Insights | June 3, 2019

New precedent from the Finnish Supreme Court concerning the production of documents in litigation (KKO 2019:7)

Background

On 30 January 2019, the Finnish Supreme Court handed down a judgment in an interesting case, which related to the production of documents in litigation. The appellants, A Ltd and B Ltd, had signed a contract with C Ltd and D Ltd according to which the four companies owned all of company N Ltd’s shares. The contract included an obligation for the parties to work fulltime for N Ltd. If this obligation was not fulfilled, the other shareholders had the right to redeem the shares of the shareholder whom had breached the contract. In the spring of 2015, H who owned the entire share capital of C Ltd and U who owned the entire share capital of D Ltd had founded a company named N U.S., LLC (“the Company”) in the United States. C Ltd owned 80 per cent of the shares of the Company and D Ltd owned 20 per cent. H and U were also members of the Company’s board. C Ltd and D Ltd were holding companies.

The appellants initiated an action in Helsinki District Court claiming that H and U had violated their obligation to work fulltime for N Ltd by founding the Company. The appellants requested the District Court to confirm that they had the right to redeem the shares owned by C Ltd and D Ltd. They also requested the court to order the adverse parties (C Ltd, D Ltd, H and U) to present the following documents:

1. the Company’s financial statements from 2015 and 2016;
2. the founding documents of the Company and the shareholder agreements between the Company’s shareholders;
3. the offers made on behalf of the Company and the agreements the Company had signed with five specific clients; in the claim, the timing of the signing in 2015 and 2016 was individualized with the accuracy of at least a calendar year;
4. all the letters and emails that the adverse parties had relating to the above mentioned documents;
5. extracts of the Company’s accounting material from 2015 to 2017 relating to the invoicing regarding the agreements signed with the five specified clients as well as all other clients; and
6. extracts of the Company’s accounting material from 2015 to 2017 relating to the expense compensation, salary, commissions, interest and profits paid to the adverse parties.

General requirements for imposing an obligation to produce documents

The Supreme Court had to evaluate whether the prerequisites for an order to produce documents were at hand. The court had to consider whether i) the documents had been sufficiently individualized, ii) whether they could have any relevance as evidence in the main issue and iii) whether the documents were in the adverse parties’ possession. In addition, the court had to evaluate whether the documents included trade secrets, and if so, whether this would be an obstacle for issuing the order.

Individualization

The Supreme Court found that the request for the financial statements from 2015 and 2016 had been sufficiently individualized. The Supreme Court stated that the request for the founding documents and shareholder agreements had been sufficiently individualized due to the type and limited quantity of the documents. Also, the request for the documentation on offers and agreements was sufficiently individualized, since the request was limited to only include five agreements within a limited timeframe and the offers that preceded these agreements. The request for the letters and emails had also been limited to only include the correspondence that had been exchanged with five specific clients regarding the agreements with said clients and the offers preceding these agreements. Even though the request for the letters and emails was not limited by a certain timeframe, the Supreme Court found that the documents had been sufficiently individualized since they were connected with certain clients.

The request for extracts from the Company’s accounting material had been sufficiently individualized as far as it concerned the payments that the Company had made to the adverse parties. The request concerned a certain type of documents within a specific timeframe and only concerned certain payments made to the adverse parties. Therefore, the extracts concerning the payments made to the adverse parties could, in the Supreme Court’s point of view, be separated from other accounting material of the Company. Regarding the request for invoicing documents within the accounting material, the Supreme Court found that the request for all client invoicing was not sufficiently individualized. The request was only sufficiently individualized to the extent it referred to the invoicing sent to the same five clients that had already been identified in other parts of the request.

Evidentiary value

Further, the Supreme Court found that all the requested documents could, at least indirectly, show whether H and U had breached the contract by not working fulltime for N Ltd since they could indicate whether the work conducted for the Company would be so significant that it would render it impossible for the adverse parties to work fulltime for N Ltd.  Because Section 40 of Chapter 17 of the Code of Judicial Procedure sets a quite low threshold in relation to the potential value as a piece of evidence, the Supreme Court decided that the requested documents could have value as evidence. However, the shareholder agreements made after the notification of the usage of the right to redeem shares (19 November 2016) were not considered to have evidentiary value.

Possession

The Supreme Court noted that it could not be automatically assumed that the documents referred to in the request for production of documents were in the possession of the adverse parties simply due to their position as founders of the Company. The reason for this was that the general assumption that that ownership and management are separate in limited liability companies. This basic principle can only be set aside in rare cases.

