicably, or its mere trust in the customer, i.e. information that could easily be misused by a new market entrant or mere competitor to the disadvantage of the undertaking. As a rule, however, the pricing policy may also be based on more internal reasons, such as the planned production of new products (and the related clearance sale of old ones), the quality or failure rate of the products in question, or the shift to a new production technology.
It follows from the very nature of things that the subject of the business secret, according to the legal requirements, will rather be the pricing policy as such, as an internally interlinked bundle of information. Conversely, this requirement does not have to be fulfilled by the individual price of an individual product in an individual transaction (when, on the contrary, the agreed price does not even have to correspond to the general business policy of the undertaking at all).
Act on the Contract Register
The Contract Register Act stipulates (with a great deal of simplification, reflecting the focus of this article) the obligation to publish any contract “exceeding CZK 50,000” concluded between the private and public sectors in the Contract Register, whereby if such a contract is not published, it does not become effective, and if such a contract is not published even within 3 months of its conclusion, it is deemed nullified ab initio. The Contract Register Act elaborates on this general approach in much more detail, especially with regard to the obligated persons and the consequences of such non-publication.
The contract must always be published / entered in the contract register in the form of an electronic image of the contract’s contents in an open and machine-readable format (from a purely practical point of view, this means the editable text formats .doc(x), .rtf, .odt and .txt or .pdf with a built-in text layer, regardless of whether this layer was created when the text format was saved in .pdf or subsequently inserted by OCR technology). So there is a twist: although it is a contract registry, the contracts themselves do not have to be published; the primary focus of the law is on the text image itself; signatures (whether scanned or electronic) are irrelevant on the embedded document.
Part of the publication itself is the incorporation of appropriate “metadata”, i.e. information containing the following:
– Identification of the contracting parties,
– Definition of the subject matter of the contract,
– The price and, if not included in the contract, the value of the subject of the contract, if it can be determined, and
– The date on which the contract was concluded.
Without this metadata, the contract will not be properly published (although the Contract Register Act, again, provides for certain exceptions), resulting in the adverse consequences mentioned above.
The business secret and the contract register
As mentioned above, the Contract Register Act contains rules and exceptions regarding what must be published in the Contract Register and what in fact cannot be published. The law distinguishes when the following is not subject to publication:
– the “whole” contract (e.g. a contract which will largely be performed outside the Czech Republic),
– an “entire” individual document (e.g. a technical draft), or
– only a part of such contract and/or document.
According to the provisions of Section 3(1) of the Contract Register Act, the last group includes – among other things – information which cannot be provided under the provisions on free access to information. This category generally includes classified information, personal data or facts which are the subject of industrial property protection. This category also includes business secrets.
An exception to this exemption, i.e. the obligation to also disclose business secrets, is made within the legal scope of free access to information with respect to the following:
– The scope and purpose of public funding;
– The recipient of public funds; and
– An approximate definition of the subject matter of the transaction;
i.e., to again simplify somewhat, information on “for whom” performances are rendered, and “why, and how much will be paid, and for what”. The scope of this information, which must remain unredacted in the contract, corresponds to the above-mentioned mandatory disclosure (again, with a number of exceptions) of metadata. Although such metadata (and the corresponding information contained directly in the text of the contract) may generally be part of the business secret, such disclosure of the contract is not considered a breach of the business secret, given its mandatory nature.
It is also worth mentioning that the last category of non-published information under Article 3(2)(b) of the Contract Register Act includes “the method of calculating unit prices”. Unfortunately, however, this is a very vague legal term, and neither legal practice nor, for example, the Ministry of the Interior, which is responsible for maintaining the Contract Register and issuing the relevant interpretative methods, agree on what actually belongs to this category. In general, however, a restrictive interpretation of this concept is preferred, along the lines of “if in doubt, preferably publish”.
Unit prices and the business secret
In connection with unit prices for a particular service, the purely practical question then arises as to whether such prices fall under the protection of business secrets and can thus be exempted from the obligation to disclose the contract.
This is because at first glance, it concerns only one contractual relationship, usually with one party on each side, sometimes for only one product or service, i.e., an individual price, and a relatively separate piece of information which is unconnected to anything else.
On the other hand, according to the author of this article, one needs to take into account the technical aspects of how the Contract Register works. The Contract Register is a publicly and freely accessible online database, which provides access without any registration or authentication of the person accessing it; with published text images of contract documents allowing full-text search; and with linking of the text of these documents to Internet search engines used worldwide (i.e., it is sufficient to enter the relevant term to immediately find direct links to specific contract documents published in the Contract Register). Moreover, contracts are published in the Contract Registry for an “indefinite” or (currently) unlimited period of time, and there is nothing to suggest that this situation will change any time soon. All these issues lead to the fact that commercial services can also be found which offer data mining of the data published in the Contract Registry.
