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Civil Code: Trade Secrets and Non-Competition

2020-11-23

Author: Bi Zhenzhou
Translators: Normand Gauthier, Su Yiwei
 
Trade secrets are an especially important intangible asset during company operations. On April 23, 2019, the Standing Committee of the National People's Congress made amendments to the Anti-Unfair Competition Law. One of the most important modification was the amendment to provisions of trade secrets. On January 15, 2020, the U.S. and China finally reached the Economic and Trade Agreement between the Government of the United States and the Government of the People’s Republic of China. The first chapter is the agreement on intellectual property rights the first of which is the content of the trade secret protection clause, which both sides agree to ensure effective protection of trade secrets and confidential trade information and to effectively prevent the theft of such information. On August 24, 2020, the 1810th meeting of the Judicial Committee of the Supreme People's Court passed the Provisions of the Supreme People's Court on Several Issues Concerning the Application of Law in the Trial of Civil Cases Infringing Commercial Secrets, which makes detailed provisions on common problems in trade secret disputes and will come into force on September 12, 2020. This time, Article 501 and 585 of the Civil Code involve the protection of trade secrets, liquidated damages and the provisions on how to effectively claim losses caused by leakage of trade secrets. In this section we will analyze and give constructive opinions to readers on the practical operation of the company's trade secret protection and non-competition.
 
1. The Civil Code and its recent regulations on the protection of trade secrets
The first paragraph of Article 501 of the Civil Code: "A party shall not disclose or improperly use trade secrets or other confidential information known to it in the course of concluding a contract, no matter whether the contract is established or not; if it discloses or improperly uses such trade secrets or information and causes losses to the other party, it shall be liable for compensation."
The first paragraph of Article 32 of the 2019 Anti-Unfair Competition Law stipulates:
" In the civil trial procedure for infringement of a trade secret, if the right holder of the trade secret provides prima facie evidence that it has taken confidentiality measures for the claimed trade secret and reasonably indicates that the trade secret has been infringed upon, the alleged tortfeasor shall prove that the trade secret claimed by the right holder is not a trade secret as described in this Law…"
According to the provisions of this paragraph, once the right holder has completed the burden of proof of the “primary evidence” that the trade secret meets the legal requirements, the alleged tortfeasor will need to bear the burden of “shall prove that the trade secret claimed by the right holder is not a trade secret as described in this Law”. That is, the burden of proof is transferred between the two parties.
The Supreme People’s Court promulgated the "Regulations on Several Issues Concerning the Application of Laws in the Trial of Civil Cases of Infringement of Commercial Secrets" (Fa Shi [2020] No. 7) (hereinafter referred to as the "Regulations") that came into effect on September 12, 2020. A series of issues in the handling of cases have been standardized and clarified, especially some of the long-standing pain points and difficulties.
 
2. Influence of the Civil Code on the protection of trade secrets
2.1 Scope of trade secrets
The People's Court may determine the technical information referred to in Article 9 (4) of the Anti-Unfair Competition Law in the newly issued Provisions of the Supreme People's Court on Certain Questions of the Law Applying to the Trial of Civil Cases of Violations of Trade Secrets (Legal Interpretation (2020) No. 7) on structures, raw materials, components, formulations, materials, samples, styles, new breeding materials of plants, processes, methods or their steps, algorithms, data, computer programs and related documents.
The People's court may determine that the business information referred to in Article 9, paragraph 4, of the Anti-Unfair Competition Law constitutes information on creativity, management, sales, finance, planning, samples, bidding materials, customer information, data, etc. related to business activities. Customer information called in the fore paragraph, including the customer's name, address, contact details and trading habits, intentions, content and other information.
The trade secrets mentioned here include not only the company's technical information and business information, but also the "customer information", as well as other business information. Different companies have different definitions of their own trade secrets, which can be defined in the company's system or labor contracts.
 
2.2 Confidentiality obligation
The employee’s obligation of confidentiality stems from the employee’s duty of loyalty to the employer. The obligation of loyalty is a general obligation of the parties to a contract arising from the principle of good faith. Because of the personal attributes of labor contracts, the degree of loyalty obligations undertaken by employees is obviously greater than that of ordinary civil and commercial contracts. As employees, they must safeguard the legitimate rights and interests of employers and undertake confidentiality obligations, regardless of whether there is an express agreement, regardless of the employee's employment period or after leaving, as long as the business secret is not disclosed, the employee must perform the corresponding confidentiality obligation.
Article 27 of the newly revised Regulations on Labor Contracts in Jiangsu Province, which came into effect on May 1, 2013, stipulates that the employer and the worker may agree in the labor contract to keep the employer's trade secrets and confidential matters related to intellectual property rights. For employees with confidentiality obligations, the employer may make an agreement with them in the labor contract or confidentiality agreement on the notice period for the laborer to request the termination of the labor contract and the adjustment of positions and labor compensation during the  notice period. The notice period shall not exceed six months. If companies in other regions do not have clear legal terms and judicial interpretations, and the relevant agreements are agreed upon by both parties and do not harm the interests of employees, the principle of autonomy is followed.
If the above-mentioned confidentiality obligation is a statutory obligation, workers cannot demand additional remuneration for fulfilling the confidentiality obligation. Even if the employer does not pay additional economic compensation or confidentiality fees to the employee during the duration of the labor relationship or after the labor relationship is terminated, the employee shall perform the obligation of confidentiality. However, it is not prohibited by the law for employers to voluntarily give employees confidential fees, etc.
 
