The Past and Present of Former Employees Infringing on Trade Secrets

There are various ways trade secrets can be leaked, with the most common being leaks by former employees. In judgments involving the disclosure of trade secrets, most cases relate to former employees. The phenomenon of former employees leaking trade secrets has existed since ancient times, and with the increasing mobility of talent and intensified competition in modern business society, this problem has become increasingly serious. This article explores the issue of former employees infringing on trade secrets through the analysis of typical cases.

I. Traditional Forms of Former Employees Infringing on Trade Secrets

“If Xu You’s strategies were put to use, the land would not belong to Cao Cao,” a line from Hu Zeng’s poem “On History” from the Tang Dynasty, also quoted in *Romance of the Three Kingdoms*, means that if Xu You’s strategies were given due consideration, the land would belong to Yuan Shao, not Cao Cao. From the perspective of former employees leaking trade secrets, Xu You was originally an employee of Yuan Shao, but later, due to some reason, he was provoked and impulsively resigned. After leaving, Xu You immediately joined the team of Cao Cao, Yuan Shao’s direct competitor. At the time, Yuan Shao and Cao Cao were locked in a stalemate at Guandu, and the war was at a critical juncture. Xu You leaked a crucial trade secret: Yuan Shao’s supplies were stored at Wuchao, which was poorly defended. He then proposed the strategy of “burning Wuchao,” which led to Cao Cao’s decisive victory over Yuan Shao and laid the foundation for Cao Cao’s unification of northern China. This traditional form of leaking trade secrets is frequently seen in Chinese historical novels and remains prevalent in today’s judicial practice.

For example, consider the case of Dalian Beitong Data Platform Management Center versus Cui Moumou regarding infringement of trade secrets. Dalian Beitong Data Platform Management Center is a high-tech enterprise specializing in data processing, analysis, and services, possessing several core technologies. Cui Moumou worked in management at the company from early 2019 and signed a confidentiality agreement. At the end of 2019, Cui Moumou forwarded trade secrets to a private email address and shortly after resigned.

During the litigation, both parties presented their claims. Dalian Beitong Data Platform Management Center argued that Cui Moumou’s actions infringed upon its trade secrets and requested the court to order Cui Moumou to cease the infringement and compensate for losses. Cui argued that the two parties had reached a settlement on the dispute. After trial, the court held that Cui’s act of distributing technical information without the consent of Beitong Data violated the principle of good faith and the generally accepted business ethics, which threatened Beitong Data’s competitive advantage. The court ordered Cui to immediately cease the infringement and compensate Dalian Beitong Data Platform Management Center for economic losses. It is worth noting that in the second instance, the amount of compensation awarded by the Supreme People’s Court was significantly higher than that awarded in the first instance, reflecting the protection of the rights holder and the warning against infringement of trade secrets[1].

II. New Forms of Trade Secret Infringement by Former Employees

In recent years, with the intensification of corporate competition, the phenomenon of employees colluding to establish new companies and infringing on the trade secrets of their former companies has become increasingly serious. Employees of enterprises have a certain level of understanding of the company’s trade secrets. They know which information is sensitive and which information can be used. Some employees may have moral risks. While working in their former companies, they have already begun to plan the establishment of new companies, usually through cross-departmental cooperation, in order to obtain more business benefits. In this case, before leaving the company, the employee will pass on sensitive information such as the former company’s trade secrets, customer information, and market strategies to the new company. After the establishment of the new company, the original company’s trade secrets were used to cooperate with the original company’s customers, thereby weakening the original company’s market share.

The case of Yangzhou Hengchun Electronics Co., Ltd. v. Yangzhou Aibode Automation Equipment Manufacturing Co., Ltd. et al., concerning the infringement of technical secrets and business secrets, is a typical case of internal employees colluding to establish a new company. Gu Moumou, Xu Mou, Wang Moumou, and Wang Moumou were originally employees of Hengchun Company. Gu Moumou was the director of the technical department when he resigned in December 2007, Xu Mou was in charge of circuits and software in the technical department when he resigned in April 2008, and Wang Moumou and Wang Moumou served as sales managers of Hengchun Company from 2002 to December 2007. In January 2008, Gu Moumou and the other three natural persons invested with third parties to establish Aibode Company, whose business scope was basically the same as that of Hengchun Company. The court held that the shareholders of Aibode Company (including Gu Moumou) were all former employees of Hengchun Company, and they should have known that Gu Moumou had illegally disclosed Hengchun Company’s technical secrets but still used them. The actions of Gu Moumou and Aibode Company both infringed on the technical secrets involved in the case [2]. Collusion among internal employees to establish new companies has become increasingly common in recent years. From case studies, the positions most frequently involved in leaks of confidential information in this situation are technical management personnel, with sales staff often being the colluders.

