Trade Secrets Protection in China FAQ

2020-07-31

What are trade secrets?

Trade secrets are intellectual property (IP) rights on confidential information which may be sold or licensed.

In general, to qualify as a trade secret, the information must be:

  • commercially valuable because it is secret
  • be known only to a limited group of persons
  • be subject to reasonable steps taken by the rightful holder of the information to keep it secret, including the use of confidentiality agreements for business partners and employees

What types of trade secrets are there?

Trade secrets can be divided into two types: technical information and commercial information. Here's a sampling of what trade secrets can protect:

Technical Trade Secrets

  • Product Recipe: a list of ingredients (materials and subassemblies) and their quantities.
  • Manufacturing Process: the steps through which raw materials are transformed into a final product
  • Know-How: practical knowledge to solve key technical problems
  • Data: P&ID (drafts), laboratory reports, experimental data, etc.

Commercial Trade Secrets

  • Management secrets: corporation organizational structure, personnel management, management experience, etc.
  • Financial secrets: cost accounting, profit and loss, investment plan, etc.
  • Business secrets: business model, R&D plan, business strategy, etc.
  • Transaction secrets: customer list, supply chain, etc.
types of trade secrets

Chinese Legal Framework Protecting Trade Secrets

  • “CIVIL CODE OF THE PEOPLE'S REPUBLIC OF CHINA”, Article 123: Civil subjects enjoy intellectual property rights in accordance with the law. Intellectual property rights are the proprietary rights enjoyed by the right holders, in accordance with law in respect of the following objects.
  • “CIVIL CODE OF THE PEOPLE'S REPUBLIC OF CHINA”, Chapter 20: Confidentiality clauses in technology development agreements, technology transfer agreements, technology license agreements, technology consulting contracts, technical service agreements or separately signed confidentiality agreements.
  • “Anti-Unfair Competition Law of the People's Republic of China”(AUCL), Article 21: Where a business or any other natural person, legal person or unincorporated organization infringes upon a trade secret in violation of Article 9 of this Law, the supervisory inspection department shall order the violator to cease the illegal act, shall confiscate any illegal income, and impose a fine of not less than 100,000 yuan nor more than 1 million yuan, or, if the circumstances are serious, a fine of not less than 500,000 yuan nor more than 5 million yuan.
  • “Criminal Law of the People's Republic of China”, Article 219: Whoever commits any of the following acts of infringing on business secrets and thus causes heavy losses to the obligee shall be sentenced to fixed-term imprisonment of not more than three years or criminal detention and shall also, or shall only, be fined; if the consequences are especially serious, he shall be sentenced to fixed-term imprisonment of not less than three years but not more than seven years and shall also be fined.

As a foreign-funded enterprise, how to protect my trade secret in China?

With the market competition getting more and more intense, foreign-funded enterprises in China have encountered tough problems in trade secrets violations. Leakages of both customer information and R&D information are among the most prominent issues. The main reason for this phenomenon is insufficient awareness and countermeasures.

  • Cognitive bias: Little awareness of management related business information.
  • Shortage of specialized agencies: chaotic division of work
  • Imperfect protection measures: neglection of in-house trade secret theft.
  • Protection measures lag: difficult to deal with the problems in the current era of rapid development of information network

How to build my trade secret protection system?

  • The first level: rational management of business secrets
  • The second level: effectively deal with the crisis of trade secret leakage
  • The third level: claim for compensation for infringement of trade secret

What cause trade secret leaks?

  • Enterprise cognitive bias
  • Lack of in-house management organization
  • Imperfect protection measures
  • Lack of attention to information technology

4 Common Ways of Trade Secrets Theft

  • Eavesdropping
  • Using of Internet technology
  • Bribing relevant staff
  • Commercial espionage

What are some examples of trade secrets?

Confidential documents:

  • Print media, including confidential documents, contracts, agreements, archives, telegrams, letters, data statistics, charts, maps, photographs, books and periodicals, other graphic and text materials with secret information
  • Digital media, including hard disks, floppy disks, U disks, magnetic tapes, recording tapes, video tapes, etc. that can record info
  • Photoelectric resources, including optical disks, radio waves, optical fibers, etc., which transmit secret information by recording optical and electrical signals

Confidential equipment:

  • Equipment, instruments and products directly containing trade secret information, and equipment, instruments or products that can obtain trade secret information through observation, testing and analysis

How Can You Protect Your Company' s Trade Secret?

  • Limit the scope of confidential information, and inform only the relevant, need to know personnel
  • Physically isolate and protect company' s trade secrets
  • Mark documents containing company' s trade secrets
  • Use passwords or codes for confidential information
  • Sign a confidentiality agreement
  • Restrict access to company' s facilities, that contain confidential information such as machinery or workshops. Require all visitors to sign in when entering
  • Other reasonable measures to ensure information confidentiality

Three Indicators of Confidentiality Measures

  • Whether it's a trade secret


    For the information we need to protect, we must carefully identify whether it belongs to a trade secret and has the following characteristics: it is not generally known to the public, confers economic benefit on its holder, the holder makes reasonable efforts to maintain its secrecy. If the object is falsely protected as a trade secret, it is likely to fall into unfavorable situation in the later litigation.

  • Scope of trade secrets


    Many trade secrets determined by confidentiality measures are not clear. Some companies have formulated a wide range of trade secrets for convenience. For example, some companies stipulated that all financial and personnel arrangements held by the company belong to trade secrets. It is common in practice to expand the scope of trade secrets and set up flexible boundaries. But few of them will be deemed valid in the litigation stage. The most recommended approach is to specify the confidentiality measures.

  • Whether the confidentiality measures are reasonable


    In legal practice, whether the confidentiality measures are taken is a key factor. Confidentiality measures should be made known to relevant personnel in a reasonable manner.

6 Key Points of Confidentiality Measures

  • The strategic choice of company' s core interest protection
  • Confidentiality measures of secret departments and units
  • Confidentiality measures for relevant types of trade secret
  • Computer information system confidentiality measures
  • Management and review of externally released information
  • Comprehensive management of secret-related personnel

Who may leak your company's trade secret?

Management personnel

  • Middle and senior management staff
  • Administrative, human, legal, financial management personnel

R&D personnel

  • Key staff engaged in technology research and development
  • Head of technical department

Sales staff

  • Needs to understand company' s trade secrets for sale promotion
  • Knows trade secrets such as sales data

External personnel

  • Visitors
  • Partners or future partners in negotiation process
  • Cleaning, maintenance, property management, etc

Three Trade Secret Enforcement Options in China

Administrative Enforcement

  • According to the "Anti-Unfair Competition Law of the People's Republic of China", specific measures should be taken by administrative organs, but in practice, the efficiency and effectiveness are not satisfactory.

Criminal Enforcement

  • Advantages: Strong evidence collection, relatively less energy spent, low cost.
  • Disadvantages: The standard of conviction and sentencing for the crime of trade secrets violation is relatively strict, it is not easy to convict, and the efficiency is generally low. The entire investigation and prosecution process require a lot of time. Moreover, criminal cases belong to the scope of public prosecution, and there is little room for maneuver.

Civil Enforcement

  • Advantages: the parties can have a better control over the litigation process, with choice of arbitration or litigation, mediation or withdrawal of the lawsuit, flexible and diverse ways.
  • Disadvantages: The cost of civil litigation or arbitration is relatively high, and the burden of proof on the plaintiff is heavy, there are less ways to collect evidence, litigation is quite difficult.