IP Insights: Yu Chunbo | Dealing with Trade Secret Risks from Outside the Enterprise

Foreword

While the national level is actively engaged in counter-espionage efforts, corporate espionage is equally crucial. Although China has made significant progress in intellectual property protection, there is still considerable room for improvement in areas such as trade secret protection. This article analyzes common types of corporate espionage through case studies, providing guidance for companies in addressing external trade secret risks.

On July 1, 2023, the *Anti-Espionage Law of the People’s Republic of China* officially came into effect, providing a legal basis for counter-espionage activities at the national level and ushering in a rule-of-law era for counter-espionage. On August 1 of the same year, the Ministry of State Security of China released its first WeChat public account post, calling on the entire nation to join in counter-espionage efforts. While the national level actively combats espionage, the fight against commercial espionage at the corporate level is equally important.

Commercial espionage is a common competitive tactic, one that has existed since ancient times. In today’s increasingly competitive market, companies may resort to unfair means to obtain competitors’ trade secrets and business information. Commercial espionage is one such common competitive tactic, using various methods to acquire competitors’ trade secrets and business information to gain a competitive advantage.

I. The Long-Standing Presence of Commercial Espionage

The following text and images are from Baijiahao/Huapu[1]. We will not verify the authenticity of this story for the time being, but there are different versions of it, and it is widely circulated. The author read this story more than 20 years ago in middle school. At that time, he did not think about the related infringement issues, but admired the pioneering spirit of the successful people. However, what he did not expect was that similar cases still occur today.

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On September 15, 2005, Zhejiang Legal Daily reported a news article titled “The Boss ‘Infiltrates’ and Gets Imprisoned for Stealing Skills”[2]. The report stated that in February 2003, Yang Mouzhu, the general manager of Fengbo Company (the company’s major shareholder), concealed his true identity and claimed to be a laid-off engineer. He came to Longgang District Keerda Electrical Equipment Co., Ltd. to apply for a job. Yang Mouzhu had solid technical skills and was quickly appointed as the director of the R&D center. He could access and use all the company’s technical data and R&D equipment. Yang Mouzhu used his authority to steal a large number of trade secrets and then left without saying goodbye. Subsequently, Korda discovered that a company called Fengbo had launched a product identical to its main product and was bidding everywhere at less than one-third the price of Korda’s product, causing the company’s market share to drop rapidly.

In the case of Hubei Nayu New Energy Technology Co., Ltd., You Mouyu et al., regarding the infringement of trade secrets[3], the court found the following facts: On September 4, 2018, You Mouyu and his wife jointly established Nayu Company. On April 1, 2019, You Mouyu applied for a job at Mingdeng Company with the purpose of stealing the coking inhibitor formula. The labor contract period was from April 1, 2019 to April 30, 2022. He served as a senior technical manager, engaged in technical research and development, and was appointed as the deputy general manager of the technical department on June 14, 2019. Before joining Mingdeng Company, You Mouyu had no experience in product research and development or sales in the field of coking inhibitor technology. On July 8, 2019, while working at Mingdeng Company, You Mouyu learned all of Mingdeng’s blast furnace coking inhibitor formulas by cracking the computer password of a former R&D staff member. He also learned the raw material procurement channels through the raw material procurement personnel and the company’s customer list through product follow-ups and surveys. On August 19, 2019, after leaving Mingdeng Company, You Mouyu began producing and selling coking inhibitors through Nayu Company.

Perhaps the two bosses in these two cases had also read the story we initially mentioned and wanted to emulate their predecessors’ entrepreneurial methods. However, they clearly overlooked the fact that infringing trade secrets is illegal, and serious cases constitute a crime. These cases also reflect the current state and problems of intellectual property protection in my country. They remind us again that in a globalized economic environment, a company’s technology and trade secrets often become the focus of competition among rivals. For companies possessing core technologies and trade secrets, protecting their intellectual property is particularly important.

The above is just one example of a boss acting as an undercover agent. In fact, the methods of commercial espionage are diverse, including network intrusion, phishing attacks, and social engineering. Commercial espionage is highly covert and difficult to detect and prevent. At the same time, its scope is very broad, involving not only the core business of enterprises but also their management and employees.

II. Low Cost and High Return of Commercial Espionage

Commercial espionage is a low-cost, high-return illegal activity. Trade secrets and business information are among the most important core assets of an enterprise; once stolen or leaked, they can cause incalculable losses. However, the cost of commercial espionage is often low, but the returns are very high.

The case of the Guangdong Luoding Forest Products Chemical Plant (hereinafter referred to as the Forest Products Chemical Plant) versus the Hunan Zhuzhou Mineral Processing Reagent Plant (hereinafter referred to as the Reagent Plant) and Liu Mouchi regarding a dispute over the infringement of technical secrets [4] is an intellectual property dispute involving the infringement of technical secrets. The Forest Products Chemical Plant is a professional manufacturer of forest chemical products, with its main product being rosin. Rosin is a natural resin widely used in coatings, rubber, papermaking, pharmaceuticals, and other fields. The Reagent Plant is a manufacturer of mineral processing reagents, with its main product being mineral processing reagents. Mineral processing agents are chemical reagents used in mineral processing to improve the flotation recovery rate and efficiency of minerals. The Forest Products Chemical Plant employs unique production processes and technologies in its rosin production, resulting in high-quality rosin products that are highly sought after in the market. The Forest Products Chemical Plant believes its rosin production process and technology are trade secrets, not disclosed, and not obtained by anyone.

