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Strategies for Trade Secrets Protection in China

Trade secrets under Chinese laws shall meet the requirements of secrecy, commerciality, and confidentiality. To get the court’s support in infringement disputes related to trade secrets, the rightholder must demonstrate that he or she has implemented reasonable and effective confidentiality measures to protect the trade secrets. Otherwise, the court could rule in favor of the defendant for non-infringement. Obviously, the court puts significant weight on the due diligence taken by the rightholder in determining whether or not a trade secret exists. In light of recent trade secret litigation, we would like to discuss how to conduct reasonable and effective confidentiality measures to protect your trade secrets.

 

Object of the Confidentiality Measures – Concept and Types of Trade Secrets

 

It is stipulated in Article 9 of China’s Anti-unfair Competition Law, which came into effect on January 1, 2018, that the term trade secret means “information about technologies and business operations unknown to the public, possessing commercial value and protected by corresponding confidentiality measures taken by the rightholder.” According to this definition, trade secrets shall possess three features, which are secrecy, commerciality and confidentiality.

 

Confidentiality is a necessary element in establishing a trade secret. The object of confidentiality measures is “information about technologies” and “information about business operations,” and the premise of confidentiality measures is that there are “information about technologies” and “information about business operations” to be protected. Accordingly, confidentiality measures shall be implemented on the aforesaid two kinds of information.

 

As to the manifestations of information about technologies and business operations, it is stipulated in the provisions in Article 2 of Several Provisions on Prohibiting Infringements upon Trade Secrets issued by the State Administration for Industry and Commerce of China, that information about technologies includes designs, procedures, formula of products, manufacturing techniques, etc., and manufacturing methods; and information of business operations includes management secrets, name list of customers, information about source of goods, production and sale strategy, bottom price of a bid, contents of bidding documents, etc.

 

Legal Provisions on Confidentiality Measures

 

Chinese laws stipulate the confidentiality measures which can be taken by rightholders.

 

It is stipulated in Article 2 of Several Provisions on Prohibiting Infringements upon Trade Secrets, revised by the State Administration for Industry and Commerce of China in 1998, that “confidentiality measures taken by the rightholder as mentioned in these provisions include signing a non-disclosure agreement, setting up a confidentiality system and taking other reasonable confidentiality measures. ”

 

Article 11(3) of the Judicial Interpretation of the Supreme People's Court on Matters About the Application of Law in the Trial of Civil Cases Involving Unfair Competition, which came into effect on February 1, 2007, stipulates the definition of confidentiality measures, the scope of investigation which should be conducted by courts when determining whether confidentiality measures are taken, and some common confidentiality measures, such as “to take preventive measures as locking the carrier of the classified information up; to conclude a non-disclosure agreement; to use passwords or codes for accessing the classified information, etc.”

 

It can be seen from the above legal regulations that reasonable confidentiality measures shall not only reflect the rightholder’s intention about what information they wish to keep confidential, but also have concrete manifestation; and the specific confidentiality measures shall also have the effect of preventing classified information from being disclosed under normal condition.

 

Judicial Determination on Whether a Confidentiality Measure is Reasonable

 

In practice, the following judicial precedents may give us insight on how to take reasonable and effective confidentiality measures to protect classified information.

 

Cases in which courts determine that reasonable confidentiality measure are taken to protect information about business operations.

 

The Shandong Higher People’s Court, in its Civil Judgment (2016)LMZ NO. 310, first determines the object of the confidentiality measures, i.e. the content of the information about business operation, and then determines that the rightholder has taken reasonable confidentiality measures to protect the information about business operation on the basis that documents of the Cooperation Agreement and Supplementary Agreement involved in this case are both marked with the word “confidential”; furthermore, confidentiality measures are stipulated in the document Management System on Confidentiality of the Company provided by the rightholder who claims the trade secret; and the former employee of the company has agreed to accept the duty of confidentiality once the Statement of the Employee’s Work Position was concluded between the company and the former employee.  

 

The Beijing Higher People’s Court, in its Civil Judgment (2017)JMZ NO. 398, determines that the rightholder has taken confidentiality measures on the fact that the Sales Contract for the carrier of the classified information of business operation contains a confidentiality clause; the internal management system of the rightholder and the confidentiality agreement concluded between the rightholder and the employees state that the employees have the duty of confidentiality regarding classified information about business operation; and there is no contrary evidence.

 

Cases in which the courts determine that reasonable confidentiality measure are taken to protect information of technologies.

 

The Shaanxi Higher People’s Court, in its Civil Judgment (2016)SMZ NO. 451, determines that the rightholder has taken proper confidentiality measures on the fact that the classified technical date is sealed with the wording “controlled documents”; the rightholder who claims the trade secret concluded a Confidentiality Agreement with the employee at the time the employee was enrolled in the company; and the rightholder required the employee to sign Letter of Commitment to Keep the Secret for Separated Employees when an employee is leaving the company.

 

The Jiangxi Higher People’s Court, in its Civil Judgment (2017)GMZ NO. 104, determines that the rightholder has taken reasonable confidentiality measures according to the Employee Manual made by the rightholder and the contract concluded with the employee in charge of technology, where confidentiality clauses and liability for breach of contract are appointed and it wrote that not all employees can access to technical drawings.

 

Judicial precedents in which confidentiality measure is deemed as not taken.

 

The Supreme People’s Court, in its Judgment of Retrial (2017)ZGFMS NO. 2964, made the following Judgment based on evidence and materials relating to “confidentiality system”:

 

The company’s Several Provisions on Confidentiality Works Information “only in principle require all employees to keep confidential of the company’s sale, operation and technology secrets, but fail to let the object of the regulation, namely all employees, know the scope of the information protected as trade secrets, therefore, such measures are not practically feasible measures for protecting the trade secrets.

