An overview of trade secrets

An important form of intellectual property, trade secrets are increasingly attracting attention, particularly in regard to operational information such as customer lists and technical information in software. In China, trade secrets are mainly protected by the Law for Countering Unfair Competition and the Criminal Law. Article 10 of the Law for Countering Unfair Competition sets out situations in which trade secrets are infringed and defines a 'trade secret' as technical and operational information which:

  • is not known to the public;
  • is capable of bringing economic benefits to the rights holder;
  • has practical application; and
  • the rights holder has taken measures to keep secret.

Accordingly, there are three main constitutive elements for a trade secret:

  • secrecy (not known to the public);
  • economic value (economic benefits and practical applicability); and
  • protective measures (measures to keep secret).

The courts mainly review trade secret cases on the following factual issues:

  • constitutive elements of the trade secret;
  • infringement; and
  • liability for infringement.

Constitutive elements
The constitutive elements of the trade secret are the most crucial and difficult parts of the court's review. As there is usually little dispute on economic value, the court hearing is focused on the secrecy and protective measures of the information at issue.

Secrecy is the fundamental characteristic of a trade secret to differ from other information. As by nature a trade secret is information not known to the public, it is difficult for the plaintiff to testify to negative facts. Thus, in practice the court usually lowers the standard of proof as appropriate. The burden of proof is met if the plaintiff proves that the information at issue differs from and improves the public information, and if the judicial evaluation or expert witness evidence supports the establishment of the trade secret. On the other hand, the defendant may prove that the information at issue is known to the public as its defence.

Protective measures
The hearing on protective measures is intended to examine whether there are measures to maintain secrecy (eg, whether a confidential contract has been signed) and whether those measures are appropriate (eg, there is not just a general confidentiality clause) in order to determine:

  • the intention of the rights holder to protect the trade secret; 
  • the recognition of the intention by the defendant; and
  • the subjective malice of the defendant.

Other issues
In addition, the plaintiff should prove the protection scope of the trade secret, and should specify:

  • concrete information on the technical solution for technical information; and
  • the name and contact information, as well as other issues such as customs, prices, transaction habits and terms of payment, for operational information.

Further, the plaintiff should provide evidence such as technical drawings, original records and signed contracts in order to prove the ownership of the information at issue.

After establishing that a trade secret exists, the court will turn to the act of infringement. In practice, the burden of proof for the plaintiff is adjusted to reduce further the need for testimony. The common rule is “substantially identical + contact - lawful origin”.

First, the plaintiff must prove that the accused information of the defendant is identical or substantially identical to the trade secret, and that the defendant has access to the trade secret. The burden of proof then shifts to the defendant to prove the lawful origin of the accused information.

The lawful origin of the accused information includes transfer, inheritance, reverse engineering and independent research (the latter two are unique to trade secret cases). Reverse engineering requires a legitimate act; otherwise, evidence for the defence will be considered inadmissible. If independent research is used as a defence, the defendant must prove that the accused information was created from independent research before the formation of the plaintiff's trade secret; otherwise, the defendant will fail to establish the burden of proof.

Liability for infringement
There are three kinds of liability of infringement:

  • The infringer can be ordered to refrain from infringement and must not disclose the trade secret until it is known to the public.
  • The infringer must pay compensation based on:
    • the actual loss suffered by the rights holder;
    • the profits that the infringer earned from the infringement; and
    • statutory damages (referring to the prescription in the Patent Law).
  • The infringer may face criminal liability depending on the actual loss suffered by the rights holder:
    • for losses of Rmb500,000 the infringer may face imprisonment for up to three years; and
    • for losses of Rmb2.5 million or more the infringer may face imprisonment for between three and seven years.

In summary, the protection of trade secrets mainly depends on the rights holder's desire to protect itself. Rational protective measures and the preservation of evidence are vital to win trade secret litigation.

This is an Insight article, written by a selected partner as part of IAM's co-published content. Read more on Insight

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