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Client Information and Trade Secret Protection in China


Author: Alex Gong
Editor: Normand Gauthier

“Know the enemy and know yourself, and you can fight a hundred battles without defeat” as the saying goes, business is just like a war. Understanding the competitor and business partner is an essential capability for every successful enterprise. Therefore, client information can be used as a weapon to improve the ability to compete, knowing your business partner, and maintaining a long-term business relationship. It could lead companies to win many of the competitions. However, due to the instability of relations with employees and other similar reasons, companies may be stuck with some legal problems and difficulties to protect their own rights. This article will summarize the elements of client information based on two typical precedents and hopefully will bring some insights on trade secret protection.

Understanding three elements of client information through cases
In accordance with Anti-unfair Competition Law of the People's Republic of China, the definition of trade secret demonstrates three key elements: secrecy, value, and confidentiality. Client information needs to be determined in the light of these three elements since it is a part of trade secret.

1. Secrecy.
Client information to be identified as a trade secret must first be characterized as secrecy. In accordance with the law, secrecy means “not known to the public”, that is, information that is not generally known and easily accessible by the relevant personnel in its field. Generally speaking, in judicial practice, this feature will be considered from four aspects: (1) the depth of the client’s information content; (2) labor, money and effort which has to be invested into compiling such information; (3) whether there is a relatively stable trading relationship with the client; (4) the level of difficulty which the average person has when obtaining such information.

Case No.1 of the Beijing Intellectual Property Court in 2017
Company B complained that two former employees of Company A and Company B infringed their trade secrets. Company A and two former employees believed that the information claimed by Company B has been published on the website. Company B claimed that the trading habits, trading preferences, demand preferences, and price tolerance of the specific client are not private and valuable and should not be protected as trade secrets. Furthermore, Company B did not agree that the two companies are in a competitive relationship, and the information that can be found on the Internet did not include in-depth information such as project information, source of approval funds, operating standards of previous services, contact details of relevant responsible persons, and project acceptance criteria. In addition, the labor contract signed between Company B and its former employees includes the terms of “confidentiality and non-competition restrictions”, and also the business restriction agreement, intellectual property commitment agreement, and confidentiality agreement. The court held that the issue of the case was whether the client information constituted a trade secret.

Firstly, from the perspective of the coincidence of business scope and service targets, there is indeed a competitive relationship between the two companies. Secondly, according to the following four points, this information can be deemed as a trade secret:
(1) From the depth of the claimed client information, the claimed information includes client trading habits, needs, price tolerance, personality characteristics of the project leader, contact information, address, etc. The above information is different from general client information that can be found within the public domain. Secondly, the information of Company B's past transaction records reflected the trading habits, trading tendencies, demand preferences and price tolerance of client to a certain extent. At the same time, based on the special nature of the client company as a petroleum company, the appeal court held that

considering the entry threshold and marketization degree of its business development, although there is a general introduction of related projects in the relevant online media, the relevant personnel in the relevant fields have no way to know the specific project content, the source of approval funds, and the operation of the pre-service through open channels. Core information such as standards, project acceptance criteria, and price tolerance, and the in-depth information about the contact details, personality characteristics, trading habits, and trading tendencies of the responsible person, are the key to grasping business opportunities and gaining competitive advantage, especially for the software development operation and maintenance service filed which requires fast replacement and highly critical time requirements.

Therefore, due to its large volume and the degree of marketization of its transactions, such information cannot be mastered by the general enterprise or individual, therefore the above information is not known to the relevant personnel in the field and has a certain depth.

(2) From the perspective of the amount of labor, money and effort paid for the formation of client information, the question is whether Company B organized the transaction process information or operated a long-term stable business relationship, and whether Company B needs to invest a lot of manpower, material resources, and financial resources.

(3) From the perspective of whether there is a relatively stable trading relationship with the client, as mentioned above, Company B had formed a relatively stable trading relationship with the client.

(4) From the difficulty level of the general person to obtain the information, according to the first point, taking into account the special nature of the client’s company, and based on the stable, trustworthy, long-term relationship established with the client which resulted in the possibility to access such information. Therefore, the information is not the information that ordinary people can obtain without a certain effort. In summary, the client information claimed by Company B had secrecy and constitutes a trade secret.

Case No. 2 of the Hubei Provincial Supreme Court in 2019
Company C claimed that its former employees, and Company D, infringed on client information, and the former employees used the information to facilitate the transaction between Company D and the client, resulting in Company C suffering a huge loss. Company D and former employees believe that the information is publicly known and should not be considered as a trade secret. The focus of both parties here is still whether the claimed information was a trade secret. The court held that

determining whether the client list constitutes a business secret should be considered from the following aspects: whether the client information is specific, stable, private, and obtaining it requires manpower, financial resources, and some hardships, without which, others can not properly obtain such client information.

