Protecting trade secrets should be a priority in any jurisdiction. For companies, trade secrets are valuable assets that provide a competitive advantage.
Establishing confidentiality and non-competition agreements with employees are crucial and practical ways to protect trade secrets.
Below, we outline protecting trade secrets under the Chinese jurisdiction.
What is the Legal Definition?
According to Paragraph 4 of Article 9 of the Anti-unfair Competition Law, the definition of the term "Trade Secret" refers to:
- technical information;
- operational information; or
- other business information
Such information is not publicly disclosed, holds commercial value and confidentiality measures have been adopted by the party holding the rights.
According to Article 1 and Article 2 of the Certain Provisions on Prohibiting Infringements upon Trade Secrets, Trade Secret refers to the "technical information" and "operational information", which are as follows:
- not publicly disclosed;
- capable of bringing economic benefits to the owners of the rights;
- has practical applicability; and
- confidentiality measures have been adopted by the party holding the rights.
Technical information and operational information includes:
- product formulas;
- manufacturing processes;
- manufacturing methods;
- management know-hows;
- client lists;
- supply source information;
- production and marketing strategies;
- base number of tender documents;
- content of tender documents; and
- other information.
Not publicly disclosed refers to the fact that such information cannot be obtained directly in the public domain.
Capable of bringing economic benefits to the owners of the rights and has practical applicability refers to the fact that such information has definite application. It is also capable of bringing actual or potential economic benefits or competitive advantages to the owners of rights.
Owners of the rights have taken confidentiality measures" includes:
- concluding confidentiality agreements;
- establishing confidentiality systems; and
- taking other reasonable confidentiality measures.
How to Provision Trade Secret Obligations?
Practically, trade secret obligations can be stipulated in the employment contract. Namely, a confidentiality agreement and a non-competition agreement can be utilised with the employee, specifying their confidentiality and non-competition obligations.
According to Paragraph 1 of Article 23 of the Labor Contract Law, an employer and an employee may agree on the maintaining the confidentiality of trade secrets of the employer and the confidentiality matters relevant to intellectual property rights in the labour contract.
Therefore, an employer and an employee can either adopt of the following:
- insert a confidentiality clause in the employment contract; or
- sign a separate confidentiality agreement.
The employer can require the employee to keep trade secrets of the employer confidential. The employee shall assume liability for breach of agreement for violating confidentiality obligations.
According to Article 25 of the Labor Contract Law, an employer shall not specify in an agreement with an employee the following:
- the employee shall assume liquidated damages when he or she violates the confidentiality obligations.
Additionally, the Anti-unfair Competition Law, stipulates that the confidentiality obligation of an employee is a statutory obligation. Whether an employer reaches an agreement after departing the company, the employee shall keep trade secrets of the employer confidential.
In the case, there is a confidentially agreement between the employer and the employee, such agreement shall be applied first. Where there is no confidentiality agreement between the two parties, the employer shall pursue the tort liability of the employee. This shall be to the extent that the employee infringed trade secrets.
In such case, the scope of confidentiality is limited to statutory trade secrets. It also does not include other secrets of the employer.
Non-competition obligation refers to a specified period after the cancellation or termination of a labor contract, in which the employee shall not seek employment in any other employer under the following:
- produces or deals in similar products; or
- engages in the similar business and competes with his or her former employer;
- start a business to produce, deal in similar products or engage in the similar business.
According to Paragraph 2 of Article 23 of the Labor Contract Law, the employer may agree on the following:
- a competition restriction clause with the employee in the labor contract or confidentiality agreement; and
- a monthly economic compensation payable to the employee within the non-competition period after the cancellation or termination of the labor contract.
Where the employee violates the non-competition agreement, he or she shall pay liquidated damages to the employee according to the agreement.
According to Article 24 of the Labor Contract Law, personnel subject to the non-competition obligation shall be limited to following:
- senior management personnel;
- senior technical personnel; and
- other personnel of the employer with confidentiality obligation
The non-compete period is limited to less than two years. The employer and the employee through negotiations can determine the following:
- amount of non-competition economic compensation;
- amount of liquidated damages for violation of non-competition obligation by the employee; and
- scope, area, and period of non-competition.
