To safeguard their competitive edge and prevent employees from switching jobs or disclosing trade secrets, many companies implement non-compete agreements. These agreements require employees to refrain from working for or starting a business with a competing organization for a specified duration, thereby protecting the company's trade secrets from potential leaks.
In the area of legal protection, trade secrets and non-competition agreements are closely connected. However, the perception of their relationship has evolved in both theory and practice. In 2008, the Supreme People's Court classified non-compete disputes as cases of trade secret infringement. By 2011, this classification was revised, and non-compete disputes were redefined as labor contract disputes. At present, trade secret infringement and non-compete disputes are acknowledged as two separate categories: the former is associated with tort disputes, while the latter is linked to breach of contract disputes.
This article seeks to examine the relationship between trade secrets and non-compete agreements. It will cover how non-compete agreements factor into trade secret infringement cases, how trade secrets are assessed in non-compete conflicts, and the possible intersection of breach of contract and tort liabilities. Furthermore, it will look into important factors and trial tactics for these various case types, along with the legal options available for businesses looking to safeguard their interests.
The Role of Non-Compete Agreements in Trade Secret Infringement Disputes
In the context of trade secret infringement disputes, it is essential to first assess whether the rights holder possesses legally recognized trade secret rights and whether the alleged infringer has indeed violated those rights. According to Paragraph 4 of Article 9 of the Anti-Unfair Competition Law, "trade secrets" encompass commercial information, including technical and business information, that is not publicly known, holds commercial value, and has been safeguarded by appropriate confidentiality measures implemented by the rights holder. To establish their rights, the rights holder must demonstrate that the information in question satisfies the criteria of confidentiality, value, and protective measures.
When a business has a non-compete agreement with a departing employee, it can present this agreement in court to substantiate that it has taken necessary confidentiality precautions regarding the sensitive information at stake. However, it is important to note that non-compete agreements are not infallible. In the case of Shanghai Furi Industrial Co., Ltd. v. Huang Ziyu et al. (2011) heard by the Supreme People's Court, the court ruled that relevant information must be protected as trade secrets and must meet the criteria outlined in the Anti-Unfair Competition Law, which includes the implementation of confidentiality measures. Simply having a non-compete agreement is insufficient; it must clearly articulate the employer's intent to maintain confidentiality and specify the scope of information considered as trade secrets. Therefore, a non-compete agreement does not automatically qualify as a confidentiality measure under applicable trade secret laws and regulations.
There are specific criteria for evaluating the confidentiality of trade secrets. According to Paragraph 2 of Article 5 of the Provisions of the Supreme People's Court on Several Issues Concerning the Application of Law in the Trial of Civil Cases of Infringement of Trade Secrets, courts will assess whether the rights holder has implemented appropriate confidentiality measures based on various factors, including the nature of the trade secret, its medium, its commercial value, the clarity of the confidentiality measures, their relevance to the trade secret, and the rights holder's commitment to maintaining confidentiality. If the measures are adequate to prevent the disclosure of commercial secrets under normal circumstances, the court will recognize that the rights holder has taken appropriate steps to protect the confidential information involved.
In judicial practice, the adequacy of the confidentiality measures can often become a contentious issue. Courts have frequently found that rights holders lack the basis for trade secret rights when the claimed confidentiality measures do not meet legal standards. Consequently, for a business to pursue tort liability against a departing employee in a trade secret infringement case, it must provide evidence that confidentiality measures were implemented in accordance with relevant regulations. Relying solely on a non-compete agreement to assert that appropriate confidentiality measures have been taken may not yield the desired results in litigation.
Analysis of Trade Secrets in Non-Compete Disputes
In addition to cases involving trade secret infringement, companies with non-compete agreements have the option to initiate a lawsuit for non-compete disputes against departing employees for breach of contract. Generally, the burden of proof and litigation expenses associated with non-compete disputes are less demanding compared to traditional trade secret infringement cases.
In a non-compete dispute, the court primarily assesses whether the non-compete agreement adheres to the legal requirements for validity and whether the individual has violated the terms of the agreement. Regarding the existence of a trade secret, the court typically relies on legal presumptions when evaluating the validity of the non-compete agreement.