2.3 Confidentiality Agreement
The statutory duty of confidentiality is not inconsistent with the "Confidentiality Agreement" signed separately by the employer and the worker. Signing a separate "Confidentiality Agreement" under the premise of statutory obligations is a concretization of statutory obligations. How is the company’s business secrets and the definition of certain boundary behaviors, such as passive disclosure of business secrets, if not stipulated, workers can claim that they have not disclosed the secrets. The general "confidentiality agreement" mainly includes the following clauses: the scope (definition), the statement of confidentiality obligations, the statement of violations of confidentiality obligations, the agreement on confidentiality obligations and confidentiality fees, and the accountability for disclosing business secrets. In practice, the company may not sign a separate "confidentiality agreement" with employees or a third party, but stipulate a confidentiality clause in the "Labor Contract" or separately stipulate a confidentiality clause in the "Termination Agreement" when the employee leaves, or it can also be stipulated in the company's management system, such as adding detailed regulations in the "Employee Handbook" or "Confidentiality System".
The first paragraph of Article 501 of the Civil Code and Article 10 of the Provisions on Several Issues Concerning the Application of Law in the Trial of Civil Cases Infringing Commercial Secrets both clearly stipulate confidentiality obligations. The people’s court shall determine that the confidentiality obligations assumed by the parties in accordance with legal provisions or contractual agreements belong to the confidentiality obligations referred to in Article 9 Paragraph 1 of the Anti-Unfair Competition Law.
 
3. The impact of the Civil Code on the protection of non-competition
The non-competition clauses in the Labor Contract Law refers to non-competition stipulated in the labor contract and agreed between the employer and employee on intellectual property rights ownership agreement or technology confidentiality agreement for employees who are responsible for keeping the employer’s business secrets. Within a certain period of time after the termination or dissolution of the labor contract, the (ex)employee is not allowed to work in employers that produce similar products, operate similar businesses, or have other competitive relationships, nor can they produce similar products or operate similar businesses that compete with the original unit. The time limit shall be agreed in advance by the parties but shall not exceed two years.
 
3.1 Non-competition obligations
Non-competition is to limit the scope of employees' choice of employment within a certain range to protect business secrets. The obligation to restrict competition is not a mandatory obligation that workers must perform. It is an agreed obligation, the determination of this obligation must be determined by the employer and the worker by signing a Non-competition Agreement.
A non-competition agreement does not mean that the protection of the rights of employers is not subject to any restrictions. Otherwise, it is undoubtedly a serious infringement of workers' right to work and choice of employment. Therefore, the employer is required to pay economic compensation for the employee to perform the non-competition obligation. If the compensation is not stipulated in the agreement or the compensation is agreed but the employer does not pay the worker, can employers still require employees to perform corresponding obligations? In this regard, the guidance of the Jiangsu Provincial High People's Court, Jiangsu Province Labor Dispute Arbitration Commission on the trial of labor dispute cases clearly stipulates:
The employer and the employee have agreed on a non-competition clause but not agreed on economic compensation, or agreed on economic compensation but If the payment is not made in accordance with the agreement, the non-competition clause shall not be legally binding on the worker.
However, in 2013, the Interpretation of the Supreme People’s Court of Several Issues on the Application of Law in the Trial of Labor Dispute Cases (IV), Article 8, stipulates that:
Where the parties agree on non-competition and economic indemnity in the labor contract or confidentiality agreement, if the employee requests the removal of the non-competition clause on the ground of non-payment of economic indemnity for three months after the rescission or termination of the labor contract for reasons attributable to the employer, the people's court shall support such a request.
 
3.2 Breach of Non-competition
Article 23 of the Labor Contract Law stipulates that employers can agree with employees on non-competition related matters and agree to provide employees with monthly economic compensation during the non-competition period after the termination or dissolution of the labor contract. The prescribed compensation amount for non-competition varies between regions. Because the company pays compensation within the effective period of competition, both parties must agree on a certain amount of liquidated damages based on the principle of equal rights and obligations. However, the Labor Contract Law and its existing related laws and regulations have not clearly stipulated the amount of liquidated damages. In practice, the amount of liquidated damages is too low and has a limited effect on employees. However, on the opposite, if the agreed penalty is too high, such as hundreds of thousands of millions, it would be unfair to ordinary workers. Article 585 of the Civil Code stipulates that:
The parties may agree that if one party breaches the contract, it shall pay a certain sum of liquidated damages to the other party in light of the circumstances of the breach, and may also agree on a method for the calculation of the amount of damages incurred as a result of the breach. Where the amount of liquidated damages agreed upon is lower than the losses incurred, the people's court or an arbitration agency may increase such amount upon the request of the parties; where the amount of liquidated damages agreed upon is excessively higher than the losses incurred, the people's court or the arbitration agency may appropriately reduce such amount upon the request of the parties…
Therefore, whilst high amount of liquidated damage may seem beneficial to the company, employees could claim that it is unfair, and this may lead to the invalidation of the liquidated damages agreement. The determination of the final specific amount would be freely determined by the arbitrators and judges. According to our practical experience, a reasonable amount is generally three times the employee’s annual salary during the period of employment.
 
