Is your trade secret really a trade secret?

Preface

The traditional understanding of trade secret protection often involves taking self-protection measures. However, in modern business society, where the risk of leakage is ubiquitous, it is clearly necessary to focus on the avenues for protecting rights after a leak. In many cases, parties only discover after the leak that what they considered “trade secrets” are not legally protected, leading to significant losses.

In judicial practice, a common situation arises where certain information has never been proactively disclosed, and its owner believes it to be a trade secret. Only when this information is infringed upon do the owner discover that it does not meet the conditions for trade secret protection. When a company or individual believes that certain information is a trade secret, it must possess significant commercial value. If this information is ultimately found not to meet the protection conditions, this situation will inevitably have a considerable negative impact on the company or individual. Therefore, ensuring that trade secrets receive reasonable and proper protection is crucial.

I. Definition of “Trade Secrets” in Civil Litigation The definition of “trade secrets” in civil litigation is stipulated in the Anti-Unfair Competition Law. Article 9, Paragraph 4 of the currently effective Anti-Unfair Competition Law (amended in 2019) stipulates: “Trade secrets, as referred to in this Law, mean commercial information such as technical information and business information that is not publicly known, has commercial value, and for which the right holder has taken corresponding confidentiality measures.”

Therefore, three legal conditions must be met simultaneously for an information to constitute a trade secret:

1. It must not be publicly known;

2. It must bring economic benefits to the right holder and have commercial value;

3. The right holder must have taken confidentiality measures, which is commonly referred to as secrecy, value, and confidentiality.

Secrecy, value, and confidentiality are specifically stipulated in Articles 3, 5, and 7 of the Supreme People’s Court’s Interpretation on Several Issues Concerning the Application of Law in Civil Cases of Infringement of Trade Secrets (Fa Shi [2020] No. 7).

Secrecy refers to information possessed by an enterprise or individual that is not publicly known. This information is only known to internal personnel of the enterprise or the individual themselves. If this information is disclosed voluntarily or if it is already publicly known, then the information lacks secrecy.

Value refers to the commercial value of this information that is not publicly known. For example, if competitors obtain a company’s trade secrets, they can imitate or surpass the company’s products and services, thus creating significant competitive pressure. Furthermore, trade secrets can help a company gain a competitive advantage in the market, increasing market share and profitability.

Confidentiality refers to the need for “reasonable” confidentiality measures to protect trade secrets. In judicial practice, what specific confidentiality measures are considered to meet the “reasonable” standard? This question will be discussed in Part III of this article.

Regarding the specific objects of trade secret protection, Article 1 of the “Several Issues Concerning the Application of Law in the Trial of Civil Cases Involving Infringement of Trade Secrets” (Fa Shi [2020] No. 7) provides examples, mainly including the following two categories:

Information related to technology, such as structure, raw materials, components, formulas, materials, samples, patterns, propagation materials of new plant varieties, processes, methods or their steps, algorithms, data, computer programs and related documents;

Information related to business activities, such as ideas, management, sales, finance, plans, samples, bidding materials, customer information, and data.

II. Reasons for the Failure of Protecting Intellectual Property Rights by Trade Secrets As mentioned above, the statutory conditions for trade secrets suggest that the protection of trade secrets should focus on four main aspects:

The source and right holder of the trade secret;

Whether it possesses secrecy;

Whether it possesses value;

Whether it possesses confidentiality.

In infringement cases, it is essential to first clarify whether the right holder possesses the right. Therefore, in disputes involving the infringement of trade secrets, the source and right holder of the trade secret are crucial. For example, in the dispute between Nantong Synthetic Materials Factory of the Ministry of Chemical Industry, Nantong Zhonglan Engineering Plastics Co., Ltd., etc., and Nantong Wangmao Industrial Co., Ltd. (formerly Nantong Dongfang Industrial Co., Ltd.), Chen Moumou, etc., regarding the infringement of technical secrets, the three plaintiffs in the first instance (appellants in the second instance) claimed to have shared technical secrets and also claimed trade secret protection for the information involved in the case. However, they could not clarify the specific time when the various technical and business information involved in the case was formed and the corresponding right holder. Under these circumstances, the court could not determine whether the various information involved in the case claimed by the three plaintiffs had taken reasonable confidentiality measures and constituted trade secrets. Ultimately, the court did not support the claims of the three plaintiffs[1]. In fact, if the three plaintiffs in this case had taken reasonable protective measures, their claimed trade secrets would likely have been protected. However, due to the lack of prior protective measures, the rights holder could not be confirmed, thus losing their own intellectual property rights and causing tangible losses to their intangible assets.

