Trade secret protection: taking precautions is key

By Frank Liu, TianTai Law Firm

Recent years have seen infringements upon the trade secrets of many high-tech companies. Usually it happens like this: one or more key technicians steal the core technology from their employer and establish a new entity that produces and sells competitive products at lower prices.

FRANK LIU Partner Tiantai Law Firm
Tiantai Law Firm

In some cases, the infringement also involves salespeople or IT technicians of the employer. Seeking trade secret protection has been a challenge in China owing to the difficulty in defeating infringements and the heavy burden to prove trade secret infringements under existing PRC legislation for civil and criminal proceedings. Many have been exploring better solutions for trade secret protection.

Given the calls for intellectual property (IP) protection, both from domestic companies and the international community, China not only attaches more importance to IP protection at the macro-policy level, but also reflects its growing emphasis on trade secret protection through legislation. The General Principles of the Civil Law, effective on 1 October 2017, and the Anti-Unfair Competition Law, effective on 1 January 2018, contain provisions specifically designed for trade secret protection.

Existing problems

As far as trade secret protection is concerned, the reality is still depressing. First of all, rights owners have yet to improve their awareness of trade secret protection. We have found that many rights owners have no idea about which technologies developed by them are entitled to legal protection after the occurrence of trade secret infringements. They need professional lawyers who work with their technicians to re-examine the innovations of the technologies and identify possible solutions to seeking legal protection.

Despite continuous advancements in policy making and legislation at the macro level, achieving meaningful improvements at case level may still be difficult in the short term, given the low plaintiff win rate of civil trade secret infringement cases and the difficulty to initiate criminal proceedings.

Rights owners may also find it challenging to meet the burden of proof that requires demonstration of secrecy, commercial value and confidentiality measures, because the fact that a trade secret is infringed implies a breach or inadequacy of the confidentiality measures that results in the trade secret being made publicly available, at least within a certain scope. In that case, keeping the secrecy of the technology or information is difficult.

As technical information is concerned, applying for patent protection is no longer possible due to loss of novelty. Compared with infringers of other IP rights, trade secret infringers generally act in a more undetectable way that is more difficult to prove. That is why trade secret holders have a slim chance of winning, in judicial practice. And even if they win, their chances of recovering all commercial losses are also slim.

Therefore, for trade secrets, taking precautions is preferable to seeking post relief. A case in point of trade secret protection is the Coca-Cola Company, which sells its products all over the world but has been stringently keeping its recipe a trade secret. Its experience and system are definitely worth considering and learning.

Some precautions

As discussed above, keeping the secrecy of a trade secret is most important for preserving the commercial interest that the rights owner has in the trade secret. That said, a confidentiality system lays the foundation for protecting the trade secret. The system requires effort in two aspects: the first relating to improvement of internal rules and policies, as well as confidentiality provisions under relevant agreements; and the second to effective implementation of the first.

The top priority for building a confidentiality system is to have well established trade secret protection rules and policies in place. Companies must ensure that these rules and policies address all concerns surrounding trade secret protection, including the scope and management of trade secrets, persons who are allowed access to trade secrets, classification of trade secrets, specific approaches to protecting them, procedures of handover between staff members, the restrictions on use of the trade secrets, and measures necessary for protecting them on occasions of co-operation and exchange with outsiders.

In addition, since an absolute majority of existing trade secret infringement cases involve leakage by internal employees, it is important that the internal rules and policies require employees to sign agreements designed for trade secret protection, which usually include confidentiality agreements and non-compete agreements. It is worth noting that these two categories of agreements are different from each other in terms of scope, conditions and period of application.

The confidentiality agreements, which do not impose any special restrictions on the duration of confidentiality obligations, may apply to all personnel who have access to trade secrets. However, non-compete agreements apply only to senior executives, senior technical personnel and any other personnel with confidentiality obligations (such as marketing and sales staff, accounting staff and secretaries). The period of non-competition should not exceed two years, and employers are required to pay appropriate financial compensation for this period.

The specific implementation of the confidentiality system involves two aspects. The first relates to management of places where confidential information is kept, deployment of signs of confidential information, setting up of access to computers, and preservation and classification of confidential information, all to be implemented and monitored strictly in accordance with the rules and policies concerning trade secret protection.

The second relates to awareness enhancement. Specifically, technicians must enhance their confidentiality and legal awareness in relation to technical secrets, and any new technologies or approaches emerging from the early R&D stage to the production stage must be communicated with processionals promptly so that suitable legal protection solutions may be identified.

In summary, as far as trade secret protection is concerned, taking precautions provides much more benefit than seeking ex-post relief. In China, only rights owners who make provision for rainy days will have maximized protection for their trade secrets.

Frank Liu is a partner at TianTai Law Firm

Tiantai Law Firm

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