Answer: At present, there are fundamental defects in the legal framework of trade secrets in China. They are mainly manifested in the liability for trade secret infringement concerning customer information.
The Chinese legal system regards trade secrets as a kind of property right, granting them indefinite protection as long as the trade secret remains confidential. However, there are numerous contradictory cases in the judicial practice about whether there should be indefinite protection for the type of trade secrets, customer information.
For example, in the case of Kan He before the Supreme Court in 2021, the employee poached 25 customers of the employer after his resignation and establishment of a new company. The court of the first instance ordered that the infringement of trade secrets of customer information must cease (that is, the transaction with customers was not allowed to continue). The court of the second instance maintained the infringement finding but set aside the order of cessation of infringement. The Supreme Court, in the appeal, simply found that there was no infringement. In many cases, the courts appears to be inclined to consider that cases concerning customer poaching should not simply be decided with order of cessation of infringement, reflecting that the protection of customer’s information as trade secrets should be limited to a reasonable time frame. This is starkly contrasted with the protection of typical trade secrets, such as technical secrets, which enjoy absolute protection against infringement.
In the article “How to construct a reasonable rule in judging whether a customer poaching act constitutes infringement?”, we observed that in response to the problem of customers poaching, we should leap out of the confinement of whether specific customer information constitutes a trade secret, and consider the balance of rights and interests of the right holder, the defendant and the third party and the general public. We may need to rethink the overall institutional framework of trade secrets and non-competition.
China’s trade secret protection and non-competition are developed by drawing lessons from the common law. 1Li Zhian and Liu Jingwen, On the Protection of Trade Secrets and Confidential Information from the Perspective of Common Law, Law of Jiaotong University, 2020, “The trade secret system in China and other civil law countries is inherited from the common law system. the practical experience of the latter has considerable reference value for the development of China’s trade secret system.”The legal framework of restraint of trade in the United Kingdom and New Zealand is based on three types of employer interests, setting three corresponding types of restraint of trade.
The first type of employer interest is the interest in customer protection, which is based on the input of developing customers and the important interests of the employers’ operation concerning those customers. The behavior restriction permitted by law is that employers have the right to require departed employees not to contact (including active and passive) customers, with whom employees have had contacts, for a period of time after the employment termination, so that the employers have a reasonable time period to arrange other personnel to serve the customers. At the end of this transition period, employees are free to contact and trade with these customers in accordance with the principle of free competition. Employers are not required to pay any compensation or allowance as consideration for this restriction.
The second type of employer interest is the protection of trade secret (or confidential information under the common law). In cases where trade secrets are established, the law allows employers to require employees not to engage in competing industries for a reasonable period of time. This protection essentially involves the mandatory imposition, by law, of obligation for departed employees to refrain from engaging in competing industries for a certain period, in addition to the employers’ absolute right of trade secret protection that they have already been entitled to, to build a safeguard buffer for the employee’s illegal use of the employer’s crucial trade secrets causing significant harm. Due to the negative impact of such restrictions on the livelihood of employees, a specific time limit must be set. After this time limit, employees are free to work in a competitive industry. Whether before or after employment termination, employees are prohibited from infringing upon the employer’s trade secrets, and this absolute obligation in protecting trade secrets is distinct from the relative restrictions of non-competition. Employers are also not required to pay any compensation or allowance as consideration for this restriction.
The third type of employer interest is employee stability. The employer’s interests and the legal limits allow the employer to request that departing employees refrain for a certain period from actively enticing others employees to leave together, aiming to avoid disruptions to the employer’s human resources and business operation. Once this restriction period has elapsed, the departing employee is no longer constrained from engaging in such solicitation activities. This restriction, similar to the temporary limitations on contacting clients and engaging in competitive industries, is a legally permissible measure to temporarily restrict employees’ freedom. The purpose is to safeguard the employer’s business operation from short-term severe impacts and disruptions. Employers are still not required to pay any compensation or allowance as consideration for this restriction.
The difference between the common law of the United Kingdom and New Zealand and employment law of China in the protection of customer information is that the former does not classify it as the temporary protection of the second category of employer’s interest, interest in customer protection, which prohibits departed employees from contact or trade with customers of the employer within a certain period of time so as to prevent serious impact on the employer’s business. After the temporary protection period, employees are no longer subject to any restrictions on customer poaching and are free to transact with them. This practice better solves the problem of “since customer information is a trade secret, why can’t the courts order cessation of infringement”, and it strikes a sensible balance between the customer’s free choice of suppliers, the departed employee’s right of free competition, and the reasonable protection of employer’s business rights and interests.
Therefore, China’s legal system for trade secrets and non-competition seems to be able to refer to this overall framework, designating the protection of client information as a temporary measure to safeguard the interests of employers in their customers, rather than forcibly categorizing it as a trade secret. This approach can theoretically resolve the contradiction in China between the legal practice that restricting customer contacts tends to have a time limit and the statutory rules that protecting trade secrets bears no time limit.
This article is a part of our new book“Employment Law in China: A Practical Guide. A book about “What should I do” with case laws.”Stay tuned, and the book will soon be published as an electronic books!
Mr. Dong Wang has been in practice for over 20 years, specializing in business law, including employment law, commercial law, company law, and intellectual property law. Mr. Wang has earned respect and trust from his clients due to his professionalism, fidielty, and kindness.
Email: wangdong@royalaw.com
- 1Li Zhian and Liu Jingwen, On the Protection of Trade Secrets and Confidential Information from the Perspective of Common Law, Law of Jiaotong University, 2020, “The trade secret system in China and other civil law countries is inherited from the common law system. the practical experience of the latter has considerable reference value for the development of China’s trade secret system.”