China question: How do I protect my trade secrets?

On-board training and exit interviews can be utilised to educate the employee regarding the importance and nature of trade secrets and possible civil and criminal penalties resulting from an offence. Exit procedures including returning or shredding of all property of the company is vital for such purposes. A reminder letter may also be sent to senior managers upon their exit of their post-employment obligations, including confidentiality obligations and any non-compete restrictions. There should be clear evidence the individual has received and understood these documents in order for them to have weight in court.

Ying Wang

DLA Piper, Shanghai

The domestic perspective

When protecting trade secrets, employers often run into two difficulties, both of which are requirements to establish a valid trade secrets claim in China:

(a) How can you prove that what the former employee took away are your trade secrets? We often discover that it is easier to prove that ex-employees had access to confidential information, but employers often have to prove that the accessed confidential information constituted trade secrets under Chinese law.

(b) How can you prove the damages that were caused to your business? This issue is critical to the remedies you can obtain from the courts. For those employers who want to proceed with criminal prosecution, proof of damages is the first barrier they must overcome.

Any agreements that will be signed by your employees have to be drafted to help you protect yourself in the future or ease the burden in future legal proceedings. Our experience in litigating trade secret cases in China reveals several pitfalls employers may wish to avoid:

(1) Employment contracts may not be a suitable vehicle to set out all confidentiality obligations. These contracts are subject to strict governmental regulations and disputes that arise can be subject to mandatory arbitration. There are cases where local courts have refused to accept trade secrets lawsuits and required both parties to go through labour arbitration. Separate confidentiality agreements are a good option for employees to sign.

(2) People sometimes do not distinguish between confidentiality agreements and non-compete agreements. Confidentiality agreements are critical in defining the obligations of confidentiality and what counts as confidential information. Employers must craft an agreement that will protect any confidential information that may be accessed by employees to the broadest extent possible and in sufficient detail. By contrast, non-compete agreements are more about preventing former employees from working for competitors immediately after departure. Employers often make the mistake that the obligations in non-compete agreements or non-compete terms are proof of confidentiality obligations. The Supreme People's Court has rejected such a position in the case Shanghai Furi Industrial vs Huang Ziyu and Shanghai Safeiya Textile. The Court held that non-compete agreements alone are not sufficient proof as to the scope of confidential information.

(3) Employers cannot solely rely on the agreements to protect trade secrets. To prove that confidential information constitutes legally protectable trade secrets, employers must show they have taken some kind of measures to protect confidential information. Such measures may vary depending on industry practice.

It has been well established that enforceable non-compete agreements require that the employers pay reasonable compensation to employees. For confidentiality agreements, it is advisable to insert, in sufficient detail, language to justify the benefits that employees receive in exchange for taking on the duty of confidentiality. To avoid possible uncertainty in unfamiliar court venues, the employers and employees may consider agreeing in advance on court jurisdictions to adjudicate possible disputes.

To increase enforceability, employers and employees may also agree on liquidated damages in confidentiality agreements and non-compete agreements. This allows the courts to have at least some reference in determining the amount of damages awarded. Employers should take note of the latest amendment to the PRC Civil Procedure Law (中华人民共和国民事诉讼法), see page 28 for analysis and full translation online. Under the new amendment, Chinese courts will be given powers to grant a new kind of remedy in all types of civil claims, including trade secret cases, which will allow the plaintiff to obtain court orders to prevent the other side from conducting specific activities.

He Jing

ZY Partners, Beijing

The in-house perspective

Compared with other IP rights, trade secret protection is a challenge due to enforcement shortcomings. Effective prevention is thus more important in practice. Most trade secret disputes are between employers and former employees, making employment contracts critical in limiting the risk you take in disclosing valuable information. The following provisions and practical tips are worth considering and careful crafting is needed to protect your inerests while ensuring enforceability under Chinese law:

Confidentiality Obligation

Trade secrets or confidential information should be clearly defined by their nature, types and content so employees fully understand what is protected. It should be made clear confidential information includes not only technical but also commercial information, and any third-party information the company is obligated to protect. The company's confidential information protection policy and security measures can be attached to the employment contract, ensuring employees know what they are expected to do. The confidentiality obligation should be made perpetual, so it survives the employment termination. For any possible exceptions, such as information that arguably has become public or was obtained without confidentiality requirements, employees can be required to produce the relevant proof to the company for verification before any disclosure. The contract can have employees agree to reimburse the employer for attorney's fees and costs incurred in enforcing against their breach in addition to any other damages. For employees bearing critical trade secrets, the contract may set up a liquidated damage that will be immediately triggered once any trade secrets are divulged. That way the employees would have a stronger sense to comply because they know the price for a breach is high.

Non-compete covenant

This option is commonly known to be possible under Chinese law but to ensure a non-compete agreement or provision is valid and enforceable, it should bind an employee by no more than two years and only be applicable to senior management, senior technicians, and those bound to keep sensitive information central to the employer's business. It also requires reasonable compensation to the employee. The employer should carefully identify employees to sign a non-compete agreement as there are enforceability and cost issues to consider. As a practical approach, the employer may try to establish a relatively broad pool of people above a certain level or meeting certain credentials, and have all of them sign a non-compete agreement with the company once on board or in the middle of the employment. This is because it would be more difficult to ask people to agree to a non-compete agreement when they are about to leave the company. The non-compete obligation is not triggered until the employee resigns (or is terminated), but at that time the employer can choose to release it or effect it by paying the required compensation, depending on the actual need for clearance.

IP and trade secret ownership

Chinese law has different rules about who owns the IP developed by an employee during their employment unless contracted out. For instance, under the PRC Patent Law (中华人民共和国专利法) the right to apply for patents for any service inventions made by the employee would belong to the employer, but it is silent about who owns the trade secret rights if those service inventions are not to be filed for patents. In addition, the PRC Copyright Law (中华人民共和国著作权法) provides that only certain work for hire would be owned by the employer, like technical drawings or software programs that were developed mainly by using the employer's resources and the rest would belong to the employee. It is very important that the employment contract specifically makes it clear that all such IP developed for the employer or relating to the employer's business should be disclosed to and belong to the employer, whether they will be protected as patent, trade secret, copyright, or any other type of IP rights.

Jerry Xia

Honeywell, Shanghai