Holding core personnel liable for theft of trade secrets

By Zeng Di, Zhilin Law Firm
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In February this year, the Supreme People’s Court (SPC) imposed a record RMB159 million (USD25 million) in damages for violating Jiaxing Zhonghua Chemicalon’s trade secrets, and ordered defendants including Wanglong Group and Fu Xianggen to cease all infringement.

Indeed, annual trade secret cases heard by Chinese courts more than doubled to 1,994 from 886 in the three years to 2018, according to judicial records.

This increase reflected companies’ growing awareness of the importance of trade secrets protection. On the other hand, the author must also note that the majority of these lawsuits failed. This makes tackling the leak of trade secrets one of the most vexing of corporate risks.

Case analysis

曾迪,-Zeng-Di,-Zhilin-s
Zeng Di
Senior Partner
Zhilin Law Firm

Why has it proved so difficult to hold the leakers liable? Based on publicly available case records, the main cause is simply that many companies are not familiar with the relevant laws and regulations. Instead, they trust in their own judgment on the scope of trade secrets, and fail to set up the necessary internal protection mechanisms. The result is that courts often cannot support the companies’ claims due to inadequate evidence. Looking at a real-life example will help pinpoint the specific challenges.

Xu was engaged by an equipment manufacturing company as vice president for sales. They signed a labour contract and a confidentiality agreement, in which Xu agreed to “undertake confidentiality obligations and not infringe on company trade secrets”. Due to the nature of his duties, Xu was given free access to the company’s design drawings, manufacturing technique, sales strategies and client list.

Half a year later, he left the company to join a competitor and applied for a series of patents that were very similar to the former employer’s manufacturing technique. In addition, the competitor targeted marketing towards certain customers using his previous company’s sales strategies and tailored to the clients’ business habits. In view of this, the company began to prepare a lawsuit against Xu and the competitor for infringing on trade secrets.

According to China’s Anti-unfair Competition Law and the Provisions of the Supreme People’s Court on Several Issues Concerning the Application of Law in the Trial of Civil Cases of Infringement of Commercial Secrets, for a company to claim trade secret infringement it must first prove what constitutes a trade secret, then the possibility for the accused to access those secrets, and finally that those secrets were used by the competitor.

What constitutes a trade secret? The law requires that the secrets must remain undisclosed to the public, and steps should have been taken to protect them. The company holds that the design drawings, manufacturing technique, sales strategies and client list are all its core trade secrets.

However, while the design drawings and manufacturing technique remained unavailable through public channels, the sales strategies had been made public by its agency, and the client list was on display in a prominent position on its own website. Obviously, sales strategies and the client list cannot be considered trade secrets in this case.

In terms of protection, the company’s efforts were limited to the labour contract and the confidentiality agreement, which failed to define design drawings or manufacturing technique as trade secrets. Furthermore, the company did nothing with the specific purpose of isolating these trade secrets. So far, not so good with the evidence collection.

Proving that the accused had access to the trade secrets. This step is closely connected to the above protective efforts. The company provided Xu’s work e-mail and his WeChat record with a certain colleague, which contained discussions on the sales strategies and client list (already excluded as trade secrets due to being public), but no communication was found concerning the design drawings or manufacturing technique. Although two employees of the company testified that Xu had indeed viewed the design drawings and the manufacturing technique, the absence of other types of evidence meant the accusation was on shaky foundations.

Proving the competitor used the trade secrets. This can be accomplished by comparing the trade secrets and the alleged infringements item by item. Since joining the competitor, Xu had sought several patents with himself as the inventor and the competitor as the applicant. When compared with the public patent information, multiple technical similarities could be detected with the company’s design drawings and manufacturing technique.

It seemed highly unlikely that Xu was able to independently develop these techniques only after joining the competitor. Hence, there was a high probability that Xu’s technique originated from the theft of the company’s trade secrets. After deliberation, the company decided to go ahead with a lawsuit for trade secret infringement.

From the above analysis, the company underperformed in the first two of the three factors due to its inadequate internal protection systems, and so faced bleak prospects in court. However, by applying for patents with himself as the inventor, Xu provided comparable samples and established a strong correlation between his successive identities, an employee of the company and an inventor at the competitor. This went a long way in making up for the company’s lapses.

But what if Xu had kept a low profile? After all, competitors and leaking persons in most cases make use of stolen trade secrets surreptitiously. Without an established system to protect trade secrets, companies will always be more likely to lose such cases.

Legal advice

So how can trade secrets best be protected? Taking into consideration the judicial interpretations and decisions of the SPC, companies are advised to take the following steps:

    • With rules and regulations or training, companies should require employee confidentiality with a clearly defined scope of secrecy, access limitations and method of safekeeping.
    • As confidentiality agreements are basic-level documents, when it comes to core personnel, companies may further clarify their access history by requiring them to sign on working records at specific timepoints, such as at the beginning and end or milestones of a project.
    • Physically isolate, or prohibit visits or photographing in sensitive work places, or restrict access, saving or copying at sensitive computers or systems.
    • Sign non-competition agreements with core personnel that restrict them from engaging in the same field for two years after departure, further keeping company trade secrets safe and secure.

Zeng Di is a senior partner at Zhilin Law Firm

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E-mail: di.zeng@zhilinlaw.com

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