How to prevent the disclosure of trade secret by the employee?

Trade secret is one of the key factors which enable the company to
keep competitive in the market. However, due to the increased
competition in the market, many companies are concerned with the
disclosure and improper use of trade secret, among which, the disclosure
of trade secret by the employee is one of the reasons leading to
disclosure of trade secret.

The disclosure of trade secret by the employee can be caused due to one of the following reasons:

1. the employee is induced by other competitive company leading to the disclosure of the trade secret;
2. Due to the lack of complete company regulation for protecting
   confidentiality, the employee works for other competitive company after
   he leaves the company and discloses the trade secret;
3. Regardless of company regulation for confidentiality, the employee
   discloses the trade secret to competitive companies in bad faith after
   he leaves the company;
4. The employee makes use of the trade secret for his own business.

Despite of the disclosure of trade secrets, many companies may find
themselves difficulty to pursue against the employee for legal
liability, which is usually caused due to the lack of sense for
protection of trade secret and the incompletion of company regulation.

So when the regulation for confidentiality is planned, what shall be noted?

I. What is trade secret?

Many companies will include the clause of confidentiality in the
employment contract with the employee. However, according to our
observation, these clauses are very general which may cause dispute over
the definition and scope of trade secret.

Trade secret, according to the definition in the Law of Anti-unfair
Competition, refers to technology information and operation information
which is not known to the public and capable of bringing economic
benefit to the holder, and has practical utility with measures taken by
the holder to keep confidential.

Therefore, trade secret consists of technology information and operation information.

Technology information including programs, designs, manufacturing
processing, product formula, manufacturing method etc; Operation
information including management know-how, client list, goods resource
intelligence, production and marketing strategy, base price of the
tender and content of bid document etc.

When the company defines the scope of confidential information for
protection, it shall fully understand the definition of trade secret by
the law. That means, not all information relating to the company can
constitute trade secret by the law.

II. Confidentiality Agreement

The conclusion of a confidentiality agreement is an important measure
to protect confidential information, which is also one of features to
identify the trade secret. When concluding and enforcing the
confidentiality agreement, the followings shall be noted

1. Definition of Confidential Information

The company shall define the scope of confidential information in accordance with the nature of its business.

If the company is a manufacturer or technology-oriented development
company, it shall particularly emphasize on the protection of technology
information while a marketing-oriented company or trading company shall
emphasize on the protection of operation information.

2. Explicit measures shall be taken to protect confidential information

Besides the conclusion of confidentiality agreement, during the
course of delivering documents containing confidential information to
the employee, or access to the place or system containing confidential
information by the employee, the company shall mark the nature of
confidentiality of the information in an explicit way. For example, the
company can mark “confidentiality” on the first page of the document
containing confidential information, or add a lock to the carrier of
confidential information. Meanwhile, a record of receipt of or access to
the confidential information by the employee shall be maintained. In
doing so, the company can remind the employee receiving the confidential
information of the nature of information received, on the other hand,
once these information is disclosed, it will be easier to define the
scope of disclosed confidential information

3. Penalty

In the confidentiality agreement, penalty can be agreed if the employee breaks the obligation of confidentiality.

However,
it shall be note that under current practice in Shanghai, the penalty
for breaking the confidentiality obligation will actually apply to
following situations:

• if the employee breaks the obligation of confidentiality during the
  term of labor contract, penalty will not be supported by the court.
  However, if the company suffers actual loss, the company can request for
  compensation against the employee;
• if the employee breaks the obligation of confidentiality after he
  leaves the company, the penalty is acceptable to the court. However, we
  suggest a reasonable consideration shall be paid to the employee for his
  confidentiality obligation.

III. Confidentiality and Non-competition

Confidentiality agreement and non-competition agreement are inter-linked but two separate legal concepts:

1. The main purpose of a non-competition agreement is to restrict the
   employee with confidentiality obligation to seek employment in a
   competitive company after he leaves the company. However,
   confidentiality agreement itself does not contain any clause of
   non-competition;
2. According to the law, the maximum term for non-competition is 2
   years while the obligation of confidentiality can be with indefinite
   term;
3. Only management personnel, senior technology personnel and other
   employees with confidentiality obligation can be requested to conclude
   non-competition agreement while confidentiality agreement applies to any
   employee having access to confidential information;
4. Penalty for breaking the obligation of non-competition and confidentiality can be agreed separately;
5. If necessary, the company can conclude both confidentiality agreement and non-competition agreement with same employee.