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Protecting trade secrets in China

There is no trade secret law in China. But that does not mean that trade secrets cannot be protected, as Ran Wang and Xiaojing Wang of Liu Shen explain

A company's assets include both tangible and intangible assets. Tangible assets may include for example buildings, land and equipment, and intangible assets include both reputation assets and intellectual property in which only patents and trade secrets protect ideas. A trade secret is information that is valuable for being not generally known in the trade and that the information holder takes reasonable measures to keep secret. Trade secrets may exist in all facets of the company's operations, and may include information that is not actively used in the company's operations as well as information about what does not work. The economic value of a trade secret may be destroyed through disclosure or a failure to take reasonable measures to protect the secrecy of the information. What is a trade secret in the context of Chinese law, how can you defend it and how can you protect it?

Definition of trade secret in Chinese law

In China, there is no an individual Trade Secret Law. However, a trade secret is defined in the Chinese Anti-Unfair Competition Law. According to Article 10 of this Law, a trade secret is defined as:

'Trade secrets' mentioned in this Article refers to any technology information or business operation information which is unknown to the public, can bring about economic benefits to the obligee, has practical utility and about which the obligee has adopted secret-keeping measures.

The first thing to notice is the broadness of the definition: trade secret means any technology information or business operation information. Trade secret protection is thus much broader than patent, copyright or trade mark protection in its potential inclusion of any information possessed by the oblige.

The first requirement on the information in order to be considered as a trade secret is that "it is unknown to the public, can bring about economic benefits to the oblige". Notice also that this economic benefit is dependent on the information not being known to others. In other words, disclosure of the information will destroy the economic value of the trade secret.

Note also the requirement regarding "has practical utility", which does not require the trade secret is actively used in the company's business. For example, a company invents a new compound: the previous 10 tries are all failures before the eleventh try is successful. All the previous 10 formulas may also be deemed as a trade secret because a competitor would economically benefit from knowing that those 10 formulas did not work, saving it the time and expense of trying all of these formulas in developing its own compound.

The second requirement for the information to be considered as a trade secret is that "about which the obligee has adopted secret-keeping measures". That is, the owner of the trade secret must try to keep it a secret, and this effort is not optional. Failure to make such an effort will destroy the trade secret rights and inherent economic value of the trade secret.

How to defend trade secrets

Given that trade secrets are so valuable and important to the company, how to defend trade secrets in the context of Chinese Law becomes an inevitable issue.

The only way to validate a trade secret is through litigation. Absent a court finding that trade secret property rights in information exist, the trade secret status of the information remains alleged but unproven.

Generally, litigation of trade secret rights occurs after an alleged misappropriation of the information. The trade secret owner files suit as a plaintiff that the defendant violated the plaintiff's trade secret property rights in the information. The plaintiff bears the burden of proving the following aspects:

Is there information qualified as a trade secret?

It is a basis of the litigation. In doing so, the plaintiff must prove the information to be claimed as a trade secret is unknown to public, can bring economic benefit to the plaintiff and has practical utility and about which the plaintiff has adopted secret-keeping measures.

It is noted that the information must be specified, and the plaintiff cannot allege everything in his company is a trade secret; otherwise, the court would reject the suit.

The secret-keeping measure also must be specific for the specified trade secret, as in Beijing Qiwei Hangce Ltd Co v Beijing Beidou Navigation technology Ltd Co, where the court held that when the plaintiff alleged that someone has infringed his trade secret, the plaintiff bore the burden of proving that the trade secret claimed complied with the conditions provided in the Law. One of the legal requisites for the trade secret is secret-keeping measure, that is, the plaintiff has taken particular secret-keeping measures for the claimed trade secret, and the measures should be specific and effective, and directly aimed at the trade secret itself.

Does the plaintiff own rights in the information?

Ownership is often overlooked in trade secret litigation, but it does come up in specific cases. The plaintiff must prove that it owns the information alleged to be a trade secret, and there are traps with regard to the ownership of trade secret rights that can ensnare the unwary.

