May the confidentiality agreement not be a mere formality

A company's employees, and above all the technical and managerial staff who hold its confidential information, are walking trade secrets. While they serve the company they are the best big data it has, a symbol of its wealth; but when they leave, the trade secret all too often leaves with them, which is no longer news in present-day society, and has become a matter of course in technology-intensive industries, foreign trade and other fields.

To prevent the disclosure of technical and business information that a company does not wish to make public, more and more companies take confidentiality measures of their own to protect their trade secrets, either adding a clause on the duty of confidentiality to the employment contract when it is signed, or signing a separate confidentiality agreement with the employee. But through unfamiliarity with the relevant laws and regulations, many clauses exist in name only: many confidentiality agreements never show in daily life the deterrent force that would restrain an employee's conduct, nor do they provide a remedy once a leak has occurred, and the agreement is a dead letter. Minton's lawyers will, in this article and with cases, analyse briefly the details that a company cannot overlook when it agrees confidentiality obligations with its employees.

Before drafting a confidentiality clause, Minton's lawyers suggest that a company must first clarify the following three matters:

1. An employee's duty of confidentiality does not exist objectively from the outset. Confidentiality is because there is a secret to keep: the premise of the employee's duty is the existence of a trade secret. A company should first attend to the creation and construction of its secret information, which should be a trade secret protected by law. At the same time, when drafting the confidentiality clause, the company should make clear which information is a trade secret, that is, let the employee know which information he is obliged to keep confidential;

2. The duty of confidentiality is an incidental duty of the employment contract, which the worker is bound to observe, and no separate confidentiality fee need be paid. If, however, a fee is agreed, it must be paid as agreed, or the worker is under no duty to keep the secret;

3. The worker's duty of confidentiality does not end with the term of the employment contract; at its longest it lasts until the trade secret is made public.

Case 1: the defendant, Mr Chen, joined the plaintiff, an information technology company in Shenzhen, in July 2009 as manager of the technical research and development department, responsible for research on new products; for archiving the company's technical files; and for leading the product development, procurement, production workshop, finance and quality departments in setting standardisation targets for the company's products and achieving uniform standards for bills of materials, cost accounting, process documents, testing standards and assembly drawings. The plaintiff and the defendant signed an employment contract which agreed confidentiality clauses. In December 2013 the defendant set up W Company with Mr Fan and Mr Yao, whose business scope was the same as the plaintiff's. In that period the defendant copied the plaintiff's promotional materials, contacted the plaintiff's customers without authority, and quoted prices to them in the name of W Company; some of the plaintiff's customers did not renew with the plaintiff but placed new orders with W Company. The plaintiff asked the court to order the defendant to stop infringing its trade secrets immediately and to compensate its economic loss.

In that case the plaintiff confirmed to the court that the trade secrets it asserted were, among technical and business information, the master purchase schedule, the supplier directory, the quotations and the promotional materials. The court of first instance dismissed the claim on the ground that the technical and business information asserted was not a trade secret, and the court of appeal dismissed the appeal and upheld the judgment.

Minton's analysis: in Case 1 the plaintiff and the defendant had signed a confidentiality agreement, so why did the plaintiff lose? The key lies once again in the finding that a trade secret exists.

Compare the first point that Minton's lawyers made above: the technical information a plaintiff seeks to protect must be definite and specific, with a protectable point of secrecy; it cannot be technical or business information in the abstract. The plaintiff in this case offered no evidence about the technical information it asserted — what the technical information was, which parts of it were the secret, whether it had economic and practical value, and so on in every respect — so the assertion lacked any factual basis; and the supplier directory it asserted was no more than a list of factory names, with nothing else, and showed no feature distinguishing it from ordinary commercial information. Secondly, the business information asserted as a trade secret was defective in its secrecy too. The quotations themselves showed no secrecy, and the plaintiff did not explain them; and as to the promotional materials, these are by nature accessible to the public through various proper channels, so they can hardly satisfy secrecy, one of the constitutive elements of a trade secret, and are not a trade secret either.

In sum, taking the constitutive elements of a trade secret as the starting point, the technical and business information the plaintiff asserted had no point of secrecy and was not secret, and so was not found by the court to be a trade secret; the plaintiff's claims were dismissed in their entirety.

