“The challenge is thus how a Chinese company can protect its trade secrets when an employee quits to either start a competing business of his or her own or to join a competitor without violating PRC law in the process”
As China continues to develop truly world-class e-commerce and other Internet and technology companies like Alibaba, Huawei, and others, a new problem is rearing its head for these and other companies. In what has long been a nearly time-honored tradition in California’s Silicon Valley, many employees of such Chinese businesses are leaving to either work for a competitor or start their own company. In the process of leaving, these employees often (whether intentionally or unintentionally) take with them valuable skills learned at their now ex-employer and, more importantly for that company, potentially company trade secrets as well. Whether these are proprietary ways of doing business, ideas that are being developed by the employee’s soon to be ex-employer, or other inside information that is not publicly available, the departure of employees and preventing those employees from disclosing that information is a critical business challenge for Chinese employers.
The challenge is thus how a Chinese company can protect its trade secrets when an employee quits to either start a competing business of his or her own or to join a competitor without violating PRC law in the process. Younger Chinese citizens are not only starting companies at a much higher pace than their older peers, but they are also seeking to expand their businesses abroad in a way that Chinese companies never have before. Thus, whenever an employee leaves a Chinese employer, the biggest challenge for the company he is exiting often is protecting the trade secrets that belong to his former employer from disclosure to either domestic or foreign competitors. Although this can be a difficult process, there are a number of steps a Chinese company can take to help keep its trade secrets from being disclosed to the public or, even worse, a competitor when employees leave the company.
No Company Is Immune
This problem was recently illustrated in the United States, where former Google engineer Anthony Levandowski left Google to start his own self-driving trucking company, Otto. Months after its founding by Mr. Levandowski and several other individuals, Otto was bought by the ride-sharing company Uber. Before leaving Google, Levandowski allegedly downloaded more than 14,000 confidential company documents, including the design for circuit board for the company’s laser-based radar (or lidar) system for the self-driving vehicle Google was working on. Waymo, the Google division working on developing a self-driving vehicle, has brought a lawsuit against both Otto and its new owner Uber based on what it contends was the deliberate theft of the Waymo documents by Levandowski before he left Google. The alleged theft came to light when a Waymo employee was inadvertently copied on an email communication by a lidar supplier that contained attachments which appeared to be exactly replications of Waymo’s lidar circuit board contained in Otto internal documents. This quickly led to suspicions on Waymo’s part that Levandowski had stolen trade secrets before leaving Google, which prompted it to conduct an internal investigation, including a forensic examination of Levandowski’s computer. After review, it was discovered that he had downloaded nearly 14,000 documents onto an external hard drive before leaving Google to start Otto. Waymo now is suing Otto and its owner, Uber, for allegedly stealing trade secrets, unfair competition and patent infringement and seeking unspecified money damages.
The Protection Given to Trade Secrets under Chinese Law
“Trade secrets only have legally protected status under Chinese law so long they are not disclosed publicly.”
Under Chinese law, trade secrets are a form of intellectual property that is non-registrable, meaning they cannot be trademarked or given legal protection pursuant to application to any Chinese government agency like a copyright or a trademark. Therefore, trade secrets only have legally protected status under Chinese law so long they are not disclosed publicly. It is thus crucial to prevent a company’s trade secrets from being divulged in the first place. Once disclosed publicly, there is usually very little a company can do to “get the cat back in the bag” or seek continuing protection for the company’s trade secrets. Protecting them from disclosure on the front end thus becomes of the utmost importance in protecting the confidentiality of trade secrets.
What to Do When Key Employees Exit Your Company?
Although there is little to protect an employer if an employee upon departing decides to take the type of bold actions a rogue departing employee like Levandowski did when leaving Google, there are steps that a company based in China can take to prevent their trade secrets from being stolen or disclosed. First and foremost, the company should always ensure that every written employment agreement contains a non-disclosure provision. Holding regular meetings reminding employees of their non-disclosure obligations under their employment agreements is also an important practice to consider as well as indicating in the Employee Handbook that trade secrets are and should remain confidential. Such provisions are enforceable under Chinese law, provided the provision is reasonable in scope and application. In addition, and particularly for senior managers (who often are the employees most likely to leave and start/join competing companies), a Chinese employer can also require senior managers to sign a separate non-compete agreement as further protection to keep them from decamping with trade secrets. This is perfectly legal and enforceable under Chinese law, again provided that the terms of the non-compete agreement are of a reasonable length and do not violate the PRC Labor Contract Law.
“Although it is possible to bring a claim for theft of trade secrets in a Chinese court as well as to seek enforcement of a trade secret through the local Administration for Industry and Commerce, this can be a difficult claim to prevail upon. ”
In addition, if employees are leaving a Chinese company, it is also important to hold an exit interview with the employee in which they are reminded of their non-disclosure obligations. Chinese employers also should require employees who are leaving the company to physically hand in all company documents, materials, files or computers in the employee’s possession. Finally, given the ease with which an employee can forward emails or files to a personal email address, it is also important in the case of departure of senior management or other key employees to perform a forensic audit (if possible) of the employee’s computer immediately prior to the employee’s departure to ensure no trade secrets have been inappropriately shared by the now ex-employee. Nowadays, technology allows employers to have a better control over their data retention policies and practices and practical tools (such as online activities monitoring) now exist to prevent or at least greatly limit the abilities for a rogue employee to siphon sensitive data prior departure.
Conclusion: Protecting Trade Secrets on the Front End is Most Important
Trade secrets are notoriously difficult to protect given that they are not given explicit protection under Chinese intellectual property law. Although it is possible to bring a claim for theft of trade secrets in a Chinese court as well as to seek enforcement of a trade secret through the local Administration for Industry and Commerce, this can be a difficult claim to prevail upon. Doing so requires the company whose secret was allegedly stolen to prove that (i) it owned the trade secret in question, (ii) that the trade secret is tangible, (iii) that the trade secret has commercial value, and, most importantly, (iv) that the company took appropriate measures to protect the applicable trade secret from disclosure. Successfully proving such a claim requires meeting a heavy burden and the submission of often voluminous documentary evidence. Given the difficulty meeting this burden if a company may have made a mistake and failed to adhere to its own recordkeeping policies or simply misplaced and/or cannot find the relevant evidence, prevention is ultimately the key to protecting trade secrets rather than relying upon such post-disclosure remedies.
Employers in China should thus do everything within their power to prevent employees from taking and/or subsequently disclosing any trade secrets or proprietary information or processes upon their departure from the company by (i) including a form non-disclosure provision in every employment contract the company enters into, (ii) entering into non-compete agreements with key employees and senior managers of a reasonable duration, and (iii) ensuring that all company files, documents, computers, portable memory devices, etc. are monitored and then returned before an employee is permitted to leave on his or her last day in a company’s employ. Because protecting itself on the front end is often the only time an employer can truly ensure that its trade secrets are adequately protected from disclosure, every company should take appropriate protective measures for the safeguarding of such secrets. Better be safe than sorry!
About IPO Pang Xingpu: IPO Pang Xinpu is a premier international law firm that has been representing clients in China since the early 1990’s. We’ve been here longer than the vast majority of corporate law firms, and have helped hundreds of companies across a wide spectrum of industries securely and quickly establish operations in China, and then provide follow-on services for their ongoing legal needs.