To sum up, the following visual metaphor appears to describe the matter quite aptly: if the pricing policy forms a puzzle, and if anyone can potentially “cherry-pick” the pieces of this puzzle, given the longevity, prominence, and accessibility of the contract registry, and put the pieces together one by one until they’ve created a complete puzzle of their own, or at least gotten a rough idea of what this puzzle shows, the question is whether each piece of this puzzle should not better be protected.
Although there are, of course, strong views in legal practice that the price tends not to be a business secret and therefore the disclosure can be made independently of the metadata mentioned above, completely opposite opinions may also be found. For example, one such case is the methodology issued by the Ministry of Health in 2019, which specifically addresses unit prices. It explicitly states that “a particular unit price by itself (…) as well as in combination with other sales prices of a particular supplier may be a business secret, as the longer-term pricing policy of a particular competitor in the market can be inferred from this overall picture.” This premise was logically supplemented by the rule that the unit price must first be declared a business secret by the distributor/supplier in question, and that the obligated entity (in this case, the hospitals directly administered by the Ministry of Health) must then verify that the unit price information also meets the other business secret characteristics mentioned above. As stated above, the declaration of one party (or even both) is not sufficient to establish a business secret. If the competent party (the hospital) then concludes that the information is indeed a business secret, it will not publish the information – in this case the unit price – in the contract register.
Although legal practice is not entirely in agreement in this matter, in the opinion of the author of this article, a strong legal argument can be found to support the view that – with regard to the principles of the functioning of the contract register – each individual unit price can fulfill the characteristics of a business secret. However, this always requires compliance with all the individual regulations prescribed by law and a careful analysis of the relevant contract documents.
Therefore, the contract can then be anonymized accordingly, but a distinction must be made as to whether the contract covers a single service (one service, one type of goods, etc.) or several partial services (a series of goods/services); all this on the premise that the disclosure of “how much” and “for what” generally cannot be withheld.
The requisite thoroughness in reviewing and anonymizing contracts is also justified by the as of yet unresolved question of how to deal with situations in which it later turns out that the information is not a business secret.
Generally, in such case, the contract has not been published in accordance with the law and thus ceases to exist three months after its conclusion. Although the Contract Register Act provides for the possibility of correcting and republishing such a contract and thus the relevant information, it is not clear in which specific contractual relations this mechanism will be applied.
In fact, as of now, one heterodox interpretation of Section 7(2) of the Contract Register Act has not been fully clarified. According to this provision, [the penalty of nullity does not apply] “if only a part of the contract has not been published through the Contract Registry or if metadata has been wrongfully excluded from publication for reasons of protection of the business secret in accordance with the procedure of Section 5(6)” [and a corresponding correction is then made]. The provision of Article 5(6) referred herein allows for the exclusion from publication only with respect to certain selected metadata (identification of the contracting parties and price/value of the contract), and only for selected public institutions (universities, public enterprises, health insurance companies, etc.). According to the interpretation of some legal practitioners, the option of rectification can only be used in cases where (1) part of the contract was not published due to the protection of the business secret in accordance with the procedure established in Article 5(6), or (2) metadata was excluded due to the protection of business secrets in accordance with Article 5(6); thus, it will always concern part of the contract/metadata that falls under the above exception and only for selected public entities (but not private ones). However, the Ministry of the Interior’s interpretation is that the provision applies to cases where (1) a portion of the contract has not been made public (generally, for any reason), or (2) metadata has been left out for protection of the business secret under the Article 5(6) procedure. The difference in interpretation is therefore simply based on a different understanding of the conjunction “or”.
The implications of these different interpretations are, of course, significant. The first interpretation allows correction and corrective contract disclosure of the business secret only for selected information and only for selected public entities; this procedure does not apply to other information and/or entities. The second interpretation binds such selected information and selected entities only to the unpublished metadata; correction of (any) part of the contract (which is unpublished for whatever reason) may be made at any later time.
Hence, it is advisable that – until this opinion has been clarified by the relevant court decisions – the parties proceed with utmost circumspection, both in the individual evaluation of each contract and in the establishment of internal organizational mechanisms for the identification, marking and eventual decision not to disclose the part of the contract that contains the business secret, in particular unit prices.
Source:
Act No. 340/2015 Coll., on special conditions for the effectiveness of certain contracts, the publication of such contracts, and the Contract Register (Contact Register Act)
Act No. 89/2012 Coll., Civil Code
e.g. Bouda, P. et al., “Zákon o registru smluv. Komentář.” (Act on the Contract Register. A Commentary), 1st ed., Prague: C. H. Beck, 2016, 456 pp.