The company’s Sale Management System and Letter of Responsibility for People Providing Marketing Service prohibit the marketing people from selling commodities of the same category using the original marketing channel when working at the company and within three years from the date of leaving the company, the Supreme People’s Court holds that the above said agreements are simply non-competition provisions but does not explicitly point out the duty of confidentiality shall be taken by the staff who are sued for infringement in the case. Although these types of agreements are intended to protect trade secrets, they fail to meet the establishment of confidentiality measures stipulated in the Anti-unfair Competition Law since they neither explicitly point out the employer’s subjective will to protect the trade secret nor give the scope of the information protected as trade secret.

 

Besides, the duty of confidentiality stipulated in the Agreement on Labor Contract cannot be deemed as constituting confidentiality measures meeting the legal rules, i.e. contractual collateral obligations do not constitute confidentiality measures.

 

Contractual collateral obligations are derived from the principle of honesty and faithfulness and are different from the component element “confidentiality,” which is a kind of positive act, of trade secret.

 

The Supreme People’s Court, in its Civil Judgment (2014)MSZZ NO. 3, determines that the documents of “job requirements” provided by the rightholder does not constitute reasonable confidentiality measures due to that they just generally state the duty of “keeping information confidential” but not point out what the specific object and the scope to be kept confidential are; “record for checking-out (classified) files” is not determined as a confidentiality measure either for the reason that there is no specific rule or requirement stipulating that the classified information should be kept confidential. Moreover, the Supreme People’s Court also determines that common measures in production activities are not necessarily be determined to be confidentiality measures, and the rightholder is required to provide evidence to prove that the purpose of adopting such measures is to keep the classified information confidential; evidence such as documents of selling price marked with “top secret” can only prove that confidentiality measures are taken to keep such information about business operations confidential, but cannot prove that the rightholder also takes confidentiality measures to keep the information about technologies and information about business operation relating to a named list of clients. Besides, this judgment also determines that for trade secret co-owned by multiple individuals/entities, all co-owners shall take confidentiality measures for the trade secret.

 

Based on the above judicial precedents, we recommend that the rightholder state clearly, in evidence for relevant confidentiality measures, the scope of the information protected as a trade secret, and not just include general wordings like “sale, operation, and production technology secret”; at the same time, the rightholder shall explicitly appoint the duty of confidentiality which employees shall take, without relying on the agreement of a non-competition restriction or collateral obligations of a labour contract; and if a trade secret is co-owned, it is necessary to make sure that all co-owners take confidentiality measures for the classified information.

 

Conclusion – Suggestions for the Rightholder on Taking Confidentiality Measures for Classified Information

 

That confidentiality measures have been taken is an important manifestation in determining trade secrets. They are more operable for the rightholder and easier to be recognized in comparison with the features of trade secrets. As what is said in the Judgment of Retrial (2017)ZGFMS NO. 2964 by the Supreme People’s Court, confidentiality measures shall indicate the rightholder’s subjective will to keep the classified information confidential and explicitly point out the scope of the information protected as trade secrets, so as to make the obligors know the rightholder’s intention of keeping the classified information confidential as well as the object to be kept confidential; and confidentiality measure being taken shall be sufficient to prevent the classified information from being disclosed under normal conditions. To protect trade secrets, enterprises shall take reasonable confidentiality measures and pay attention to the following points:

 

Explicitly indicating the scope of the object to be kept confidential in the confidentiality measures, so as to make the obligors know the object to be kept confidential.

 

Both documents regarding confidentiality system unilaterally made by the enterprises and confidentiality agreements or documents contain a confidentiality clause concluded between the enterprises, and the employees shall explicitly stipulate the scope of the information protected as trade secrets; and shall not simply contains general wordings like “employees should keep sale, operation and production technology secrets” or just appoint a non-competition restriction; instead, they shall specify the specific duty of confidentiality and the object to be kept confidential, so as to make the obligors know the object the rightholder would like to keep confidential.

 

Developing multiple confidentiality measures, so as to sufficiently prevent the classified information from being disclosed under normal conditions.

 

Confidentiality is one of the most important component elements for determining trade secrets. Where the rightholder cannot prove he or she has taken reasonable confidentiality measures to protect the classified information, the rightholder will lose the infringement lawsuit relating to trade secret.

 

Taking multiple confidentiality measures can help not only to prove before courts that the rightholder has the subjective will to actively protect the secret through reasonable measures, but also to effectively avoid the loss of a lawsuit due to a single confidentiality measure deemed as defective by the court.

 

Based on the above, in terms of the establishment of an internal management system, enterprises shall not only set general a confidentiality system for the whole company but also draw up a stipulation of service, statement of a work position or the like to specify the duties for any particular work positions and obligations for confidentiality for employees of any particular work position. Except for the aforesaid unilateral stipulations made by enterprises, enterprises shall also conclude confidentiality agreement or other documents contain confidentiality clauses with the relevant employees; enterprises could also teach, educate and train the employees about the duty of confidentiality by holding meetings. Marking “confidential” on the secret-related carrier is also a convenient confidentiality measure.

 

Announcing the confidentiality measures to the employees, so as to enforce the rightholder’s intention to keep the classified information confidential and explicitly point out the object to be kept confidential.

 

Documents of the confidential system unilaterally made by the enterprises should be distributed to employees and the evidence for such announcement should be kept. If enterprises preach and teach the employees about the confidential system by holding conferences, complete meeting minutes should be archived. The meeting minutes shall contain the name list of the attendees and should be signed by each of the attendees. In this way, the rightholder’s intention to keep the classified information confidential is emphasized and the objects to be kept confidential are clarified to the obligors.

 

This article first appeared in the April 2018 issue of Asia IP.

http://www.asiaiplaw.com/article/39/3054/

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