Featuring three essential Q&As on the definition of trade secrets, common risks, and enforcement strategies.

In today’s fiercely competitive market, trade secrets have become one of the most vital intangible assets for businesses. As a cornerstone of intellectual property protection and a driver of competitive advantage, safeguarding trade secrets is more critical than ever. However, trade secret disputes - often triggered by employee misconduct or post-employment leaks - are on the rise. Effective management of employees with access to confidential information is essential for trade secret protection. Establishing sound trade secret policies, not only helps prevent and respond to challenges, but also builds a strong line of defence for safeguarding corporate interests and enabling sustainable growth in a competitive marketplace.

Addressing hot-button issues such as the fundamentals of trade secrets, common operational risks, and practical enforcement and remedy strategies, we have selected three key Q&As from Chapter 2: Protection of Trade Secrets and Management of Employees of the Practical Q&A Guide to Cutting-Edge Intellectual Property Issues, co-authored by Wolters Kluwer, Rouse, and its strategic partner Lusheng Law Firm.

Selected Practical Q&As

【Definition, Scope and Types of Trade Secrets】What is a trade secret? What are the statutory requirements for constituting a trade secret? What are the general types of trade secrets?

Article 9 of China’s Anti-Unfair Competition Law defines “trade secrets” as “Commercial information – such as technical information and business information – that is unknown to the public, has commercial value, and has been subject to corresponding confidentiality measures by the right holder.” According to the above definition, the commercial information involved in the business activities of an organization must meet the following three statutory requirements to qualify as a trade secret:

• Not known to the public, i.e. secrecy. According to Article 3 of the Provisions of the Supreme People’s Court on Several Issues Concerning the Application of Law in the Trial of Civil Cases of Infringement of Trade Secrets (hereinafter referred to as the “Provisions”), being not known to the public generally refers to not generally known and easily accessible to relevant persons in the field at the time the infringement act in question took place.

“Relevant persons in the field” typically include the producers, sellers, R&D personnel and other persons involved in the industries related to the information, and who derive economic value from the use of trade secrets. This includes competitors and employees of the information holder.

It is different from the expression of “technicians in the relevant technical field” as described in China’s Patent Law, as patents and trade secrets serve distinct legal interests and relationships. While patents derive value from technological innovation, trade secrets primarily hold value in market competition. Consequently, the scope of those who can recognize trade secret value is defined by economic activity rather than purely technical expertise.

“Not generally known” emphasizes that trade secrets should be distinguished from publicly known information in the said field, while “not easily accessible” requires that the formation process of trade secrets is relatively difficult, requires a certain degree of labour and cost, and that the information that relevant persons can easily know through lawful channels should be excluded from the scope of protection of trade secrets.

Article 4 of the Provisions specifies the common circumstances where information known to the public does not constitute a trade secret:

( I ) The information is common knowledge or industry practice in the field to which it belongs.

( II ) The information only involves the size, structure, materials and simple combination of components of the product, and can be directly obtained by relevant personnel in the field by observing the product on the market.

( III ) The information has already been disclosed through publications or other media.

( IV ) The information has already been disclosed through public reports or exhibitions.

( V ) Relevant persons in the field may obtain the information from other public channels.

It should be noted that the new information formed after sorting, improving and processing the information known to the public may constitute a trade secret if it meets the requirements of Article 3 outlined above.

• It has commercial value. Article 7 of the Provisions provides that if the information requested by the right holder derives actual or potential commercial value by not being known to the public, then it may be deemed to have said commercial value. The interim results of production and business activities can also be deemed to have commercial value.

In practice, the value of trade secrets is easy to prove. According to Article 7 of the Reference for the Presentation of Evidence in Civil Cases of Trade Secret Infringement, issued by the Beijing Intellectual Property Court, “The value of trade secrets can be proven based on factors such as the cost of research and development, the benefits obtained or that could be obtained from implementing the trade secret, and the period during which the competitive advantage can be maintained.”

• Confidentiality, i.e. the confidentiality measures taken by the right holder. Article 5 of the Provisions provides that: “The court will recognize confidentiality measures as valid if they were implemented by the rights holder before the alleged infringement and were intended to prevent the disclosure of trade secrets. The assessment of whether appropriate confidentiality measures were in place is based on a comprehensive evaluation of factors, including the trade secret’s nature and its carrier, the trade secret’s commercial value, the identifiability of the confidentiality measures, the correspondence between the confidentiality measures and the trade secret, and the rights holder’s willingness to maintain confidentiality.”

Article 6 of the Provisions enumerates the common circumstances in which corresponding confidentiality measures are taken:

( I ) Signing a confidentiality agreement or stipulating confidentiality obligations in the contract.

