Enterprise Trade Secret Management Practice

■ Xiaobo He, Yihui Cao

With the increasingly fierce market competition, power differences between enterprises is no longer restricted to their respective physical capital -- trade secrets, as a type of intangible asset, are becoming a powerful weapon that enterprises should not ignore in market competition. Nevertheless, some enterprises are unfamiliar with protection, management and dispute resolution regarding trade secrets. This unfamiliarity can easily lead to infringement of their trade secrets in practice, and it can trigger legal actions as well. In this sense, thorough knowledge and effective management of trade secrets should be treated as an important weapon in an enterprise’s intellectual property arsenal.

I.Trade Secrets

1.Definition and Constitutive Elements

Article 10 of the 1993 P.R.C. Anti-Unfair Competition Law (hereinafter, the “Old Law” provided that a “trade secret” refers to technical information and operational information that (i) is unknown to the public; (ii) can bring economic benefit to the rights owner; (iii) possesses practicability; and (iv) is the subject of confidentiality measures taken by the rights owner. The current P.R.C. Anti-Unfair Competition Law, revised and passed on November 4th, 2017, was implemented on January 1st, 2018 (hereinafter referred to as the “New Law”). Article 9 of the New Law partially revised the literal expression of the definition of trade secrets; specifically, a trade secret refers to technical information and operational information that (i) is unknown to the public; (ii) incorporates commercial value; and (iii) is the subject of corresponding confidentiality measures taken by the rights owner. This revision involves only changes in the literal expression of the term and does not represent a substantial change in the constitutive elements. According to the revised definition, “trade secrets” include operational information and technical information. According to Article 3 of the Several Provisions of the State Administration for Industry and Commerce on Prohibiting Trade Secret Infringement, operational information and technical information includes designs, programs, product formulas, production processes, management know-how, customer lists, product sourcing information, production and marketing strategies, tender estimates, tender document content for bidding and tendering, etc.

Nevertheless, not all operational and technical information qualifies for trade secret protection. Under the foregoing provisions, the following conditions must be met before the operational and technical information possessed by an enterprise becomes entitled to trade secret protection:

(1)Secrecy

“Secrecy” refers to the condition that the trade secret must be information unknown to the public and unavailable on the market.  It is the most important constitutive element of a trade secret. Article 9 of the Interpretations of the Supreme People’s Court on Several Issues Concerning the Application of Law in the Trial of Civil Cases Involving Unfair Competition specifically provides standards for the identification of secrecy. For example, none of the following possess secrecy: (i) general knowledge or industry practices already known to the public; (ii) information already disclosed in reports or contracts; or (iii) information that can be easily obtained by means of product testing and duplication.

Special attention should be paid to the secrecy of customer lists. In reality, it is relatively difficult to convince courts to recognize customer lists and customer information as trade secrets due to the secrecy requirement. If an enterprise asserts that its customer list and information constitute trade secrets, it must prove the difference between this information and public information. For example, a customer list for which the enterprise expended labor and paid money might reflect customers’ special purchase preferences, settlement modes and price floors. All such information is accumulated through long-term communication between the enterprise and the customer, rather than being obtained directly from the market. Consequently, such information is obviously distinct from public information.

(2）Value

The value of a trade secret is based on the actual or potential economic value that can accrue to the rights owner through current or future use or application of the trade secret, while the most essential feature lies in the fact that the rights owner gains a competitive advantage due to its control over the trade secret. In essence, the expressions “brings economic benefit to the rights owner” and “possesses practicability” under the Old Law both represent the element of “value”, and can therefore be reduced to a single element. Since “practicability” is not an independent constitutive element of trade secrets, by deleting the expression “practicability” the New Law attaches greater importance to the element of “value”.

(3)Confidentiality

Confidentiality serves as the fundamental feature that distinguishes a trade secret from other rights. It means that the enterprise subjectively treats and protects such information as its trade secret and objectively adopts protective measures proportionate to the value of the trade secret. In practice, protective measures may include (i) restrictions on the scope of access or (ii) limitations on personnel that have access to the trade secret.

Among the three constitutive elements of a trade secret listed above, the element of value is comparatively easy to establish, while the elements of secrecy and confidentiality are a bit harder to satisfy.

2.Scope and Medium

(1)Scope: When an enterprise asserts that certain information constitutes a trade secret, in addition to asserting a broad scope of protection, it should also clearly identify the specific scope. For example, if an enterprise wants to protect the production process for its plastic profiles, it would be impracticable for it to claim the entire production process as a trade secret – instead, it must identify the specific scope of protection, such as the sizes of the production dies and the unique cooling method. What the law protects is not all of the technical information involved in the production process, but instead a specific scope for the asserted trade secret.

(2)Medium: Since a trade secret is by nature a type of intangible information originally created by human thought, it cannot be entitled to protection until it is reduced to a tangible medium. Nevertheless, a trade secret is in no way equivalent to its medium, since it can be reflected in various media including texts, drawings, descriptions, electronic files, etc. This means that what the enterprise protects as a trade secret is actually information, rather than the medium that expresses that information.

3.Features of Protection for Trade Secrets

(1)The protection of information as trade secrets offers distinct advantages. For one thing, the duration and territory of the protection is unrestricted. Coca Cola’s production formula is still protected as a trade secret to this day, for example, and this status is likely to continue indefinitely to the great competitive advantage of the company. Another advantage is that the protection of information as a trade secret reduces the risk that confidential information might be disclosed, and therefore the enterprise does not need to worry so much about the loss of an advantageous competitive position.