Without a written agreement, a trade secret made by an employee may be owned by the creator himself, rather than by an employer. And this is also applied to independent contractors, outside manufactures and other suppliers to the company. The agreement needs to be executed to transfer the ownership rights of the trade secret from the creator to the company.

As in Beijing Puran Track Transportation Technology Ltd Co v Anan He, the court held that the plaintiff does not own the trade secret because although the plaintiff claimed the formula for a certain material is a trade secret, the plaintiff did not even know the content of the formula.

Had the defendant had actual, constructive or implied notice of the trade secret status of the information?

The notice proof requires the plaintiff to demonstrate that the defendant has realised the information he obtained is a trade secret. Especially in litigation between an employer and a former employee, the employee is free to use their general skills, knowledge, and experience in competition with their former employer. Therefore, the plaintiff must draw a line between the employee's general knowledge, skills and experience and the company's alleged trade secrets.

It is not sufficient to claim that "everything in the company is a trade secret" because we all know that some information possessed by the company does not qualify as a trade secret. Failure to do so would be fatal to the plaintiff's case in litigation.

However, sometimes it is easy to fulfil this task, for example by labelling documents containing trade secret information with "confidential" or "proprietary" stamps or legends. Actual notice can also take the form of a list of trade secrets presented to a visitor, a customer or a potential cooperator.

Had the defendant access to the information qualified as trade secret

Everybody has the right to develop or reverse engineer the trade secret information independently, so the plaintiff must show that such independent development or reverse engineering does not exist, rather the defendant came into possession of the alleged trade secret through their access to the plaintiff's information.

Sometimes, access may be easy to prove. The defendant may either have written or been on the distribution list for the information. Alternatively, the defendant may have been in a position where it had opportunity to access the information.

In other cases, proving access can be much more difficult. Did the defendant pick up or read a sensitive document to which he or she should not have had access, and which was carelessly left out in the open when someone left their desk for a moment? Is the defendant accessing the information through some illegal act, such as by bribing, spying or computer hacking?

In practice, access control and safeguards, together with access tracking, will provide affirmative proof that the defendant had access to the trade secret information.

Had the defendant used or disclosed the information?

Sometimes, it is difficult for the plaintiff to collect solid evidence proving the defendant has used the plaintiff's trade secret. The plaintiff may request an appraisal, to prove that the defendant's product involves the plaintiff's trade secret. In addition, the plaintiff may also resort to the power of the Public Security Bureau by reporting a criminal liability for trade secret infringement, so as to collect the evidence of the defendant by taking advantage of the power of the authorities, as in SIGroup, SI Shanghai v Huaqi (company), XU Jian (individual).

Plaintiff was impaired by defendant's use of the information or defendant was unjustly enriched thereby.

If the plaintiff was harmed by the defendant's use of the trade secret information, he is entitled to claim damage from the defendant. How to determine damage is provided in Article 17 of the judicial Interpretation of Anti-Unfair Competition Trial issued by the Supreme Court of China, and the damage can be calculated by referring to the method used in trade mark infringement litigation:

Article 17. As regards determining the damages for the acts infringing on business secrets as stipulated in Article 10 of the Anti-unfair Competition Law, it may be performed with reference to the methods of determining damages for patent infringement, and as regards determining the damages for the unfair competition acts as stipulated in Article 5, 9 or 14 of the Anti-unfair Competition Law, it may be performed with reference to the methods of determining damages for infringing upon registered trade mark rights.

If any business secret has been made aware to the general public due to any tort, the damages shall be determined subject to the commercial value of this business secret. The commercial value of this business secret shall be ascertained in light of such elements as the research and development costs, the income from implementing this business secret, possible benefits and the time for maintaining competitive advantage.

How to protect trade secret

Security against outsiders

Outsiders may access the company's trade secret information through both proper and improper means.

Access to trade secrets by proper means occurs typically, for example, by careless or inadvertent disclosure during for example trade shows, conferences, promotions and interviews, unprotected disclosures to potential customers, contract employees and potential employers, discussion between insiders in public locations, errors in transmission of trade secret information in the mail and over the internet or careless disposal of company records, documents, computers and storage media. The only effective prevention method is employee management and education, so as to carefully handle the company's trade secret information. The company cannot claim damage by establishing litigation before the court.