3.3 Non-competition agreement
Generally speaking, the main core clauses included in non-competition agreement include the scope, the period, the statement of what constitutes a violation (direct operation or indirect access to shares or manipulation of benefits, etc.), economic compensation (amount, payment procedures, counterparty assistance obligations, taxes), damages (amount, payment procedures, non-exemption of liability for compensation, the counterparty’s notification obligation), waiver and notice of the company’s non-competition right.
However, in practice, when an employee deliberately work with a competing company in secret, not only is it difficult to provide evidence as a company, investigating for evidence may accidentally results in infringement privacy. In particular, if a company entrusts a company to investigate which have practices such as tracking and installing locators in private vehicles. Article 1033 of the Civil Code also expressly restricts this behavior:
Unless otherwise prescribed by the law or specifically agreed by the right holders, no organization or individual may carry out any of the following acts:  
(I) Disturbing the private peace of others by means of telephone, text message, instant messaging tools, e-mails, leaflets, etc.;
(II) Entering, taking pictures of or peeping into others' houses or hotel rooms or other private space;
(III) Taking pictures of, peeping into, eavesdropping, or making public the private activities of others;
(IV) Taking pictures of or peeping into any private part of the body of another person;
(V) Dealing with the confidential information of others; or
(VI)Infringing upon the right to privacy of others by other means.”
We believe that some audio and video materials taken in public places are generally not subject of infringement, but if the tracking and shooting of the party’s whereabouts are used, it is likely to be suspected as an infringement of privacy. Employers should beware of stepping on mines when collecting evidence by themselves. Common forms of evidence proof include publicly obtained work photos of employees in WeChat, introduction of team building activities with employees of the other company, calling and recording the front desk of competitors and sending delivery for the parties to sign for records, electronic work licenses, social security provident funds and individual tax payment records, etc.
 
4. Suggestions for employers to protect their trade secrets
According to the recent amendments, the newly promulgated Civil Code, Anti-Unfair Competition Law, Regulations on Several Issues Concerning the Application of Law in the Trial of Civil Cases Infringing Trade Secrets, etc., the development of the economy and the progress of science and technology, China’s protection of trade secrets has entered a new stage of massive development. Provisions on Several Issues Concerning the Application of Law in the Trial of Civil Cases of Infringement of Commercial Secrets, Article 6
If, under normal circumstances, it is sufficient to prevent the disclosure of trade secrets, the people's court shall find that the right-holder has taken appropriate confidentiality measures:
(1) signed a non-disclosure agreement or agreed on the obligation of confidentiality in the contract;
(2) To make confidential requests for confidentiality to employees, former employees, suppliers, customers, visitors, etc. who have access to and obtain trade secrets by means of articles of association, training, rules and regulations, written notification, etc.;
(3) restricting visitors or carrying out differentiated management of confidential factories, workshops and other production and operation places;
(4) distinguishing and managing trade secrets and their carriers by marking, classification, isolation, encryption, sealing, restricting the range of persons that can be contacted or obtained; and
(5) prohibiting or restricting the use, access, storage and reproduction of computer equipment, electronic equipment, network equipment, storage equipment, software, etc;
(6) Requiring the separated employees to register, return, remove, destroy the trade secrets they have come into contact with or obtain and their carriers, and continue to assume the obligation of confidentiality;
(7) taking other reasonable confidentiality measures.
From the perspective of the company's practical operations, firstly the company must establish a sound management system involving the protection of trade secrets, especially the Employee Handbook, Confidentiality System, and Labor Contract confidentiality clauses. Secondly, necessary confidentiality measures must be taken, such as adopting different levels and grades of confidentiality for the company’s trade secrets, setting up different levels of confidentiality authority and responsibilities, signing a confidentiality agreement and non-competition agreement, setting a confidentiality period and fines (liquidated damages, compensation, criminal liability, etc.) etc. Thirdly, to sign the non-competition agreement with relevant employees in a timely manner. Generally, the time point for signing is during the onboarding, and when the employee is adjusted to an important core position. The non-competition agreement must be signed at that time; sign the agreement in advance before the employment is terminated. Fourth, strengthen internal management, for a timely detection of problems and financial losses.

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