As the base of an enterprise's competitiveness, trade secrets are a company's most vital form of information. In recent years, there are frequent reports of employees leaking and exposing trade secrets of their employers. Often these trade secrets are provided to a new company after departure, which directly or indirectly leads to a great loss to the former company. Under these circumstances, the company may select one of two remedies: litigate for the infringement of a trade secret or for a default of a non-compete clause. Which one is the better remedy? The author hopes to provide some suggestions on how to select a suitable remedy based on the company's state of affairs as well as preventative measures to reduce potential loss.
Litigation for the infringement of a trade secret and for default of a non-compete clause are two remedies through which a company can protect its trade secrets. The former allows the company to bring a case to court against the employee and a 3rd party company for unfair competition based on the PRC law of Anti-unfair Competition. The company can also claim on disputes of Intellectual Property when it involves patents or other technical secrets. The latter enables the company to bring a case for a default based on the regulations of non-compete clauses, e.g. PRC Labor Contract Law and interpretations from Supreme Court and the agreements binding by the two parties.
Comparing the two remedies, there are some differences.
1.Differences of the nature of the protected rights.
Litigation on the infringement of a trade secret is based on the company's ownership of the trade secret in question, which means that any infringing act by any non-owner is forbidden. The previous law of Anti-unfair Competition only prohibits an infringement by company's operator. However, the updated version promulgated on April 23,2019 enlarges the range. It is stipulated that: "An illegal act as set forth in the preceding paragraph committed by a natural person, legal person or unincorporated organization other than a business shall be treated as infringement of the trade secret. Where a third party knows or should have known that an employee or a former employee of the right holder of a trade secret or any other entity or individual has committed an illegal act as specified in paragraph 1 of this Article but still acquires, discloses, uses, or allows another person to use the trade secret, the third party shall be deemed to have infringed upon the trade secret."
Default of a non-compete clause, as the name suggests, concerns the content of agreement signed by the two parties. So, the relevant rights and obligations are only applicable to the two parties.
2.Differences of applied objects.
According to the law, the obligation of confidentiality is applied to all staff who could potentially be in contact with trade secrets and would not have been able to obtain such secrets in reasonable and legal way before contact. However, according to Article 24 of the PRC Labor Contract Law, the obligation of non-compete only binds senior managers, senior technical staffs and other staffs to an obligation of confidentiality.
3.Differences of limited rights.
The duty of confidentiality prohibits any disclosure trade secrets directly or indirectly intentionally or involuntary to any other third party. The obligation of non-compete not only requires employees to keep known trade secrets confidential during and after employment, but also prohibits employees from working for a competing employer that produces or deals in the same type of products or is engaged in the same type of business as his former employer, or to establish his own business that produces or deals in the same type of products or engages in the same type of business.
4.Differences in the length of the rights validity.
The obligation of confidentiality is eternal, which means that the disclosure of trade secrets is prohibited at all times, until the point at which the trade secret becomes public information. However, according to PRC Labor Contract Law, the period of non-compete shall not exceed two years since the employment termination date.
5.Differences of company's duty
According to PRC Labor Contract Law, the company shall pay compensation to the terminated employee during the period of non-compete. On the other hand, there is no legal requirement to compensate employees whom respect their duty of confidentiality.
6.Differences of legal proceedings
Generally, litigation for the infringement of trade secrets shall go through the civil case process i.e. the system of judgment of the second instance as final. The case shall be categorized as an infringement of trade secret dispute under the Anti-unfair competition law. A 'default of non-compete' is a labor dispute case and shall go through the civil process only after the arbitration stage.
7.Differences of difficulty
In litigation for infringement of trade secrets, companies can claim compensation for loss based on the employee's violation of the Law of Anti-unfair Competition. However, in practice, the main difficulty of this kind of case lies in providing sufficient evidence. The company should meet to evidential requirements. First, company should prove that the information can be classified as one of the above-mentioned trade secrets. Secondly, the company should prove that the employee had access or the possibility of accessing the relevant information.
