Home Commercial trading A good time for trade secret protection in China, part two

A good time for trade secret protection in China, part two

  1. Implement good practices in the management of trade secrets

First of allwe need to identify the protected subject matter of the trade secret.

Article 9 of the AUCL states that “Trade secret means technical, operational or other commercial information not known to the public, which has commercial value for the owner of this information who has taken the corresponding measures of confidentiality.“What trade secrecy protects is commercial information, including technical information and operational information.

Article 1 of the Provisions of the Supreme People’s Court on Several Matters Concerning the Application of Law in the Trial of Civil Cases of Trade Secret Infringement Disputes (referred to as “Provisions”), effective September 12, 2020, specifically lists what information constitutes technical information and what information constitutes operational information, i.e. (i) information regarding structure, raw materials, components, formulas, materials, samples, models, propagating material of new varieties of plants, processes, methods or steps thereof, algorithms, data, computer programs relating to technology and documents relevant, are considered technical information; and (ii) information regarding creativity, management, sales, marketing, financing, planning, samples, tender documents, customer information (which includes name, address, customer contact information, as well as information about customer business practices, intentions and content, data, etc. related to the operational activities of the company, can be considered operational information.

There is a wide range of business information, however, not all business information constitutes a trade secret, and only that which meets certain conditions in terms of secrecy, value and confidential treatment constitutes a trade secret. The secrecy test emphasizes that the business information concerned is unknown to the public, the value test requires that the business information has commercial value, while the confidentiality test depends on whether or not confidentiality measures.

Secondlywe must objectively determine the secrecy and value of commercial information.

Secrecy is the foundation and starting point of all trade secret protection, and only secret business information can be protected as trade secrets.

Section 3 of the provisions specifies when and the criteria for determining secrecy, i.e. the information is not widely known or readily available to relevant persons in the field when the alleged offense occurs . Section 4 of the Provisions lists the circumstances under which business information will be determined to be publicly known, and therefore no longer secret:

  1. The information is general knowledge or industrial practice in the field to which it belongs;
  2. The information relates only to the dimensions, structure, materials, simple combinations of components, etc., of the product and is directly accessible to persons competent in the field by observing the marketed product;
  3. The information has been publicly disclosed in a public publication or other media;
  4. The information was made public through public presentations, exhibitions, etc. ;
  5. Information is available from other publicly available sources for those concerned in the field.

It also specifically states that, when any new information formed by the sorting, refinement and processing of information known to the public complies with Article 3 of the provisions, this new information is deemed to be unknown to the public.

Furthermore, the Interpretations provide for a reverse enumeration of the non-secret in point (6), i.e. any information easily obtainable without paying a certain price is not considered to be unknown to the public.

This reverse enumeration is useful for companies to determine whether certain information is secret, especially for common technical information in high-tech companies, which often carry out research and analysis of existing technologies before initiating a project. If this research and analysis is carried out by an independent third-party body, such as a committed professional organization, it will be more objective and can help companies better determine whether the relevant information is secret and can also be kept as evidence.

Although operational information exists in any company having commercial activities, an active company in normal operation will have a large amount of operational information. To the extent that this operational information fails the reverse enumeration test above, it can basically be considered unknown to the public.

With secrecy comes value, and business information has value because of its secrecy. There is hardly a question of value in judicial practice, as this test is relatively easy to understand. Generally speaking, there is no need to take confidentiality measures for worthless information, and few people will dispute worthless information. It should be specially noted that: (1) any new information formed by the sorting, refinement and processing of publicly known information is considered secret, that is, publicly known information can acquire the secret and become unknown to the public after reprocessing; (2) data from some failed experiments has the value required for a trade secret because it may avoid additional R&D investment or expedite R&D; and (3) certain interim deliverables may also be useful due to their actual or potential commercial value.

Thirdly, we must take good measures of confidentiality. Confidentiality is what accomplishes trade secrets. Without confidentiality measures, there can be no trade secrets.

Article 5 of the Provisions states that, The reasonable confidentiality measures taken by the right holder to prevent the leakage of the trade secret before the alleged infringement occurs shall be determined by the people’s court to be the corresponding confidentiality measures referred to in paragraph 4 of article 9 of LUCA.

The people’s court determines whether the right holder has taken corresponding confidentiality measures depending on the nature of the trade secret and its medium, the commercial value of the trade secret, the extent to which the confidentiality measures can be identified and correspond to the trade secret, and the confidentiality intention of the right holder, etc.

Section 6 of the Provisions and Section 11 of the Interpretations each list six specific circumstances and one catch-all provision. If any of these circumstances are sufficient to prevent the leakage of trade secrets under normal circumstances, the people’s court will determine that the right holder has taken the corresponding confidentiality measures.

Both the Provisions and the Interpretations provide for similar confidentiality measures, which can be summarized as follows:

  1. Limit the extent of knowledge of confidential information. Technical information is mainly limited to basic technicians and middle and senior managers, and operational information is mainly limited to middle and senior managers.
  2. Conclude a confidentiality agreement and, where applicable, a non-competition agreement, with the persons subject to the obligation of confidentiality. It should be noted that the Non-Disclosure Agreement and the Non-Competition Agreement are different in this regard. A nondisclosure agreement requires keeping trade secrets confidential, usually without consideration, and sets out a term of confidentiality until the trade secrets are made public. While a non-competition agreement usually specifies that employees are not allowed to work at competing companies or engage in competitive business activities while employed or within a certain period of time after leaving. The non-compete restriction will only be legally protected after payment of consideration and must have a clear non-compete period, either during the term of employment or two years after departure.
  3. Physical encryption, including restricting access or putting in place privacy requirements for physical locations such as machines, factories and workshops related to secrecy; take measures such as sealing and locking trade secret media.
  4. Electronic encryption, encrypting electronic information itself and taking various measures to prohibit or restrict use, access, storage, copying, etc.
  5. Other reasonable measures.

The specific confidentiality measures to be taken are inseparable from the determination of the value. The more valuable the information, the more confidentiality measures must be taken. It is also the basis for companies to perform hierarchical management of confidential information. The higher the level of security, the more comprehensive the confidentiality measures taken.

A single confidentiality measure is often not sufficient for a court to determine that the right holder has taken corresponding confidentiality measures. For example, it is difficult for a court to support an allegation of having taken a confidentiality measure made by someone who only signs a non-disclosure agreement. Multiple privacy measures taken based on the importance of trade secrets are more likely to gain court support and provide better overall trade secret protection.