In March 2020, Anthony Levandowski, a leader in the self-driving car technology in Silicon Valley, was sentenced to 18 months in prison for trade secret theft. He had previously helped develop Google’s self-driving cars and was accused of stealing Google’s trade secrets and using them for Otto, a company he founded after leaving the tech giant. The Levandowski case can be classified as one of the most high-profile recent examples of a classic trade secret infringement behavior.

With the expansion of today’s business world, more and more enterprises have begun to attach great importance to the protection of trade secrets, as when an enterprise reaches a certain scale of business operations, it tends to devote large amounts of human and capital resources into technology research & development and the accumulation of business information, which is the later converted into trade secrets. Therefore, trade secrets contain huge commercial value as the embodiment of the enterprise’s core competence and competitive advantage/s. Some famous enterprises even consider trade secrets as its foothold to survival, and the leakage of such commercial secrets tends to bring immeasurable losses to an enterprise.

Fierce competition within commercial business allows for huge value to be attributed to trade secrets, which is defined as the technical information and operational information that are not known to the public, can be used to bring economic benefits to rights holders, and have practicability and for which the right holders have taken measures to ensure confidentiality in accordance with ART 9 of the Anti-Unfair Competition Law of the People’s Republic of China. Technical information and operational information can be collectively defined as “commercial information”, which includes design, program, product formula, production technology, production methods, management know-how, customer list, sources of information, production and marketing strategy, bidding pre-tender estimate and non-standard design, program, product formula, production technology, production methods, management know-how, customer list, sources of information, production and marketing strategy, bidding pre-tender estimate, tender information such as the book content information, etc.

 

To summarize, the accreditation of trade secrets shall embody the following 3 conditions:

  • Not known to the public;

A trade secret shall be information that the public cannot know and the market cannot obtain. Therefore, secrecy is naturally the most important factor in the composition of business secrets. According to ART 9 of the < Interpretation of the Supreme People’s Court on Several Issues Concerning the Application of Law in the Trial of Civil Cases of Unfair Competition>, common sense or industry practices that have been disclosed, or information that has been disclosed in reports or contracts, and information that can be easily obtained through product monitoring and copying does not contain a level of secrecy.

  • Possesses business value;

The value of trade secrets refers to the fact that trade secrets can bring actual or potential economic value to the rights holder through current or future use. The most essential feature is that the owner has a competitive advantage because of the mastery of the trade secret.

  • Confidential Measures have been taken.

This is a fundamental feature that distinguishes trade secrets from other rights. It refers to acts that companies subjectively endeavor in order to protect the information as trade secrets, and objectively adopt protective measures equivalent to the value of such trade secrets. Protective measures include limiting the scope of knowledge in practice.

None of the above three conditions can be absent when the court is deciding whether the relevant information constitutes a trade secret in China, which will be illustrated and contextualized further below. According to common practice, the aforementioned 1st and 3rd condition are more difficult to meet compared to the 2nd.

As per our research upon current practical cases, there are several channels of trade secret leakage:

  • The turnover of professional employees of the company, who breach the confidential obligation clause and use or disclose the trade secret;
  • Cases in which a company authorizes a third-party company to process or manufacture products, which may lead to trade secret leakage;
  • Commercial espionage activities.

In fact, employee turnover is most consistently attributed to the leakage of trade secrets. Jill Scoby, AMD’s chief litigator, once said: “Each AMD employee resignation may take away several million dollars of trade secrets. AMD has a responsibility to ensure that these trade secrets remain in the minds of its employees and are not used or disclosed by them or by their new organization.” As the backbone force of technology-based enterprises, R&D personnel master the core competitiveness of enterprises. After they leave their jobs, they are likely to continue to engage in the same field of industry and provide the same products or services as their previous posts, which may produce a series of potential legal risks.

 

Let’s examine a typical trade secret infringement dispute caused by employee turnover, as announced by the official website of the Beijing Intellectual Property Court. A famous golf service company (“golf company”) sued 5 former employees, who leaked the relevant business information of the golf company to the new company (“new company”) after leaving the former. The new company used the aforesaid trade secret to cooperate with relevant golf courses and banks, which ensured huge economic profits from tender bids. The golf company subsequently sued these employees on the basis of trade secret infringement, claiming huge awards of compensation. The focus of the dispute in this case can be summarized as follows:

  • Whether the golf company’s business information can be regarded as a trade secret;

For the accreditation as a trade secret, the golf company provided evidence showing that it had accumulated business information with a number of gold courses & banks on prices, cooperation models, processes, related contacts, contact information, etc., which is clearly of vital business value. This information is confidential and is not generally known and readily available to practitioners in the field. The golf company had also taken appropriate confidentiality measures in order protect such business information, mainly in forms of confidentiality provisions. Therefore, golf company’s business information may be classified as a trade secret.

  • Whether the 5 employees and the new company conducted behavior which may be regarded as infringement;

The employees contacted and contracted with golf courses and banks on behalf of golf company and the new company, who had access to trade secrets claimed by Golf company in this case. Three of them were sent to tender and sign a golf service project cooperation agreement with the bank shortly after joining the new company, it is important to note that the new company had previously not engaged in such business. The new company were therefore aware that the employees illegally disclosed trade secrets formulated by golf company in cooperation with the relevant banks, and actively used such trade secrets. it is sufficient to conclude that the employees committed an infringement of golf company’s trade secrets.

  • The scope of legal liability that the 5 employees and the new company shall undertake.

After the accreditation of trade secret infringement, the court ruled that the  employees and the new company shall cease the infringement activity and compensate for losses caused. Considering the fact that the actual losses claimed by the golf company could not have been supported by sufficient evidence, the compensation amount was based on the profit gained by the new company.

Therefore, after the trial at the 2nd instance, the court finally ruled that the 3 relevant employees and the new company jointly infringed the trade secrets of the golf company, requesting them to cease the infringement and compensate for economic losses and reasonable expenses to the total amount of 7.99 million yuan RMB.

 

Based on the above analysis of a trade secret infringement case, we can see that the accreditation of such infringement is very precise and strict. A plaintiff tends to a bear large burden of proof and it is therefore suggested for companies to preemptively protect its valuable trade secrets from the following aspects:

  • Standardize the management of trade secrets during business operation

The premise for any operational information or business information to be protected by law is that it may be constituted as a trade secret. Therefore, a company shall firstly clarify the scope of its trade secret and add some significant components if necessary.

  • Use technical tools to strengthen the protection of trade secrets

The company can choose the right control means and equipment according to their own characteristics, such as through traffic monitoring, hard disk monitoring, system log monitoring, hardware change monitoring, mobile phone system log monitoring, camera monitoring, base station monitoring and other technical means.

On the one hand, these technical methods can effectively prevent the disclosure of trade secrets, on the other hand, once trade secrets leakage has been discovered, such tools can be further utilized in order to provide relevant evidence.

  • Sign Non-Competition Agreements/Confidentiality Agreements with employees

As the most direct approach to prevent former employees from leaking trade secrets to a new company, such an agreement can prevent an employee from joining another competing company for a certain period of time or conducting activities in violation of their confidentiality obligations.

 

Should you have any questions, or require any additional information, please do not hesitate to contact us at info@dandreapartners.com.