As for categorizing trade secrets, it is stipulated in Article 9 of the Law of Anti-unfair Competition that: "For the purpose of this Law, 'trade secret 'means technical, operational or other commercial information unknown to the public and is of commercial value for which the right holder has taken corresponding confidentiality measures." The company's information will be recognized as a trade secret if the following three elements are present: secrecy, value, and taking reasonable security measures for it.
(1) Secrecy: This information is not disclosed to the public and could not be obtained directly from public channels;
(2) Value: This information has real or potential commercial market value and can provide a competitive advantage for the rights holder;
(3) Reasonable confidentiality measures have been taken: the rights holder has taken reasonable and necessary confidentiality measures, so that the person bound by a duty of confidentiality is aware of that he/she is bound to maintain the confidentiality of certain information.
Among these, the confidentiality measures are interpreted by Article 11 of Interpretation of the Supreme People's Court on Several Issues Concerning the Application of Law in the Trial of Civil Cases on Unfair Competition: "The people's court shall determine whether the right holder has taken confidential measures according to the characteristics of the information carrier involved, the willingness of the right holder to keep confidential, the identifiability of the confidentiality measure, and the difficulty level obtained by others through proper means.
If one of the following is sufficiently met to prevent the leakage of confidential information under normal circumstances, the rights holder shall be deemed to have adopted the duty of confidentiality:
(1) Limiting the scope of knowledge of confidential information, and only informing relevant personnel who must know it;
(2) Taking precautionary measures such as locking for the confidential information carrier;
(3) Marking "confidentiality" on the carrier of the classified information;
(4) Using passwords or codes for classified information;
(5) Signing a confidentiality agreement;
(6) Restricting visitors or requesting confidentiality for classified machines, workshops, workshops, etc.;
(7) Other reasonable measures to ensure the confidentiality of information."
As a second step, the company must prove that employee has acted in in breach by providing evidence that the information has been used by the employee in a company operation and for profit. However, due to the very nature of trade secrets - their invisibility and non-proprietary nature - the company has heavy burden of proof in practice.
High litigation costs, high legal risk and long, drawn-out proceedings are all difficulties associated with this course of action.
Finding evidence for proving a default of a non-compete clause is comparatively easy. Generally, a company would need to prove that the employee had established a company in competition or now works for a competitor and that the two companies produce the same kind of product or operate the same type of business. Generally, this would be judged on the business range certificated in the company's Articles of Association. Furthermore, if the company's actual business is different from the written business range, relevant evidence can be submitted to prove that the company and the employee's current employer are in similar business range or in a competitive relationship.
Compared to trade-secret litigation, this method is quicker and less costly.
8.Differences between remedies
Companies receive a default amount of compensation for breaches of non-compete clauses. This means that the actual economic compensation is relatively low but it works to prevent an employee's infringing action quickly and effectively. On the other hand, if a company was able to prove infringement of trade secret, the compensation granted would be for all loss suffered which can be extremely high.
In the case of a company that has suffered a trade secret infringement, the company may consider this choice of relief in line with the following perspectives:
1. Hoping to stop an employee' violation as soon as possible.
For those who have signed a non-competition agreement, in order to stop the infringement at low cost, quickly and effectively, it is recommended to litigate for a default of non-compete agreement.
When the company has clearly signed a non-competition agreement with an employee, and have fulfilled the obligation to pay compensation after the employee has left the company, if the company can fully and effectively prove that the two companies have direct competition, the company could litigate for breach of a non-compete agreement and the company could request a court injunction to stop the infringing act.
2. Based on consideration of external public relations and internal management of the company.
It is recommended to file a lawsuit for unfair competition, so that the dispute will enter the long-term litigation period which would clearly and strictly express the company's attitude towards such behavior. A criminal case could also be brought, which often has a significant social impact. It can also serve as a warning to other employees, which will make internal management easier.
Finally, for those companies who have not signed a Non-compete agreement but is often in contact with a company's core technology and other business secrets, the company can consider introducing a confidentiality agreement. When signing the agreement, it is suggested to determine the confidentiality measures according to the characteristics of the classified information, the degree of identifiability, the degree of difficulty that others obtain in a legitimate way, etc. and clarify the definition and scope of the trade secrets. This will be useful for future labor disputes where a violation has taken place.