Trade secret litigation and arriving at a definition of 'commensurate' security measures

It is well known that the basic elements of trade secrets include:

they must not be known to the public; they must have commercial value; and commensurate security measures must have been taken by the right holder.

The first two elements are relatively easy to understand and prove in trade secrets litigation, while the last element often becomes focus of the lawsuit on which each party spends lots of resources to compete. Some recent cases reveal that the right holders of trade secrets might not have sufficient understanding of the word of ‘commensurate’, which leads to unsatisfying outcomes in trade secrets litigation.

What kinds of security measures taken by the rights holders are accepted by courts as ‘commensurate’ in China? What are the underlying theories behind the word ‘commensurate’? And what aspects should the rights holders pay attention to when adopting security measures? This article tries to provide answers to these questions based on some recent judgements of the Supreme People’s Court (SPC) of China.

Legislative history of security measures

According to an earlier version of the Unfair Competition Law of China, the rights holders of trade secrets must take security measures to defend their trade secrets. However, at that time, there was no adjective preceding ‘security measures’. This means that courts did not pay too much attention to the facts if the measure were reasonable and sufficient to protect the trade secrets. Few courts noticed this issue but did not elaborate on the relationship between the measures and the trade secrets in the practice.

After observing the legal practice for about 15 years, the SPC officially indicated in 2007 that the security measure must be “reasonable and commensurate with the trade secret”. It is not hard to find out the reason why the SPC set up the new standard as, in practice, many measures taken by the rights holders were not reasonable and could not protect the trade secrets.

In 2020, the SPC again revised the wording from “reasonable and commensurate measures” to “reasonable measures before infringement” in its law interpretation to match the revised wording “commensurate measures” of the Unfair Competition Law. Therefore, the holders of trade secrets must prove that reasonable measures have been taken before the secret information is infringed so that the elements of trade secrets can be fulfilled. The court will review whether the plaintiff has taken “reasonable measures” in the trial.

The key factors of commensurate security measures

Five factors have been taken into consideration when determining whether the security measures are commensurate, including:

the nature of the trade secret and its carrier; the commercial value of the trade secret; the identifiability of the confidentiality measures; whether the confidentiality measures are commensurate with the trade secret; and the right holder’s will to keep the secret.

Each of the factors will be explained as follows.

The nature of the trade secret and its carrier

A trade secret is a type of information, including technical information, business information or other commercial information, that is recorded or reflected by a certain carrier. The carrier is not the secret but is the object of security measures. The purpose of setting up the measures is to protect the carrier from exposing secrets to the public. Therefore, the nature of trade secrets (typically, the type of trade secrets) and their carrier should be considered in the trial first, well before reviewing other factors.

Some recent SPC cases reveal the Court’s attitude toward this. In one case, the plaintiff sued the defendant for infringing the technical secrets contained in the product. The confidentiality measures adopted by the plaintiff, however, were directed to the technical drawings of the product, instead of the product. Although the SPC confirmed the measures for the drawings may guard the secrets contained in the drawing, the claims of the plaintiff were denied because those measures were not related to the products that had been commercially available for a long time before the alleged infringement. The SPC indicated that in this case the carrier bearing the secret was the product; thus, the confidentiality measures adopted for the drawings, such as non-disclosure agreements with former employees and the technical drawing management policy, did not apply to the product (the carrier of the trade secret in this case). Thus, the measures provided by the plaintiff did not constitute trade secrets according to the law because the right holder did not apply security measures to guard the secrets. In another SPC case, the Court clearly stated in the sentence that the carrier of the secrets must be examined, while the connection between the measures and the carrier must be considered in the meantime. If the security measures are not aimed at the carrier, the claims in connection with the carrier cannot be supported because the measures are not commensurate.

The commercial value of trade secrets

The commercial value of the trade secrets is another factor that needs to be scrutinised in trade secret litigation. However, this factor typically is considered in combination with other factors. For example, the higher value the secrets have, the stricter and more identifiable the measures are that should be taken. This factor also reflects the will of the right holder to take measures for their secret information.

The identifiability of the security measures

This factor means that the security measures adopted must be identifiable so that people can clearly understand that the information protected by the identifiable measures is secret and confidential. As mentioned above, the more important and valuable the information is, the more identifiable and stricter the security measures are that need to be adopted.

In a recent case, the plaintiff signed a non-disclosure agreement with only some of its employees and claimed this formed confidentiality measures to protect its secret information. However, the court found that the carriers, some manufactured devices, were placed in an open place without any identifiable restriction measures to show the devices were confidential. In this instance, other employees, without signing the non-disclosure agreement, and even visitors could readily access those devices. Thus, the court ruled that the measures were not sufficient to protect the secret information from exposure to the public because the coverage of the measures was inadequate and the measures were not identifiable enough to make everyone understand that the devices contained secret information.

Whether the confidentiality measures are commensurate with the trade secret

Needless to say, important secrets deserve stronger restriction measures for protection. Typically, comprehensive measures include statements in the employee manual, non-disclosure agreements, competitive restriction and confidential clauses in commercial contracts to protect all aspects of the confidential information.

