Answer: At present, China’s laws and court decisions lack clear legal rules and stable judgment results in dealing with the issue of employees’ behavior of customers poaching. The purpose of this article is to deduce a reasonable rule for analyzing customer poaching and provide a guidance for predicting outcome of customer poaching issue. Average readers can skip the detailed legal analysis below and go straight to the conclusion of our answers to the questions.
Although the current judicial decisions tend to reduce the issue to whether customer information constitutes a trade secret, from the perspective of these decisions, the court’s decisions appear to revolve around three types of factors to reach the conclusion of whether there is an infringement.
The first factor is the consideration of the legitimacy of the defendant’s behavior. This factor should probably be the most important consideration, because the examination of trade secret infringement cases itself is to examine the illegality of infringement. Article 2 of the Supreme Court’s regulation concerning trade secrets also refers to “obtaining the trade secrets of the right holder by unlawful means”. For example, in the case of Hou Lanyu before the Zhejiang High Court in 2020, the employee of a patent office took advantage of her work to obtain in-depth information about customers. Although she signed a commitment not to take away customers when she left, she still poached several important customers in violation of the commitment and confidentiality agreement. The Zhejiang Provincial High Court held that even if these customers voluntarily traded with the employee out of trust, the employee’s behavior was still accountable.1Hou Lanyu and Hangzhou Hangcheng Patent Office Co., Ltd. Civil Ruling of Zhejiang Provincial People’s High Court (2020) Zhe Min Shen No.1941. In the case, the staff of the Patent Office obtained in-depth information of customers and took away important long-term customers. The court held that this constituted a trade secret infringement, even if the customer voluntarily traded with the employee, because the employee promised not to take the customer away when she left, there was accountability.
The second factor is the interest of the right holder. The Article 2 of the aforementioned Supreme Court’s regulation refers to customer relationship as “long-term stable transactions”, implying that long-term customers are an important interest of the right holder. In the case of Luoyang Ruichang Environmental Engineering Co., Ltd. in 2020, the Supreme Court pointed out “analyzing the time, manpower, and material costs invested by the right holder in the development of customers, as well as the long-term and stable transactions between the two parties” to assist in judging whether the information constituted “information not known to the public”.2Luoyang Ruichang Environmental Engineering Co., Ltd. and Luoyang Mingyuan Petrochemical Technology Co., Ltd. and other civil disputes over infringement of trade secrets and technical secrets Civil Judgment of Second Instance Civil Judgment of the Supreme People’s Court of the People’s Republic of China (2020) ZGFZMZ No.726. Hangzhou Jingda Electronic Technology Co., Ltd. and Chen Aiping Infringement of Trade Secrets Dispute Appeal Case Zhejiang Provincial People’s High Court Civil Judgment (2004) Zhe Min San Zhong Zi No.156. The court held that although some customer information is publicly available, the company has worked hard to accumulate and collate such information, which belongs to trade secrets. Finally, the court ruled that the employee’s illegal acquisition was an infringement of trade secret, but did not constitute the use of trade secrets, the court awarded a discretionary compensation.This also implies that the right holder’s input is related to their interests in the customer relationship. Therefore, the more long-term customers are, the more customers invested in development of the customer, and the more customers that have been poached, the greater the rights and interests of the right holder, and the more trade secrets need to be protected.
The third category of factors are interests of third party and general public. The aforementioned Article 2 of the Supreme Court’s regulation on voluntary transactions by customers out of trust in employees implies that the right of customers to freely choice of suppliers should not be excessively restricted. For example, in the case of Beijing Lima Software Information Technology Co., Ltd. in 2004, the Beijing High People’s Court held that “the demander of a product or service has the right to freely choose their trading partners” and that “the customer’s right to freely choose the trading partner should be respected”. The court of Yiwu City, Zhejiang Province, also pointed out in the case of Ningbo Luzun International Trade Co., Ltd. in 2019 that “customers have the right to freely choose the plaintiff or other market entities in conducting their transactions”.3Beijing Lima Software Information Technology Co., Ltd. and Beijing Institute of Machinery Industry Automation, etc. (Civil Judgment of Beijing High Court (2004) GMZZ No.800) on the Dispute over Infringement of Trade Secrets and Unfair Competition. The court held that “in market competition, in general, the demander of products or services has the right to freely choose the trading partner. In this case, six companies, including Zhuzhou Electric Locomotive Research Institute, Nanyang Explosion-proof Group Co., Ltd., Harbin Volkswagen Food Group Co., Ltd., Changde Tobacco Machinery Co., Ltd. and Qinhuangdao Tobacco Machinery Company Limited, Changchun Railway Passenger Car Company Limited, turned to the Automation because of personnel changes within Lima Software Company. Their right to freely choose their trading partners should be respected, and there is nothing wrong with the Automation trading with them.” Ningbo Luzun International Trade Co., Ltd. and Shen Shanqing, Yiwu Borui Import and Export Co., Ltd. Civil Judgment of First Instance on Infringement of Trade Secrets, Zhejiang Yiwu People’s Court Civil Judgment (2019) Zhe 0782 Minchu No.4102. The court held that “from the perspective of maintaining free competition in the market, the customer in the trade secret claimed by the plaintiff has the right to freely choose the plaintiff or other market entities to conduct transactions. The value of the trade secret is mainly reflected in providing conditions and convenience for the formation of transactions with the customer. The existence of the trade secret does not necessarily lead to transactions. The trade secret can bring weak competitive advantage and low economic value to the plaintiff.”
