‘Order theft’: Rat that infringes trade secrets of company

By Efar Zhou, MHP Law Firm
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The term “order theft” (literally “flying order”) means a salesperson, after securing an order in the name of his/her employer, arranges for a company he/she controls to execute the contract, thereby appropriating the commercial profit that rightly belongs to his/her employer. The principal perpetrators of “order theft” are company employees. The concealed nature of the infringement method, the ease with which the evidence can be destroyed, and the difficulty of defining the legal relationship are all problems existing in such cases.

Efar Zhou Associate MHP Law Firm
Efar Zhou

The items and infringers involved in cases we have actually handled are numerous and the circumstances complex. We simplify a case’s circumstances as follows: Client Company A is a wholly foreign-owned enterprise. Its sales manager, Mr Zhu, after securing an order on Company A’s behalf, arranges for Company B and the end user to execute a contract to skim off the profit. Company B is a one-person entity, which the sales manager’s wife, Ms Zhang, established in Hong Kong. The husband and wife had long ago agreed to divorce and Mr Zhu had left with none of the family’s mutual property.

Only labour dispute? At the outset, some argued that the case was a labour dispute between the employer and the employee. However, if dealt with as a labour dispute, the case would be unfavourable to Company A because not only would the procedure be relatively long and the target of the suit be limited solely to the employee, but the measure of damages would also be relatively minimal.

Through precedent research, we finally found the Supreme People’s Court’s opinion on this issue (see Civil Ruling (2008) Min San Zhong Zi No.9), which held that “the law does not require parties to an employment contract to institute a labour dispute solely on the basis of an employment contract, and where a breach of an employment contract also constitutes a tort, the concerned party may demand that the perpetrator of the act bear tort liability in respect of his/her tortious act”.

By citing this precedent, we successfully convinced the court to accept that the case was an action in tort, and that the court should directly open the case without its first going through labour arbitration.

Legal nature of “order theft”. “Order theft” clearly falls within the category of a tort, but “tort” can be divided into: (1) Personal injury and property torts to be tried by a court’s first civil trial division; and (2) unfair competition cases to be tried in a court’s intellectual property division.

Different trial divisions clearly have separate trial standards and adjudication perspectives in respect of cases. If, at the time of opening of a case, only tort is claimed, the judge of the case-filing division will find it difficult to determine the cause of action. After careful thought and assessment, we ultimately argued that Mr Zhu’s “order theft” should be deemed unfair competition, which was specifically manifested as below:

  1. Mr Zhu, in using Hong Kong Company B as substitute for Company A in the transaction and appropriate Company A’s commercial profit, breached commercial ethics and the fundamental principle of good faith. Pursuant to Article 2 of Chapter 1 of the Law Against Unfair Competition (a general framework provision), Mr Zhu was liable for damages; and
  2. the end user’s procurement intent was a trade secret of Company A. Pursuant to Article 9 of the Law Against Unfair Competition, Mr Zhu infringed Company A’s trade secrets.

Reasonableness of broad confidentiality clauses. The term “trade secrets” means technical and business information publicly unavailable, which can generate economic benefits for the rights holder, that is practical and, in respect of which, the rights holder has taken confidentiality measures. When determining whether something constitutes a trade secret, the court will conduct its review from secrecy, value and confidential measures.

Pursuant to laws, confidentiality measures include the execution of a non-disclosure agreement. A quick look at the employment contract in the case shows that it only has one phrase reading “Mr Zhu shall bear an obligation of confidentiality for Company A’s trade secrets”, and lacks any specific information describing the trade secrets. The court at first instance found that the confidentiality clause was overly broad, failing to correspond with the confidential information asserted by Company A. Accordingly, it found that the trade secret that Company A was asserting did not exist.

With a view to overturning the opinion of the court at first instance, we ascertained the Supreme People’s Court’s opinion on this issue through a precedent search. In Civil Ruling (2008) Min Shen Zi No.853, the court held that “even if an employee has not executed a specific non-disclosure contract with his or her employer, if his or her employment contract specifies that he or she has an obligation to maintain the confidentiality of trade secrets, the employer should be deemed to have taken reasonable confidentiality measures”. From this, it can be seen that a single phrase can, at times, be sufficient.

Timely addition of defendants. When we learned in the course of the trial that Mr Zhu had long ago divorced and left with none of the family’s mutual property, we promptly decided to add a defendant, naming his former wife, Ms Zhang, a co-defendant, failing which it would have been highly likely that we won the case, but lost the enforcement.

The addition was mainly based on the following two grounds: (1) As Ms Zhang had assisted Mr Zhu in diverting the property by way of the divorce, she was a joint tortfeasor; and (2) Ms Zhang, as the actual controller of Hong Kong Company B, took advantage of the organizational structure and independent legal status of Hong Kong Company B to use it as an instrument to engage in an illegal act. Accordingly, we requested the lifting of Hong Kong Company B’s veil and demanded that Ms Zhang bear joint and several liabilities in her capacity as shareholder.

Although we had no evidence supporting the foregoing arguments at the outset of the case, with the progress of the trial and the court’s investigation and gathering of evidence and in light of the actual business position of Hong Kong Company B, the court, through lifting of the company’s veil, ultimately rendered a judgment ordering Ms Zhang to bear joint and several liabilities for the tort committed by Hong Kong Company B.

Efar Zhou is an associate at MHP Law Firm

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