How to Protect Trade Secrets


-----Xu Wei

A remarkable 70 percent of the market value of a typical U.S. high-tech company resides in its intellectual properties, such as trade secrets. However, most of these companies spend 80 percent of their security budgets protecting the other 30 percent of their assets, such as physical property. Even when focusing on intellectual property protection, little attention is paid to trade secrets – most resources go toward protecting patents, copyrights and trademarks.
In China, the environment is somewhat similar, although inattention to trade secrets is even more pronounced. There has been progress on the protection of trademarks, patents and copyrights, but most companies have little or even no idea of the need to safeguard their trade secrets. The trade secret can play a decisive role in maintaining a company’s competitive advantage. A famous example of this is the Coca Cola formula. As the recipe for creating Coca Cola syrup for soft drinks is a very well-guarded secret, no-one else has been able to replicate it and Coca Cola remains the number one soft drink producer in the world.

What are trade secrets and its current situation in China?
Trade secrets are a collective subject which can include the designs, prescriptions, arts and crafts, techniques, customer and vendor lists, marketing strategies and tenders. PRC law defines a trade secret as any formula, pattern, device, machine, process, technique, compilation of information, or program (referred to collectively as proprietary information). (From the "Several Regulations on Prohibiting Actions of Infringing Trade Secrets" as promulgated by the State Administration of Industry and Commerce). Such proprietary information must be used in one's business and provide a competitive advantage or a potential competitive advantage. The proprietary information must be kept secret so that, except by improper means, it is difficult to acquire.
In America, many states have already promulgated their own trade secret protection laws. In China however, there isn't a specific body of law that addresses the subject. In addition to the above, regulations related to trade secret protection are scattered across the following bodies of law and regulation:
1. The Anti-Unfair Competition Law, and its related administrative regulations
Pursuant to Article 10 of the "Anti-Unfair Competition Law", a competitor is prohibited from using the following measures to infringe upon another's trade secrets:
a) To acquire the owner’s trade secret by theft, intimidation, or other improper approaches;
b) To disclose, use, or allow others to use the owner's trade secrets that have been obtained through the above methods;
c) To disclose, use or allow others use the trade secrets which breach the agreement or requirements of the owner.
It is considered a trade secret infringement for any third party to acquire, use or disclose another's trade secrets under the condition that he acknowledges the existence of illegal behavior as set forth in the above clauses.
Article 25 of the "Anti-Unfair Competition Law" further stipulates: Where there is any prejudicial behavior that falls within the scope of Article 10 of this law, the supervising and examining authorities shall demand the infringing party to cease the illegal conduct, and determine whether to penalize the infringing party with a fine ranging between RMB 10,000 to 200,000 depending on the circumstance.
"Several Regulations on Prohibiting Actions of Infringing Trade Secrets" further details the protection principle established under the "Anti-Unfair Competition Law".
2. Since disputes arising from trade secrets are often related to personnel issues, applicable trade secret regulations can also be found in the labor law and some administrative regulations prescribed by state labor administrative authorities.
Article 22 of the PRC "Labor Law", allows that both parties of an employment contract can agree to an employment contract clause that affords protection for the employer's trade secrets.
According to Article 15 of the "Provision on Labor Contracts for the Municipality of Shanghai", both parties to an employment contract may establish a confidentiality clause in the contract, or sign separate confidentiality agreements. Where trade secrets are acknowledged by the public, such confidentiality clauses or confidentiality agreements related to the items that are public knowledge will automatically lapse.
3. Regulations in other civil and criminal laws
Prescriptions on protecting trade secrets are also contained in Article 118 of the General Principle of Civil Law, Article 43 of the PRC Contract Law, and Article 219 of the Criminal Law.
Due to the scattered and incomplete nature of the legal system, it is difficult for a company to protect their trade secrets in China. Since there isn't a specialized law that addresses the problem, companies are often unable to implement proper plans to protect trade secrets. Moreover, the lack of procedural regulations can prevent a company from taking further steps in the event an infringement takes place and the company suffers from the trade secret being leaked.
In practice, most trade secret disputes take place following the departure of a key employee to another company, and the old employer finds the new employer is now manufacturing the same products or using the same techniques. In court however, the old employer usually can only prove that the new employer began to manufacture the same products after the employee left, but cannot further establish enough evidence to convince the judge that the employee and his or her new employer have taken illegal action as set forth in Article 10 of the "Anti-Unfair Competition Law". As for those employees who sell trade secrets to a company's competitor when they are still with the original company, it is almost hopeless to obtain enough evidence to hold them liable.

