Risk Prevention and Strategy for Trade Secret Protection in China

The China Civil Code, effective from 1 January 2021, attaches great importance to the protection of trade secrets, with Article 123 of the Civil Code stipulating that trade secrets are a type of intellectual property right and shall therefore be protected by intellectual property laws.

China's current legal system of trade secrets includes the Civil Code, the Anti-Unfair Competition Law (revised in 2019), the Provisions of the Supreme People's Court on Several Issues Concerning the Application of Law in the Trial of Civil Cases of Trade Secret Infringement (effective from September 2020), the Interpretation of the Supreme People's Court on Some Matters about the Application of Law in the Trial of Civil Cases Involving Unfair Competition (effective since January 2021), the Labor Contract Law, the Criminal Law, as well as other laws, local regulations, and judicial interpretations.

Types of Trade Secrets in China

Article 9 of China's Anti-Unfair Competition Law sets out five types of trade secrets^[1].

In China, trade secrets can be categorised into two main types of information: technical information and business information.

1. Technical information

Technical information generally refers to solutions obtained by using scientific and technological knowledge, information, and experience, mainly including product formulas, technical know-how, process flow, production methods, design drawings (including sketches), test results and records, product models, computer source programs, computer program documentation, key data, and other information.

2. Business information

On the other hand, business information generally refers to information that can bring competitive advantages to the right holder, which may include management know-how, customer lists, business plans, financial information, knowledge of purchase sources and sales channels, tender price and tender content in a bidding, etc.

Risk and Strategy for Protection of Trade Secrets in the Business

1. Employee

It is inevitable that employees will have access to business secrets during their service in the company and there is therefore a high risk that trade secrets will be disclosed by current or former employees. High priority should be given to the vulnerability of customer lists to be misused by sales staff, which is a prominent risk factor in practice.

Feasible countermeasures:

• Sorting and analysing existing trade secrets;
• Establishing an enterprise trade secret protection management system; and
• Implementing specific confidentiality measures, such as signing confidentiality agreements with employees, marking confidentiality warnings and levels on computers, documents, and thumb drives, etc.

However, it is worth noting that the personal experience and basic skills accumulated by employees themselves may not fall into the category of protectable trade secrets.

2. Business partner

Trade secrets may need to be shared with potential business partners to obtain possible business opportunities and to generate mutual trust. Additionally, business cooperation would require the disclosure and utilisation of trade secrets, as a result, there is a risk that the trade secrets would be misused by the business partner. For example, an Original Equipment Manufacturer (OEM) may produce similar products under its own brand name and supply them to the licensor's customers.

Feasible countermeasures:

• Regulating and managing interactions with business partners based on the company's confidentiality system;
• Signing valid confidentiality agreements (i.e. NDAs) with business partners. It is of vital significance to reach an agreement on the amount of damages, as the loss caused by infringement of trade secrets is often difficult to be calculated.

3. Joint venture and other affiliated companies

Trade secrets may also be shared and used among affiliated companies. In such cases, it is easy to overlook the fact that the affiliated companies are legally independent entities and that sharing information among these companies can still cause confidentiality issues.

Feasible countermeasures:

• Companies should educate and offer clear guidance to employees on the issue of transferring information with other affiliated companies;
• It is also recommended that an NDA should be signed between affiliated companies sharing trade secrets, despite of the close relationship between the companies.

4. Business espionage

The competitor of a company may use an "investigator" to gather the secret information. The "investigator" may search for relevant documents in the company's waste, contact the current or former employees of the company via various channels, or even try to obtain the confidential information through bribery.

Feasible countermeasures:

As mentioned, companies should establish a trade secrets protection system and implement feasible measures to prevent the possible leaks of the confidential information, for example, by signing confidentiality agreements with employees and effectively managing classified medium.