How the law can protect your customer list

Cases are too numerous to count in which an employee, on leaving, takes customer information away, so that the company loses business and suffers heavy loss. Many companies in practice protect their interests through legal proceedings, yet the judgments differ widely. Why exactly is that?

Many companies at present take the view that, so long as an employee leaves with customers or tells other companies about customer information, their trade secrets have been infringed. That is not so: a "customer list" is not necessarily the same thing as a "trade secret", and only a customer list that meets the standards applied by the Chinese courts can become a trade secret and so be protected by the Anti-Unfair Competition Law and the Criminal Law. Nor does a customer's following the employee necessarily mean that the employee has infringed the company's trade secrets: only where certain conditions are met can it be found that he has.

A company should protect its trade secrets, customer lists among them, strictly in accordance with the judicial standards when it builds its systems and conducts its internal management, so that it may obtain judicial relief from the state when infringement occurs. This article gives a brief account of how a customer list is established to be a trade secret, and how it is protected.

1. A "customer list" in the legal sense

A customer list in the sense of the Anti-Unfair Competition Law differs considerably from the customer list as ordinarily understood. Article 13 of the Interpretation of the Supreme People's Court on Several Issues concerning the Application of Law in the Trial of Civil Cases of Unfair Competition provides that a customer list within a trade secret generally means the special customer information constituted by the customer's name, address, contact details and the habits, intentions and content of its transactions, distinguished from the relevant publicly known information, including a register gathering many customers and a particular customer with whom a long-term and stable trading relationship is maintained.

Under those provisions, and in the light of the adjudication practice in China, a customer list must satisfy the following requirements before it can be a trade secret:

(a) Secrecy

Secrecy is the most important standard in determining whether a customer list is a trade secret. A trade secret has the characteristic of being "information not publicly known", that is, the content of the customer list must be unobtainable through public channels. Such information is generally special or deep information that a company can learn only by spending manpower and money over a long period of close contact, such as the customer's trading habits, the quantities required and the names and specifications of goods, its pricing policy, the method of settlement, the method of transport and the method of delivery.

Where nothing more is involved than a customer's name, telephone number and business address, information easily obtained from public channels and so "publicly known", it generally cannot be treated as a trade secret and protected by law.

(b) Value

Value means that by using the customer list the rights holder may obtain present or potential economic benefit or a competitive advantage.

Concretely, it means that the customers on the list have had, or are about to have, dealings with the company, from which the company can earn a reasonable profit.

(c) Confidentiality measures

Confidentiality measures mean that the company regards its customer list subjectively as a trade secret and has taken reasonable protective measures. If the company itself had no intention of keeping the information secret and took no confidentiality measure at all in using it, the information cannot be treated as a trade secret.

The management and protection of a customer list turn on the list not being publicly known. A company should, in the light of its business practice, open a customer file for each customer and mark it clearly with the words "trade secret", and should strengthen the clauses on the customer list in its confidentiality agreements and non-compete agreements.

2. How to protect a customer list as a trade secret

Establishing a sound system for managing customer lists and forming an effective list will not only win the company support when it enforces its rights in litigation, but will also avert the loss of the list, protecting its interests at the source.

Consolidating the content of the list and forming an archive. A company should, in accordance with the constitutive requirements of a customer list, separate from the knowledge it already has, has at present and that is public, the customer information that answers to a trade secret, and refine and consolidate it into a customer list in the legal sense. Because a customer list is abstract and intangible, its content must be presented through a particular medium and form, producing a visible list such as a customer information database, which is of the first importance in litigation for identifying the point of secrecy and asserting the scope and content of protection.

Taking appropriate and reasonable confidentiality measures.

In present judicial practice, business information protected by the following confidentiality measures may generally be found to be a trade secret:

1. a confidentiality system has been established, and the information in question is expressly listed as confidential;

2. although no confidentiality system has been laid down, it is expressly required that particular information be kept confidential;

3. a confidentiality system has been established, and although a particular piece of information is not expressly identified as a trade secret, it falls within the confidential scope under that system;

4. when information is disclosed or provided to another, the relevant contract or document expressly requires the technology developed to be kept confidential;

5. trading vouchers are retained, and a system of archiving customer transactions is established.

In adjudication, where a company and a customer have dealt only by chance, or in a single transaction, or where they once dealt but no longer do, such customer information generally cannot be found to be a trade secret, since the company no longer has business relations with the customer and so cannot be in competition with the alleged infringer. Retaining the contracts, orders, invoices and other evidence of long-term dealing with a customer is therefore of the first importance in proving a long-term and stable trading relationship. A system of archiving these core, long-standing customers not only manages and regularises dealings effectively but preserves important material for the protection of the trade secret.

3. Exceptions to the protection of a customer list as a trade secret

The Interpretation of the Supreme People's Court on Several Issues concerning the Application of Law in the Trial of Civil Cases of Unfair Competition provides that where a customer enters into market transactions with the unit for which an employee works on the strength of its trust in that employee personally, and after the employee leaves it can be proved that the customer voluntarily chose to trade with him or with his new unit, it shall be found that no improper means were used, unless the employee and the former unit have agreed otherwise.

In the light of that provision a company should hold an exit interview with a departing employee and, on the result, decide whether to start the non-compete agreement. At the same time it should begin work on maintaining the customer relationship as soon as the employee leaves, so that the customer does not drift away of its own accord.

In sum, it is not hard to see that not every customer list that objectively exists can constitute a trade secret: only a list that satisfies certain constitutive requirements can obtain the protection of the law.

A company should adopt a series of measures and systems to strengthen in real earnest the protection of its customer list as a trade secret, so as to avoid losing business through accidental disclosure or the departure of staff. Sound protective measures also assist the company's remedy after the event, and help it to protect its lawful rights and interests through legal channels.