Fundamentally, the rules of protecting trade secrets should be set at a reasonable balance between punishing employees’ unlawful acts, protecting legitimate rights and interests of right holders, and properly taking into account public interests, including the interests of third parties (such as customers).
Therefore, our answer to “whether customer poaching constitutes infringement on trade secret” is as follows: we should leap out of the confinement of whether specific customer information constitutes a trade secret to consider the balance of rights and interests of the right holder, the defendant, and the third party and the general public.
First, when considering employees’ unlawful acts, the three conditions of trade secrets should be taken into account, including non-publicity nature and the depth of customer information, confidentiality measures, and business value. But more importantly, it is to assess the impropriety of employee behavior, including whether customer information was stolen or acquired legitimately, the reasonableness of contacting and transacting with clients, whether the employee established a company before departure, the presence of explicit commitments against customer poaching, awareness of the significant harm to the company’s operations through customer poaching, and the involvement in unlawful activities such as fraud, coercion, and theft, etc.
Second, consideration should also be given to the legitimacy and significance of the rights related to the right holders, including the company’s long-term investment in customer development and relationships, the extent of the impact on the company by customer poaching, and even factors such as favorable employment terms for the employee in question. Lastly, the consideration should extend to third-party or public interests, encompassing whether clients are aware of the employee’s obligations regarding confidentiality or non-solicitation and the duration of their cooperation with the right holders. Other factors may include whether there is collusion between the employee and the third party and whether the prohibition of transactions between the customer and the employee’s company is fair.
Considering these factors in a whole, it is ultimately necessary to judge whether it is fair and reasonable for the employee to poach the company’s customers without punishment. It is no longer necessary to narrowly confine the problem to whether the customer information constitutes a trade secret. Considering the above factors, if it is unfair and unreasonable not to punish the employee for customers poaching, the employee’s behavior of customers poaching will constitute infringement. Otherwise, it does not constitute infringement.
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
- 1Hou Lanyu and Hangzhou Hangcheng Patent Office Co., Ltd. Civil Ruling of Zhejiang Provincial People’s High Court (2020) Zhe Min Shen No.1941. In the case, the staff of the Patent Office obtained in-depth information of customers and took away important long-term customers. The court held that this constituted a trade secret infringement, even if the customer voluntarily traded with the employee, because the employee promised not to take the customer away when she left, there was accountability.
- 2Luoyang Ruichang Environmental Engineering Co., Ltd. and Luoyang Mingyuan Petrochemical Technology Co., Ltd. and other civil disputes over infringement of trade secrets and technical secrets Civil Judgment of Second Instance Civil Judgment of the Supreme People’s Court of the People’s Republic of China (2020) ZGFZMZ No.726. Hangzhou Jingda Electronic Technology Co., Ltd. and Chen Aiping Infringement of Trade Secrets Dispute Appeal Case Zhejiang Provincial People’s High Court Civil Judgment (2004) Zhe Min San Zhong Zi No.156. The court held that although some customer information is publicly available, the company has worked hard to accumulate and collate such information, which belongs to trade secrets. Finally, the court ruled that the employee’s illegal acquisition was an infringement of trade secret, but did not constitute the use of trade secrets, the court awarded a discretionary compensation.
- 3Beijing Lima Software Information Technology Co., Ltd. and Beijing Institute of Machinery Industry Automation, etc. (Civil Judgment of Beijing High Court (2004) GMZZ No.800) on the Dispute over Infringement of Trade Secrets and Unfair Competition. The court held that “in market competition, in general, the demander of products or services has the right to freely choose the trading partner. In this case, six companies, including Zhuzhou Electric Locomotive Research Institute, Nanyang Explosion-proof Group Co., Ltd., Harbin Volkswagen Food Group Co., Ltd., Changde Tobacco Machinery Co., Ltd. and Qinhuangdao Tobacco Machinery Company Limited, Changchun Railway Passenger Car Company Limited, turned to the Automation because of personnel changes within Lima Software Company. Their right to freely choose their trading partners should be respected, and there is nothing wrong with the Automation trading with them.” Ningbo Luzun International Trade Co., Ltd. and Shen Shanqing, Yiwu Borui Import and Export Co., Ltd. Civil Judgment of First Instance on Infringement of Trade Secrets, Zhejiang Yiwu People’s Court Civil Judgment (2019) Zhe 0782 Minchu No.4102. The court held that “from the perspective of maintaining free competition in the market, the customer in the trade secret claimed by the plaintiff has the right to freely choose the plaintiff or other market entities to conduct transactions. The value of the trade secret is mainly reflected in providing conditions and convenience for the formation of transactions with the customer. The existence of the trade secret does not necessarily lead to transactions. The trade secret can bring weak competitive advantage and low economic value to the plaintiff.”