China trademark: What makes customer lists qualify as trade secrets?

March 22, 2019

In this increasingly transparent and closely connected world, trade secrets are becoming an effective way to protect certain intellectual assets. It is widely recognised that trade secrets can help a company maintain its competitive edge. Customer lists are often among a company's most valuable assets. Safeguarding this information may be critical to the success of a company. It is taken for granted that customer lists are treated as trade secrets which are protected by law. However, in reality, this is not always true. In China, a customer list must satisfy certain criteria in order to be considered a trade secret and thus entitled to legal protection.

Unlike the United States, China's rules in relation to trade secrets are scattered throughout a series of laws and regulations, among which the PRC Anti-Unfair Competition Law (AUCL) promulgated in 1993 and amended in 2017 is most important. In accordance with Article 9 of the law, "trade secret" is defined as any technical or business information with commercial value that is not generally known to the public, and for which the holder has taken reasonable measures to maintain confidentiality. However, the law does not specifically mention a customer list.

In January 2007, the China Supreme People's Court released the Interpretation on Certain Issues related to the Application of Law in Trials of Civil Cases involving Unfair Competition (Interpretation), which specified that a customer list is eligible for protection as a trade secret as long as it satisfies the statutory requirements set out for a trade secret. According to provision 13 of the Interpretation, a customer list refers to names, addresses, contact information, trading habits, intentions, and substances, etc. which are distinguished from public information. Hence, simply a compilation of the contact information of customers cannot constitute a protectable customer list. In other words, the undisclosed habits, preferences, quotations and substances of transactions, rather than the names and contact information of a company which can be obtained from public sources, are the substantial factors that apply to determine whether a customer list is a trade secret or not. Thus, including a customer's buying habits, preferences, specific pricing information, and sales volume can significantly boost the likelihood that a customer list qualifies as a trade secret.

Furthermore, Article 11 of the Interpretation provides specific guidance on what constitutes reasonable confidentiality measures. Carrying out one of the measures listed below may amount to a reasonable measure: (1) restricting access to confidential information and merely disclosing it to people who need to know; (2) locking the carrier of confidential information or adopting any other preventive measures; (3) marking the carrier containing confidential information with a confidentiality notice; (4) providing passwords or codes for access to confidential information; (5) executing a confidentiality agreement; (6) restricting a visitor's access to classified areas of machinery, factory, workshop or any other place, or demanding confidentiality obligations.

It is worth bringing attention to new employers who may have potential joint liabilities under the AUCL. According to Article 9 of the AUCL, a third party shall be deemed to have committed trade secret infringement if i) it acquires, uses and discloses any trade secret; and ii) it knew, or should have known that the employee or former employee of the trade secret holder committed trade secret infringement.

The above rules are illustrated in a case handled by Shanghai Middle Court [(2014) 沪一中民五 (知) 终字第74号]. In this lawsuit, the Shanghai court upheld the plaintiff's assertion that the second defendant had committed trade secret infringement on the ground that i) as a former deputy general manager of the plaintiff, the second defendant and the plaintiff had entered into a confidentiality agreement under which he was prohibited from competing with the plaintiff within two years after termination of his employment with the plaintiff; ii) the confidentiality agreement expressly specified that the second defendant should not disclose the address, email, website, telephone number, quotations, offers, business card, etc. of the plaintiff's customers and potential customers; iii) execution of the confidentiality agreement proved that the plaintiff had taken a reasonable measure to protect its trade secrets; iii) the plaintiff had invested tremendous human and financial resources in developing customer connections by participation in exhibits, advertisement and online business promotions, ending up with a long-term and stable relationship with its customers; iv) the customer information under dispute contained trading habits, character of the personnel in charge, and specific requirements which are not available on the websites of its customers; v) the second defendant proactively approached four customers of the plaintiff and struck deals with these four customers.

In light of the fact that the first defendant, as the existing employer of the second defendant, engaged in the same business which competed with the plaintiff for a long time, and hired the second defendant as its general manager who is responsible for developing the domestic and international market, the court made a presumption that the first defendant knew or should have known about the second defendant's misappropriation of trade secret. Thus, the court held that the first defendant should have joint and several liability.

In contrast, in a case handled by the Zhongshan Court of Guangdong province [(2016) 粤 2071 民初 4755号案], the court declined the plaintiff's claim on the ground that the customer list lacked detailed information such as each individual customer's specific requirements, and trading habits.

Therefore, a company should exercise particular caution to manage the risks when dealing with customer lists during its daily operations in China. A company may take the following measures to minimise its risks and help ensure that its customer lists qualify as protectable trade secrets:

1) When recruiting a new employee, especially from its competitors, a company should verify whether he or she is subject to a non-compete obligation to his or her former employer.

2) A company should require any new employee to undertake in writing not to use any trade secret which he or she obtains during previous employment.

3) A company should include employees' confidentiality obligations in the employee manual, execute confidentiality agreements that refer specifically to the business's customer list, and frequently communicate to all employees the secret nature of customer information, as well as adopting measures to limit access to such information.

4) A company should maintain files of customer lists which not only include contact information but also specific information about customers' preferences, quotations, pricing lists, etc.

5) A company should maintain files of its marketing activities, in particular, the approach used to build up connections with a client and the expense incurred.

6) A confidentiality agreement should be executed to cover the entire transaction process before a company starts to disclose any information to any parties involved.