How to Protect Trade Secrets
Since it is relatively easy for a trade secret to be prejudiced, and also relatively difficult to collect enough evidence to prosecute, the protection of trade secrets primarily relies on prevention and safeguard measures.
For the purpose of protection, it is important to keep the trade secrets conforming to the special features that are prescribed by the law, that is, unknown to the public, with business value and kept in secret. In the event of a breach, this allows for a legal basis for prosecution.
For example, if a company leaves the trade secrets in unlocked file cabinets in unrestricted areas of the company, or leaves the documents disclosing trade secrets in garbage cans without shredding the documents, then they have more difficulty establishing that the trade secret was to remain unknown to the public or has high commercial value. It is sometimes surprising how many companies are susceptible to such a simple mistake. It is quite easy and inexpensive to establish such internal protective measures and with a documented policy on how such materials are to be handled, there becomes a point of reference for a court to base prosecution on.
The following approaches are recommended:
1. To maintain proof that the company is the legal owner of the trade secrets and that such trade secrets fall within the scope of legal protection:
A. Maintain logs of the nature and scope of the trade secret itself, with all the processing material during the research and development. When any litigation takes place, the first thing that is needed to be proven is that the company possesses the trade secret. This is why such documentation is so important. If such fact is rejected by the court, there are no grounds for the suit.
B. Adopt security measures to prove the trade secret is being properly maintained as a secret;
1) Marking documents as "confidential" or "trade secret";
2) Keeping hard copies of secret materials in a locked vault, safe or cabinet. If the documents existed in soft copy, require the use of passwords for access;
3) Monitoring all the hard copies that exist documenting the trade secret;
4) Prohibit photocopying of trade secret documents;

2. To perfect the trade secret protection system:
A. Have a written trade secret plan and follow the plan;
1) Limit access to as few people as possible, and reevaluate those people during a fixed period for adjustment;
2) Maintain logs of who has access rights to the trade secrets;
3) Prohibit the disclosure of the trade secrets outside of the company's restricted areas;
4) Transport trade secret materials under lock;
B. Employee Training
It is vital to improve the employees' attention on the need for protection of trade secrets, particularly those who have easy access, such as technical staff, management and document management personnel. The company should advise those employees that the information is regarded as a trade secret and communicate to them in writing the company’s expectations of secrecy.
C. Confidentiality Agreement
A more important measure in keeping the trade secret a secret is ensuring that employees and business partners who have access to company trade secrets have signed confidentiality or non-disclosure agreements.
In the event the trade secrets are held by several key staff members, and if the trade secrets are disclosed to competitors, the company could suffer a heavy loss. A simple confidentiality agreement may not be sufficient to protect the trade secret. The company might consider the use of non-compete agreements, which can restrict an employee from leaving and taking a position with a competitor, or establishing a competitive business himself. Pursuant to Article 16 of the "Provision on Labor Contracts of the Municipality of Shanghai", such period shall not exceed three years. In this manner, the company's trade secrets can be better protected and safe within such period. It should be noted however, that such non-compete agreements may require the employer to pay proper severance compensation to the employee since the employee will have lost opportunities in such period. If this is not handled, then the agreement/clause could be considered to be null and void.
Currently, trade secrets are most often protected through the use of confidentiality agreement in China. It is crucial to restrict the possible disclosure from company's employees and commercial partners who have access to the trade secret. A well designed, precise confidentiality agreement can even have the same effect as a non-compete agreement.
Summary
As high tech companies and e-tailers race to get their products and technologies to market and to compete in the market place, they must be careful not to get bumped out of the race by losing their trade secrets to competitors. Unlike copyrights, patents and trademarks, trade secret protection lasts indefinitely. With the planning recommended above, trade secret holders can protect and maintain the secrecy of their trade secrets. If litigation becomes necessary, they can place themselves in a much more well-prepared position to win enforcement of any infringement.

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