In today’s fiercely competitive business environment, trade secrets, as an extremely important and unique intangible asset of enterprises, are a key element in protecting intellectual property rights and enhancing core competitiveness. However, in actual operations, disputes over trade secrets arising from on-the-job employees leaking information or employees’ departure are on the rise. Therefore, internal management of employees with access to confidential information is crucial to the protection of trade secrets. Proper management and protection of trade secrets can not only effectively prevent and respond to relevant risks, but also build a solid line of defense for safeguarding corporate rights and interests, thereby helping enterprises move forward steadily in market competition.
Focusing on several hot issues such as the basic principles of trade secrets, common related risks in business operations, and avenues for rights protection and remedies, we have selected the following three popular Q&As from Chapter II: Protection of Trade Secrets and Employee Management of the Frontier Hot Topics in Intellectual Property Practice Q&A Handbook, jointly compiled by Wolters Kluwer Legal & Regulatory, Lusheng Law Firm and its strategic partner Rouse.
Selected Practical Q&A
Q1
[Definition and Types of Trade Secrets] What is a trade secret? What statutory elements must be satisfied for information to constitute a trade secret? What types of information are generally included as trade secrets?
Article 9 of the Anti-Unfair Competition Law provides: A trade secret refers to business information such as technical information and business information that is not known to the public, has commercial value, and for which the right holder has adopted corresponding confidentiality measures. According to the above definition, business information involved in an enterprise’s business activities must satisfy the following three statutory elements to constitute a trade secret:
• Not known to the public, i.e., secrecy.According to Article 3 of the Provisions of the Supreme People’s Court on Several Issues Concerning the Application of Law in the Trial of Civil Cases Involving Infringement of Trade Secrets (hereinafter referred to as the “Several Provisions”), “not known to the public” generally means that the information is not generally known to and readily obtainable by relevant persons in the field to which it belongs. “Relevant persons in the field to which it belongs” generally refers to producers, sellers, R&D personnel and other persons in the industry to which the relevant information pertains who obtain economic value from the use of the trade secret, including competitors of the information holder and their employees. This is different from the expression “persons skilled in the art” in the Patent Law. Patents and trade secrets, as the basis of rights, protect different legal interests and involve different legal relationships. The value of trade secrets is mainly reflected in market competition. Therefore, the subjects who perceive their value should not be divided according to technology-based fields as in the Patent Law, but should be determined based on economic activities characterized by the combination of production factors to define the scope to which the information belongs. “Generally known” emphasizes that trade secrets should be distinguished from publicly known information in the relevant field, while “readily obtainable” requires that the process of forming the trade secret be relatively difficult and that a certain degree of labor and cost be invested. Information that relevant persons can easily know through lawful means should be excluded from the scope of protection of trade secrets. Article 4 of the Several Provisions enumerates common circumstances in which information is known to the public and does not constitute a trade secret:
(1) The information is general knowledge or industry practice in the field to which it belongs;
(2) The information only involves simple combinations of product dimensions, structures, materials, components, etc., which can be directly obtained by relevant persons in the field to which it belongs through observation of products already on the market;
(3) The information has been publicly disclosed in published publications or other media;
(4) The information has been made public through open presentations, exhibitions, and other means;
(5) Relevant persons in the field to which it belongs can obtain the information from other public channels.
It should be noted that new information formed by organizing, improving, or processing information known to the public may constitute a trade secret if it meets the provisions of Article 3 above.
• Having commercial value, i.e., value.Article 7 of the Several Provisions provides: Information for which the right holder seeks protection may be deemed to have commercial value if it has actual or potential commercial value due to not being known to the public. Interim results formed in production and business activities may also be deemed to have commercial value. In practice, the value of trade secrets is relatively easy to prove. According to Article 7 of the Reference for Evidence in Civil Cases Involving Infringement of Trade Secrets issued by the Beijing Intellectual Property Court, the value of trade secrets can be proved by adducing evidence regarding factors such as the research and development costs of the trade secret, the benefits, expected profits, and the period during which a competitive advantage can be maintained through the implementation of the trade secret.
• The right holder has adopted corresponding confidentiality measures, i.e., confidentiality.Article 5 of the Several Provisions provides: Where, prior to the alleged infringing act, the right holder has adopted reasonable confidentiality measures to prevent the disclosure of trade secrets, the people’s court shall determine that corresponding confidentiality measures have been taken. In determining whether corresponding confidentiality measures have been taken, a comprehensive assessment shall be made based on factors such as the nature of the trade secret and its carrier, the commercial value of the trade secret, the identifiability of the confidentiality measures, the degree of correspondence between the confidentiality measures and the trade secret, and the right holder’s intention to maintain confidentiality. Article 6 of the Several Provisions enumerates common circumstances in which corresponding confidentiality measures are deemed to have been taken:
(1) Entering into confidentiality agreements or stipulating confidentiality obligations in contracts;
(2) Imposing confidentiality requirements on employees, former employees, suppliers, customers, visitors, etc. who can access or obtain trade secrets through articles of association, training, rules and regulations, written notices, and other means;
(3) Restricting visitors or implementing differentiated management with respect to confidential plants, workshops, and other production and business premises involving trade secrets;
(4) Distinguishing and managing trade secrets and their carriers by means such as marking, classifying, isolating, encrypting, sealing, and restricting the scope of personnel who can access or obtain them;
(5) Adopting measures such as prohibiting or restricting the use, access, storage, and copying of trade secrets with respect to computer equipment, electronic devices, network equipment, storage devices, software, etc. that can access or obtain trade secrets;
(6) Requiring departing employees to register, return, delete, or destroy the trade secrets and their carriers that they have accessed or obtained, and to continue to assume confidentiality obligations.
