By Sun Jin(Marlow), China Attorney at law, and Peng Wei (Austin). All rights reserved, republishing this article please indicate author and source of this article(from this website). March 21, 2013

 
 


I. What is the definition of trade secret in laws of mainland China and how to understand it correctly and comprehensively?

Trade secret could also be named as business secret or commercial secret. According to article 10 of Law of the People's Republic of China Against Unfair Competition (“PRC AUC LAW”) which was made and entered into force in 1993, Trade Secret refers to any technology information or business operation information which is unknown to the public, can bring about business benefits to the owners, has practical utility and about which the owners have adopted secret-keeping measures. And later in revised PRC Criminal Law, we have a same definition.

Hence, Trade Secret is firstly a sort of information, and is the immaterial asset of the owners; meanwhile, if the owner is a company (below we mainly talk about the situations that the owner is a commercial company), no all information of a company could be trade secret. To understand this definition correctly, we need to understand its connotation and denotation, and then look at it from different directions, including intellectual property law, criminal law and administration law, as well as, of course, civil and commerce law, just like when we are looking at a bottle on a table, we can look at it from directions of upper, left, right, back and forth.

II. How to make it sure that whether a technology information or business operation information is trade secret?

On China law theory, when we say a technology information or business operation information is trade secret, it must meet four conditions at same time. First condition is that it must be something secret, i.e. it’s not known by public; second, it has some commercial value, and can bring business benefits to the company, the owner; third, it has practical utility, and can be used to create commercial values, practically or potentially; fourth, the company had taken some secret-keeping measures, for example, the company can stamp a seal of Secret or Secret-Keeping or Commercial Secret etc. on the files of confidential information, and made a written secret-keeping rule of company inner management.

In practical situations, we have one fairly simple method to judge it whether a pc of information is trade secret, that is whether this information had ever been “Processed plus Secret-kept”. A piece of information, after being processed by the company’s staff, generally will become something valuable and could be practically utilized, and after it’s Secret-kept by the company, it will become something secret and under protection of secret-keeping measures. Hence information which had been “Processed plus Secret-kept”, could defined as trade secret according to the conditions prescribed in PRC AUC LAW.

When we compare trade secret of a company with its intellectual property, we can say not all intellectual property of a company could be trade secret, like officially filed patents and trademarks because they must become public when we file them. However, before we filed them officially especially some invention patent, it might not be protected by intellectual property law because they are not filed yet, hence it’s know-how only, but if we turn it into trade secret with secret-keeping measures, they can be protected by PRC AUC LAW. And another example, if we have some design patent which is not filed as design patent officially, then we can say it’s our copyright (which need not be filed but can become a legal right), and this could become trade secret as well, when the designs will be protected by both intellectual property law and PRC AUC LAW. There is at least one character which is common between trade secret and intellectual property, i.e. they are both exclusive rights, on basic meaning level. It’s hard to say that a secret could be shared is secret any more, but there might be one exception, that is small secrets between girls.

III. Below two cases may help us to understand the definition of trade secret on PRC law better

Case one: company staff’s processing on the information turns it into trade secret

Here is a company we call it AA company, AA company had ten former clerks, who did not finish the job with AA company over termination of employment agreement, and one by one brought working archives of daily use to another BB company who is in competition position against AA company. And BB company established a new business department hiring the ten guys, and use the working archives these clerks had brought with them from AA company, and gradually, the AA company’s customers become the customers of BB company, which resulted in AA company’s suffering of big business loss. After negotiations failed, AA company sued BB company to court, claiming it that BB’s unfair competition doings must be stopped, and BB must return all working files from AA company, and at same time BB company must compensate AA company’s direct business loss. When court heard the case, BB argued that, all the information in working files, like customers’ address, telephone number, facsimile number, emails, etc, are all public on public medias and online, hence are known by public, so nothing secret at all. But after checked the working files legally, court judged it that the working files are trade secret of AA company, and here is the Court’s opinion: AA company had spent years of time on establishment of good working relationship with customers listed in the working files, and AA company had selected and made this customer list from public information that could be seen everywhere on public media and internet with due hard work and expenses, hence AA company’s selection on this customer list had turned this customer list into unknown to public any more, and is something valuable and has the character of utility, and is the trade secret in PRC AUC LAW, hence is the trade secret of AA company.

