Business secrets refer to such commercial information as technical information and business information, which are of commercial value, unknown to the public, and protected by security measures. Business secrets are the essential intangible assets of an enterprise. Due to the rapid development of intellectual property and growing competition in the market, the protection of business secrets has gained increasing attention. Under China’s system of law, business secrets are mainly protected by the provisions of the labour laws regarding non-compete clauses, those of the competition laws concerning the determination of infringement related to business secrets and the legal liabilities thereof, and those of the criminal laws related to infringement of business secrets.
In practice, most of the disputes involving business secrets are triggered because the employees (the “Employees”) were employed by the competitors (the “Competitors”) of the former employers (the “Former Employers”). In many cases, the Former Employers not only accuse the Employees of a breach of non-compete obligations, but also accuse the Employees, alone or jointly with the Competitors, of their infringement of the business secrets of the Former Employers. In the following text, analysis of the difference between the non-compete dispute and the dispute over infringement on business secrets will be carried out in accordance with the relevant laws and based on judicial practice.
I Legal proceedings
In accordance with the Regulations on the Cause of Action of Civil Cases formulated by the Supreme People’s Court, the “non-compete dispute” falls into the category of the “employment contract dispute”, while the “dispute over infringement of business secrets” into that of the “unfair competition dispute”. According to the Labor Dispute Mediation and Arbitration Law promulgated by Standing Committee of the National People's Congress, a labour dispute shall first be filed to the labour arbitration commission for arbitration; only after that, may either or both of the parties file a lawsuit with the court for such a labour dispute, if they are not satisfied with the award of the labour arbitration. This is what we call the “prior arbitration and two-instance trial” proceedings for labour disputes. Non-compete disputes fall in the scope of labour disputes and thus should follow such proceedings. However, disputes over infringement of business secrets are infringement disputes governed by the civil laws. For such disputes, instead of being subject to prior labour arbitration, the Former Employers may directly file an action to the court against the Employees who infringed on the former’s business secrets.
II Subject of Legal Responsibilities
As described above, non-compete disputes are labour disputes. Since the Competitors are not a party to the employment relationship with the Former Employers, the Former Employers may accuse only the Employees of breach of non-compete obligations. Even though the Competitors enter into employment with the Employees when the Competitors are clearly aware of the non-compete obligations of such Employees, usually in labour arbitration and litigation, the Former Employers are not allowed to list the Competitors as co-respondents or co-defendants, or directly require the Competitors and the Employees to take joint and several liabilities.
However, in disputes over infringement of business secrets, if the Employees and the Competitors jointly infringed on the business secrets of the Former Employers, the Former Employers may list the Competitors and the Employees as co-defendants in the litigation and require them to take joint and several liabilities.
III Focus of Trial
In non-compete disputes, the labour arbitration tribunal and the court will focus on reviewing whether there are clear agreements between the parties on the non-compete obligations of the Employees, whether the Employees have started worked for the Competitors, whether the non-compete compensation has been clearly agreed upon by the parties and paid already by the Former Employers, whether the parties have clear agreement on the liquidated damages for breach of non-compete obligations, and whether the liquidated damages agreed are of rational amount, etc. However, whether the Employees infringed on the business secrets of the Former Employers, and whether the infringement has caused actual economic loss to the Former Employers are not the focus of labour arbitration tribunal and the court. Besides, it should be noted that in the case where the Former Employers and the Employees have clear agreement with respect to the scope of business secrets and the confidentiality obligations, the labour arbitration tribunal and the court usually won’t substantively review whether the Former Employers do have business secrets or whether the Employees know about the business secrets of the Former Employers.
In unfair competition litigation where the Former Employers accuse the Employees of their infringement upon business secrets, the court will mainly review whether the business secrets claimed by the Former Employers are secret and valuable as defined by the law and protected under the security measures taken by the Former Employers as required by the law, whether the Employees divulged or used the Former Employers’ business secrets, and whether the Competitors obtained illegal gains by taking use of the business secrets of the Former Employers.
IV Conditions for Legal Responsibilities
In non-compete disputes, the Former Employers may require the Employees to take liability for breach of non-compete obligations according to the non-compete agreement, as long as the Former Employers can prove that the Employees “competed” with the Former Employers, with no need to prove that the Employees infringed on the Former Employers’ business secrets and thus caused economic loss to the Former Employers. Besides the liquidated damages, if the Former Employers require the Employees to compensate for economic loss, the Former Employers have to prove that the Employees’ breach of non-compete obligations has directly brought such economic loss to the Former Employers.
For disputes over infringement of business secrets, the Former Employers need to prove that the business secrets, as defined by the law, suffered infringement, and the Former Employers sustained actual loss or the Competitors obtained illegal gains.
V Allocation of Burden of Proof
In non-compete disputes, the labour arbitration tribunal and the court usually follow the principle that the burden of proof goes to the party which raises a claim. The Former Employers need to bear the burden for proving that the Employees breached their non-compete obligations. In practice, should the Employees and the Competitors adopt disguised measures to cover up the Employees’ breach of non-compete obligations, it would be difficult for the Former Employers to acquire direct evidence for the Employees’ employment with the Competitors. In such cases, the Former Employers tend to prove the breach with a chain of indirect evidence or, in accordance with the law, request the court to investigate the breach and obtain evidence. In the hearing of some non-compete disputes, arbitrators and judges understand the difficulty for the Former Employers to provide evidence, and therefore will order the Employees to give reasonable explanation for their suspected competing behaviors and provide relevant evidence or will initiatively collect evidence by exercising their judicial powers, provided that preliminary evidence has been provided by the Former Employers to prove the Employees’ breach of non-compete obligations and then determine the legal facts based on the rule of probability. However, so far, there are no unified provisions or standard rules for award/judgment regarding the allocation and transfer of burden of proof, and the adoption of evidences. The arbitration/court opinions differ a lot among different cases.
In disputes over infringement of business secrets, though the Former Employers need to prove with evidence the infringement of business secrets by the Employees and the Competitors, the Anti-unfair Competition Law, newly revised in 2019, has clear requirements on the “transfer” of burden of proof in certain circumstances. Article 32 Paragraph 1 of the Anti-unfair Competition Law provides that “during civil trials of infringement cases of business secrets, where the preliminary evidence provided by an obligee of business secrets can prove that it has taken measures to keep the confidentiality of the business secrets it claimed and can reasonably indicate that such business secrets have suffered infringement, the alleged infringer shall prove that the business secrets claimed by the obligee do not fall in the scope of the business secrets defined by this Law.” Paragraph 2 of this Article 32 further specifies that the preliminary evidence shall include at least any of the following: “ (1)the evidence showing that the alleged infringer has access to, or opportunities to obtain, such business secrets and the information used by the alleged infringer is substantially identical to such business secrets, (2) the evidence showing that such business secrets have been, or are under the risk to be, disclosed or used by the alleged infringer, or (3) any other evidence showing that such business secrets have been infringed by the alleged infringer.”
Anjie Law Firm
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Mr. Liu has been making theoretical researches and practicing in the area of employment, social security and labor union laws since 2000. He now serves as the regular legal counsel in employment for more than 30 renowned multinational corporations, internet technology companies, state-owned enterprises and joint-stock companies. He has advised quite a number of large-scale enterprises and conglomerates in the formulation and revision of internal rules and regulations, the draft of HR compliance guidance, and the employee settlement for layoff in M&A and reorganization deals. He has served the clients from wide spectrum of industries, including energy, aviation and space, automobile, finance, telecommunications, internet technology, movie and TV media, biological, medical and life sciences, chemistry, machine manufacturing, and education, etc.