Protecting trade secrets with confidentiality measures

By Zhu Nandi and Zhang Yifan, Tiantai Law Firm
0
122

Trade secrets are intangible wealth accumulated by an enterprise in the course of its production and operations which, once leaked, will often require it to spend a great deal of energy and money to remedy – or in the worst case, lead to disastrous consequences. However, despite its importance, most enterprises fail to take sufficient confidentiality measures to protect them. Pursuant to the Anti-Unfair Competition Law and Judicial Interpretation of the Supreme People’s Court on Several Issues Concerning the Application of Law in Trial of Civil Cases of Infringement (Theft) of Trade Secrets, adopting confidentiality measures is an important basis for recognising trade secrets and their value.

In practice, such measures are also important means of preventing trade secrets from being leaked. The authors believe that protection of trade secrets begins with day-to-day management and the building of a requisite compliance system.

SCOPE OF PROTECTION

Protecting trade secrets with confidentiality measures Zhu Nandi Tiantai Law Firm
Zhu Nandi
Associate
Tiantai Law Firm

In establishing a trade secret protection system, the first step is defining the scope of trade secrets. Although relevant laws and regulations offer clear definitions of trade secrets, when defining such scope it remains necessary to have in-depth understanding of the unique features of the enterprise’s operations, and its weak links and risk exposure, in addition to the requirements of laws and regulations due to differences in their scope of business, market positioning, customer sources and development directions.

It should be noted that this is a long-term practice, during which the enterprise needs to constantly inspect for omitted and newly arisen types of trade secrets, and add them to the existing scope to achieve fullest coverage possible.

LEVELS OF CLASSIFICATION

To take different levels and means of protection, enterprises need to classify their defined trade secrets based on such factors as their own needs, value of trade secrets, and difficulty in independently acquiring them.

When adopting confidentiality measures, enterprises should in particular fully consider its operational needs, and distinguish the focal point of its internal management and external operations in order to achieve the right mix of lenience and strictness, allowing management to serve operations.

Furthermore, enterprises should apply determined confidentiality measures to appropriate ranks and posts, based on the type and level of trade secrets. Based on the authors’ experience and research on such cases, issues such as confusion in job responsibilities and failure to differentiate by ranks negatively characterise many enterprises in the management of their trade secrets. Accordingly, in the event of infringement, the enterprise is likely to have failed to take the necessary confidentiality measures, and will bear adverse consequences.

EMPLOYEE NON-DISCLOSURE

Protecting trade secrets with confidentiality measures Zhang Yifan
Zhang Yifan
Associate
Tiantai Law Firm

In judicial practice, whether non-disclosure agreements exist between an enterprise and its employees is an important factor on which a court will determine whether the enterprise has taken confidentiality measures.

Specifying the non-disclosure obligations of employees can be done either directly in their employment contracts, or through the execution of separate non-disclosure agreements, which should specify the scope and period of confidentiality, duties, and corresponding rewards and penalties. Considering the possible need to revise an employee’s duties, and the scope of trade secrets, the enterprise may provide supplementation by promptly revising internal rules and regulations or formulating a dedicated document.

The following should be noted in personnel management:

(1) Enhanced training in the internal confidentiality system. Employees should be informed of the non-disclosure requirements upon background checks and handovers. Training should be provided at regular intervals, with duty notifications and written training materials retained.

(2) When an employee departs the company, steps should be taken to ensure they perform obligations of returning, deleting and destroying the trade secrets and storage media to which they had access. They should also be informed that they continue to bear a non-disclosure obligation after leaving the company. Such measures should be served in writing before the employee formally leaves the company, or explained at the time of joining the company.

INTERNAL CONFIDENTIALITY

In internal management, enterprises should take appropriate measures to protect documents involving trade secrets, and specify strict provisions on storage media, storage places, caretaking requirements and the authority to consult such trade secrets. Online storage and transmission of trade secrets should be avoided. Employees can each be assigned dedicated computers, with varying access to the network and office software. Inadequate confidentiality measures can result in adverse consequences, such as in the case of Huo Shi Machinery Manufacturing v Hualinrui Technology and Zhang Aihua (2020). The court held that since confidentiality measures taken by the company to protect its claimed trade secrets failed to attain a reasonable and necessary level, such information recorded in the sales contract did not constitute trade secrets subject to protection of the law.

As for the company’s operating information, because it failed to submit any evidence regarding its storage media or specific content, or that any protective measures were taken, the court likewise did not consider them trade secrets.

BOOSTING EXTERNAL OVERSIGHT

During negotiation and formal co-operation, enterprises could execute standalone confidentiality agreements, or set out such provisions directly in the letter of intent or contract, specifying the information requiring confidentiality, the term, scope of the entities bearing an obligation of confidentiality, disposal of the confidential information after co-operation, and liability for breach of contract. The scope of entities bearing an obligation of confidentiality tends to be overlooked. In the actual course of performance, entities with access to trade secrets could include not only those that executed the contract, but also their affiliates and relevant service personnel, which is difficult to cover. Accordingly, enterprises should restrict entities with access to those “with an actual need for provision of service”.

In summary, an enterprise should look to its day-to-day management to initiate its trade secret protection mechanism. Protective measures should be in line with particular needs of the enterprise, and cover its entire management and operations to the extent possible – while also being practical and feasible, and not just an empty framework.

Zhu Nandi and Zhang Yifan are associates at Tiantai Law Firm

trademarks

Tiantai Law Firm
29/F, T1 Building, Raffles City
No.1133 Changning Road
Shanghai 200051, China
Tel: +86 21 5237 7006
Fax: +86 21 5237 7009
E-mail:

zhunandi@tiantailaw.com

zhangyifanbj@tiantailaw.com

www.tiantailaw.com