In China, trade secrets are defined and governed by several different laws. Firstly, according to Article 149 of the Company Law, directors or managers of a company should not disclose the company's trade secrets via illegal means. Under the Contract Law, the parties involved in the negotiations of a contract are required not to disclose or inappropriately exploit any confidential information obtained during negotiations. Further, under the Criminal Law, it is a criminal offence to infringe upon the trade secrets of a third party causing significant loss and damage to the rightful owner.
Leakage of trade secrets is often done by employees or ex-employees. In this context and besides the above means of protection, employees often resort to contractual measures such as the Labour Law, the Labour Contract Law and the Anti-Unfair Competition Law to seek to enforce rights in trade secrets. This article seeks to explore the avenues of enforcing against trade secret infringement, especially in the employment setting.
Confidentiality agreements
The Labour Law and Labour Contract Law protect the trade secrets of employers. Under these laws, parties to the labour contract may agree on the terms in relation to the employee's duty to keep the employer's trade secrets confidential. For example, if an employee is in breach of his duty of confidentiality and causes loss or damage to the employer, the employee may be required to compensate for the loss or damage suffered by the employer. This may either be stipulated in the employment contract or a separate confidentiality or non-disclosure agreement. A separate confidentiality or non-disclosure agreement may be more favourable as it allows employers to directly submit the disputes to the courts. Labour contract disputes are normally resolved in labour tribunals, so having the confidentiality clause within the labour contract will necessitate appearing before the labour tribunal before the clause becomes subject to review by the courts.
The parties may agree on the scope of confidential information and the duration of the period of the confidentiality obligation. There is no specific stipulation on how long the confidentiality obligation period should be. In practice, the confidentiality period should be consistent with the level of importance of the confidential information. If it is anticipated that the confidential information will be disclosed to the public in the near future, the confidentiality period can be shorter. The confidentiality period should be reasonable and should not be stipulated as unlimited. When an employee breaches his duty of confidentiality and causes loss or damage to his employer, the employer may claim such loss or damages by providing evidence in support. When an employee has only breached his duty of confidentiality without defaulting on other provisions, such as non-compete provisions, the employer cannot request the employee to pay liquidated damages. Any terms in the labour contract requiring liquidated damages to be paid to the employer due to the breach of confidentiality will be interpreted as invalid.
The Anti-Unfair Competition Law
Under China's Anti-Unfair Competition Law, a trade secret is defined as technical or business information which:
- is unknown to the public, and
- will bring economic benefits to the owner and has practical utility, and
- the trade secret's owner has undertaken measures, to maintain its confidentiality.
The following will be considered as a misappropriation of trade secrets:
- obtaining trade secrets by theft, threatening, inducement or other improper means; or
- disclosing, using or allowing others to use trade secrets obtained by the abovementioned improper means; or
- disclosing, using or allowing others to use trade secrets in breach of an agreement entered with the owner of the trade secrets. Where a third party receives, uses or discloses trade secrets knowing that it has been obtained illegally, the third party will also be regarded as infringing the trade secrets of the owner.
In practice, claims relating to the employee's obligation of confidentiality under the labour contract or confidentiality agreement are combined with the claim of misappropriation of trade secrets under the Anti-Unfair Competition Law. The two separate heads are filed under the same claim. If there is a well-drafted confidentiality term in the employment agreement or a separate confidentiality agreement, employers may consider first bringing a lawsuit on this basis, as it may be easier to satisfy the burden of proof requirements.
Non-compete provisions
The Labour Contract Law sets out statutory limitations on non-compete provisions. According to Article 24, employees who may be under a duty of non-compete are limited to senior management, senior technician or other personnel who have the obligation to keep confidential information. The longest time period sanctioned by the law is two years after the termination of the labour contract. With respect to the relevant employees, the employer and employee may agree upon the non-compete provision in the labour contract or in the confidentiality agreement. The scope, geographical area and time period for a non-compete provision are subject to agreement, but must not contravene existing laws and regulations. The Constitution in China protects nationals' right to work, which is interpreted by some to mean that the employee has the right to freely choose his employer. In practice, few judgments on non-compete have elaborated on this point.
The Labour Contract Law sets out the scope of competing activities that can be controlled. These are limited to:
- work that the employee undertakes for any other employer producing or engaging in products of the same category;
- conducting business of the same category;
- establishing his or her own business producing or engaging in products of the same category; or
- conducting business of the same category as the employer.
The law is silent on non-solicitation clauses (clauses which prevent the soliciting of employees or clients post-termination). However, most employers tend to include non-solicitation clauses in the contract, and there are few published cases on the validity of such provisions.
One of the most topical issues relating to the non-compete provisions in China concerns the quantum of economic compensation to be paid to the employees. The Labour Contract Law only provides that the employer may agree with the employee that upon termination of the labour contract, a monthly payment will be paid to the employee as economic compensation for the duration of the non-compete period.
