China: How To Prevent The Disclosure Of Trade Secret By The Employee?

Last Updated: 29 December 2017
Article by Erex Chen

Trade secret is one of the key factors which enable the company to keep competitive in the market. However, due to the increased competition in the market, many companies are concerned with the disclosure and improper use of trade secret, among which, the disclosure of trade secret by the employee is one of the reasons leading to disclosure of trade secret.

The disclosure of trade secret by the employee can be caused due to one of the following reasons:

  1. the employee is induced by other competitive company leading to the disclosure of the trade secret;
  2. Due to the lack of complete company regulation for protecting confidentiality, the employee works for other competitive company after he leaves the company and discloses the trade secret;
  3. Regardless of company regulation for confidentiality, the employee discloses the trade secret to competitive companies in bad faith after he leaves the company;
  4. The employee makes use of the trade secret for his own business.

Despite of the disclosure of trade secrets, many companies may find themselves difficulty to pursue against the employee for legal liability, which is usually caused due to the lack of sense for protection of trade secret and the incompletion of company regulation.

So when the regulation for confidentiality is planned, what shall be noted?

I. What is trade secret?

Many companies will include the clause of confidentiality in the employment contract with the employee. However, according to our observation, these clauses are very general which may cause dispute over the definition and scope of trade secret.

Trade secret, according to the definition in the Law of Anti-unfair Competition, refers to technology information and operation information which is not known to the public and capable of bringing economic benefit to the holder, and has practical utility with measures taken by the holder to keep confidential.

Therefore, trade secret consists of technology information and operation information.

Technology information including programs, designs, manufacturing processing, product formula, manufacturing method etc; Operation information including management know-how, client list, goods resource intelligence, production and marketing strategy, base price of the tender and content of bid document etc.

When the company defines the scope of confidential information for protection, it shall fully understand the definition of trade secret by the law. That means, not all information relating to the company can constitute trade secret by the law.

II. Confidentiality Agreement

The conclusion of a confidentiality agreement is an important measure to protect confidential information, which is also one of features to identify the trade secret. When concluding and enforcing the confidentiality agreement, the followings shall be noted

1. Definition of Confidential Information

The company shall define the scope of confidential information in accordance with the nature of its business.

If the company is a manufacturer or technology-oriented development company, it shall particularly emphasize on the protection of technology information while a marketing-oriented company or trading company shall emphasize on the protection of operation information.

2. Explicit measures shall be taken to protect confidential information

Besides the conclusion of confidentiality agreement, during the course of delivering documents containing confidential information to the employee, or access to the place or system containing confidential information by the employee, the company shall mark the nature of confidentiality of the information in an explicit way. For example, the company can mark "confidentiality" on the first page of the document containing confidential information, or add a lock to the carrier of confidential information. Meanwhile, a record of receipt of or access to the confidential information by the employee shall be maintained. In doing so, the company can remind the employee receiving the confidential information of the nature of information received, on the other hand, once these information is disclosed, it will be easier to define the scope of disclosed confidential information

3. Penalty

In the confidentiality agreement, penalty can be agreed if the employee breaks the obligation of confidentiality.

However, it shall be note that under current practice in Shanghai, the penalty for breaking the confidentiality obligation will actually apply to following situations:

  • if the employee breaks the obligation of confidentiality during the term of labor contract, penalty will not be supported by the court. However, if the company suffers actual loss, the company can request for compensation against the employee;
  • if the employee breaks the obligation of confidentiality after he leaves the company, the penalty is acceptable to the court. However, we suggest a reasonable consideration shall be paid to the employee for his confidentiality obligation.

III. Confidentiality and Non-competition

Confidentiality agreement and non-competition agreement are inter-linked but two separate legal concepts:

  1. The main purpose of a non-competition agreement is to restrict the employee with confidentiality obligation to seek employment in a competitive company after he leaves the company. However, confidentiality agreement itself does not contain any clause of non-competition;
  2. According to the law, the maximum term for non-competition is 2 years while the obligation of confidentiality can be with indefinite term;
  3. Only management personnel, senior technology personnel and other employees with confidentiality obligation can be requested to conclude non-competition agreement while confidentiality agreement applies to any employee having access to confidential information;
  4. Penalty for breaking the obligation of non-competition and confidentiality can be agreed separately;
  5. If necessary, the company can conclude both confidentiality agreement and non-competition agreement with same employee.

Previously published 15 December 2017

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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