China: Protection of trade secrets in talent flow

Labour Law Newsletter
Last Updated: 18 February 2015

by Maggie Kong, Shane Lou, Susan Shan, Kent Xu, Grace Yang, Anderson Zhang and John Zhou

In the recent years, the increasing cases of trade secret infringement due to talent flow cover a large proportion of trade secret cases heard by the people's courts, which prominently focus on (1) serving staff violating duty of loyalty and infringing company's trade secret by means of part-time job; and (2) ex-serving staff of key positions provide service to competitors or participating in their own business that competes with the ex-employer. This newsflash is aimed to discuss the issue of trade secret protection in talent flow.

1. The Consideration and Term of Confidentiality Duty

Confidentiality duty, which is derived from the duty of loyalty, is the main obligation to employees in employment relation. Employers, strictly, are not supposed to compensate employees for their assuming the duty; however, provided confidentiality fee has been stipulated between the employer and employee, compensation shall be paid under the agreement. Employers shall not use lack of such legal obligation as defense.

Besides, we often see the term of period of confidentiality duty, such as employers are subject to confidentiality duty for two years following termination of employment in legal practice. Such agreement, however, in our opinion is not very appropriate. On one hand, confidentiality duty is a main obligation to employee in employment relation, which still lasts even though employment relationship has been terminated. Confidentiality duty period, to some extent, makes a limitation to the right of employer. On the other hand, since trade secret is deemed as employer's property before it enters into the public realm, employee, as counterparty, has no right to infringe or disclose. Hence, the agreement on period of confidentiality duty shall be revised.

2. Proof of Trade Secret Infringement

The trial principle of trade secret infringement cases, in many parties' opinions, is "similarity (or identical) + contact – legal source". The counterparty is supposed to bear the burden of proof as to the fact of "legal source" as long as the facts that the counterparty's information is similar or identical and the counterparty has access to the trade secrets at his convenience have been proved. If the counterparty cannot prove the "legal source", the counterparty shall be liable to infringement.

The aforesaid analysis, however, is not in compliance with the Interpretation of the Supreme People's Court on Certain Issues Concerning the Application of Law in the Trial of Civil Cases Involving Unfair Competition. Pursuant to Article 14 of it, where a party alleges that another infringes its trade secret, the party shall bear the burden of proof as to the fact that the trade secret it has possessed is in conformity to the statutory requirements, that the other party's information is identical or substantially identical to its trade secret, and that the other party has adopted unfair means. The evidence showing that the trade secret conforms to the statutory conditions shall include the carrier, specific content, and business value of the trade secret, and the specific confidentiality measures taken for the trade secret.

Therefore, the party shall bear the burden of proof as to the facts as below prior to requiring the counterparty to prove "legal source", or it seems to require the counterparty to prove his own innocence that is against the principle of civil law.

  1. Proving that they are the legitimate holders of trade secrets; and
  2. The other party has adopted unfair means.

3. Identification and Protection of Customer List

Customer list is one of the most common and important trade secrets to all corporations. Unfortunately, not all the customer lists are deemed to as protected trade secrets. In compliance with Article 13 of the Interpretation of the Supreme People's Court on Certain Issues Concerning the Application of Law in the Trial of Civil Cases Involving Unfair Competition, the customer list that is a trade secret shall generally refer to special customer data that is different fromrelevant public information, such as the names, addresses, contact information, habits, intentions, and contents of transaction of the clients, etc. It includes a customer list with the names of many customers /clients, and specific customers/clients with whom a long-term stable trade relationship has been established.

Hence, only the compile of the contact information of customers cannot constitute the customer list protected by the Interpretation. In summary, the undisclosed habits and contents of transaction, except the names and contact information of corporations which can be obtained publicly, are the substantial contents of a protected customer list.

Case Study

Plaintiff A is an equipment company which runs for production and sales for agriculture machinery. Defendant B and C were both employee of A and concluded a confidential agreement with A. In December 2012, B and C, during the employment at the company, set a Company D whose business competes with company A. Besides, B and C, making use of their position convenience at company A, illegally disclosed trade secrets of A to company D, which led adverse impacts on A's operation. Thus A sued B and C for ceasing infringing act and compensating for loss.

The trial found that what the plaintiff alleged cannot constitute trade secrets defined in the Anti-unfair Competition Law, because most of the information has been disclosed on A's website, some of it even on public websites. Moreover, the plaintiff can only prove that B and C have taken part in the same bid, which cannot prove that the defendants illegally obtain customer lists.

The trial held that the plaintiff failed to prove it holds the information of trade secret. The plaintiff also failed to prove that the defendant had infringing act. Therefore, the claims of plaintiff have been denied.

Our team believes that employers shall establish and improve the regulations on trade secret protection and effective media censorship system to avoid unconsciously discloses trade secrets. Concerning customer lists, under the circumstances of failing to set security classification of the contents, enhancing the customer relationship management is the fundamental way.

Moreover, although there are still some doubts about effects of non-compete agreement in practice, the successful rate of the non-compete disputes is still much higher than general trade secret infringement disputes in judicial cases. Therefore, imposing non-compete obligation on key personnel is still an adoptable strategy.

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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