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The Management and Protection of Trade Secret Assets from the Perspective of Business Competition

08

MAY

2020

Trade secret is one of the most important intangible assets for all enterprises, and a valuable bargaining chip for the enterprises to gain competitive advantages in the market. On one hand, without an appearance of right, the judicial recognition of the trade secret would mainly depend on the efforts of the right holders to protect it. On the other hand, due to huge economic benefits, some potential competitors would take all means to misappropriate the trade secret. In the fight between the protection and misappropriation of the trade secret, the right holders should try their best to protect their trade secrets as far as possible in order to gain and maintain competitive advantages.

1. The logic and strategy of the trade secret protection

Unlike the patent system wherein the principle of granting exclusive rights for disclosing the invention applies, i.e., a patent is granted to an applicant for its technical contributions to the society, the fundamental logic of the trade secret protection lies in “providing protection for being confidential”. That is, the right holder can only seek for judicial protection when sufficient measures have been taken to keep the valuable information confidential, so that the outcome of not-public-known is reached. Therefore, the purpose of the judicial protection of the trade secret is not to award the right holder, but to maintain the normal social order, respect business ethics, seek for fair competition, and promote market development.

The legal rules widely used in the judicial review of trade secret are as follows:

1. Identification of the trade secret: analyzing whether the secret information is not publicly known, has economic value, and is protected by corresponding protecting measure;

2. Determination of the misappropriation: using “substantially identical + contact - lawful origin” model; and

3. Determination of remedies: injunctive relieves and damages for civil remedies, and criminal remedies.

Among others, the not-public-known aspect and the substantially identical aspect, i.e., the accused information is substantially identical to the secret information, are always difficult for the right holder to prove. Correspondingly, the judicial practice adjusts the distribution of the burden of proof set on the plaintiff and defendant. For one thing, the plaintiff’s burden to prove the not-public-known aspect is reduced, as it would be difficult for the right holders to provide sufficient evidences to prove such negative facts; and for the other thing, the “substantially identical + contact - lawful origin” model further lessens the plaintiff’s burden of proof by requiring evidences indicating the outcome rather than the conduct of the misappropriation. However, the right holders should also take efforts to look for evidences regarding the misconduct of the defendant, which would offer a better chance to the plaintiff to win the case.

With the legal interests and rules in trade secret protection understood, right holders can take purposeful actions to get concentrated on adopting reasonable protecting measures during the trade secret protection. These protecting measures should include: the specific intent of protecting the secret, sufficient measures matching with the commercial value of the secret, and achieving the effect of making unauthorized disclosure of the secret being prevented under normal circumstances. Measures that is often carried out in practice include NDA, confidentiality policies, encryption, physical security precautions, access on a need-to-know basis, and warning signs, etc.

2. Emphasis of protecting measures and misconducts in amended anti-unfair competition Law

Within one and a half years, the anti-unfair competition Law, Law of the People's Republic of China for Countering Unfair Competition, has been amended twice. New versions have been issued on November 4, 2017 and April 23, 2019, respectively, to continuously reduce the plaintiff's burden of proof and strengthen the protection of the trade secret.

In the 2017 version, the misappropriation behaviors of bribery and fraud were specified, disclosure or use of a trade secret from the employee or former employee of the right holders was emphasized, the remedies were prescribed to include lost profit of the plaintiff, the unjust enrichment of the defendant, and the discretionary damage of up to 3 million RMB.

In the 2019 version, the misappropriation behaviors of electronic intrusion, as well as the act of abetting, tempting, or aiding other person to misappropriate were specified, which is a common and concealed conduct in practice, the punitive damages from 1 to 5 times of the determined amount of compensatory damages was prescribed, the maximum discretionary compensation was increased from 3 million to 5 million RMB, and the distribution of the burden of proof was adjusted.

The most important amendment is the shift of burden of proof from the plaintiff to the defendant, which may solve the previously high failure rate of the plaintiff due to the difficulties to provide evidences. After adjusting the distribution of the burden of proof, the defendant’s burden of proof is increased, making it easier for the judge to find out the truth, thereby providing a more proper protection for the trade secret.

