Nearly all businesses in all industries and sectors possess trade secrets. They are a valuable and highly useful form of intellectual property rights (IPR).

As the name suggests, however, trade secrets are a non-registerable form of intellectual property; they only enjoy legal protection as long as they are not publically disclosed. In the conclusion to this two-part article, the China IPR SME Helpdesk describes measures you can take to help ensure trade secrets aren’t leaked via employees and third parties, as well as options available to you should your secrets be disclosed.

Don’t forget your employees

Most trade secret theft cases involve current or former employees, disgruntled or otherwise. A typical case involves an employee leaving a particular company for a competitor, with the company discovering shortly after that its competitor is selling a product that looks suspiciously familiar.

The best way to avoid such situations is to adopt an employee agreement with non-disclosure provisions. Employees should also be periodically reminded of their confidentiality obligations.

Exit interviews should be held with departing staff where they should return all company documents, materials, computers and files. If new employees signed non-disclosure agreements (NDAs) with their former employers, appropriate steps should be taken to ensure that you do not misappropriate their trade secrets. For important and senior-level employees who have intimate knowledge of your business it may be a good idea to utilise a non-compete agreement of a reasonable duration that complies with China’s Labour Contract Law.

Trade secrets may be inadvertently disclosed by employees – an overzealous engineer may give away too much technical information when making a presentation for example. Also, particularly in China, employees may not have the same understanding of IP rights and proprietary information, or the expectations for protecting such information, as you do. For example, they may not immediately understand that a project proposal may contain valuable, sensitive information.

Dealing with third parties

Another common way trade secrets are disclosed is during business dealings or negotiations with potential partners, suppliers, contractors, licensees or customers. Generally, you should insist that both parties sign a mutual NDA before discussions begin or any documents are transferred. After negotiations have reached a certain stage, both parties should enter into a Memorandum of Understanding (MOU) outlining the structure of the deal, what information will be shared and the respective non-disclosure obligations of both parties. The final agreement should clearly identify who owns what information, what information was or will be exchanged and the respective non-disclosure obligations of both parties. Explaining that it is your policy to have a NDA in place before negotiations begin is a good way to demonstrate your professionalism and respect for your counterpart’s IPR. Having the agreement already drafted also helps to minimise the issue so that you can move forward with your negotiations.

Many foreign small and medium-sized enterprises (SMEs) operating in China find it difficult to insist on a pre-negotiation NDA when dealing with Chinese parties who often claim that such requests are hostile or unnecessary. The prospect of losing a potential business opportunity often leads many SMEs to move forward with negotiations without an agreement. However, this may prove costly when the other party starts using the information to compete against you. Therefore it is important to know, before you enter negotiations, when to walk away. A party that refuses a reasonable request for a mutual NDA is also a party that is likely to misappropriate your trade secrets. Finally, being business savvy is also important; if the Chinese party requests to see your designs, you can request that they view them at your business premises or send only rough sketches to them.

Even after an agreement is signed, it is important to make sure you continue to monitor your partners, suppliers or licensees. You may wish to negotiate in your agreement the right to make unannounced visits and to conduct periodic audits.

What to do when your secret is out

The key to protecting your trade secrets is prevention, but if you find that your trade secrets may have been stolen the first step is to conduct an internal investigation and to preserve as much evidence as possible, including documents and emails. It may be necessary to engage the services of an external investigator to gather all the information, after which you and your lawyer can decide the best course of action.

Litigation is the primary means to pursue a remedy for the misappropriation of trade secrets in China.  If you are successful, the court can require the infringer to pay you damages and order them to stop using the trade secret. In order to be successful in these cases, you need to prove with sufficient evidence that:

• You have, and own, the trade secret in question, including that it is tangible, has commercial value and you have taken measures to protect it;
• The defendant possesses information that is identical or substantially identical to your trade secret; and
• The defendant used improper means to obtain it.

The court will place a heavy burden on you to prove these three elements with direct evidence, which in a Chinese litigation scenario is almost exclusively in the form of documents as a court will usually not permit witnesses to testify. Although you can request the court to go to the defendant’s business premises to obtain evidence, there is no guarantee that the court will find the evidence you need. Because of these reasons it is very important to have sufficient records and proper documentation already in your possession.

Unlike many other countries, China provides for administrative enforcement in trade secret cases in addition to litigation through the court system. Through the local Administration for Industry and Commerce (AIC) it is possible to stop the sale of products manufactured using your trade secret and to obtain administrative penalties against the infringer ranging from RMB 10,000 to RMB 100,000. However, in practice it can be difficult to get the AIC to accept your case, particularly if complex technology is involved.

Theft of trade secrets is also a crime in China where the loss to the injured party is more than RMB 500,000. If the Public Security Bureau conducts a criminal investigation, infringers may be fined and/or imprisoned for up to three years, or in very serious cases, such as those involving a loss of more than RMB 2.5 million, for up to seven years.

Take-away messages

• As with most IP, the best way to protect trade secrets is a prevention strategy that ensures your employees have a clear understanding of what constitutes a trade secret and know their role in protecting it. Your business should also take extra steps to create clear contractual clauses to prevent leakage via employees and business partners.
• If you find your trade secrets have been stolen the first step is to conduct an internal investigation while preserving as much information as possible. It may also be necessary to consider hiring an external investigator.
• In China litigation is the main way to pursue a remedy for the misappropriation of your trade secrets. However, you must ensure that enough evidence has been collected for your case or else it can be very difficult for you to prove trade secret infringement.

The China IPR SME Helpdesk is a European Union co-funded project that provides free, practical, business advice relating to China IPR to European SMEs. To learn about any aspect of IPR in China, visit our online portal at www.china-iprhelpdesk.eu. For free expert advice on China IPR for your business, e-mail your questions to:  question@china-iprhelpdesk.eu. You will receive a reply from one of the Helpdesk experts within three working days. The China IPR SME Helpdesk is jointly implemented by DEVELOPMENT Solutions and the European Union Chamber of Commerce in China.