However, the Labour Contract Law does not specifically stipulate whether the payment of the economic compensation is a pre-condition for the validity of the non-compete obligations, or the quantum of such economic compensation. There is much variance in the practice of the local courts. Nevertheless, if the employer and the employee have agreed on a non-compete provision and the employer fails to pay the economic compensation as mentioned in the agreement, the employee may request the employer to make the payment.
In Shanghai, the court's position is that as long as the parties to the labour contract have agreed on non-compete provisions, even if they have failed to expressly set out whether the economic compensation shall be paid or how much it shall be, the agreement has binding force on both parties. If the amount of economic compensation to be paid is unclear in the contract, the parties may negotiate on the quantum. However, if the parties still are not able to reach a consensus after discussions and negotiations, the employer shall pay 20-50% of the previous salary to the employee per month. If the employer fails to pay the economic compensation, the employee is entitled to disregard the non-compete provisions. However, in Zhejiang Province, if the terms of the non-compete provision or agreement are silent on the amount of economic compensation or if the amount of the economic compensation is obviously too low for the employee to maintain the lowest threshold of local living standard, the non-compete terms or agreement will be deemed invalid. Even if the non-compete provisions are considered valid, if the employer fails to pay the economic compensation, the non-compete provisions or agreement will not be binding on the employee.
Similar to Zhejiang, in Guangdong and Shangdong provinces, if the agreement does not expressly provide for the economic compensation, the agreement is regarded as invalid. If the employer does not pay compensation after one month of termination of employment, the employee will not be bound by the non-compete agreement.
As to the quantum to be paid, this varies by location. In Shanghai, the amount to be paid is 20-50% of the average normal salary of the employee. In Jiangsu, it is no less than one third of the remuneration of the 12 months prior to the termination of the labour contract. In Zhejiang, as mentioned above, the amount of compensation should be high enough to allow the employee to maintain the minimum threshold of the local living standard.
The parties may agree on liquidated damages to be paid if the employee is in breach of non-compete obligations. However, the liquidated damages cannot be higher than the actual loss or damage. If the courts or tribunals find that the liquidated damages are too high, the court or tribunal will enforce damages based on the actual loss or damage. In practice, it is advisable for employers to specify the liquidated damages in the agreement as it may be difficult for the employer to prove its loss or damage as a result of the employee's breach of the non-compete obligation.
Enforcing confidentiality
Recent court cases show a trend of employers seeking to prevent trade secrets infringement by using both trade secrets infringement claims and claims of breach of non-compete obligations. According to the Provisions on the Cause of Action of Civil Cases issued by the Supreme People's Court in 2011, disputes on infringement of trade secrets and non-compete provisions are separate causes of action which may be brought to court. However, these heads may be brought under the same complaint. If the claimant elects to sue on the basis of the Anti-Unfair Competition Law, the alleged claimant is required to prove that the trade secret fulfills the legal requirements of misappropriation of trade secrets. Procedurally, trade secrets infringement cases, even with non-compete elements, may be directly filed to the courts. This is as opposed to pure non-compete disputes, which must go through the labour tribunal before being brought to the courts.
| John Ng |
John Ng is a qualified PRC patent attorney at Vivien Chan & Co and has been practicing intellectual property for over 12 years.
John has considerable experience in patents in a wide range of technical fields. He has prepared and prosecuted patent applications in major jurisdictions (including Greater China, US and Europe) in mechanical, electro-mechanical inventions, electronics, telecommunications, semiconductor technologies, wireless communications, computer hardware and software, medical devices, automation and industrial systems, internet-related inventions and business methods. John is also well versed in the prosecution of chemical and pharmaceutical patent applications in Greater China. John’s practice areas include patent specification drafting and patent prosecution; patent searching and patentability advice; patent infringement and validity opinions; patent litigation and revocation proceedings. He also advises on patent enforcement, assignments and licensing matters in Greater China, as well as overall patent and design portfolio management.
John graduated from the Hong Kong University of Science and Technology with a Bachelor’s degree in Mechanical Engineering. He then obtained a Bachelor’s degree in Laws from the University of London. He is fluent in English, Cantonese and Putonghua.
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| Anna Mae Koo |
Anna Mae Koo is an Associate at Vivien Chan & Co practicing transactional and intellectual property law. Anna Mae regularly advises on all areas of intellectual property including licensing, franchising and other transactional intellectual property, IP due diligence and strategic acquisitions, prosecution, technical assistance and technology transfer agreements, trade practices and unfair competition law.
Anna Mae is also actively involved in international associations and is a Litigation Committee Member of the International Bar Association and an Internet Committee Member of the International Trademark Association.
Anna Mae was a Prince Philip Scholar at the University of Cambridge where she graduated with an M. A. in Law. She has also obtained a Masters in Real Estate from the University of Hong Kong. She is fluent in English, Mandarin and Cantonese.
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