However, such agreement shall not violate laws or regulations and shall comply with the principles of fairness and reasonableness.
According to Article 8 of the Interpretation of the Supreme People's Court on Several Issues concerning the Application of Law in the Trial of Labor Dispute Cases (IV), where employees and employers have agreed on non-competition and economic compensation clauses, and the employers fail to pay economic compensations for three months due to their own reasons. Then employees may request termination of the aforesaid non-competition clauses.
Within the non-compete period, the employers may also request the termination of non-compete clauses. However, according to Article 9 of the Interpretation of the Supreme People's Court on Several Issues concerning the Application of Law in the Trial of Labor Dispute Cases (IV), when an employer terminates the non-compete clause within the non-compete period, the people's court shall support the employee's request for additional payment of a three-month economic compensation.
Unlike the confidential obligation, the non-competition obligation is an agreed obligation agreed within a written agreement. If there is no agreement on non-competition between the employer and the employee, the employee will not assume the non-competition obligation.
It should be noted that under general circumstances, the payment of non-compete compensation by the employer after the resignation of the employee in accordance with the agreement. This is the precondition for the employer to require the employee to perform the non-compete obligation.
According to the provisions of Article 6 of the Interpretation of the Supreme People's Court on Several Issues concerning the Application of Law in the Trial of Labor Dispute Cases (IV), in the case that an employee and an employer fail to stipulate payment of economic compensations to the employee after the labor contract concerned is rescinded or terminated. And the employee has fulfilled his/her obligations under non-competition clauses.
Then the employee may request the employer to pay the economic compensations on a monthly basis at the rate of 30% of the average monthly wage for the 12 months before rescission or termination of the labor contract concerned.
Where the amount of the aforesaid economic compensations is less than the minimum wage standard at the place where the labor contract concerned is performed. Then minimum wage standard at the place where the labor contract concerned is performed shall be applied.
This standard can be referenced to define economic compensation of non-competition.
What is the Legal Definition of Trade Secret Infringement?
According to Paragraphs 1, 2 and 3 of Article 9 of the Anti-unfair Competition Law, acts of infringing upon trade secrets include:
- obtaining business secrets from the owner of the right by stealing, bribery, fraud, resorting to coercion, electronic intrusion, or other illegitimate means;
- disclosing, using or allowing another to use the business secrets of the owner of the right obtained by the means mentioned in the preceding item;
- disclosing, using or allowing another to use the commercial secrets of owner of the right in violation of confidentiality obligations or the owner of the right's requirements on keeping such commercial secrets confidential;
- obtaining, disclosing, using or allowing another to use an owner of the right 's trade secrets by inciting, inducing or helping another to violate confidentiality obligations or the owner of the right 's requirements on keeping such trade secrets confidential.
Where any other natural person, legal person or unincorporated organization than the business operator commits any of the illegal acts listed above, such practice shall be deemed as infringement of trade secrets.
Where a third party knows or should know of the fact that an employee or former employee of the right owner of commercial secrets or any other entity or individual conducts any of the illegal acts specified above, but still obtains, discloses, uses or allows others to use such secrets, such practice shall be deemed as infringement of commercial secrets.
What to Do in the Case of a Violation?
According to Article 90 of the Labor Contract Law, where an employee violates the confidentiality obligation or non-competition agreed in the labor contract, causing harm to the employer. The individual shall assume compensation liability.
According to Article 2 of the Official Letter on Issues of Trade Secret Infringements Involved in Labor Disputes given by the General Office of the Former Ministry of Labor and Social Security, where labor contracts clearly stipulates confidentiality of trade secrets, but employees fail to fulfill and incur infringement on employers' trade secrets – therefore a labor dispute occurs. If parties concerned apply for arbitration with labor dispute arbitration commission, the commission shall accept. The commission shall make award according to the relevant provisions and stipulations in labor contracts.
According to the above, if the disputes arise due to infringement of confidentiality obligations and confidentiality obligations are stipulated in the labor contract. Then the employer has the right to pursue the following:
- apply for labor arbitration and pursue the liability of the employee for breach of agreement; or
- initiate a civil action to pursue the tort liability of the employee for trade secret infringement.
Originally published 16 June 2023
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.