Articles
Engineers know the intrinsic value of intellectual property to their business. For those doing business in China, the safeguarding of intellectual property, and above all trade secrets – such as patent applications, business plans and financial data – is of paramount concern.
China’s anti-unfair competition law and criminal law define a trade secret as a specific type of confidential information that gives an economic advantage to a company, at least for so long as that information is kept confidential. So it is important when looking to enforce rights to trade secrets to show the steps that have been taken to preserve confidentiality.
There are a few simple ways whereby companies can minimise risk. At the outset, consider keeping trade secrets offshore, if possible. If a trade secret needs to be brought to China, consider ‘storing’ the information at separate locations so that staff at any one site do not have full knowledge of the whole.
Where the trade secret is in writing, mark it as “confidential” and copyright the information.
Limit access to classified information to those on a need-to-know basis and use locks (mechanical or electronic) to prevent unauthorised access. Update passwords at least every two months, and track data flows and file transfers.
By far the greatest source of trade secret theft in China is a company’s own employees, so impose confidentiality and non‑competition obligations on all “ordinary employees” in their standard contracts. You should ask management staff and others who have access to trade secrets to sign a separate and stricter confidentiality and non-competition contract with a liquidated damages clause.
This separate contract may allow enforcement without going through the labour arbitration that is required for most employment disputes. Then, specify in contracts and the firm’s manual that theft of a trade secret constitutes grounds for termination.
Remind departing employees of their continuing contractual obligation not to use or disclose trade secrets. Finally, be ready to take prompt action after identifying a problem: for example, recovering an employee’s laptop, filing a case with the Administration of Industry and Commerce and public security bureau, and applying for preliminary injunctive relief.
Protection can be enhanced by considering other potential sources of leaks – business partners, suppliers and customers. Partner companies and their employees, and firms that supply or purchase from your business, may have the opportunity to misappropriate your secrets if they have access to technical data.
Consider also whether your customers could gain access to and misuse your proprietary information, a common problem in China.
Conduct basic due diligence on the intellectual property (IP) compliance history of your potential business partner or supplier. Some international companies fail even to run the Chinese equivalent of a Google search to determine whether an organisation has been associated with IP theft.
Before sharing confidential information, establish a non-disclosure agreement not just with the company that will be your partner or supplier, but also its employees who have access. Employee turnover in China is high, so insist that your counterpart impose on its employees the same non-disclosure obligations and specify that they will continue for a reasonable period after expiration of the employment relationship.
You may also want to incorporate some of the following in your contracts: an acknowledgement of your ownership of the trade secrets and a covenant that they will be used by the partner/supplier only for the specified purposes; a covenant that the partner/supplier will not claim ownership or attempt to register any trade secret; the right to conduct and a duty to cooperate with technology audits; an obligation to comply with your trade secret protection policies; and your right to terminate the contract for trade secret theft, with the right also to claim damages.
While there is improved sensitivity to IP in courts in China, the best course of action for companies is to ensure they have taken steps to prevent the theft of trade secrets. n