A Brief Discussion on Risk Management of Partners Infringing Trade Secrets

Preface

In today’s globalized economic environment, the division of labor and cooperation between enterprises are becoming increasingly close and active. The management of trade secrets between partners is playing an increasingly important role. This article analyzes the risks of trade secrets from partners and how to deal with them, based on case studies, to safeguard the honesty, trustworthiness, cooperation and win-win situation between enterprises.

In today’s globalized economic environment, the division of labor and cooperation between enterprises are becoming increasingly close and active. With the deepening of cooperation, the issue of trade secret protection is becoming increasingly prominent. Trade secrets are the key elements for enterprises to gain an advantage in market competition. Once leaked, they may not only lead to a decline in the core competitiveness of enterprises, but may even lead to bankruptcy. Obviously, cooperation will bring the possibility of access to trade secrets and the risk of leakage of trade secrets. Therefore, when enterprises carry out business cooperation, they must attach great importance to the protection of trade secrets and take effective measures to prevent trade secret risks.

I. Typical Case Analysis

The fourth of the top ten typical intellectual property cases of Shenzhen courts in 2022: the dispute between Shenzhen Huaer Zhanfang Network Technology Co., Ltd. and Zhejiang Panxing Information Technology Co., Ltd. et al. for infringement of technical secrets is a typical case of partners violating confidentiality obligations[1]. The first instance court established the following basic facts, which were confirmed in the second instance judgment: Huafangzhan Company is the rights holder of the source code for the “Youkeduo” mini-program. Panxing Company and Huafangzhan Company signed a “Huafangzhan Source Code Usage License Agreement,” stipulating that Panxing Company could obtain the source code of the software in question. However, after obtaining the source code, Panxing Company failed to fulfill its confidentiality obligations under the contract and disclosed the source code on a public website, making it open-source software.

Huafangzhan Company invested millions of yuan in developing the mini-program, and the mini-program’s revenue was also considerable. The leakage of trade secrets caused Huafangzhan Company significant losses. The following is the cost and loss claimed by Huafangzhan Company: According to the audit report issued by the accounting firm, the investment amount for the “Huafangzhan Youkeduo Software” project was 3,595,635.74 yuan. The revenue statistics table of the Youkeduo product submitted by Huafangzhan Company shows that after the leakage of its trade secrets, the total revenue of the product continued to decline, from nearly 3.5 million yuan in six months at its peak to about 1.08 million yuan in six months. The court of first instance, taking into account factors such as the lifecycle of the mini-program, supported some of the claims of Huaer Zhanfang Company, determined that the infringement was established, and ordered Panxing Company to compensate Huaer Zhanfang Company for economic losses and reasonable rights protection costs totaling RMB 5 million. The court of second instance upheld the original judgment.

In daily business activities, anyone may encounter “unlucky people,” so it is especially important to take reasonable measures to protect trade secrets and to respond appropriately after infringement occurs. Otherwise, one will inevitably bear adverse consequences.

In the case of the dispute over infringement of technical secrets between Xi’an Aerospace Huawei Chemical Bioengineering Co., Ltd. (hereinafter referred to as Huawei Company) and Yangzhou Yongfeng Industrial Equipment Installation Co., Ltd. (hereinafter referred to as Yongfeng Company)[2], Huawei Company claimed that: the manufacturing drawings of the equipment involved in the case were the core secrets of Huawei Company’s technology, and that Z, Y, and S leaked Huawei Company’s core secrets to Yongfeng Company, resulting in the leakage of relevant secrets. As a result, Yongfeng Company was able to manufacture the equipment involved in the case and sell it to Huawei Company’s old customers, seizing Huawei Company’s market share. Yongfeng Company argued that the 27 drawings claimed by Huwei Company had already been disclosed by other third parties or the places where they were used, and therefore lacked secrecy and did not constitute the elements of a trade secret. Yongfeng Company’s products had a legitimate source, and Yongfeng Company had a long-term cooperative relationship with Yufeng Industrial Group Co., Ltd. (an unrelated party to the case). Yongfeng Company accepted orders according to Yufeng Industrial Group Co., Ltd.’s customization requirements and agreements, and had its equipment surveyed at Yufeng Company. Therefore, Yongfeng Company did not commit any infringement.

During the trial, the second-instance court organized a joint investigation by Huwei Company and Yongfeng Company at Yufeng Industrial Group Co., Ltd. G, the workshop director of Yufeng Industrial Group Co., Ltd., authorized by the company’s legal representative, stated that from April 26th to 30th, 2017, Huwei Company successively delivered four sets of equipment to Yufeng Industrial Group Co., Ltd., and Yufeng Industrial Group Co., Ltd. staff reported to G that Yongfeng Company had surveyed Huwei Company’s equipment.

Ultimately, the appellate court held that: First, Huawai Company took confidentiality measures regarding the 27 drawings it claimed were trade secrets. The technical information recorded in these 27 drawings was not publicly known and could bring economic benefits to the plaintiff, thus meeting the legal requirements for trade secrets. Huawai Company’s claim of trade secrets was valid. Second, Huawai Company claimed that S obtained the trade secrets in question through improper means and then disclosed them to Yongfeng Company, but failed to submit corresponding evidence. Yongfeng Company claimed that it designed the allegedly infringing product itself using publicly available information, combined with its surveying and analysis of the plaintiff’s products, and submitted evidence to prove this. Huawai Company’s claim that the defendant infringed trade secrets lacked sufficient basis and was not supported.