(2)As every coin has two sides, the protection of information as a trade secret also includes inherent disadvantages. Since a trade secret is not a type of right specifically provided for by law, it differs from patent and trademark rights in that the protection granted by law for a trade secret is in essence a protection of the rights and interests of the enterprise. Consequently, the protection of trade secrets is not as stable as the protection of patent and trademark rights, as it depends on the confidentiality measures adopted by the enterprise. In other words, if the enterprise does not adopt sufficient confidentiality measures for the information, it is very likely that trade secret protection will be lost. Moreover, unlike the situation with patent rights, an enterprise will not necessarily be able to prevent another enterprise from developing and using the same information. As long as such information was independently developed by the other enterprise, it will be entitled to use the information.

II.Trade Secret Infringement

In contrast with the Old Law, the New Law incorporates no substantial revision other than certain changes in literal expressions involving the infringement of trade secrets. Articles 9.1 and 9.2 of the New Law provide four types of infringement of trade secrets: (i) obtaining trade secrets by theft, bribery, fraud, coercion or other improper means; (ii) disclosing, using or permitting others to use trade secrets obtained through improper means; (iii) disclosing, using or permitting others to use trade secrets in his/her/its control in breach of an applicable agreement or confidentiality requirement; and (iv) acquiring, disclosing, using or allowing another to use a trade secret, by a third party who knew or should have known of illegal conduct prescribed in the preceding paragraphs committed by employees or former employees of the trade secret rights owner or other entities or individuals (i.e. Article 9.2). Item (iv) suggests that “employees of the enterprise” can also infringe the enterprise’s trade secrets and be held liable for infringement.

In practice, violations of items (ii), (iii) and (iv) occur more often than violations of item (i).

Trade secrets may be lost for the following (and other) reasons (i) the enterprise’s executive or employee resigns and then uses or discloses the trade secrets within their control in violation of an applicable non-disclosure agreement or non-competition agreement; (ii) during outsourced processing and production, the opposing party discloses trade secrets in violation of confidentiality clauses in applicable contracts; (iii) during visits by relevant individuals, the enterprise fails to adopt appropriate confidentiality measures, resulting in the disclosure of the trade secrets; (iv) trade secrets are stolen by others when the enterprise publishes a paper or a book or participates in an academic exchange; and (v) trade secrets are directly or indirectly stolen through commercial espionage.

After the enterprise discovers an infringement of its trade secret, it needs to take note of the following enforcement matters: (i) it must prove that the allegedly infringed confidential information satisfies all of the constitutive elements of trade secrets including secrecy, commercial value, protective measures and specific scope of protection; (ii) it must prove that the information used by the suspected infringer is identical or similar to its trade secret; and (iii) it must prove the illegal means through which the suspected infringer obtained the trade secret. Due to the hidden nature of trade secrets, the third item usually proves the most difficult for the enterprise. Courts adopt a compromise approach in practice -- the enterprise needs only to prove that the opposing party had the opportunity to access the trade secret at issue, e.g. if the suspected discloser was engaged by the suspected infringer after he or she resigned from the enterprise, the courts will deem that the suspected infringer had the opportunity to access the information. If the enterprise can prove the possibility of access, the burden of proof will be shifted to the suspected infringer, who will then have to prove that the information it used is not the enterprise’s trade secret, but instead was obtained through independent research and development or certain public channels. Failure to prove this much will result in a high likelihood of trade secret infringement liability. 

III. Trade Secret Protection

1.The Enterprise’s Organizational Structure

If an enterprise plans to establish an effective trade secret management system, it should consider building a certain type of organizational structure. If its need for protection of trade secrets is strong, it should consider establishing an IP department or a special trade secret management department.  If it has no such special need, it may appoint a person to be responsible for managing its trade secrets (the title of such person should be no lower than General Manager).

2.Protection of the Content of Trade Secrets

Please pay attention to the following matters in terms of the content to be protected in the management of trade secrets: (i) the enterprise should identify a specific scope of protection for its trade secrets; (ii) the enterprise needs to take certain measures for the management of visitors, e.g. informing visitors in advance of the territorial restrictions and the code of conduct to be followed for visits; (iii) the enterprise should attach importance to the management of its employees, e.g. by concluding non-disclosure agreements with them or providing them with special training on trade secret protection; (iv) the enterprise should implement categorized registration and management of its trade secrets, e.g. Top Secret, Strictly Confidential, Confidential, etc. (v) the enterprise should establish an early warning mechanism for its trade secrets and establish preliminary countermeasures against infringement of its trade secrets, including preventing the further distribution of the infringed information, carrying out evidence preservation, etc.

3.The Role of Lawyers

Lawyers, as an important force for enterprise trade secret management, can help an enterprise establish an internal trade secret management system, assist it in establishing an effective trade secret protection system, guide the enterprise in defining the scope of trade secrets, tutor it in providing training for its employees, and manage and assist the enterprise in completing know-how reviews. Outside counsel can help the enterprise review technical confidentiality agreements and participate in litigation and enforcement actions on behalf of the enterprise.

In view of the increasingly prominent value of trade secrets in enterprise operations, competition for information will inevitably become a focus issue in market competition. Only by formulating a competent and effective trade secret management system will an enterprise be able to stand in a strong position in the face of fierce market competition. All of this will undoubtedly require joint effort from the enterprise and outside parties such as counselors and lawyers.