Case 2: in December 2014 Ms Wang signed an employment contract with an information technology company in Shanghai and worked as a programmer in its information technology department. In August 2016, following a change in her work, Ms Wang was assigned by the information technology department, besides her own work as a programmer, to the company's marketing department as a specialist of the technical department, responsible for providing information consultancy services to some of the company's customers. Because Ms Wang had the opportunity to come into contact with the company's internal customer information and would keep in regular contact with those customers over the long term, and because over the years she served the company she came gradually to know and master part of its core technical information, the company signed a confidentiality agreement with her, providing that the technical information she knew of or came into contact with while serving the company, such as technical codes, technical schemes and technical data, and the business information the company compiled, such as customer lists, statistics and forecasts of customer intentions, customer feedback and the plans for handling it, were the company's confidential information; that Huang was under a duty to keep it confidential; and that the duty would last until the company made that information public of its own accord.

In early 2017, in the course of dealing with the company's customers, Huang disclosed to several of the company's customers the prices at which the company provided information consultancy services to other enterprises. On discovering this the company sued Huang in court, requiring her to bear liability for breach of contract and for damages for disclosing its trade secrets in breach of the confidentiality agreement.

Minton's analysis: in Case 2 the company did not put a confidentiality clause in the employment contract when it was signed, which is disadvantageous both for avoiding risk in advance and for limiting loss once a trade secret has leaked. Minton's lawyers suggest that a company may include a basic clause on the duty of confidentiality in the employment contract and, according to the characteristics of the employee's post, add a targeted catch-all clause. Article 23 of the Employment Contract Law provides that an employer and a worker may agree in the employment contract to keep the employer's trade secrets and matters related to intellectual property confidential. For a worker under a duty of confidentiality, the employer may agree non-compete clauses with the worker in the employment contract or in a confidentiality agreement. This is the support the law gives a company in protecting its own trade secrets.

In Case 2 the company, in the light of how the employee's work actually developed, signed a confidentiality agreement with Ms Wang and made clear the content of the confidentiality and its term. This is the company making sensible use of the rights the Labor Law gives it, laying down provisions on confidential matters and binding the employee not to disclose, use or permit others to use the secret information. It was for this reason that the court, in hearing the case, taking the evidence the company submitted together, found the confidentiality agreement effective, held that Ms Wang had acted in breach, and that she should bear the corresponding legal liability.

Besides the three points above, Minton's lawyers suggest that, in drafting a confidentiality clause in the employment contract or a separate confidentiality agreement with an employee, a company must consider including the following:

1. The specific scope of the trade secrets to be kept confidential under the contract;

Different companies hold different trade secrets, so the content and scope of confidentiality should be agreed according to a company's own characteristics, and delimited appropriately to its particular circumstances.

2. Without permission, an employee may not disclose trade secrets to any third party by any means, or use them for any purpose other than the object of the contract. Where the company's secret information must be disclosed to a third party for the purposes of the work, the employee must ensure that the third party who comes into contact with it is bound, as the employee is, to keep the company's secret information confidential. In this way everyone involved in performing the confidentiality agreement may be made to restrain their conduct and to perform the duty of confidentiality better.

3. Listing certain confidentiality measures, including but not limited to: the employee may not carry out of the confidential area any medium containing confidential information, including but not limited to materials, documents and physical objects; may not, in dealings with any third party, touch on the trade secrets provided by the contract; and may not actively seek out or acquaint himself with trade secrets.

4. A corresponding system should be established for the use of confidential information, and reflected briefly in the confidentiality clause or agreement: for instance, confidential materials and information should be registered within the company before use, and should be returned when the relevant work is completed or the confidentiality contract ends.

5. The term of confidentiality should be expressly agreed, making the point that the duty does not end with the employment contract but lasts until the company makes the confidential information public of its own accord.