Trade secrets generally include technical secrets and business secrets. Article 1 of the Several Provisions provides: Information relating to structures, raw materials, components, formulations, materials, samples, patterns, propagating materials of new plant varieties, processes, methods or steps thereof, algorithms, data, computer programs and related documents, etc. that are related to technology constitutes technical secrets. Information relating to business activities such as ideas, management, sales, finance, plans, samples, bidding and tendering materials, customer information, and data constitutes business secrets.
In practice, common technical secrets include various types of information, for example, the well-known Coca-Cola formula, clinical trial data of drugs not yet marketed, source code of computer software, production processes and equipment for chemical raw materials, etc. In practice, the information claimed to constitute technical secrets can be proved through judicial appraisal, technical appraisal, and other means. The most common business secrets in practice are customer information, including information such as customer names, addresses, contact details, and trading habits, intentions, and contents.
It should be noted that customer lists or accumulated transaction information mastered by enterprises in the course of business operations do not automatically constitute trade secrets.Only where such information reflects in-depth information such as customers’ trading habits and intentions that cannot be obtained by others through public channels can it be protected as trade secrets. For example, in case (2020) Yu Zhi Min Zhong No. 539, the customer list provided by the plaintiff contained only customer names, telephone numbers, and addresses, without in-depth information such as trading habits and intentions, and the information in the customer list could be obtained from public channels, so it did not constitute a trade secret. In contrast, in case (2019) Yue 03 Min Zhong No. 4816, the customer information claimed by the plaintiff included specific combined information covering trading habits, intentions, and contents, such as the names of products traded by customers and suppliers, payment methods, document requirements, quality requirements, and packaging requirements. This information was specific information fixed by the plaintiff through prior transactions, repeated contacts, and communications, and was not generally known to or readily obtainable by relevant persons in the field to which it belonged, and thus constituted a trade secret.
Q2
[Sorting Out and Inspecting Risks of Trade Secret Leakage] In which stages of business operations are enterprises prone to trade secret leakage?
“Preventing problems before they occur” is the primary and ultimate goal of trade secret management for enterprises, because once trade secrets are leaked, the damage to an enterprise’s competitiveness is often irreparable. To achieve this goal, enterprises need to identify and understand the stages and risk points in actual business operations that are prone to trade secret leakage, and regularly sort out and inspect these risk stages to prevent leakage incidents. In practice, stages with a high incidence of trade secret leakage include the following scenarios:
• Employees with access to confidential information taking the company’s trade secrets with them upon departure.The departure of employees with access to confidential information is a high-risk event for trade secrets. Matters that enterprises need to carefully inspect at this stage include:
(1) Sorting out and taking stock of all confidential information that the departing employee had access to during employment.
(2) Inspecting the departing employee’s IT equipment to determine whether there are records of unlawful use of networks or transmission of confidential information to external parties.
(3) Inspecting and supervising the handover process of confidential information to ensure that the departing employee returns all carriers of confidential information and office equipment to the company.
(4) Verifying whether a confidentiality agreement or non-compete agreement has been signed with the departing employee, and ensuring that the departing employee clearly understands the content and scope of the confidentiality obligations assumed.
• Internal employees being bribed by competitors to provide trade secrets.In practice, trade secrets are also frequently leaked by on-the-job employees in exchange for direct economic benefits from competitors. In the “rubber antioxidant” trade secret infringement case[1], the defendant company stole the plaintiff’s confidential technical process by bribing the plaintiff’s technical personnel and used the secret process to design and build its own production line. To reduce the possibility of internal leakage, enterprises need to verify the following matters in daily operations:
(1) Regularly inspecting access records of trade secret documents to identify abnormal access.
(2) Interviewing on-the-job employees with abnormal access to understand and verify the reasons and purposes of such access.
(3) Regularly inspecting the company’s internal monitoring systems to identify whether on-the-job employees have unlawfully stored or sent confidential documents to external parties.
• Failure to adopt adequate trade secret protection measures in external cooperation.Enterprises are also involved in external cooperation in their business activities, for example, with contract manufacturers or distributors. Negligence in the course of external cooperation can also easily lead to trade secret leakage. Therefore, in cooperation with third parties, enterprises should pay attention to verifying the following matters:
(1) During cooperation, emphasizing to third parties which information constitutes trade secrets and entering into confidentiality agreements.
(2) Adopting necessary redaction measures, such as redacting confidential information in documents, to prevent the cooperating party from knowing the complete trade secret information.
