Measures to protect or restore trade secrets

By Sun Jinlin, Jincheng Tongda & Neal
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Recently, the proprietary technology for the production of food products bearing the well-known Chinese trademark “Lao Gan Ma” was divulged and used by a former employee, who was arrested for allegedly committing the crime of infringing trade secrets. The police determined that the amount involved exceeded RMB10 million (US$1.46 million). This case has again made the protection of trade secrets a focus of attention and debate among large companies.

孙巾淋 SUN JINLIN 金诚同达律师事务所合伙人 Partner Jincheng Tongda & Neal
孙巾淋
SUN JINLIN
金诚同达律师事务所合伙人
Partner
Jincheng Tongda & Neal

The marked difference between trade secrets and patents, trademarks and other such intellectual property is that the securing of rights in trade secrets is dependent on the rights holder itself taking protective measures, as secrecy is one of the core constituent elements of a trade secret. Accordingly, when a company is selecting a specific protective measure, it must consider whether such measure is permitted by law, as trade secrets are accorded protection in accordance with the law only if protective measures permitted by the law are taken. Based on the author’s practical experience, enterprises can take the following effective measures to protect their trade secrets.

Establishment of a sound non-disclosure system. A company can specify, in the employee handbook, provisions of principle for the protection of trade secrets, and formulate specific rules and regulations for the management of trade secrets (which gives rise to the corresponding legal validity), to ensure that there are specific systems that can be relied upon at each stage of the company’s operations where protection of trade secrets is involved. The company is also required to seek the opinions of its employees through democratic procedure when formulating the rules and regulations, and bring them to the employees’ attention once they have been issued.

Enhancing the protection of the media on which trade secrets are carried. The main purpose of taking confidentiality measures in respect of such media is to reduce as much as possible the scope of access to trade secrets so as to reduce the possibility of their being stolen and divulged. Confidentiality measures include: sealing off the area where the media carrying the trade secrets are housed and attaching a confidentiality mark to the media; encrypting digitized confidential information and taking the necessary computer and network security measures; and segregating such areas as technology research and development offices, laboratories and core plant areas, and restricting access to only necessary personnel.

Strengthening management of employees with access to secrets. The working of trade secrets cannot be divorced from people. Subject to not affecting the development of the company’s business, trade secrets should, to the extent possible, be partitioned, with employees only having access to the portion required for completing their work tasks, and having no access to the other portions. Separate non-disclosure agreements should be executed with those employees and partners that have access to the trade secrets.

LEGAL RELIEF

Even if an enterprise takes rigorous and effective protective measures, trade secrets may still be stolen by unscrupulous competitors, or disclosed or used without authorization by employees or other persons. As in the Lao Gan Ma case, according to available information, although Lao Gan Ma had executed a non-disclosure agreement and a non-compete agreement with its former employee, that employee joined another food processing plant under a false name and used Lao Gan Ma’s core technology without authorization. When a trade secret is infringed, an enterprise should promptly take effective means of legal relief to safeguard its interests and minimize its losses. Under current Chinese legislation, a rights holder may apply singly or in combination for the following three types of legal relief:

Civil legal action. In the majority of trade secret cases, there will be an employment relationship or technical co-operation agreement between the divulging party or using party and the rights holder, and the contractual relationship will usually contain non-disclosure clauses. Accordingly, the probability of the content of an infringement suit and a breach of contract suit overlapping are extremely high, giving the rights holder the option to institute either. In practice, companies are usually more willing to institute an infringement suit, mainly because in an infringement suit the requirements in respect of evidencing the specific infringement process and the actual losses are comparatively less stringent, reducing the rights holder’s burden of proof.

Of course, on the point of the establishment of the trade secrets, the burden of proof borne by the rights holder in an infringement suit is heavier than that in a breach of contract suit. In an infringement suit, not only may the contract counterparty that divulged the secrets be named a defendant, but a third party outside the contract that used the trade secrets without authorization may also be included.

In addition to damages, the rights holder may also require the infringer to bear other such liabilities for infringement as ceasing the infringement, apologizing, etc., is another important factor of consideration when a rights holder opts to institute an infringement suit.

In a situation of urgency, a company may also apply to the court for a temporary injunction, requiring the infringer to immediately cease the infringement.

Criminal measures. If infringement of trade secrets causes the rights holder to incur a material loss, the infringer may, in addition to being subject to a civil claim, have criminal measures slapped on. The minimum limit for the “crime of infringing trade secrets” as specified in the Criminal Law is RMB500,000. If the amount of the loss incurred by the rights holder as the result of infringement of its trade secrets is at least RMB500,000, it may pursue the criminal liability of the infringer by way of a criminal private prosecution, or public prosecution by the procuratorate. The advantages of criminal remedies are their high efficiency and speed, and the proactive investigation by the public security authority can effectively cut through the difficulties that rights holders face in gathering evidence in civil actions.

Administrative relief. A rights holder may also, when its trade secrets have been infringed, seek administrative relief from the administration for industry and commerce in accordance with the Law Against Unfair Competition. The administration may, ex officio, take such penalty measures as ordering the infringer to cease the sale of or destroy the infringing product, return the information relating to the trade secrets and assess it an administrative fine.

Sun Jinlin is a partner at Jincheng Tongda & Neal

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