Can Employees’ Nondisclosure Warranty Letter Be A Confidential Measure in China?


(By Albert Chen) According to the Anti Unfair Competition Law, one of the conditions required for something to constitute a trade secret is whether sufficient measures have been taken for such information to remain confidential. In practice, apart from an NDA (Non Disclosure Agreement), other confidential articles that explicitly indicate the inclusion of remuneration for confidentiality in an employee’s pay, as well as written warranties issued by an employee can both be considered confidential measures in law sufficient to properly maintain a trade secret.

Case Summary:

Wuhu Shunda Logistics Co., Ltd. (“Company S”) carries out a joint transportation business specializing as an agent in waterway logistics. Chu, Zhang and Mu respectively held posts as a business agent, a representative in Lianyungang City, and a normal employee. All three tendered their resignations and left the company.

During their employment with the company, as part of their salaries, their payment slips would indicate on the payroll that money tendered as employee payment included remuneration for confidentiality and noncompetition, totaling twenty percent of paid salary. At the same time, Zhang issued a written warranty to the company when he left, indicating that he would promise not to take away any confidential information from the company, or work with any competitors within a two-year period after resigning. Moreover, according to this signed guarantee, Zhang agreed he would not carry out any business through Company S’s commercial channels.

However, after going to find employment with the Shenyang Shipping Company (“New Company”), Zhang introduced Company S’s data management system to the New Company, as well as stored information thereby running in the system in his working computer, for the benefit of the company’s use. The aforesaid information included Company S’s transaction data as well as specific information related to pending transactions. As for Mu and Chu, although they did not bring any of Company S’s confidential information to the New Company, they made use of information supplied by Zhang on a regular basis.

According to Company S, what Chu, Zhang, Mu and New Company had done was clearly a violation of its confidentiality agreements regarding trade secrets, and it thereby filed a lawsuit in court. After the court heard the case in the first instance, the court ruled that the defendants had infringed upon Company S’s trade secrets. Dissatisfied with this ruling, Chu and New Company appealed to a higher court; at the higher court’s hearing, Chu claimed he had not infringed against Company S’s trade secrets. The court refused Chu’s appeal, and the court in the second instance affirmed the lower court’s ruling that Company S had taken sufficient measures to retain confidentiality, and those measures were violated.

Lawyer Analysis:

The highlight of this case is the court’s definition of remuneration in conjunction with a written warranty to maintain a nondisclosure agreement as a confidentiality measure. As provided in Article 11 of the Interpretation on Several Issues concerning the Trials of Unfair Competition Cases (“Interpretation”), the measures include the following methods:

1. To limit the scope of information disclosure such that only the staff necessarily knowing the confidential information would be put on notice regarding its confidentiality;

2. Utilizing a sort of lock mechanism regarding the information involved;

3. Indicating the confidential nature of the information to its carrier;

4. Adopting a system of passwords or codes in order to access the information;

5. Conclusion of an NDA;

6. Limiting the ability to access machines, factories, or workshops related to the confidential information, or requiring nondisclosure;

7. Other measures for the nondisclosure of information.

It is not difficult to conclude from the above regulations that the Interpretations have adopted a rather “open” attitude regarding confidentiality measures in trade secrets cases. Despite a payment to an employee as a guarantee of nondisclosure not directly “limiting” an employee’s access to the information or his or her ability to disclose such confidential information, it is a manifestation that the employee is well aware of the confidential nature of such information, and has willingly accepted his or her responsibilities in regard to maintaining confidentiality and nondisclosure. In regard to what should be reasonably considered a “trade secret,” the courts are typically making such a determination based on it not being available to the general public, being practical, and being of benefit to the holder(s) of such trade secrets.

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