Regarding value, there is little dispute in disputes involving infringement of trade secrets. The commercial value of trade secrets is often obvious and usually quite high. In disputes involving infringement of business secrets, there may be some disputes. In such cases, the rights holder needs to provide evidence to prove that the business secret in question has commercial value, while the accused infringer needs to provide evidence to prove that the business secret in question does not have commercial value. For example, in the case of Zhang Jinhui’s infringement of business secrets in Guangzhou Narnia Dance Training Co., Ltd., the court held that individual customer information, which was not compiled into a customer list by Narnia Company and could not become a specific customer, did not have commercial value [2].

Regarding secrecy, the author believes that the strategy adopted in litigation is very important. The trade secrets and business secrets involved in the case often contain a lot of information. In some cases, the selection of “secret points” is inappropriate, sometimes contradictory, and even involves claiming already disclosed information as trade secrets, naturally leading to self-inflicted trouble. In other cases, although the main information has been disclosed, the selection of “secret points” is very skillful, making them difficult to find within the publicly available information; the court ultimately supports the infringement claim.

Regarding confidentiality, it depends on the rights holder’s level of trade secret management. For example, in the trade secret infringement dispute between Xi’an Aerospace Huwei Chemical Bioengineering Co., Ltd. and Yangzhou Yongfeng Industrial Equipment Installation Co., Ltd., the plaintiff, Huwei, sold equipment to a third party, Yufeng. Hufeng quickly discovered that it had reduced its orders and purchased equipment from the defendant, Yongfeng. Further investigation revealed that Yongfeng’s equipment was copied from Huwei’s, leading to an infringement lawsuit. The court held that Huwei’s claim that Yongfeng measured Huwei’s equipment without authorization at Yufeng’s site fell under the category of reverse engineering, not theft. Furthermore, Huwei failed to prove that it had taken any confidentiality measures to prevent Yongfeng’s measurements when they were being conducted at Yufeng’s site. In addition, Huawai Company stated in the second instance that there was no evidence to prove that Yongfeng Company disclosed the above-mentioned technical information. Therefore, Huawai Company’s claim that Yongfeng Company stole and disclosed its technical secrets cannot be established[3]. Equipment that can be reverse engineered should be protected by patents before being publicly sold. However, in this case, if Huawai Company’s confidentiality measures are appropriate, the possibility of protecting the technical secrets is also very high.

III. Positive Paths to Protect “Trade Secrets”

If enterprises want to reasonably protect trade secrets, they must first start with their employees and improve their awareness of confidentiality. Enterprises should regularly conduct confidentiality education and training so that employees fully understand the importance of protecting trade secrets, understand relevant laws and regulations, and clarify their confidentiality responsibilities. At the same time, enterprises should also establish and improve confidentiality systems, clarify confidentiality regulations and operating procedures, and ensure that trade secrets are effectively protected.

Information is the main carrier of trade secrets. If enterprises want to effectively protect trade secrets, they must strengthen information security management. Enterprises should establish and improve information security management systems, clarify information security management responsibilities, strengthen the security protection of information systems, and ensure that trade secrets are not leaked, tampered with, or damaged. Furthermore, companies should strengthen information security training for their employees to improve their information security awareness and skills, preventing the leakage of trade secrets due to employee negligence.

With the development of technology, companies can adopt various technical means to protect trade secrets. For example, companies can use encryption technology to encrypt trade secrets, ensuring that even if the data is stolen, the trade secrets cannot be directly deciphered. In addition, companies can use access control technology to strictly control access to trade secrets, ensuring that only authorized personnel can access them. At the same time, companies should increase investment in network security to prevent the leakage of trade secrets due to hacker attacks.

When signing contracts with other companies or partners, companies should fully consider the protection of trade secrets, sign confidentiality agreements, and clearly define the responsibilities and obligations of both parties in protecting trade secrets. Once a contract involves the leakage of trade secrets, the breaching party should bear corresponding legal responsibility, thus forming a strong constraint on the protection of trade secrets.

Faced with the risk of trade secret leakage, companies should establish and improve response mechanisms to ensure that measures can be taken quickly to minimize losses in the event of a leakage incident. Enterprises should establish an early warning mechanism for leaks, monitor and analyze information that may involve trade secrets, and immediately activate emergency plans once an anomaly is discovered. At the same time, enterprises should strengthen cooperation with external institutions such as the government and industry organizations to jointly combat the illegal acquisition and use of trade secrets.

IV. Conclusion
In conclusion, protecting trade secrets is an important guarantee for enterprise development, but reasonable measures must be taken to protect them; otherwise, they may face the risk of being unable to protect their rights. Enterprises should take measures from multiple aspects to ensure the security of trade secrets. Only in this way can they remain invincible in fierce market competition and achieve sustainable development.

References

[1] Supreme People’s Court, Civil Judgment No. 3 of 2014.

[2] Guangzhou Intellectual Property Court, Civil Judgment No. 2310 of 2021.

[3] Supreme People’s Court, Civil Judgment No. 9 of 2020.