Access to trade secrets by improper means or illegal access can occur through fraud, trespass, theft, hacking and inducement of an insider to breach their fiduciary or contractual obligation of confidentiality.

Securing trade secrets against illegal access by outsiders usually involves taking measures to make the illegal access difficult, ensuring that the illegal access to the trade secret is noticed, and ensuring that there is no illegal access to the trade secrets evidence that allows the company to identify the perpetrator.

Security against insiders

It has been seen that the insider threat to trade secret information has now surpassed the outsider threat for most companies. For example, one employee worked in the company for several years, quit the company and went to a direct competitor's company or become another competitor, doing business by using the information obtained from the former employer. This kind of story has occurred again and again in the recent years.

Therefore, first, the company should draw a red line between the general skill or knowledge of the employee and the company's trade secret, and clearly notify this line to the employee.

Second, the disclosure of trade secrets to employees should be limited to the disclosure of those trade secrets the employee needs to know in order to fulfil his job. Compartmentalization is one method for limiting the disclosure of the trade secrets within the company. In compartmentalization, the trade secrets are disclosed only within the areas of the company that are required to perform assigned tasks. For example, manufacturing trade secrets remain in manufacturing, engineering trade secrets remain in engineering, and so on.

Third, there is an access tracking system for the trade secret information in the company. Access tracking is also important for proving access in any future trade secret misappropriation lawsuit, and access tracking can also provide a method for detecting unauthorised access and attempts at unauthorised access, as well as documenting unauthorised accesses and attempts.

Fourth, the protection of the trade secret should be started as soon as the employee is initially interviewed. The prospective employee should be informed of the obligations he or she will undertake to his or her new employer to respect and protect IP rights, so that his or her acceptance of employment under these conditions is an explicit acknowledgement of the expected obligations to the new employers.

Fifth, one of the high risk periods of an employee copying, disclosing or using the company's trade secrets is just before his or her departure from the company. It is therefore recommended that an exit interview containing trade trade secrets is carried out. During the trade secret exit interview, the employee is shown a list of the company's trade secrets to which he or she had access or was exposed during employment. The employee may be requested to sign a statement acknowledging that the information on the list is the company's trade secret, and that he or she agrees not disclose or use the information in future, and so on.

Due to a trade secret's non-disclosure character, trade secret misappropriation is often not discovered until evidence of the company's proprietary information appears in the marketplace; at that time, disclosure of the trade secret would bring unrecoverable damage to the company's operation. Therefore, the company should repair the house before a rainy day, and take good secret-keeping measures to lower the risk of disclosing trade secrets.

Ran Wang
Ran Wang joined Liu Shen in 2000. He qualified as a patent attorney in 2002 and an attorney at law in 2004, and specialises in patent protection. He has experience in a variety of areas, including mechanical engineering, automobiles, engines, elevators and rolling mill machinery. Before joining this firm, he worked for North Vehicle Research Institute of China for three years as a mechanical engineer.. Wang provides legal services in patent application/inquiry, patent re-examination and invalidation, patent infringement analyses, patent administrative and legal proceedings, and other matters related to IP rights. Wang has a master’s degree from Beijing Institute of Technology in 1997. He also joined the law degree training programme jointly provided by China University of Political Science and Law and the John Marshall Law School, Chicago, USA from 2005 to 2007, and got his LL M degree. In addition, he participated in the master of intellectual property programme at the University of Melbourne, and has extensive knowledge of patent practice in China, America, and Australia.

Xiaojing Wang
XiaoJing Wang is a partner, patent attorney and attorney-at-law focusing on patent prosecution, patent invalidation and patent infringement litigation. He specialises in patent prosecution work in the fields of vehicles, industrial device, sports equipment and other mechanical engineering.

Wang received a bachelor degree in vehicle engineering from Hebei Industrial University in 1998 and a masters degree from China Academy of Machinery Science & Technology in 2006. He worked in the Beijing Research Institution of Mechanical & Electrical Technology (BRIMIT) for nine years and joined the law firm Liu, Shen & Associates in 2007.

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