Trade Secret Misappropriation by Ex-Employees in China: How to Confront “Inside Theft”

Article 123 of the General Provisions of the Civil Law of the People’s Republic of China (effective Oct. 1, 2017) confirmed that trade secrets are intellectual property, signifying China’s recognition of the importance of trade secret protection.  Nevertheless, trade secret misappropriation remains rampant in the country. 

Article 10 of the Anti-Unfair Competition Law of China provides that trade secret misappropriation occurs when:

  • a party acquires an owner’s trade secret by improper means such as theft, economic inducement, or coercion;
  • a party discloses, uses, or allows other parties to use the trade secret acquired by such improper means;
  • a party discloses, uses, or allows other parties to use the trade secret in violation of an agreement with, or requirement by, the owner to protect the trade secret; or
  • a third party acquires, uses, or discloses another party’s trade secret with the actual or presumed knowledge of the above-mentioned illegal acts.

Article 10 provides three requirements for trade secret status:  (a) it is unavailable to the public; (b) it creates economic benefits for its owner and is of practical utility; and (c) it is subject to reasonable measures taken by its owner to maintain its secrecy.  Article 13 of the Interpretation of the Supreme People’s Court on Issues Concerning the Application of Law in the Trial of Civil Cases Involving Unfair Competition provides that customer lists are protectable trade secrets because they contain client information that is unavailable to the public, including business habits, intent and transaction history.

At the beginning of this year, two Chinese enterprises initiated legal action against their former employees for trade secret misappropriation.  In January 2017, Huawei announced that six of its former engineers and designers from its end-user business unit were investigated by the public security bureau for alleged trade secret misappropriation.  In May 2017, the public security bureau arrested a former quality control technician of Lao Gan Ma, a producer of Black Bean Chili Sauce.  The bureau found that the technician misappropriated more than RMB 10,000,000 worth of trade secrets concerning the production process and raw material ratio of the sauce when he defected to another food factory which started producing an identical product.

There are many other trade secret misappropriation cases in China.  However, the overall success rate by trade secret owners is still low due in large part to the difficulty of collecting supporting evidence.  It is therefore prudent for businesses to implement preventative measures.  Examples include instituting varied security measures for different categories of information depending on their value and significance; entering into nondisclosure and noncompete agreements with employees; training employees on their duty of confidentiality; conducting comprehensive exit interviews of key employees upon their departure; and encrypting employees’ electronic devices and recovering them as needed.