JIN Bingyi (Chinese Lawyer, Partner of Shanghai Runyi Law Firm)
XU Tian (Chinese Lawyer, Consultant of Eiger Law Firm)

I. Preface

With the economic take-off of Mainland China and the continuous expansion of foreign investment, how to protect a company's trade secrets and pursue legal liability against infringers when trade secrets are infringed upon has gradually become a thorny issue that many foreign enterprises that have achieved success in China need to face. For foreign enterprises planning to enter the Chinese market, fully understanding this issue and even establishing an effective protection and response mechanism will enable the enterprises to achieve twice the result with half the effort. This article explores the protection of customer information, which constitutes an extremely important part of trade secrets, through a highly representative case. The judgment of this case was ultimately included in the Gazette of the Supreme People's Court of the People's Republic of China.

II. Case Brief

Yanshengji Company is a professional company engaged in corporate financial and management consulting services.

Zhao was originally a founding shareholder and director of Yanshengji Company, with access to Yanshengji Company's internal DN88 management system (which records a large amount of customer information and other business information).

Subsequently, Zhao suddenly resigned from Yanshengji Company on the grounds of needing to immigrate abroad. However, in reality, after resigning, Zhao did not immigrate but founded Jieshengbei Company, which engages in the same business as Yanshengji Company, and competed with Yanshengji Company in the same industry.

In the competition, Jieshengbei Company promoted Yanshengji's customers as its own, exaggerating its own reputation and service level. At the same time, Jieshengbei Company used the customer information that Zhao had mastered in Yanshengji Company and, with a slightly lower service price, poached Yanshengji Company's customer resources.

Under such circumstances, Yanshengji Company had to entrust lawyers to file a trade secret infringement lawsuit against Zhao and Jieshengbei Company for their infringement acts in the Shanghai No.1 Intermediate People's Court of China.

After trial, the court finally determined that the acts of Zhao and Jieshengbei Company constituted trade secret infringement against Yanshengji Company, and ruled that the two defendants should stop the infringement and compensate for losses.

III. Qualification of Customer List as Trade Secret

The biggest focus in this case is whether Yanshengji Company's customer list constitutes its trade secret.

According to the provisions of the Anti-Unfair Competition Law of the People's Republic of China, trade secrets have the following three attributes:
1. Not known to the public;
2. Capable of bringing economic benefits to the right holder and having practicality;
3. The right holder has taken relevant measures to keep it confidential.

In this case, Yanshengji Company's customer information is the company's core confidential information, which can bring competitive advantages to Yanshengji Company and undoubtedly has practicality and can bring economic benefits to it. Yanshengji Company used invoices, payment vouchers and customer information to prove that 7 customers currently in Jieshengbei Company's customer list on its website were originally customers of Yanshengji Company.

Yanshengji Company presented evidence of the confidentiality measures taken for its customer information as follows: the DN88 management system with permission-based access, relevant company confidentiality rules and regulations, and the labor contract between Yanshengji Company and Zhao which includes confidentiality clauses. Through the above evidence, the court determined that Yanshengji Company had taken appropriate confidentiality measures for its customer information.

The defendant argued in court that Yanshengji Company's customer information had been published on its company website and had thus become public information, so it did not constitute Yanshengji Company's trade secret. After trial, the court held that the defendant's defense was not established: "Although the customer names have been published on Yanshengji Company's website, the evidence shows that the customer names on its website are only abbreviations of the customers, and the detailed customer information, such as contact information, transaction terms, transaction habits and transaction intentions, has not been disclosed. Therefore, it cannot be proved that the customer information has been made public, and the commercial information of the 7 customers involved belongs to Yanshengji Company's trade secret".

This case is the first judicial precedent in Shanghai courts that clearly recognizes that customer information can be identified as trade secret and thus protected by law. However, the customer list that can be identified as trade secret cannot be a simple enumeration of customer names easily accessible to the public, but special customer information different from publicly known information. It is precisely because it meets the above specificity requirements that Yanshengji Company's customer information was identified as trade secret by the court.

IV. Determination of Trade Secret Infringement and Burden of Proof

In judicial practice, Chinese courts have always adopted the "access + similarity" rule to allocate the burden of proof for trade secret infringement, that is, when there is evidence that the alleged infringer has the condition to obtain the right holder's trade secret and has disclosed or used a "substantially similar" trade secret, infringement can be determined, unless the alleged infringer can prove a legal source.

The burden of proof in trade secret infringement cases is borne in stages and appropriately shifted. In the trial of this case, the court did not require Yanshengji Company to present direct evidence to prove that the defendant Zhao had illegally obtained, disclosed, used or allowed others to use the trade secret he had mastered.

In this case, Yanshengji Company presented printed materials of the DN88 system login interface and the operation instructions of the interface after Zhao logged in. This evidence proves that Yanshengji Company's DN88 system stores a large amount of customer information, which can only be accessed through a password, and different materials can be retrieved through different permissions. Zhao's permission was set as a partner, so he could obtain all customer information of Yanshengji Company.

The system shows that since 2005, Yanshengji Company has provided financial consulting services to companies such as Alcatel, Estée Lauder, GE Dong, Liscai, Praxair, China Unicom, etc., and collected corresponding service fees. During this period, Yanshengji Company also provided services to other 14 companies such as Lucite Company, and Zhao approved them as a partner in the "Employment and Work Information Form" within Yanshengji Company. The company's internal information system proved that Zhao had the condition and behavior to "access" Yanshengji Company's trade secret.

Jieshengbei Company, the defendant, claimed on its website that China Unicom, Lucite, Estée Lauder, General Electric and other companies were its customers, and the attachment to the "Professional Service Proposal" used by the defendant also listed Alcatel, Estée Lauder, General Electric, Praxair, China Unicom, etc. as its customers. The court thus determined that Jieshengbei Company had business relations with Yanshengji Company's original customers.

Through the above evidence, it is proved that on the basis that the defendant Zhao was fully capable of accessing Yanshengji Company's customer information, the customers of Jieshengbei Company, which he newly established, overlapped with those of Yanshengji Company, and the customers of both parties constituted "substantial similarity". Therefore, the court held in the judgment that the two defendants infringed Yanshengji Company's legal rights to its customer information as a trade secret. Zhao, the defendant, without the permission of Yanshengji Company, arbitrarily disclosed Yanshengji Company's customer information, and Jieshengbei Company, the defendant, used such information, which together caused damage to Yanshengji Company and should jointly bear the civil liability of stopping the infringement and compensating for losses.

V. Conclusion

When establishing an effective mechanism for protecting trade secrets, companies should take into account the attributes of trade secrets and the rules usually applied by courts in hearing trade secret infringement cases, including the requirements for burden of proof.

Like other types of civil litigation, only with strong evidence and claims or defenses can either party win the lawsuit. However, compared with other types of civil litigation, it is relatively more difficult to collect evidence and organize a coherent and persuasive chain of evidence in trade secret infringement cases.

In addition, due to the highly different profit models and degrees in many commercial fields and the different degrees of discretion exercised by local courts in hearing cases, it is generally difficult to predict the amount of compensation awarded by the court when the facts of such cases are clear. In practice, the amount of compensation awarded by the court is likely to be affected by the persuasiveness of the claims/defenses of both parties and the quality of the evidence.