Particularly, the newly added Article 32 prescribes that: the burden of proof will be shifted to the defendant if the plaintiff provides primary evidence showing the alleged trade secret has been protected by proper measures and the trade secret is misappropriated, and in that case, it would be the defendant’s burden to prove the non-existence of the alleged trade secret. Further, it would be the defendant’s burden to prove no action of misappropriation if the plaintiff provides primary evidence showing the trade secret is misappropriated, such as: (1) the defendant had access or possibly access to the trade secret, and the accused information is substantively identical to the trade secret, (2) the trade secret has been disclosed, or used by the defendant or at risk of being disclosed, or used, and (3) other misappropriation behaviors.

Another important amendment is the specification of misappropriation behaviors, which on one hand warns the person or party with a potential purpose of misappropriation; and on the other hand reminds the right holder to consider these situations and take according measures.

Although better protected by the current law in force, it should be constantly kept in mind that the protection and misappropriation of the trade secret are the defense and offense sides of the business competition, and it is necessary for the right holders to actively adopt preventive measures to combat with the potential misappropriation. Developing a trade secret gains a competitive advantage, and protecting said trade secret maintains such advantage.

3. The introductions from the Supreme Court

From the cases of the Supreme Court in recent years, it could be learned that the judicial review of the trade secret mainly focuses on the determination of misappropriation rather than the identification of the trade secret as in previous years, indicating the nature of the trade secret protection lies in the regulation of the unfair competition.

To this end, we have studied the trade secret cases from the Supreme Court since 2013, and the representative cases wherein opinions on the protecting measures and misappropriation behaviors were given are summarized in table 1 and table 2 below.

Table 1. Cases where the Court finds that the protecting measures are sufficient (in chronological order)

#

Case No.

Type of trade secret

Protecting measures

misappropriation confirmed by court

1

(2013) Civil, 2nd instance, No. 6

Operative information: real estate development information with a profit analysis.

1. sign a labor contract with a confidentiality clause,

2. hide the key information, and

3. request non-disclosure requirement.

The defendant accessed to the secret through consultation, and used the secret by violating the confidentiality requirement.

2

(2013) Civil, retrial, No. 1640

Other: creativity, arrangement, and content of the book.

1. sign a confidentiality agreement, and

2. access on a need-to-know basis.

The defendant was responsible for publishing the book, but adapted and published a new book using the secret information without acquiring authorization from the plaintiff.

3

(2015) Civil, retrial, No. 1518

Operative information: the need of a company to buy an oil drilling equipment.

1. set a confidentiality clause in the brokerage agreement.

The defendant obtained the secret information by participating in the negotiation of a brokerage agreement, and used the information to acquire business opportunity with few efforts in short time.

4

(2015) Civil, retrial, No. 2035

Technical information: manufacture process and operating procedure in vitamin B5 production.

1. set a confidentiality policy, and

2. sign a confidentiality agreement.

The defendant asked the employee of the plaintiff to provide instruction, and the operating profit of the defendant has increased significantly.

5

(2015) Civil, retrial, No. 2359

Technical and operative information: technical and operative information regarding soy sauce.

1. set a confidentiality policy,

2. sign a confidentiality agreement,

3. encrypt the secret, and

4. cancel the secret information from the computer of departing employee.

The defendant downloaded the secret information without authorization, and failed to cancel the information when resigning, which results in the threatened disclosure of the secret.

6

(2016) Civil, retrial, No. 1947

Technical information: manufacture process for solid tires.

1. sign several confidentiality agreements

The defendant admitted the plaintiff’s confidential requirement.

7

(2016) Civil, retrial, No. 2206

Technical information: manufacture process for a resin.

1. set a confidentiality policy,

2. sign a labor contract with a confidentiality clause, and

3. limited access after retirement.

The defendant obtained the secret from retired employees of the plaintiff with unfair means.

8

(2017) Civil, retrial, No. 1650

Technical information: feeding machine.

1. sign a labor contract with a confidentiality clause, and

2. return the documents when resigning.

The defendant destroyed the perpetuation of evidence, resulting in the shift of the burden of proof to the defendant.

9

(2018) Civil, retrial, No. 1102

Operative information: special requirements and trade usage of the customer.

1. sign a confidentiality agreement, and

2. sign a contract with a confidentiality clause.

The defendant used the operative information of the plaintiff to gain competitive advantages.

10

(2018) Civil, retrial, No. 1273

Operative information: customer list.

