A Good Time for Trade Secret Protection in China Part Two

Part Two

I.       Put in Place Good Practices in the Management of Trade Secrets

Firstly, we need to identify the protected object of trade secret.

Article 9 of the AUCL reads that, “Trade secret means technical, operational, or other commercial information unknown to the public, which is of commercial value for the owner of such information who has taken corresponding confidentiality measures.” What trade secret protects is commercial information, mainly including technical information and operational information.

Article 1 of the Provisions of the Supreme People’s Court on Several Issues Concerning the Application of Law in the Trial of Civil Cases of Disputes over Infringements on Trade Secrets (referred to as the “Provisions”), which came into effect on September 12, 2020, specifically enumerates which information constitutes technical information and which information constitutes operational information, that is, (i) information concerning structure, raw materials, components, formulas, materials, samples, patterns, propagation material for new varieties of plants, processes, methods or steps thereof, algorithms, data, computer programs in relation to technology and relevant documents, are considered as technical information; and (ii) information concerning creativity, management, sales, marketing, financing, planning, samples, bidding materials, customer information (which includes the customer’s name, address, contact information, as well as information on the customer’s trading practices, intentions and content), data, etc. in relation to business operation activities, can be determined as operational information.

There is a wide range of commercial information, however, not all commercial information constitutes a trade secret, and only those meeting certain conditions in terms of secrecy, value and confidential treatment, constitute a trade secret. The test of secrecy emphasizes the commercial information concerned is unknown to the public, the test of value requires such commercial information to have commercial value, while the test of confidential treatment is decided by whether confidentiality measures have been taken.

Secondly, we need to objectively determine the secrecy and value of commercial information.

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

Article 3 of the Provisions specifies the time point and criteria for determining secrecy, that is, the information is not widely known or easily accessible to those relevant in the field when the alleged infringement occurs. Article 4 of the Provisions enumerates the circumstances under which the commercial information will be determined as known to the public, and therefore no longer a secret:

(1)    The information is of general knowledge or industry 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 available to those relevant in the field by observing the marketed product;

(3)    The information has been publicly disclosed in a public publication or other media outlet;

(4)    The information has been made public through public presentations, exhibitions, etc.;

(5)    The information is available from other publicly available sources to those relevant in the field.

It also specially stipulates that, where any new information formed by sorting out, perfecting and processing information known to the public conforms to Article 3 of the Provisions, such new information shall be determined as unknown to the public.

In addition, the Interpretations provide for a reverse enumeration of non-secrecy in Item (6), that is, any information which is easy to obtain without paying a certain price is not considered unknown to the public.

This reverse enumeration is helpful for companies to determine whether certain information is secret, especially for technical information common in high-tech companies, which often carry out search and analysis of existing technologies before initiating a project. If such search and analysis are completed by a third-party independent organization, such as a professional organization engaged, it will be more objective and can help companies better determine whether the relevant information is secret and can also be retained as evidence.

While operational information exists in any company with business operation activities, and an active company in normal operation will have a large amount of operational information. To the extent that such operational information does not satisfy the reverse enumeration test above, it can basically be considered as unknown to the public.

Value comes with secrecy, and commercial information has value because of its secrecy. There is hardly any 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 information without value, and few will dispute over valueless information. It should be specially noted that: (1) any new information formed by sorting out, perfecting and processing information known to the public is considered to be secret, that is, information known to the public may acquire secrecy and become unknown to the public after reprocessing; (2) data of some failed experiments have the value required for a trade secret because they can avoid further R&D investment or accelerate R&D; and (3) some interim deliverables may also be valuable due to their actual or potential commercial value.

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

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

The people’s court shall determine whether the right holder has taken corresponding confidentiality measures based on the nature of the trade secret and its carrier, the commercial value of the trade secret, how much the confidentiality measures can be identified and correspond to the trade secret, and the right holder’s confidentiality intention, etc.

Article 6 of the Provisions and Article 11 of the Interpretations each list six specific circumstances and a catch-all provision. If any of such circumstances is sufficient to prevent trade secret leakage under normal circumstances, the people’s court shall determine that the right holder has taken corresponding confidentiality measures.

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

1.      Limit the scope of knowledge of confidential information. Technical information is mainly limited to core technicians and middle and senior managers, and operational information is mainly limited to middle and senior managers.

2.      Enter into a non-disclosure agreement and, whenever necessary, a non-compete agreement, with the persons subject to confidentiality obligation. It should be noted that non-disclosure agreement and non-compete agreement are different in this respect. A non-disclosure agreement requires to keep confidential trade secrets, generally without consideration, and sets forth a term of confidentiality until the trade secrets are made public. While a non-compete agreement generally specifies that employees are not allowed to work in competing companies or engage in competitive business activities during their employment or within a certain period after their departure. The non-compete restriction will only be legally protected after a consideration is paid, 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 to or making confidentiality requirements for physical places such as secret-related machines, plants, and workshops; taking measures such as sealing and locking trade secrets carriers.

4.      Electronic encryption, encrypting the electronic information itself, and taking various measures to prohibit or restrict the use, access, storage, copying, etc.

5.      Other reasonable measures.

The specific confidentiality measures to be taken are inseparable from the determination of value. The more valuable the information is, the more confidentiality measures should be taken. This is also the basis for companies to conduct hierarchical management of confidential information. The higher the security level, the more complete the confidentiality measures taken.

A single confidentiality measure is often not enough for a court to determine that the right holder has taken corresponding confidentiality measures. For example, it is difficult for a court to support a claim of having taken confidentiality measure made by someone who signs a non-disclosure agreement only. Multiple confidentiality measures taken according to the importance of trade secrets are more likely to win support from a court and provide better all-round protection for trade secrets.