Case two: business operation information is not under protection of laws when no secret-keeping measures had ever been taken

In May of 2001, the General Manager of a C Electrical Motor Manufacturing Co., Ltd.(“C company”) made an official complaint to D Municipal Administration Bureau of Industry and Commerce(“D governmental bureau”), declaring that, the former technical department manager of C company, a Mr. E, after resigned from C company, established a new electrical motor manufacturing company (“F company”) of his own, to produce same products to that of C company, using the technical drawings and documents which Mr. E had copied privately while working for C company. C company claimed that F company and Mr. E had infringed the trade secret of C company, which caused C company business loss of CNY110,000, hence requested D governmental bureau to stop and punish the infringing actions of F company and Mr. E, according to PRC AUC LAW. After carefully investigations, D governmental bureau came to a conclusion that, C company neither ever made any inner management rules to keep its technical drawings and documents secret, nor ever signed any secret-keeping agreement with its staff, hence is in lack of secret-keeping measures. According to PRC AUC LAW, C company’s technical drawings and documents are not trade secrets, hence Mr. E and F company’s using of the technical drawings and documents, did not constitute the infringement on C company’s legal rights, and rejected the official complaint of C company, at same time D governmental bureau made one official administrative proposal to C company, suggesting C company to learn lessons from this case, and establish related company inner management rules, to protect themselves legally.

IV. Responsibilities over PRC laws resulted from infringement of trade secret

When we look at trade secret from other directions of criminal law, administrative law and civil and commerce law, the main and first issue is the responsibilities over these laws resulted from infringement of trade secret, that is to say, infringement of trade secret, could be a crime if serious enough, and could be punished by a governmental department (exactly speaking, it’s local administration bureau of industry and commerce) if not that serious to be a crime, and it also leads to responsibilities of tort and breaching of agreement over civil and commerce laws.

1. Criminal responsibility resulted from infringement of trade secret

According to article 219 of PRC Criminal Law (Crime of infringement on trade secret), if the business loss/gain involved in the infringement of trade secret is in a big sum, this article of 219 will be applied. Exactly speaking, party A infringed party B’s trade secret, which resulted in Party A’s illegal profit of more than CNY500,000, or Party B’s business loss of more than CNY500,000, or Party B’s bankruptcy, then party A shall be punished criminally according to aforementioned article. When the infringement result is serious (if not serious, then it’s not a crime yet), part A will be sentenced to fixed-term imprisonment of not more than three years or criminal detention and concurrently or independently, to a fine; and if an especially serious result is caused, Party A will be sentenced to fixed-term imprisonment of not less than three years and not more than seven years and concurrently to a fine.

2. Administration responsibility resulted from infringement of trade secret

According to article 6 of Some Provisions of the State Administration for Industry and Commerce on the Prohibition of Business Secrets Infringement (“Provisions”), in case that actions of infringer(respondent) of illegal disclosure, usage, or permitting another party to use trade secrets of secret owners which resulted in loss of the trade secret owner, upon complaint and request of the owner and under written surety of the owner on results of actions by force, local Administration Bureau of Industry and Commerce could take following measures by force:
(1). to detain the drawings, software or other materials which bearing the trade secret of owner and infringer(respondent) got them with unrightful methods from the owners;
(2). to order respondent to stop selling of products made from trade secrets of the owners.

According to article 7 of this Regulation, these who (respondent, and infringer) infringed trade secret of others, will be punished by local Administration Bureau of Industry and Commerce with measures of ordering respondent to stop illegal actions at once, and a fine of CNY10,000 to CNY200,000 according to the exact situation of the case.

3. Civil and commercial responsibility resulted from infringement of trade secret

Basing on other more basic laws like PRC Contract Law, and according to Interpretation of the Supreme People's Court on Some Issues Concerning the Application of Law in the Trial of Civil Cases Involving Unfair Competition, making certain of compensation sum of infringement on trade secrets may refer to the method of making certain of compensation sum of infringement on patent rights. That is, firstly the sum could be the profit that infringer had gained; in case the profit is not able to be calculated or ascertained, the sum may be the loss of the right owner suffered from the infringement; in case that the loss is not be able to be ascertained either, court is entitled to judge it that the infringer must compensate the right owner a sum between CNY10,000 and CNY1,000,000, according to exact situation of the case.

V. Six FAQs for HR management regarding law issues of trade secrets

1. Whether we can say it that the company had accomplished its secret-keeping measures when both parties of employment agreement had included some secret-keeping articles in the agreement?

Answer: Establishment of some secret-keeping articles in employment agreement, is only a part of secret-keeping measures for a company, meanwhile the company should take some further measures, like stamping the seal of Secret or Secret-Keeping or similar on related files and documents, and to ascertain the scope of the files and documents bearing trade secrets, otherwise, related staff may argue it with an excuse that he/she does not know that this technology or business information is belong to company’s trade secret.