At the same time, before an employee joins, Minton's lawyers suggest that the company should first ascertain whether the person it intends to engage has signed a confidentiality agreement, a non-compete agreement or a similar agreement with a previous employer, and whether he bears a duty of confidentiality or non-competition. If he bears no such duty, he should, when signing the employment contract, give a written undertaking and promise that any knowledge he uses within the company has nothing to do with his former employer, and that in accepting any task the company assigns he will not infringe the former employer's trade secrets; if he does bear a duty of confidentiality towards the former employer, the company should provide expressly in the employment contract that he must not infringe the former employer's trade secrets in carrying out his work.

By ascertaining these matters and obtaining undertakings in advance, a company can effectively avoid a great many unnecessary disputes over intellectual property, employment contracts and trade secrets, and improve its efficiency in operation and management.

6. Expressly agreeing the liability for breach of the duty of confidentiality.

7. Making clear the routes for resolving disputes, chiefly negotiation, mediation, litigation and arbitration. At the same time attention should be paid to the agreement on jurisdiction for dispute resolution.

8. Agreeing other matters in particular according to the company's business and management characteristics, such as confirming the nature of works made in the course of employment and works of joint authorship and the ownership of the intellectual property in them; the inventor of a utility model or a patented invention; and the handover and use of technical information and data.

By agreeing a confidentiality clause in the employment contract and signing a confidentiality agreement, a company may not only bind its employees by contract, attend to the sensible construction of its confidential information and perfect the terms of the duty of confidentiality (that is, make its "confidential documents" truly answer to "trade secrets" in the legal sense); should a dispute over infringement of trade secrets arise in future, the terms agreed may also serve as evidence that the information in question is a trade secret. In an action for infringement of a trade secret the plaintiff company must prove that the information it asserts is a trade secret, that is, that it meets the requirements of secrecy, value, utility and confidentiality measures. As to confidentiality measures, the court generally asks whether a confidentiality agreement or system has been laid down; and the very act of agreeing a duty of confidentiality is itself one of the confidentiality measures taken for a trade secret.

Case 3: the plaintiff, HS (Shanghai) Health Information Consulting Co., Ltd, is a provider of corporate health and welfare solutions, offering health check-ups, health management and employee benefit plans; the Youran health check card is a card product it offers to individuals and small and medium enterprises, whose purchaser may enjoy check-ups at institutions throughout the country. The defendant, Mr Dai, was a former employee of the plaintiff responsible for selling the Youran card. The defendant SH Company is a health information consulting company incorporated with Dai Long's assistance, whose business scope is close to the plaintiff's. While working for the plaintiff, on receiving the invitation to tender that the plaintiff's original customer Shanghai Electric Power Co., Ltd (Shanghai Electric) sent to the plaintiff, Dai did not tell the plaintiff, and falsely told Shanghai Electric that the plaintiff was in the course of reorganisation and that SH Company was the company after reorganisation, thereby inducing Shanghai Electric to send an invitation to tender to SH Company. At the same time Dai used the trade secrets he had learned while working for the plaintiff to prepare the tender documents, and assisted SH Company to bid in its name for Shanghai Electric's health check service contract. The plaintiff considered that Shanghai Electric's contact details, the list of check-up items and hospital information in its past contracts with the company, and the tender documents the company sent to the plaintiff constituted its trade secrets, and that the two defendants' use of its confidential information to prepare a tender report and bid to Shanghai Electric infringed its trade secrets.

The employment contract signed by the plaintiff and Mr Dai provided that the employee must not disseminate or disclose the internal affairs, trade secrets and other confidential information of the company and its customers, and that he should sign a confidentiality agreement with the company as a valid annex to the employment contract. Dai's duties included building the relevant sales channels, taking part in and carrying out the sales strategy the company set and meeting sales targets, and promoting the product through channels. On the day the contract was signed, Mr Dai signed a confirmation letter confirming that he had received the plaintiff's employee handbook, was willing to comply with all of its contents, and understood that the handbook was an annex to the employment contract. Clause 4.1, confidentiality, of the employee handbook provided that trade secrets included all the company's operating materials, including but not limited to information about customers and intermediaries, the company's customers, and marketing strategy. Of the two memoranda the plaintiff gave Mr Dai, one made clear that he needed to sign the plaintiff's "relevant confidentiality clause / employee handbook", and the other required him to "comply with the relevant clauses in the employee handbook and keep this salary adjustment strictly confidential".