( II ) Putting forward the confidentiality requirements to employees, former employees, suppliers, customers, visitors and others who may have access to or obtain trade secrets through means such as articles of association, training, rules and regulations, or written notices.

( III )  Limiting visitors to factories, workshops or other production and business sites where trade secrets are used, or implementing tiered access controls based on roles and clearance levels.

( IV ) Differentiating and managing trade secrets and their carriers by means such as marking, classifying, isolating, encrypting, sealing or limiting the scope of persons who can access or obtain them.( V ) Implementing measures to prohibit or restrict the use, access, storage or reproduction of trade secrets through computer equipment, electronic devices, network systems, storage media, software or other tools that could be used to obtain or access such information.

( VI ) Requiring that departing employees register, return, delete or destroy any trade secrets or related materials they have accessed or obtained, and that said employees continue to bear confidentiality obligations.

Trade secrets generally fall into the categories of technical secrets or business secrets.

According to Article 1 of the Provisions, technical secrets include information related to technology, such as structures, raw materials, components, formulas, samples, processes, methods and steps, algorithms, data, computer programs and related documentation.

On the other hand, business secrets pertain to commercial activities and include information such as business strategies, management practices, sales and financial data, operational plans, samples, bidding materials, customer information, and business-related data.

In practice, common technical secrets include a wide range of proprietary knowledge, such as Coca-Cola’s secret formula, clinical trial data of unmarketed drugs, source code of computer software, and the production processes and equipment used in chemical manufacturing. To establish that certain information qualifies as a technical secret, courts may rely on judicial appraisal, technical evaluation, or other evidentiary methods.

Among business secrets, customer information is one of the most frequently contested trade secrets. This may include a customer’s name, address, contact details, transaction habits, purchasing intentions and other commercially valuable details.

However, not all customer-related data automatically qualifies as a trade secret. Basic customer lists or transaction records accumulated by a company do not, by default, receive trade secret protection. Only more detailed and proprietary insights – such as a customer’s transaction preferences, purchasing intentions, or other non-public business intelligence – can be protected as a trade secret.

For example:

In the (2020) Yu Zhi Min Zhong No. 539 case, the plaintiff’s customer list contained only names, telephone number and addresses – details that were publicly accessible. As the list lacked deeper, non-public information – such as trading habits and intentions – the information in the customer list did not constitute a trade secret.

In the case (2019) Yue 03 Min Zhong No. 4816, the plaintiff’s customer information included not only names, but also detailed transaction habits, purchasing intentions, product preferences, payment methods, document requirements, and quality and packaging specifications. This information had been compiled through repeated transactions and direct communication, making it neither generally known nor easily obtainable by others in the industry. As a result, the court ruled that it constituted a trade secret.

【Sorting Out and Checking the Risk of Trade Secret Leakage】Which aspects of a company’s business activities and organization are prone to causing trade secret leakage? 

“Prevention before it happens” is the core objective of trade secret management, as the loss of a trade secret can cause irreparable damage to an organization’s competitiveness. Organizations must thus identify and understand potential risk points that could lead to trade secret leaks in their operations. Regular assessments and inspections of these risks are essential to preventing breaches.

In practice, trade secret leaks most commonly occur in the following scenarios:

• Employees with access to trade secrets pose a significant risk when leaving an organization. To mitigate this risk, companies should take the following steps:

(1) Identify and inventory all confidential information that the departing employee has been exposed to during their employment.

(2)  Check whether the IT equipment of the departing employee has any records of illegal use of the network or the transmission of confidential information.

(3)  Inspect and supervise the handover process of confidential information, ensuring that any confidential documents and office equipment are returned to the company by departing employees.

(4) Check whether a confidentiality agreement or non-compete agreement has been signed with the departing employee, and ensure that the departing employee is clear about the content and scope of the confidentiality obligation.

• Competitors bribe employees into sharing trade secrets. In practice, trade secrets are also often leaked by employees in exchange for direct economic benefits.
  
  For example, in the “rubber antioxidant” trade infringement case, the defendant company acquired the plaintiff’s secret technology and process by bribing the plaintiff’s technical personnel. The information was then used to design and build the defendant’s own production line.

To minimize the risk of internal leaks, companies need to implement the following preventive measures in their daily operations:

(1) Regularly review the access logs to trade secret documents to detect any unusual activity.

(2) Interview employees making abnormal visits to understand and verify the reason and purpose of the visits.

(3) Regularly review the company’s internal monitoring system to identify whether employees have violated regulations by storing or sending confidential documents to external parties.

• Failure to take adequate measures to protect trade secrets in external cooperation. Organizations often engage in external partnerships, such as working with factories or distributors. Negligence in this process can also easily lead to the disclosure of trade secrets. Organizations should pay attention to the following matters when cooperating with third parties:

(1) Clearly define what constitutes trade secret information and require third parties to sign a confidentiality agreement.