The strength and comprehensiveness of the measures will be reviewed by the court in a trial to see if the measures are reasonable and commensurate with the secret. In an SPC guide case, the Court fully reviewed the measures taken by the plaintiff, including the file access control policy, the rules for accessing confidential files, internal training on confidential policy and the employee manual. The Court held that those measures showed that security measures commensurate with the importance of the confidential information had been taken and actually enforced. Thus, the plaintiff finally received the damages of 159 million yuan thanks to the comprehensive security measures.

The holder’s will to keep the secret

As for the holder’s will to keep the secret, this article argues the will is the reason for the measures, while the measures are the consequence and the reflection of the intent. If the holder has no desire to protect the secret, naturally no measures are taken.

The SPC released a classic discussion about the nature and importance of the will to protect:

trade secrets are intangible assets that exist through the protection of confidentiality measures taken by the right holder. The secrets have characteristics such as easy to spread, easy to transfer, and permanent to lose upon disclosure. Confidentiality measures are means for keeping and maintaining the confidentiality of trade secrets. As the information protected by trade secrets, the right holder must have a subjective awareness of protecting the information as a secret while he should also carry out objective confidentiality measures. This is because trade secret is a right generated through the right holder own confidentiality. If the right holder has not taken confidentiality measures in himself, there is no need to protect the information (by law). This is also the value and role of confidentiality measures in the composition of trade secrets.

The underlying theory behind the factors

Although the laws and regulations talk a lot about what ‘commensurate security measures’ mean, the underlying theory is clear. In the litigation filed by the right holder, the court hopes to see the plaintiff shows their will to protect and awareness of their trade secret through enforceable measures taken to protect it. The factors listed by the SPC are used to evaluate the protection level of the trade secret in each individual case so that will, awareness and measures can be reviewed in combination.

In addition, commensurate security measures do not mean the secret information is perfectly safe so that the information can 100% be guarded against any theft or misuse. The standard is that under normal circumstances, the measures are enough to prevent the disclosure of trade secrets. In conformation with this standard, one feasible way to evaluate the measures is to see what kinds of measures have been taken by other companies in a same industry. If the measures are regular and have been adopted by most companies in the industry, the same measures being set up by a party could be considered sufficient to protect the secret under normal circumstances.

Other tips

Here are some tips in addition to the factors discussed above.

The first tip regards the time to set up the confidentiality measures, which is critical. In normal conditions, the measures should be set up before the secret information is generated in the day-to-day running of an enterprise. In fact, with a comprehensive confidentiality policy, the trade secret will be under protection at the same time it is created. That is the reason why the words “reasonable measures before infringement” are used by the SPC in the law interpretation.

In practice, if the measures are adopted after the secret information is formed, the time period between the formation of the trade secret and the time at which the measures are adopted will be strictly examined by the court to see if there is any chance that the information was leaked during that time period. The proof burden must be borne by the plaintiff that failed to adopt the confidentiality measures before infringement.

Another aspect we should pay attention to is that the relationship between non-competitive restriction and confidentiality measures. According to the SPC, the non-competitive restriction could be a kind of security measure to protect a trade secret if the non-competition agreement clearly delineates the edge of the trade secret. A general statement, however, such as generally saying that this employee cannot work for our competitor, cannot constitute a confidentiality measure according to the law because it cannot prove the will, awareness and measures of the right holder, and it is not commensurate with the secret by failing to indicate what information is being protected.

Furthermore, if the trade secrets were once shared among multiple parties, then the court requires confidentiality measures to be taken by each of the parties, not only by the party that brings the lawsuit. In one case, the plaintiff sued the defendant for revealing his trade secrets contained in some technical drawings. However, the court found that the drawings were developed by a third party under a commissioned development contract. The plaintiff did not set up a non-disclosure agreement with the developer and the developer did not take any security measures for those drawings. Thus, the court rejected the plaintiff’s claims because the information was not under protection by commensurate measures.

Finally, please keep it mind that reverse engineering is legal in China. Therefore, if the trade secret is contained in a product that has been publicly marketed, the confidentiality of the trade secret will be carefully reviewed by the court. For example, if the secret information is the structure, connections or functions of a product that is available on the market, anyone may detect and know the information contained in the product after buying and studying it through reverse engineering. Therefore, if the right holder claims trade secrets in a sold product or certain technical information in the product available on the market, the right holder needs to prove that commensurate confidentiality measures have been taken for the product and they are able to defend against the reverse engineering on the product. Two methods could be considered to prove that the trade secrets contained in the product are still under protection even after being sold:

The right holder may prove that even if someone disassembles the product containing the technical secret, they still cannot sense the technical secret because of the nature of the trade secret (eg, the information is intangible and not detectable). The right holder may show the court that some special confidentiality measures have been set within the product to hinder the reverse engineering carried out by an unauthorised party (eg, a certain mechanism that can destroy or change the secret contained in the product when the product is dissembled).