In the above case, how Yongfeng Company specifically obtained Huawai Company’s trade secrets is disputed. However, the court recognized that Huawai Company’s claim of trade secrets was valid and also acknowledged the fact that its trade secrets were leaked. The fact that the court ultimately did not support Huawai Company’s claim of infringement demonstrates, from the opposite perspective, the importance of taking reasonable measures to protect trade secrets and responding appropriately after infringement occurs.

II. Potential Risks of Trade Secret Disclosure in Collaboration

The above cases illustrate the risk of trade secret disclosure in collaborations. Partners may unintentionally or intentionally leak trade secrets during the collaboration process. This risk can arise from partner companies, their employees, or other companies or individuals with business dealings with the partner. They may choose to disclose trade secrets for various reasons, including economic incentives, lack of professional ethics, or weak awareness of laws and regulations. This risk cannot be completely avoided; companies can only mitigate it by strengthening internal management and contractual constraints, and by proactively responding when the risk occurs.

Besides the risk of disclosure, trade secret risks in collaborations can also take various forms, such as the risk of theft. Competitors may steal a company’s trade secrets through improper means. Especially when competitors and the holder of the trade secrets collaborate with the same partner, mutual reference and borrowing are unavoidable. While referencing and borrowing among peers can be beneficial to industry development, such behavior must be kept within legal boundaries. Those who refer to or borrow from others’ trade secrets must not steal them; doing so constitutes a crime. Every enterprise should adopt reasonable and diversified intellectual property protection measures to prevent its intellectual property from being legally “referenced” or “borrowed” and becoming the wealth of others.

There is also the risk of improper use. Partners may use their position and authority to obtain other partners’ trade secrets and then use them improperly for their own benefit. When a partner holds a dominant position, the holder of the trade secret is often in a position where they cannot protect their rights. Furthermore, during the cooperation process, there may be changes in policies and regulations, intensified market competition, and technological updates. Both parties need sufficient flexibility and adaptability to ensure that trade secrets are always used reasonably.

The protection of trade secrets, based on legal provisions, inevitably carries the risk of legal disputes. If an enterprise does not take sufficient protective measures, its trade secrets may be infringed, leading to legal disputes. In some cases, trade secret infringement disputes may not only cause economic losses to the original enterprise but also damage its reputation and brand value.

The above are just some examples illustrating common types of trade secret risks from partners. Real-world cases often reveal more types of risks, or a combination of several types.

III. Preventive Measures

To address the above risks, enterprises can take a series of measures to effectively prevent the leakage of trade secrets. First, it is necessary to clarify the definition and importance of trade secrets. Trade secrets refer to confidential information that is not publicly known and can bring economic benefits and technological advantages to an enterprise. In cooperation, enterprises need to recognize the importance of trade secrets, establish strict confidentiality systems, clearly define the scope of confidential information, and strengthen confidentiality education for employees and partners.

Second, reasonably limit the scope of information access. During the cooperation process, enterprises should strictly control the scope of access to trade secrets according to business needs. Only necessary personnel should have access to trade secrets, and this access must be strictly authorized and supervised. For sensitive information, access control should be implemented. Furthermore, enterprises need to establish confidentiality systems to regulate the storage, use, and dissemination of trade secrets, ensuring their security.

Third, sign confidentiality agreements. Before cooperation begins, enterprises should sign confidentiality agreements with partners. The agreements should clearly define the rights and obligations of both parties and specify confidential information in detail. At the same time, the confidentiality agreements should have strong legal force to ensure the security of trade secrets during and after the cooperation period. Particular attention should be paid to the data distribution process between the cooperating parties. For the distribution of confidential data, a strict and standardized approval and filing system should be established.

Fourth, conduct regular confidentiality training. Enterprises should regularly provide confidentiality training to employees and partners involved in the cooperation to improve their awareness and skills in protecting trade secrets. Training content may include confidentiality systems, confidentiality technologies, and emergency response to enhance employees’ and partners’ ability to respond to trade secret leaks.

Finally, a rapid and effective response mechanism should be established. Enterprises should establish a comprehensive response mechanism to monitor the storage, use, and dissemination of trade secrets in real time. Once a trade secret leak or other security risks are discovered, emergency measures should be taken immediately to minimize losses.

IV. Conclusion

In summary, trade secrets are one of the core assets of an enterprise, and their protection is a necessary condition for the survival and development of the enterprise. While seeking cooperation, enterprises must be aware of the existence of trade secret risks. By adopting appropriate risk management strategies, enterprises can significantly reduce these risks and ensure the security of their trade secrets. At the same time, enterprises should remain vigilant for any cooperation and constantly pay attention to new confidentiality technologies and strategies to cope with the ever-changing business environment and threats. Only in this way can enterprises remain invincible in the fierce market competition.

References:

[1] Supreme People’s Court, Civil Judgment No. 2298 of 2021.

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