What Information Could Be Considered as Trade Secret in Tech Product Transaction in China?

Abstract

(By Albert Chen) The tech product transaction involves the information of technology and business. Among such information, to judge which part could be considered as trademark secret, it shall be based upon Article 10 of the Anti Unfair Competition Law, which regulates that to determine the trade secret, the court shall evaluate “whether it is known to the public”, “benefiting”, “practicability” and “confidentiality”.

Case Summary

In 1998, Shanghai Zhenxing Aluminum Co., Ltd. (the “Zhengxing Company”) developed a manufacturing technology, which the company used to produce articles. This technology created by Zhenxing set the standard for the production of the article. Shanghai Huikai Aluminum Co., Ltd. (the “Huikai Company”) was founded on September 10th 2003, and afterwards carried out the business in the same product manufacturing as Zhenxing. As investigated, among the 70 clients of Huikai, 68 once transacted with Zhenxing. For these clients, most products they purchased from Huikaiu were almost the same as those they bought from Zhenxing. Furthermore, Qin and Pan, who are now working in Huikai, are former employees of Zhenxing. During their employment with Zhenxing, the company signed confidential article in the labor contract and also an independent confidential agreement.

Zhenxing believes that Pan and Qin brought privilege information from Zhenxing to Huikai, and Huikai used such information for its own benefit. Therefore, Zhenxing filed a lawsuit in court, accusing the infringement of unfair competition of the three parties.

After hearing the case, the first instance court held that the key to the case is whether the information involved could be considered as the trade secret, and for that, the court entrusted the Science Business Center for the judicial verification and got the result as follows:

(1) For the process of product manufacturing technology, technology examination standard and the specific information of the cooperating units, they shall not be considered as trade secret. Among such technologies, some have been publicized in journals, and the rest are widely accepted technology by technicians in the industry. Considering these, such technologies shall be of the public domain.

(2) The different types, standard shape, dimensional tolerance, technological requirements and other information combination shall be considered as trade secret. Although part of such information could be individually obtained from the public domain, the combination of such information was created through the plaintiff’s effort and intellectual devotion, and  cannot be retrieved through the public domain.

(3) As for the combination of the client name, address, product information, contact, contact information, as well as other detailed information, it shall be considered as trade secret. The information combination including the client information cannot be acquired through the public channel, and they are combined based on the work of the plaintiff. Especially for the client information, it comes from the effort and cost spent by the plaintiff.

In the meantime, the court confirmed that the above point 2 and 3 could benefit the possessor. Since there are confidential clauses in the labor contract, such information shall be taken as trade secret. Therefore, the first instance court ruled that the defendant is liabile of unfair competition.

Dissatisfied with the decision, Qin and Huikai appealed to the higher court, arguing that such product information would be given to the client for confirmation during the transaction, thus such information shall be deemed within the public domain. Yet, after the hearing the appeal, the second instance court denied the defendant’s appeal, and its main reasons are that despite that the information would be given to the opposite party in the transaction, as provided in the Contract Law of China, the contractual parties shall take the confidential duty for all the information in the agreement conclusion.

Lawyer Comment

For the decision of the courts in the case, they are actually applying the legal conditions for the confirmation of the trade secret. That means the court has considered whether the information has been to the public knowing, the plaintiff has taken the confidential measures, it is practical and it could bring the benefit. For sure, the ruling and argument by the court for its decision also has defects in some aspects. Considering these, the author would like to conclude and analyze as follows:

  1. In tech product transaction, it may involve the information of technology and commerce. Some of these information may be checked through the public channel, like the Internet and professional journals. But for the combination of the information, it cannot be obtained through the public channel, and also it requires the effort and intellectual devotion of the holder. Moreover, it cannot be obtained through the public domain.
  2. In tech product transaction, it is inevitable to see information exchange among the parties. Whether could such exchange can be seen as the publication of the information, rendering it public information, is of the opinion of court. In this case, the court ruled that such exchanges are not publication of information, for it only carries out within a very small scope and could not be widely spread.

The author agrees with this opinion. As provided in the Anti Unfair Competition Law, the condition is “not known to the public.” However, the scope of the “public” is quite broader than the contractual parties, and at the same time limited by the confidential duty and the consideration of the commercial benefits, the parties would not spread out the information known to them.

  1. In this case, both courts did not give their specific interpretation on the methods of the confidential measures. Although the defendant has expressed its dissatisfaction on the decision of the first instance court, the second instance court found that the measures taken for the articles concerned is considered confidential, and is included in the labor contract as  a confidential agreement.

But for the opinions of the author is that such finding is inadequate. The general agreement could not be considered as confidential, measures, and the trade secret holder shall otherwise specify what information shall be protected and explicitly label them or inform the employees the scope of them beforehand. The general provision only confuses worker as to what information shall be protected, and that would ultimately make the employer suffer from the poor protection on their trade secret.

Lawyer Contacts

You Yunting86-21-52134918  youyunting@debund.com/yytbest@gmail.com

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