(3) Requiring the cooperating party to also adopt necessary confidentiality measures to avoid trade secret leakage by the cooperating party.
Q3
[Remedies for Trade Secret Infringement] Through which avenues can an enterprise seek remedies upon discovering that its trade secrets have been infringed?
The existing legal framework for the protection of trade secrets provides enterprises with three avenues of protection: civil, administrative, and criminal:
• Civil avenue.Enterprises, as right holders of trade secrets, may file civil actions for trade secret infringement with the people’s courts, requesting that the infringer cease the infringement and compensate for economic losses. For malicious infringement of trade secrets, the right holder may also claim punitive damages of one to five times the amount of damages.
• Administrative avenue.Enterprises may also report to the market regulation authorities. Upon investigation and determination that trade secret infringement is established, the supervision and inspection authorities may order the cessation of the infringing acts, confiscate illegal gains, and impose a fine of up to RMB 1 million; where the circumstances are serious, a fine of up to RMB 5 million may be imposed.
• Criminal avenue.If an enterprise’s core trade secrets are infringed, causing serious losses, the enterprise may also directly report the case to the public security authorities. According to the criteria for filing and prosecution of criminal cases involving infringement of trade secrets,where the amount of loss caused or illegal gains reaches RMB 300,000 or more, the threshold for filing a criminal case is met.
It should be noted that the above three avenues of relief are not mutually exclusive. Enterprises may choose one of these avenues or use all three avenues concurrently. For example, in the “Haode Machinery” series of cases involving three-dimensional protection of trade secrets, the Shanghai Songjiang District Administration for Market Regulation, the Shanghai Intellectual Property Court, and the People’s Procuratorate of Songjiang District adopted a “civil-administrative-criminal integrated” approach to severely crack down on trade secret infringement[2].
In practice, due to the covert nature of trade secret infringement and the limited means of investigation and evidence collection available to right holders, enterprises generally adopt a “criminal first / civil after criminal” approach to rights protection in order to obtain more sufficient evidence of infringement and higher compensation. For example, in the “rubber antioxidant” trade secret infringement case[3], the right holder first reported the case to the public security authorities and, in the criminal case, determined through judicial appraisal that the amount of loss reached RMB 201 million. Subsequently, the right holder filed a civil lawsuit with the court, claiming compensation for actual losses of RMB 201 million and obtained full support from the court.
Other Excellent Q&As Covered in This Chapter:
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[Protection Measures for Trade Secrets] What technical measures can enterprises adopt to prevent trade secrets from being leaked?
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[Reverse Engineering] Is reverse engineering a lawful means of acquiring trade secrets?
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[Circulation and Control of Trade Secrets] What measures can enterprises take to monitor the circulation of trade secrets and effectively reduce the risk of leakage?
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[Management of Employees with Access to Confidential Information] How can enterprises manage employees with access to confidential information to effectively prevent trade secret leakage?
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[Scope of Confidentiality Agreements/Clauses] In confidentiality agreements/clauses entered into between enterprises and employees, how should the content and scope of confidentiality be defined?
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[Non-Compete Agreements and Compensation] Which employees in an enterprise are subject to non-compete agreements? How should non-compete compensation be agreed?
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[Liquidated Damages in Confidentiality Agreements] May liquidated damages be stipulated in confidentiality agreements entered into between enterprises and employees?
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[Handling of Employees Who Leak Information] May an enterprise directly terminate the labor contract upon discovering that an on-the-job employee has violated the enterprise’s confidentiality rules?
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[Risks in Hiring New Employees] Where an enterprise, as a new employer, unknowingly uses trade secrets of a new employee’s former employer, is it required to bear legal liability?
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[Distinction Between Employees’ Experience and Knowledge and Trade Secrets] How should employees’ tacit knowledge be distinguished from trade secrets?
Authors of This Chapter
Jiang Nandi Director, Co-head of Dispute Resolution Practice
Lusheng Law Firm, Beijing
Email: ljiang@lushenglawyers.com
Lu Chang Lawyer
Lusheng Law Firm, Beijing
Email: tlu@lushenglawyers.com
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About the Report:
The Frontier Hot Topics in Intellectual Property Practice Q&A Handbook is jointly and meticulously authored by Wolters Kluwer Legal & Regulatory, Lusheng Law Firm and its strategic partner Rouse International, and was officially released online in November 2024. The handbook is compiled by more than 30 senior intellectual property experts, selects 108 intellectual property questions, and is divided into 11 chapters, comprising 100,000 words of detailed analysis. It focuses on the most cutting-edge issues currently of greatest concern in the industry, comprehensively covering key areas such as patents, trademarks, copyrights, trade secrets, unfair competition on the internet, intellectual property capital contribution, and punitive damages for intellectual property, and distills hot topics of concern to intellectual property practitioners in a “question-and-answer” format to provide readers with the latest legal interpretations, case analyses, and practical guidance.
Since its release, the report has attracted widespread attention and high praise in the industry. To better share its excellent content, we will continue to select some of the best Q&As from each chapter and publish them in a series of articles.