1. set a confidentiality policy,

2. sign a labor contract with a confidentiality clause, and

3. sign a competition restriction agreement.

The defendant carried out a transaction with the customer of the plaintiff privately when he was a employee of the plaintiff.

11

(2018) Civil, retrial, No. 4529

Technical and operative information: self-cleaning filter, and project operative information.

1. set a confidentiality policy

2. sign a confidentiality agreement, and

3. limited access.

The defendant disobeyed the obligation to disclose and use the secret information to start a business to compete with the plaintiff.

Table 2. Cases where the Court finds that protecting measures are insufficient (in chronological order)

#

Case No.

Type of trade secret

The reasons why the protecting measures are not sufficient

Comments

1

(2014) Civil, 2nd instance, No. 3

Technical and operative information: modified formulation of PBT, and customer list.

1. all right holders should take corresponding measures separately,

2. the identification and scope of the secret to be kept confidential is not clear, and

3. No “confidential” signature on documents.

The plaintiff’s intent to protect is not clear.

2

(2016) Civil, retrial, No. 2161

Technical information: water-based cleaning fluid.

1. Only a general confidentiality clause in the labor contract.

The identification and scope of the secret to be kept confidential is not clear.

3

(2016) Civil, retrial, No. 3774

Technical information: apartment bed.

1. no confidentiality agreement.

A confidentiality agreement would be necessary.

4

(2017) Civil, retrial, No. 1602

Technical and operative information: modified formulation of PBT, and customer list.

1. The fact that one of the right holders took corresponding measures would not relieve the obligations of other right holders to take measures, and

2. statutory duty of loyalty cannot replace the plaintiff’s will to protect.

The plaintiff’s intent to protect is not clear.

5

(2017) Civil, retrial, No. 2945

Operative information: customer list.

1. no confidentiality agreement.

A confidentiality agreement would be necessary.

6

(2017) Civil, retrial, No. 2964

Technical and operative information.

1. only a general requirement of keeping confidential,

2. failure to identify the trade secret to be protected, and

3. the competition restriction agreement cannot replace the plaintiff’s will to protect.

The trade secret to be kept confidential should be identified.

After analysis of the above cases in table 1 and table 2, we can draw the following conclusions:

1) Cases in table 1 show that a confidentiality agreement or confidentiality clause is a prerequisite of keeping the secret confidential. This is because such confidentiality agreement or clause informs the receiving party the specific intent of the right holder of protecting the secret, which constitutes the origin of the obligation to take measures for the receiving party. Cases 1, and 3-5 in table 2 further confirm that there will be no judicial protection of the trade secret in the absence of any confidentiality agreement or confidentiality clause;

2) Cases 2 and 6 in table 2 further indicate that only a general confidentiality agreement or clause without specifying the secret to be protected is not sufficient, as it is impossible for the receiving party to recognize the secret to be protected, resulting in unduly excessive burden to the receiving party;

3) The Court ruled in case 8 in table 1 that the confidential information mentioned in the protecting measures does not necessarily equal to the “secret point” determined by the court, and a relatively specific scope of the confidential information is sufficient; and

4) In cases in table 1, other protecting measures were taken except cases 3 and 6 wherein the plaintiff further proved the unfaithful or unfair conduct of the defendant to misappropriate the secret. Without these additional measures, the plaintiff must prove it is the defendant who misappropriates the secret, in order to exclude the possibility of disclosing the secret from other resources. Proving the misconduct of the defendant will show the judges that the secret was misappropriated by the plaintiff.

For right holders, it is relatively easier to take protecting measures before the secret has been misappropriated than to prove the defendant’s misconduct. The right holders should investigate the measures to protect the trade secret, which would promote its protection.

4. Conclusion and prospect

From the perspective of the right holders, once the secret is formed, the only thing they can do is to take actions to protect the secret by various measures, and the not-public-known aspect is also the result of confidentiality measures. During the protection and misappropriation of trade secrets, if the efforts paid by the right holder are not as much as the efforts of competitors, it would be difficult to claim that the right holders have taken reasonable protective measures.

About the Firm

Liu Shen & Associates
Address 10/F, Building 1, 10 Caihefang Road, Haidian District, Beijing 100080, China.
Tel 86-10-6268 1616
Fax 86-10-6268 1818
Email mail@liu-shen.com
Link www.liu-shen.com

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