The requirement relating to the possession of the documents was evaluated separately for each document. Since C Ltd and D Ltd had no business activity of their own, the Supreme Court found it probable that the Company’s purpose was to boost the business activity and financial position of the holding companies. Therefore, the Supreme Court found it likely that C Ltd and D Ltd had the Company’s financial statements from 2015 and 2016 in their possession while drafting their own financial statements. This was supported by the fact that the Company’s profits had been included in C Ltd’s financial statement in 2015.

Since H and U founded the Company and therefore signed the founding documents, the Supreme Court found that it could be concluded with sufficient certainty that the founding documents or at least the copies of them were in the possession of H and U.

With regard to the offers and agreements that the Company had entered into, the Supreme Court found that the said documents were not in the possession of the adverse parties but in the possession of the Company. The appellants had not proven with sufficient certainty that the documents would be in the possession of the adverse parties. The Supreme Court came to the same conclusion regarding the extracts of the accounting material of the Company.

The request relating to the correspondence between clients had been explicitly specified to only include documents that were already in the possession of the adverse parties. Therefore, the request did not include correspondence that was in the possession of the Company. The Supreme Court gave additional value to the fact that H and U owned the entire share capital of the Company through their holding companies C Ltd and D Ltd and that H and U participated in the Company’s business activity as members of the Board. The Supreme Court found that the appellants had sufficiently proved that the requested correspondence was in the possession of the adverse parties.

Lifting the protection of trade secrets

According to the adverse parties, the documents referred to in the request for production of documents included the Company’s and its contracting parties’ trade secrets such as financial information, pricing models and contracts.

Under Section 9 of Chapter 3 of the Accounting Act, a limited liability company must file a copy of the financial statements and management report for registration with the Finnish Patent and Registration Office. Since the adverse parties had not submitted any evidence to prove that the Company’s financial statements would be confidential in the United States either, the Supreme Court found that there was no reason to believe that the Company’s financial statements would include trade secrets. The Supreme Court also stated that the adverse parties had not given any grounds for the Court to believe that the Company’s founding documents would include any trade secrets.

As to the five agreements between the Company and its five clients and the correspondence regarding the offers which preceded these agreements, the Supreme Court found it plausible that these documents contained trade secrets. For this reason the Supreme Court had to consider whether it could nevertheless hand down the order to produce these documents. The main issue was whether there were, as required in Section 19 of Chapter 17 of the Code of Judicial Procedure, “very important reasons” to lift the protection of trade secrets. This requirement is the same as for ordering a person to testify even if the testimony would include trade secrets. According to Section 19 of Chapter 17 of the Code on Judicial Procedure when weighing if there are “very important reasons” the nature of the case, the significance of the evidence for deciding the case and the consequences of presenting the evidence as well as other circumstances need to be taken into account.

When evaluating the documents’ significance in respect of deciding the case both the question of how essential the evidence could be for the case as well as alternatives for the proof were to be considered. The Supreme Court found that according to the preparatory works, the consequences of presenting evidence which includes trade secrets had to be evaluated from the view of the party towards which the order would be directed. Further, according to the preparatory works, the parties’ right to a fair trial should not be jeopardized.

The Supreme Court found that the nature of the case did not as such amount to a “very important reason” for lifting the protection of trade secrets. However, the emails had such a central meaning in proving that H and U had been working for another party than N Ltd that the Supreme Court ruled that the adverse parties had to submit the letters and emails to the court as evidence. This conclusion was supported by the fact that the documents could be declared confidential as well as the fact that there was no evidence showing that presenting the documents would cause the adverse parties significant damage.

Therefore, the Supreme Court ruled that the emails and letters regarding agreements between five clients and the offers preceding these agreements had to be submitted despite even if they included trade secrets. The actual agreements however could not be included in the order since they were held not to be in the possession of the adverse parties. In addition to the correspondence, the final obligation to produce documents imposed on the adverse parties included the Company’s financial statements from 2015 and 2016 and the Company’s founding documents.

To sum up, the protection of trade secrets was lifted due to the potentially strong evidentiary value of the documents and the fact that it had not been shown that damage would be caused to the holder of the trade secrets. According to the Supreme Court, lifting the protection of trade secrets was necessary in order to protect the appellants’ right to plead their case and to determine the material truth.