There is also the issue of former employees applying for patents on their former company’s trade secrets, circumventing legal regulations regarding inventions made in the course of employment. This type of situation is relatively covert and often highly controversial. In the patent application ownership disputes involving Fujian Lizhongcheng Food Co., Ltd. and Fujian Ouruiyuan Food Co., Ltd., Chen Mougen and Chen Mouli were former employees of Ouruiyuan Company. Their duties included developing new products and directly leading and managing the R&D department, as well as multiple departments such as quality control, procurement, production, packaging, warehousing, sales, engineering, and human resources. Zhou Moumou, the founder of Lizhongcheng Company, is the mother of Chen Mougen and Chen Mouli. Less than a year after Chen Mougen and Chen Mouli left Ouruiyuan Company, Zhou Moumou transferred all of her shares in Lizhongcheng Company to Chen Mouli. Chen Mougen and Chen Mouli then filed the patent application in question in the name of Lizhongcheng Company, listing Chen Moumou as the inventor. The court held that Chen Mougen and Chen Mouli were trying to circumvent the legal provisions on service inventions and ruled that the patent application right in dispute belonged to Ouruiyuan Company [3].

III. Countermeasures

To prevent and address the risk of former employees infringing on trade secrets, companies can take the following measures to actively and effectively respond:

First, signing a non-compete agreement is an effective measure. A non-compete agreement requires former employees not to engage in work that is the same as or similar to the company’s business for a certain period after leaving the company, or not to join a company that competes with the company. In this way, by restricting former employees from working for competitors, the loss of trade secrets to competitors can be limited to the greatest extent. The validity period of a non-compete agreement is usually 1-2 years, and the specific time can be determined according to the negotiation between the two parties. When signing a non-compete agreement, it is necessary to clearly stipulate the scope of the former employee’s behavior, geographical scope, and liquidated damages, etc., to ensure the effective execution of the agreement.

Second, sending a lawyer’s letter to competitors is also a common response. Through a lawyer’s letter, the company can convey its determination to protect trade secrets to competitors and require them to consciously refrain from infringing on relevant trade secrets. Lawyer’s letters typically detail the facts and evidence of a former employee’s disclosure of trade secrets, emphasizing their legal responsibility and consequences. This approach can serve as a deterrent, prompting competitors to comply with confidentiality obligations.

Third, strengthening employee awareness of confidentiality is also crucial. Companies should enhance employees’ legal and confidentiality awareness, making them understand the serious consequences of disclosing trade secrets. This can be achieved through regularly organizing training courses and publishing confidentiality policies to convey the importance and methods of confidentiality. Furthermore, a culture of confidentiality can be fostered, encouraging employees to monitor and report leaks, creating a positive environment for confidentiality.

Finally, establishing a sound trade secret protection system is fundamental to preventing former employees from infringing on trade secrets. Companies should develop detailed confidentiality measures and management systems, including encryption, backup, and access control technologies to ensure the security of important information. Simultaneously, they should strengthen the classification and management of trade secrets, assigning different levels of trade secrets to different personnel for management and maintenance. In addition, auditing and monitoring mechanisms can be established to monitor and record employee operations in real time, promptly identifying and addressing potential leaks.

IV. Conclusion

The Labor Law grants workers the absolute right to leave their jobs, and normal talent mobility is conducive to promoting economic and social development. However, the infringement of trade secrets by departing employees is one of the important risks faced by enterprises. By signing non-compete agreements, sending lawyer’s letters to competitors, strengthening employees’ awareness of confidentiality, and establishing a sound trade secret protection system, enterprises can effectively prevent and deal with this risk and protect their own commercial interests and competitive advantages.

References:

[1] Supreme People’s Court, Civil Judgment No. 1687 of 2021.

[2] Jiangsu Provincial Higher People’s Court, Civil Judgment No. 0179 of 2010.

[3] Supreme People’s Court, Civil Judgment No. 1187 of 2021.