Articles

Understanding the criteria to establish trade secret rights

By Xia Zheng, Mengmeng Yu and Xue Li, AFD China Intellectual Property Law Office

Trade secrets differ from trademarks and patents in that neither ownership certificates nor confirmation of their protection scope can be obtained for them. As such, with respect to civil disputes, the key focus should be on determining whether the trade secret in question is protectable (ie, whether the criteria to establish trade secret rights can be proven).

Legal foundations

China has no specific law governing trade secrets. Rather, statutory protection of trade secrets is scattered across various laws and regulations, including:

  • the General Principles of Civil Law (which were adopted on March 15 2017 and will take effect on October 1 2017);
  • the Anti-unfair Competition Law;
  • the Contract Law;
  • the Labour Contract Law; and
  • the State Administration for Industry and Commerce’s Several Provisions on Prohibiting Infringement of Trade Secrets.

The most important legal bases for dealing with trade secret disputes are the Anti-unfair Competition Law and the Supreme People’s Court Interpretation on Some Issues Concerning the Application of Law in the Trial of Civil Cases Involving Unfair Competition.

Trade secret infringement

Pursuant to the Anti-unfair Competition Law, trade secret infringement is categorised as follows:

  • infringement by a business operator – the following infringements may be committed by business operators:
    • obtaining a rights holder’s trade secret by theft, bribery, intimidation or any other illicit means;
    • disclosing, using or allowing another person to use a trade secret obtained from the rights holder by any of the abovementioned illicit means; or
    • disclosing, using or allowing another person to use a trade secret in the business operator’s possession in breach of an agreement or against the rights holder’s conditions for keeping the trade secret; and
  • infringement by a third party – obtaining, using or disclosing another party’s trade secrets where the third party clearly knows or ought to know of the commission of any of the abovementioned illicit acts in relation to the trade secret.

Selling a product which was manufactured in violation of a trade secret right is not deemed an infringing act under the law. The Supreme People’s Court confirmed as such in a 2008 model case promulgated to the court system ((2007) MinSanZhongZi 10 Civil Ruling), pointing out that “the process of using trade secrets is usually the process of manufacturing infringing products; when the manufacturing process of infringing products is completed, the result of the infringing use of the trade secret would have occurred concurrently”. Therefore, the place where the infringing act is carried out usually coincides with the place where the result of infringement arises, which thus excludes the place where the infringing products are sold. The Supreme People’s Court further ruled that the people’s court of the place where the infringing product has been sold has no jurisdiction over the relevant trade secret infringement dispute.

Establishing trade secret rights

Pursuant to the law, trade secrets can generally be categorised as follows:

  • technical information (eg, designs, procedures, product formulations, production processes and manufacturing methods); or
  • business operation information (eg, management know-how, customer lists, sources of supply, production and marketing strategies, bidding documents and prices).

Three factors help to determine whether any such technical or business operation information constitutes a trade secret – secrecy, confidentiality and commercial value.

Secrecy

Secrecy is the most fundamental condition for establishing a trade secret. A trade secret is entitled to legal protection only where it is unknown to the public. According to Article 9.1 of the judicial interpretation, ‘unknown to the public’ means that the information is not generally known by people in the relevant field and is not easily obtainable. In order to establish secrecy, both of these criteria must be met.

Issues for plaintiffs: The plaintiff bears the burden of proof regarding the criteria to establish a trade secret. To prove the secrecy of technical information, generally the plaintiff can submit published articles on similar technologies and show that none of the articles mentions the specific technical information at issue. Further, the plaintiff can submit evidence of its significant R&D investment in the technology at issue, which indicates that the plaintiff values the information and has taken steps to protect it. In such case, the technical information cannot easily be obtained by others and is unknown to the general public.

To prove the secrecy of business operation information, the plaintiff should provide in-depth customer information – such as their buying habits, preferences, hobbies and personalities – in addition to their names, addresses, contact details and other basic information.

Further, the plaintiff should be aware of the elements of its trade secret that are not known to the defendant before filing suit, in order to avoid unintentionally disclosing such information in the complaint statement or during evidence exchange. The plaintiff should request the court to try the case in camera to avoid disclosing the information at trial.

The rights holder should also be aware of the exact contents of the trade secret before filing suit. In practice, the court usually asks the plaintiff to identify the contents of the secret before evidence cross-examination at the latest, so that the defendant can give specific responses. If the plaintiff fails to deliver in this regard, the court will usually dismiss the case due to a lack of clarity of the facts on which the complaint is based.

Defences: The defendant may rely on the following non-infringement defences in terms of secrecy:

  • The information falls within the bounds of common sense or industrial convention in the relevant technical or economic field.
  • The relevant public can ascertain the information directly through observation (eg, simple combinations of dimensions, structures, materials and components of a product) after the product is placed on the market.
  • The information has been featured in a publication or publicly disclosed through other media.
  • The information has been disclosed in seminars, exhibitions or other public activities.
  • The information can be obtained through other public channels (eg, the Internet or libraries).
  • The information can easily be obtained at no charge (eg, by a simple search).

Scope of protection: The protection scope of the trade secret – rather than the description of its specific contents – is the most important element to bear in mind. The understanding of the protection scope may vary among the parties involved and evolve throughout the course of the proceedings. In a 2015 model case promulgated to the court system ((2015) MinShenZi 2035), the Supreme People’s Court held that in trade secret disputes, while the rights holder must describe the specific contents of the trade secret, the acceptable form of such description is not limited to a written statement. That is, no strict requirements apply to the description of trade secrets.

