Research on legal issues of trade secrets: the Hangzhou Fangda Trading case

1. The facts

The plaintiff, Hangzhou Fangda, is a trading company. Fangda was incorporated in October 1997 and is a specialist company selling knitted goods, textiles, garments and clothing accessories at home and abroad. In November 2014 the defendant, Mr Chen, applied for work at Fangda, and in March the following year the two signed an employment contract agreeing that Chen's post was foreign trade salesman for a term of two years. To protect its trade secrets Fangda signed with Chen an employment contract, an agreement on the protection of intellectual property and trade secrets and on non-competition, and other documents, which laid down the employee's duty of confidentiality; and it bought and installed foreign trade information management software to prevent trade secrets from leaking. While Chen was employed, Fangda gave its customers into his hands to handle, follow and liaise with continuously, so that Chen knew not only the customers' contact details but also the pricing strategy for each product and such deep information as the customers' trading habits, product requirements and quantities required, none of which can be obtained from public channels.

When the contract expired Chen left and went to the defendant, Ninglü Company. By chance the employee who took over his post found that Chen was still doing business with his former customers, and Fangda immediately checked the business Chen had handled during his employment, and found that he had used the customer information he obtained to win the transaction with Fangda's customer by cutting the price, intending to profit from it.

2. The judgment:

All the plaintiff's claims were dismissed.

3. Analysis of the case:

In this case every claim of the plaintiff, including cessation of infringement and compensation for loss, was dismissed. Below, this article analyses, around the issues in dispute, why the plaintiff lost and what might have been done.

To prove an infringement of a trade secret it is first necessary to make clear what a trade secret is and to prove that the information is an object of a trade secret protectable under the Anti-Unfair Competition Law; next, the burden of proving the facts of infringement must be discharged; and finally the amount of loss must be proved.

1. Was the customer information of the plaintiff company a trade secret?

The plaintiff considered that its customer list contained deep information such as pricing strategy, product requirements, transaction quantities and trading habits, that it had taken reasonable confidentiality measures, and that the list had brought it actual economic benefit, so that its customer list constituted a trade secret protected by law; the defendant considered that the customer information had already been published on websites and was not a trade secret. All the grounds the plaintiff put forward were rejected.

Article 13, paragraph 1, 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: "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, which is 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." The object protected by the Anti-Unfair Competition Law in a customer list must be special customer information made up of the customer's name, address, contact details and the habits, intentions and content of its transactions, distinguished from the relevant publicly known information. Meeting that requirement as to object, a customer list must further possess secrecy, value and confidentiality measures before it can become a trade secret.

In practice a company must do more than secure the names, addresses and contact details on a list of customer information: more importantly it must distil the customers' product requirements, and explain fully that the information provided is true, lawful and effective. When proving that a customer list is a trade secret, it must also explain the confidentiality measures taken and how difficult it is for a competitor to obtain the information.

2. Did the plaintiff prove the facts of infringement?

In this case the plaintiff could prove only that there had been correspondence by email between the defendant and the customer, but could not prove that the two had in fact colluded; and since contact details can be obtained in public, anyone may deal with the customer without obtaining the contact details by unlawful means.

Article 13, paragraph 2, of the same Interpretation provides: "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 the unit it can be proved that the customer voluntarily chose to trade with the employee 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 other words, the plaintiff must prove that the employee obtained the customer's contact details by improper means and so brought about the transaction before it has proved the act of infringement.

In practice such proof is extremely difficult: many companies cannot show that the employee obtained the customer's contact details improperly, nor produce evidence that the employee approached the customer of his own motion. A company may therefore write this situation into the confidentiality agreement it signs with its employees, so lightening its own burden of proof.

3. How was the plaintiff to establish the amount of loss?

In this case the plaintiff gave no clear method of calculating the specific amount of loss.

In practice, article 17 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 expressly that the amount of damages for an act infringing a trade secret under article 10 of the Anti-Unfair Competition Law may be determined by reference to the method for determining damages for infringement of the Patent Law. In establishing the amount of loss, actual loss or foreseeable loss is taken as the standard, then the amount the other party may have profited is considered, and finally a fixed sum is adopted, taking account of cost, manpower, time and other factors, which under the Patent Law and the judicial interpretation may not exceed RMB 500,000; the detailed rules of calculation are at present being further refined, and the relevant legal documents will be issued later.