2. Whether the employer should be responsible to it, in case that the employer hired some clerks who have connections with trade secret of another company and resulted in infringement on the trade secrets of another company?

Answer: Yes, the employer shall be under responsibility for joint and several obligations together with the clerk over civil and commerce law. In case the situation and damage is serious enough to apply criminal law, the employer will be fined, and direct management will be punished criminally.

3. Whether employer is obliged to pay employee secret-keeping fee when the employer and the employee signed one non-disclosure agreement?

Answer: There is no such a compulsive prescription in PRC laws and regulations, hence, after the non-disclosure agreement is signed, both parties may negotiate on the secret-keeping fee and come to the agreement, either pay it or not pay it.

4. After a company’s trade secrets are infringed by some party, how to evidence and prove it, like when filing a litigation case?

Answer: In judiciary practice, the method could be concluded and named as “Same plus Contact method”, in details, we need to evidence and prove it that:

(1) first plaintiff do have some trade secrets, and the technology and business information that defendant used are Same to the trade secrets of plaintiff; and
(2) plaintiff is able to Contact with the trade secrets; and
(3) there is no legal source for defendant’s using of trade secrets.

5. What to do when a company’s trade secrets are infringed by another party?

First is administrative solution, when you may make an official complaint to local Administration Bureau of Industry and Commerce, who will help you to stop illegal actions; second is civil and commerce solution, when you may file a civil litigation in court against the infringer; third is criminal solution, when you may file a indict case in local police bureau, who will check and decide whether start the criminal investigation. You may choose one of above solutions, or two of them, or all of them.

6. How to establish the protection system of a company on trade secrets by a HR manager?

First, HR manager may suggest the high management of the company, to review and check all files and documents that may contain important technology and business information of the company, and decide what files and documents the company wants to classify them as trade secret, for company’s benefits. And for these files and documents, stamp the seals of Secret or Trade Secret or Secret Keeping on these files and documents, and this is to ascertain the scope of files and documents relating to trade secrets. Second, HR manager may negotiate with employees and include some non-disclosure articles into their employment agreement, to setup obligations of secret-keeping for employees. Third, HR manager may sign a non-competition agreement with key employees who can contact with trade secrets, and may according to the non-competition agreement, pay these employees the compensations (non-competition fee) in time, especially after the key employees resign from the company.

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Article 10 of LAW OF THE PEOPLE'S REPUBLIC OF CHINA AGAINST UNFAIR COMPETITION

A business operator shall not use any of the following means to infringe upon trade secrets:

(1) obtaining an obligee's trade secrets by stealing, luring, intimidation or any other unfair means;

(2) disclosing, using or allowing another person to use the trade secrets obtained from the obligee by the means mentioned in the preceding paragraph, or

(3) in violation of the agreement or against the obligee's demand for keeping trade secrets, disclosing, using or allowing another person to use the trade secrets he possesses.

Obtaining, using or disclosing another's trade secrets by a third party who clearly knows or ought to know that the case falls under the unlawful acts listed in the preceding paragraph shall be deemed as infringement upon trade secrets.

“Trade secrets” mentioned in this Article refer to any technology information or business operation information which is unknown to the public, can bring about economic benefits to the obligee, has practical utility and about which the obligee has adopted secret-keeping measures.

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Article 219 of PRC CRIMINAL LAW

A person who commits any of the following acts of infringing upon business secrets shall be sentenced to fixed-term imprisonment of not more than three years or criminal detention and concurrently or independently, to a fine, if a heavy loss of the person who enjoys the right of the business secret is caused; and if an especially serious result is caused, to fixed-term imprisonment of not less than three years and not more than seven years and concurrently to a fine:

1. to acquire business secret of a person who enjoys the right by stealing, lure, force or any other improper means;

2. to reveal, use or permit another person to use the business secret of the person who enjoys the right acquired by means specified in the preceding paragraph; or

3. to reveal, use or permit another person to use the business secret held by him in violation of the agreement or the demand of the person who enjoys the right on protection of the business secret.

A person who acquires, uses or reveals another person's business secret which he knows or ought to know the act listed in the preceding paragraph shall be deemed an act of infringement upon business secrets.

Business secrets mentioned in this Article mean the technical information and management information which are unknown by the public, can bring economic profits to the person who enjoys the right, is of utility and has been taken classified measures by the person who enjoys the right.

The person who enjoys the right mentioned in this Article refers to the owner of business secret or the user of business secret who is permitted by the owner of business secret.

 

 
     

 

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