Confirmation of non-infringement: The court will not refuse to hear a civil suit on the grounds that the trade secret in question is unclear or that the party which holds the relevant right or obligation is difficult to determine. Where an alleged infringer has received a cease and desist letter from a rights holder, it may request the court to confirm its non-infringement. In such case, the rights holder bears the burden of proof regarding the information claimed as a trade secret. Failure to meet this burden will have unfavourable legal consequences for the rights holder. This position was confirmed by the Supreme People’s Court in a 2015 model case promulgated to the court system ((2015) MinShenZi 628 Civil Ruling).

Confidentiality

The second condition for establishing a trade secret is confidentiality. The trade secret must be under appropriate protection, with confidentiality measures put in place by the rights holder to prevent information leaks. Such measures must be suitable in view of the commercial value of the trade secret, among other factors.

To determine whether the rights holder has implemented suitable confidentiality measures, the court will review:

  • the characteristics of the storage method of the information at issue;
  • the rights holder’s willingness to protect the confidentiality of the information;
  • the extent to which others are aware of the confidentiality measures; and
  • the degree of difficulty with which others can legitimately obtain the information.

Plaintiffs should consider these elements when proving confidentiality.

Plaintiff’s burden of proof: The plaintiff can provide evidence of the following to prove that it has taken sufficient measures to prevent the disclosure of confidential information:

  • Access to the confidential information is classified and limited, and only relevant personnel are aware of the information.
  • The storage method of the confidential information is subject to protection measures (eg, locking mechanisms).
  • The confidential information is labelled as confidential.
  • Passwords or codes are used to access the confidential information.
  • A confidentiality agreement has been concluded.
  • Restrictions are set for access to machinery, factories, workshops or other places involving confidential information.
  • Other reasonable measures have been implemented to ensure the confidentiality of the information.

In practice, the inclusion of general confidentiality terms in confidentiality agreements is considered a suitable confidentiality measure on the part of the rights holder. Recent court practice has shown a tendency to value the duties of loyalty and diligence, especially when it comes to high-ranking personnel. In certain circumstances, the court may not accept the defence from such personnel that the company has not taken confidentiality measures and may hold that high-ranking personnel should adhere to the duties of loyalty and diligence even where no confidentiality agreement has been concluded.

Accompanying duties of contract: Maintaining confidentiality is one of the accompanying duties of the parties to a contract. This differs from taking confidentiality measures; the former is derived from the principle of good faith, while the latter is based on the principle of confidentiality, which requires action. The rights holder should have a subjective intention to protect the information as a secret and actively implement confidentiality measures. Therefore, the court generally will not support the plaintiff’s claim that confidentiality measures have been taken simply because the defendant should have adhered to its accompanying duties under the contract.

Commercial value

The third essential condition for establishing a trade secret is that the secret in question must bring the rights holder economic benefits and be practically applicable. Article 10 of the judicial interpretation stipulates that as long as the relevant information has real or potential commercial value, or can bring competitive advantages for the rights holder, it should be considered as having economic benefits and practical applicability.

Conclusion

Trade secret infringement cases usually focus on the elements of secrecy and confidentiality – in particular, whether the trade secret is unknown to or difficult to be obtained by the relevant public and whether the rights holder has taken sufficient confidentiality measures to protect the information. According to statistics, courts hearing trade secret infringement disputes tend to favour the defendant. This is largely because the secret information for which plaintiffs seek protection is deemed not to constitute a trade secret according to the law. Therefore, an accurate understanding of the criteria to establish trade secrets will facilitate more effective decision making when dealing with trade secret infringement suits.

AFD China Intellectual Property Law Office

Technology Fortune Centre Suite B 1601A

8 Xueqing Road, Haidian

Beijing 100192

China

Tel +86 10 8273 0790

Fax +86 10 8273 0820

Web www.afdip.com

Xia Zheng

President

afdbj@afdip.com

Xia Zheng is president and founder of AFD China, and a patent attorney, trademark attorney and attorney at law. She started her career in IP practice in 1987 and practises in many areas of the field, especially IP strategy, prosecution, post-grant proceedings and IP-related litigation. Ms Zheng participates actively in the industry and serves as a director of the All-China Patent Attorneys Association, standing director of the Beijing Patent Attorneys Association and director of the Beijing Intellectual Property Association. She was named a National IP Talent in 2016, Beijing Outstanding Patent Attorney of 2014 and an Excellent Legal Professional of Haidian in 2012 and is recommended as a leading practitioner by numerous publications, including theIAM Patent 1000.

Mengmeng Yu

Associate

afdbj@afdip.com

Mengmeng Yu is an associate with AFD China. She is a patent attorney and a registered plant variety rights agent. She focuses her practice on IP prosecution and counselling. Her role in the firm includes acting as a client and media liaison to maintain supportive partnerships with overseas clients and arrange media exposure and publicity. Ms Yu holds a doctorate in biotechnology and a BEng in food science. She also worked as a visiting scholar at the Beltsville Agricultural Research Centre of the US Department of Agriculture, where she trained as a chemical analyst from 2009 to 2010.

Xue Li

Associate

afdbj@afdip.com

Xue Li has been working as a trademark attorney with AFD China since graduating from Dalian Maritime University with an LLM in constitutional and administrative law in July 2011. She passed the Chinese Bar in 2010 and obtained her Chinese law licence in July 2012. She has significant experience in trademark practice and IP enforcement and litigation.

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