However, a pharmaceutical factory and its employee, Liu Mouchi, obtained the Forest Products Chemical Plant’s rosin production process and technology through improper means and used the technology in their own company. The Forest Products Chemical Plant believes that the pharmaceutical factory and Liu Mouchi infringed upon its trade secrets, causing significant economic losses. In this case, the pharmaceutical factory paid Liu Mouchi only 40,000 RMB, paid in two installments of 20,000 RMB each before and after the transaction. The pharmaceutical factory, however, obtained four sets of technical drawings (181 sheets) and ultimately gained access to a production capacity of 3,200 tons of rosin for four truckloads.

Commercial espionage is characterized by its low cost, yet its harmfulness is extremely high. First, trade secrets are a company’s core competitiveness. Once leaked, they can lead to a decline in market share, reduced profits, or even bankruptcy. Second, commercial espionage disrupts fair competition in the market. This makes it difficult for law-abiding companies to survive and negatively impacts the healthy development of the entire market. Third, in cases involving criminal liability, companies not only bear corresponding legal responsibility but may also suffer serious negative social consequences.

III. How to Counter Commercial Espionage

The above cases have exposed loopholes and deficiencies in some companies’ intellectual property protection. The companies involved obtained the other party’s trade secrets and technical information through leaks by internal personnel and “undercover” agents. This behavior not only violates business ethics and legal regulations but also damages the reputation and interests of other companies and the entire industry. Therefore, to counter this threat, companies need to take a series of effective counter-espionage measures.

(I) Establishing a Confidentiality System

Management begins with a system. A company’s trade secrets and business information are the main targets of commercial espionage activities. Establishing a sound confidentiality system is an important guarantee against commercial espionage. Companies need to formulate detailed confidentiality rules and regulations, clarify the scope of confidentiality and confidentiality responsibilities, provide confidentiality training to employees, and strengthen confidentiality management. Simultaneously, a confidentiality organization should be established, clearly defining confidentiality responsibilities and work processes to ensure the smooth operation of confidentiality work.

First, a personnel management system should be established: Commercial espionage often involves collusion with internal personnel; strengthening personnel management is a crucial countermeasure. Enterprises need to conduct rigorous background checks and verifications of employees to ensure the authenticity of their identities and backgrounds. At the same time, a comprehensive employee behavior management system should be established to supervise and manage employee behavior, preventing collusion between internal and external personnel for commercial espionage.

Second, a regional management system should be established: Commercial espionage often requires access to the company’s physical environment and facilities; strengthening physical security is a crucial countermeasure. Enterprises need to establish a comprehensive physical security management system, equip themselves with professional physical security equipment and technical personnel, and conduct real-time monitoring and protection of the physical environment. Simultaneously, employee security awareness training should be strengthened to improve employees’ understanding and ability to prevent physical security breaches.

Third, a training system should be established: Commercial espionage is illegal; strengthening legal awareness education is a crucial countermeasure. Enterprises need to educate employees on legal awareness, clarifying the consequences and responsibilities of illegal acts, and improving employees’ legal awareness and literacy. Simultaneously, a comprehensive legal aid mechanism should be established to provide employees with legal aid and legal consultation services.

(II) Monitoring and Prevention Using Technological Means

Counter-espionage activities should also conform to the characteristics of the times. Commercial espionage activities are often highly covert; therefore, monitoring and prevention using technological means are crucial countermeasures. Enterprises need to utilize technological means, such as data encryption, intrusion detection, and network monitoring, to protect trade secrets and business information. At the same time, a comprehensive monitoring and prevention mechanism should be established to promptly detect and prevent commercial espionage activities.

Commercial espionage activities often obtain enterprise trade secrets and business information through network intrusion, virus attacks, and other means. Therefore, strengthening network security protection is an important countermeasure against commercial espionage. Enterprises need to establish a comprehensive network security management system, equip themselves with professional network security equipment and technical personnel, and conduct real-time monitoring and protection of the network.

(III) Strengthening Cooperation and Information Sharing

Commercial espionage activities are characterized by cross-regional and cross-industry collaboration. Enterprises need to strengthen cooperation and information sharing to jointly address the threat of commercial espionage. Enterprises can establish industry associations, enterprise alliances, and other organizations to strengthen cooperation and information sharing among enterprises and jointly formulate counter-espionage measures and strategies. Simultaneously, strengthen cooperation with relevant departments such as the government and public security organs to jointly combat commercial espionage.

IV. Conclusion

Given the national emphasis on secrecy and counter-espionage, in order to safeguard economic security and commercial interests, enterprises need to take a series of effective measures to actively address external risks to trade secrets. These measures should include strengthening cybersecurity, establishing confidentiality systems, enhancing personnel management, strengthening physical security, utilizing technological means for monitoring and prevention, strengthening legal awareness education, and enhancing cooperation and information sharing. Only in this way can risks be effectively addressed and sustainable development ensured.

References:

[1] Huapu, Li Ka-shing’s first pot of gold was earned by going undercover in an Italian factory to learn the trade, Baijiahao Huapu, 2019.12.03, https://baijiahao.baidu.com/s?id=1651899371190793726&wfr=spider&for=pc

[2] Li Nanling, CEO “goes undercover” to steal skills and gets imprisoned [N]. Zhejiang Legal Daily, 5th edition: In-depth, 2005.09.15.

[3] Supreme People’s Court, (2022) Supreme Court Civil Judgment No. 275.

[4] Supreme People’s Court, (1999) Civil Judgment No. 5.