(2) Take necessary measures, such as covering up confidential information in documents, thereby preventing the partner from knowing the complete trade secret information.

(3) Require partners to implement appropriate confidentiality measures to prevent the disclosure of trade secrets.

【Remedies for Trade Secret Infringement】Punitive damages of one to five times the amount of economic loss may also be claimed for malicious infringement of trade secrets. What are the ways for an organization to seek relief if it discovers that a trade secret has been infringed upon?

The existing legal framework for the protection of trade secrets provides organizations with three avenues for enforcement: civil, administrative and criminal:

• Civil Route. As the rights holder of trade secrets, an organization may file a trade secret infringement lawsuit with the people’s court, requesting the infringer to stop the infringement and compensate for economic losses. For malicious infringement of trade secrets, punitive damages of one to five times the amount of economic loss may also be claimed.
• Administrative route. Organizations may also report suspected infringements to the market regulation department. If the investigation determines that the trade secrets are infringed upon, the supervision and inspection department may order the cessation of the infringing behaviour, confiscate the illegal gains, and impose a fine of up to 1 million yuan. In severe circumstances, the fine can be up to 5 million yuan.
• Criminal route. If an organization’s core trade secrets are infringed upon, causing serious losses, then the organization may also directly report the case to the public security authorities. According to the standards for filing and prosecuting criminal cases of infringement of trade secrets, if the amount of losses or illegal gains exceeds 300,000 yuan, the case meets the threshold for filing a criminal case.

It should be noted that the above three remedies are not mutually exclusive;  organizations can choose one of the three or use all three together. For example, in the Haode Machinery series of trade secret protection cases, the Shanghai Songjiang District Administration for Market Regulation, the Shanghai Intellectual Property Court and the Songjiang District People’s Procuratorate severely cracked down on the infringement of trade secrets through a combination of civil, administrative and criminal enforcement actions.

In practice, due to the covert nature of trade secret infringement and the limited investigative resources available to the rights holder, organizations often seek criminal or administrative enforcement first, followed by civil litigation to obtain stronger evidence and higher compensation. For example, in a trade secret infringement case involving a rubber antioxidant, the rights holder first reported the case to the public security authorities, where a judicial appraisal determined the amount of loss to be 201 million yuan. Subsequently, the rights holder filed a civil lawsuit, claiming 201 million yuan in damages, which the court fully supported.

Other Notable Q&As from This Chapter

• 【Measures for the Protection of Trade Secrets】What technical measures can organizations adopt to prevent trade secrets from being leaked?  
• 【Reverse Engineering】Is reverse engineering a legal way to obtain trade secrets?
• 【Circulation and Control of Trade Secrets】What measures can organizations take to monitor the circulation of trade secrets and effectively reduce the risk of leakage?
• 【Management of Confidential Employees】How can organizations manage confidential employees and effectively avoid the leakage of trade secrets?
• 【Scope of Confidentiality Agreement/Clause】How to limit the content and scope of confidentiality in the confidentiality agreement/clause signed between the organization and its employees?
• 【Non-compete Agreement and Compensation】Which employees in the organization are eligible for non-compete agreements? How to agree on non-compete compensation?
• 【Liquidated Damages for Confidentiality Agreements】Can liquidated damages be stipulated in the confidentiality agreement signed between the organization and the employee?
• 【Handling of Employees Who Leak Trade Secrets】Can an organization directly terminate the labour contract if it finds that an employee has violated the organization confidentiality system
• 【Risk of Hiring New Employees】Does the organization, as the current employer, need to bear legal liability if it unknowingly uses the trade secrets of a new employee’s former employer?
• 【The Difference Between an Employee’s Experience and Knowledge and Trade Secrets】How to distinguish between an employee’s tacit knowledge and trade secrets?

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In collaboration with our strategic partner Lusheng in China and Wolters Kluwer, Rouse has developed a valuable resource for rightsholders: “The Practical Q&A Guide to Cutting-Edge Intellectual Property Issues in China”. This guide, compiled by over 30 senior China IP experts from the two leading IP firms, addresses the key concerns of businesses by providing insights on patents, trade marks, copyright, trade secrets, internet unfair competition, intellectual property investment, and punitive damages in an accessible Q&A format. It offers readers the latest legal interpretations, case studies, and practical guidance applicable to their operations.

To request a full copy, please complete the form through the link here.

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Chapter Contributors

Landy Jiang, Managing Partner, Global Co-Deputy Head of Dispute Resolution, Lusheng Law Firm, ljiang@lushenglawyers.com

Terry Lu, Associate, Lusheng Law Firm, tlu@lushenglawyers.com

TAGS

• Tradesecrets
• risk control
• employee management