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An intense business war over trade secrets has erupted between technology intensive companies in recent years, especially among communications technology and new energy automobile enterprises. Trade secret disputes often involve issues such as technical competition, tussles for talent and non-competing restrictions, and the level of internal management directly affects the degree and consequence of the protection of trade secrets. To navigate the threat, companies should become more aware of the legal risks around trade secrets, especially of a criminal nature, to prevent and isolate the risks through compliance.

Causes of risks

China¡¯s Anti-unfair Competition Law provides that trade secrets refer to business information, such as technical and operation information, which is not known to the public, has commercial value, and is subject to corresponding confidentiality measures taken by the right holder.

The Civil Code categorises trade secrets as a type of object within the scope of intellectual property rights, and stipulates civil compensation liability for infringement. From this, it can be clarified that trade secrets are a type of technical and business information, which should simultaneously have the three characteristics of ¡°secrecy¡±, ¡°value¡± and ¡°necessary confidentiality measures¡±. For companies, there are two main reasons why legal risks concerning trade secrets arise:

(1) Improper management. As right holders, companies should take necessary confidentiality measures for trade secrets. The lack of trade secret protection measures, appropriate institutional norms and operating rules may result in loopholes in the use of business secrets and management process, causing trade secret leakage or even infringement of other¡¯s trade secrets, which in turn brings legal risks to the company.

(2) Misbehaviour of employees. Enterprise employees, as users of trade secrets, may also engage in the act of leaking trade secrets if they lack the awareness of protecting them, or are not subject to adequate restrictions on competition, causing companies to passively bear the risk of leakage and losses.

Criminal risks

In addition to economic losses, administrative liabilities and civil compensation, misconduct of a company concerning trade secrets may also lead to criminal liability. Once this happens, the company¡¯s subsequent operation may be seriously impaired.

The Criminal Law stipulates two main charges related to trade secrets: ¡°the crime of infringing trade secrets¡±; and ¡°the crime of stealing, snooping, bribing or illegally providing trade secrets for the benefit of foreigners¡±. Both entities and individuals may be subject to these charges. The crime of infringing trade secrets consists of three types of behaviour:

(1) Obtaining trade secrets of the right holder by theft, bribery, fraud, coercion, electronic intrusion or other improper means;

(2) Disclosing, using or permitting others to use the right holder¡¯s trade secrets obtained by the above-mentioned means; and

(3) Disclosing, using or permitting others to use the trade secrets in the right holder¡¯s possession by violating the obligation of confidentiality or requirement of the right holder to keep trade secrets.

In practice, criminal responsibility only arises when the infringement of trade secrets reaches a certain serious level.

According to the criminal prosecution standard, serious circumstances mainly refer to: (1) infringements that cause losses of more than RMB300,000 (USD41,700) to the trade secret holder; (2) obtaining illegal income of more than RMB300,000 from the infringement of trade secrets; (3) infringements directly leading to major operational difficulties, bankruptcy or closure of the right holder; and (4) other circumstances causing material losses to the right holder.

Trade secrets often have high economic value, and their leakage may cause huge losses. However, the prosecution standards for the crime of infringing trade secrets are relatively low, which also increases the possibility of enterprises or employees being held criminally responsible.

Compliance measures

To avoid potential legal risks, companies should emphasise the use of internal management compliance to strengthen the protection of trade secrets.

Establish a complete compliance management system. For the protection of trade secrets, companies should establish a full-process control system. It is recommended that the key content should be specified in the company¡¯s rules and regulations. The trade secret protection system should be used as a guiding document for compliance, specifying the grading standards for trade secrets, different levels of confidentiality measures, confidentiality operation mechanisms and emergency plans.

Clarify responsibilities of key positions and business processes. For key positions and businesses that may have access to trade secrets, specific measures for trade secret protection should be explicitly added to job responsibilities and business processes as standardised rules that employees must comply with. A trade secret protection compliance manual can be formulated to guide the practical operation of employees, clarifying their obligations to protect trade secrets in different work scenarios.

Emphasise compliance risk identification, early warning and monitoring of trade secrets. The risk of trade secret infringement/leakage often appears in situations such as talent flow, technology introduction and co-operation, investment and M&A.

Companies are advised to carry out key risk investigations and comprehensively identify the risks and loopholes of trade secrets and establish targeted preventive measures.

For example, when dealing with the introduction and outflow of talent, companies should pay attention to the signing of confidentiality agreements, improve the contents of non-competition agreements, and take necessary risk isolation measures. In the introduction and co-operation of technology, companies should carry out sufficient due diligence and formulate their internal confidentiality system and workflow.

In investment and M&A, companies should pay attention to the attribution and handling of trade secrets and in addition improve their working mechanisms, such as the early warning and monitoring mechanism of risks, the internal audit and evaluation mechanism, and the accountability mechanism for violations of their rules and regulations.

Strengthen trade secret compliance training and promotion. For trade secret risks arising from employee misconduct, companies are advised to: strengthen the construction of compliance culture within the company; regularly conduct compliance training for employees, explaining trade secret protection measures, legal responsibilities, internal rewards and punishments; and improve employee compliance awareness.

Huang Xinran is an associate at Starrise Law Firm