According to Case 2, first of all, the claimed client information can be known from the open, public, social channels such as the internet and industry information platforms, and there is no confidentiality involved. Secondly, the content does not include comprehensive client information such as client contact method, client’s demand type and demand habits, client's business rules, client's ability to bear the price of the product, etc., which were not fixed within a certain period of time and did not have unique trading habits. It can be seen from the judgment of the court that the above-mentioned client information does not have the depth of the content, and the transaction relationship with the client was insufficient to satisfy the type of characteristics of relatively fixed and unique trading habits, and the information channel was disclosed. Therefore, the claimed information did not have the characteristics of secrecy and was not a trade secret.

2. Value
Value refers to “the economic benefits and practicality that can be brought to the obligee”, that is, the relevant information has a realistic or potential commercial value and can bring a competitive advantage to the obligee.

In case 1, the court ruled that:

in a specific commercial project, the client’s trading needs, special preferences, actual acceptance criteria, and price tolerance are often extremely important core information, especially the price-bearing bottom line and other sensitive information often needs to be acquired in long-term business cooperation, business negotiation, and market research. It is also the key to the business entity's competitive advantage and successful acquisition of the project.

Whenever the company enters a business relationship between the two parties, it invests a certain amount of manpower, material resources and financial resources to accurately grasp the core needs, special preferences, and price bottom line of the client. Therefore, such information could help companies to stand out among the competitors, seize the opportunity at the lowest cost, successfully obtain cooperation opportunities, and earn commercial profits. Such client information has important business value.

3. Confidentiality
Confidentiality refers to “taking confidentiality measures”, and the obligee should take reasonable appropriate protection measures as equal to its commercial value to prevent information leakage under certain circumstances. Judicial interpretation provides an enumeration of certain parts to this point, including confidentiality signs, passwords, and confidentiality agreements. The principle of the recognition of confidentiality measures in the "Guidelines for the Trial of Cases of Infringement of Trade Secrets in the Supreme People's Court of Jiangsu Province" is summarized in three points: (1) validity, that is, the confidentiality measures adopted by the plaintiff should be adapted to the object of secrecy. The standard should be whether it is difficult to obtain such information without improper means or without violating the agreement; (2) the identifiability, that is, the confidentiality measures taken by the plaintiff, are sufficient for the relative person who assumes the confidentiality obligation to realize that the information is confidential information; (3) appropriateness, that is, confidentiality measures should be compatible with the level of confidentiality required by the information itself to meet confidentiality requirements. This requires specific discrimination based on the specific circumstances of the case. Under normal circumstances, the principle of appropriateness does not require confidentiality measures to be foolproof.

In case 1, the court explained the confidentiality measures from the subjective and objective perspective. The Court believed that the enterprise should have the awareness of protecting relevant trade secrets and adopting corresponding management measures to be considered as taking reasonable confidentiality measures. Company B has adopted multiple written forms and signed written documents such as labor contracts, non-competition agreements, employee intellectual property commitment agreements and confidentiality agreements with former employees, and objectively should be approved to take adequate confidentiality measures. At the same time, the requirements of the trade secrets (including the client’s list) are clearly defined in the terms, and subjectively, they can also be recognized as having the awareness of protecting client information.

In combination with the above three-point recognition principle, Company B uses multiple written forms as effective confidentiality measures to restrict employees, so that the degree of confidentiality was enough to attract the attention of others, and it is identifiable, and it also matches the importance of client information. Company B should be judged to have taken sufficient confidentiality measures.

The lawyer's advice
In summary, clarifying the specific elements of client information that constitutes a trade secret is the basis for protecting the rights and interests of its own business secrets. It is worth paying attention that the principle of determining client information in the analysis is not conclusive. For example, the amount of client information is not the same as the depth of client information. At the same time, there are exceptions to the long-term stable client relationship of a particular client. In short, it still needs to be analyzed according to the actual situation of the company.

When a company protects client information, it can proceed from the following two points:
a. Improve rules and regulations and establish clear terms in relevant documents.
Firstly, a company can clearly embed business risk and general information in the process of system setting and document preparation. The risk prevention clauses such as the categories of protection information and possible violations should be properly embedded, which will effectively restrict the employees. Secondly, setting different information security levels, to meet the appropriateness of confidentiality measures and have a warning effect, would help to establish a better risk prevention mechanism. Whether in the current system improvement process or in the future dispute resolution, evidence retention and related preparation work can be carried out with more diligence.

b. Retain evidence and build an evidence structure.
According to the requirements of examining client information in judicial practice, a company should retain relevant evidence of its transactions with clients, such as contracts and financial documents. At the same time, documents that prove the amounts of labor, money, and effort paid in obtaining such information are required to be retained. In a case of a legal dispute they can help to build a chain of evidence to prove that this type of information is different from information from the public domain, and ordinary people cannot easily obtain it through normal channels.

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