According to Paragraph 2 of Article 23 of the Labor Contract Law, employers may include a non-compete clause in the labor contract or confidentiality agreement, stipulating that employees will receive monthly compensation during the non-competition period following the termination of the contract. Article 24 further specifies that non-competition applies to senior management, senior technical personnel, and other employees obligated to maintain confidentiality. The scope, region, and duration of the non-compete restrictions should be mutually agreed upon by the employer and employee, ensuring compliance with relevant laws and regulations. The validity of a non-compete agreement is primarily evaluated based on the restricted individuals, the duration of the restrictions, and whether compensation is provided as required.
While Article 23 of the Labor Contract Law explicitly states that "trade secrets and confidential matters related to intellectual property rights" can be included in the non-compete agreement, courts typically do not conduct an in-depth examination of specific confidential information in non-compete disputes. Instead, they focus on the effective requirements of the non-compete agreement and the written terms of the agreement. According to judicial practice, it is generally presumed that if an employee is a senior manager or senior technical personnel, they have had access to the company's trade secrets.
It is important to note that when a company seeks to hold an employee accountable for breach of contract under a non-compete agreement, it is classified as a labor dispute and typically requires adherence to pre-labor arbitration procedures. If a lawsuit is filed directly in court without following this process, the court may dismiss the case, as seen in (2022) Ji 0502 Min Chu No. 89 and (2021) Min 0104 Min Chu No. 9398.
In summary, non-compete disputes generally require less time and effort to establish the basis of rights compared to trade secret infringement cases. If the non-compete agreement meets the necessary conditions for validity, an employee who breaches the contract can be held liable for their actions.
Relationship between tort liability and breach of contract liability
The relationship between tort liability and breach of contract liability is an important consideration for enterprises. Based on the analysis provided, it appears that the most effective course of action for a business is to pursue both tort liability for trade secret infringement and breach of contract liability for violations of non-compete agreements against a departing employee. According to Article 186 of the Civil Code, if one party's breach of contract harms the personal or property rights of the other party, the injured party has the option to seek either breach of contract or tort liability.
Departing employees often contend that there is a conflict between tort liability and breach of contract liability, suggesting that a business can only pursue one type of claim in cases involving trade secret infringement and non-compete agreement violations. However, judicial practice provides relevant case law on this matter. For instance, in the 2014 case of Hangzhou Hengsheng Network Technology Service Co., Ltd. v. Wang Yunmin et al., the court determined that to assess whether an employee breached a non-compete agreement, it is sufficient to evaluate whether the employee's new position and work nature compete with the original employer's operations, as well as whether the employee has infringed upon the original employer's trade secrets. This indicates that some courts have found no conflicting claims between trade secret infringement and non-compete breach disputes.
Furthermore, Paragraph 1 of Article 9 of the Anti-Unfair Competition Law outlines four types of actions that constitute trade secret infringement, including obtaining trade secrets through improper means, disclosing or using those secrets without authorization, and assisting others in such actions. Meanwhile, Paragraph 2 of Article 24 of the Labor Contract Law addresses violations of non-compete agreements, specifically regarding employment with competing businesses or starting similar enterprises. The former provisions focus on the illegal acquisition and use of trade secrets, while the latter pertains to employment and business activities, indicating that these two areas are based on distinct legal facts. A comparison of the legal texts further supports the conclusion that there is no inherent conflict between the two types of liability.
Summary
In cases where an enterprise has a non-compete agreement with an employee, if that employee departs and subsequently infringes on trade secrets, the enterprise has the right to pursue both tort liability for the infringement of trade secrets and liability for breach of the non-compete agreement. These two claims can be pursued simultaneously without conflict.
When initiating a lawsuit for trade secret infringement, the enterprise must demonstrate that it has met the necessary confidentiality requirements for the information in question. It is important to note that a non-compete agreement alone does not suffice to establish that appropriate confidentiality measures were implemented. Conversely, in a lawsuit concerning the breach of non-compete restrictions, the enterprise should concentrate on the legal requirements of the agreement, such as the defined scope of restricted personnel and compliance with compensation regulations. In this context, the burden of proof regarding the existence of trade secrets is not as stringent as it is in infringement cases.