Shanghai Electric was a customer of the plaintiff for whom Mr Dai was responsible. On 12 September 2013 the plaintiff (party B) and the trade union of Shanghai Electric (party A) signed a health check contract, under which party B would arrange uniform check-up items for party A's participating staff at the top-tier hospitals designated by party A, together with the number of persons examined and the total contract payment, the health check cards being valid until 30 September 2014. The annex to that contract set out the list of top-tier hospitals and the content and a short description of the check-up items. SH Company submitted its tender on 14 November 2014, introducing itself as China's leading provider of integrated health and welfare solutions and listing such marks as "Microsoft", "China National Petroleum", "Apple" and "Amway"; in the check-up scheme it tendered, the items were basically the same as those the plaintiff had provided to Shanghai Electric, with a note that the package was consistent with the previous year, and of the institutions listed seven were the same as those the plaintiff had provided to Shanghai Electric, though five more had been added at Shanghai Electric's request in its invitation. SH Company (party B) also issued to the trade union of Shanghai Electric (party A) an undertaking on the replacement of health check cards for 130 retired employees of Shanghai Electric Power Co., Ltd for 2013, to the effect that ... ... and undertaking that the package would be consistent with that for 2013, that the new cards would be valid until 31 December 2015, and that if party A confirmed party B as the provider of check-ups for retired employees for 2014-2015, party B undertook that the 130 replacement cards would correspond to the same check-up content at top-tier hospitals as in the following year.

Minton's analysis: in this case the main issues were whether the information the plaintiff asserted constituted a trade secret and whether the two defendants had committed acts infringing it (this article will analyse only the first of these briefly).

Under article 7, paragraph 3, of the Anti-Unfair Competition Law, a trade secret means technical and business information that is not known to the public, can bring economic benefit to the rights holder, has utility, and for which the rights holder has taken confidentiality measures. In this case the plaintiff asserted that Shanghai Electric, an important customer, and its contact details, the list of check-up items and the hospital information in its past contracts with the plaintiff, and the invitation to tender that the company sent to the plaintiff constituted trade secrets. The contact details of Shanghai Electric were the personal mobile number of the officer in charge at its trade union, which is not information easily obtained from public channels. The hospitals, items and prices agreed in the plaintiff's contract with Shanghai Electric were not a standard package common in the market, but were tailored to the particular needs of this customer after selecting and combining a large quantity of objective information about hospitals and check-up items, and were not a simple permutation. Moreover the plaintiff assigned a specialist, the defendant Dai, to maintain the relationship with this customer, following it continuously, which cost a certain amount in operating expenses. Through the input of manpower and resources the plaintiff made this information special customer information of a certain breadth and depth, different from information in the public domain. Once a competitor knew it, he could adjust his own quotations and check-up schemes in a targeted way when competing for this customer, and so obtain a competitive advantage and a trading opportunity. The information therefore had important commercial value, both for the plaintiff and for other potential competitors, and could bring the plaintiff economic benefit.

As to the invitation to tender that Shanghai Electric sent to the plaintiff, that project was tendered by invitation, Shanghai Electric sending invitations only to a few companies it had chosen in advance; whom to invite, and the corresponding information about the tender, is not information easily obtained by others in the field from other public channels. Without that information a business could not seek the opportunity to bid, still less take part in the tender. For a potential bidder, then, the information had important commercial value and could bring economic benefit.

The employment contract signed by the plaintiff and Mr Dai provided that he must not disseminate or disclose the internal affairs of the company and its customers, trade secrets and other confidential information, and that a confidentiality agreement should be signed separately as a valid annex to the contract. Taken together with the wording of the two memoranda the plaintiff sent to Dai, the confidentiality agreement that was an annex to the employment contract means the employee handbook, from which it appears that the handbook must contain provisions on the scope of trade secrets.

Accordingly, the information the plaintiff asserted met the statutory requirements of secrecy, value, utility and confidentiality measures, and constituted a trade secret, and the plaintiff had taken reasonable confidentiality measures.

The protection of trade secrets is centred within the company. It is hoped that this article may give companies ideas when they establish a system for protecting trade secrets and draft the related documents, supplying what has been overlooked, perfecting the details, so that once an employee leaves the company it has nothing to worry about.