About a week ago, we did a post, entitled, How To Write A China Contract. Arbitration Versus Litigation. Say Where?  That post discussed an issue that had been raised on China Group on Linkedin, (which just hit 7,700+ members): which forum is better for resolving disputes with Chinese companies, the courts or arbitration?  Our post came down favoring litigation in China (yes, in China) as usually being the best forum.

We talked of how when we seek to determine the appropriate forum for our China contracts, foremost on our minds is the following:

In figuring out what we are going to put in the contracts we write between our US clients and their Chinese counterparts, we first sit back and try to figure out the most likely breach of contract scenarios (either by our own client or by the Chinese company) and also the really critical breach of contract scenarios.  A bad delivery of $100,000 in product might be very likely, but that is going to pale in importance to the Chinese company taking over our client’s factory in China and ceasing all deliveries.  So between those two, we would probably write the contract to provide our client with the best forum for dealing with its factory being hijacked.

A recently issued Chinese Court ruling highlights why a Chinese court is oftentimes the best place to be for an American company seeking redress against a Chinese company. The ruling came from Shanghai’s No. 1 Intermediate Court in the case of Eli Lilly v. Huang, involving a trade secret dispute. The facts of the case are relatively simple.  Huang had been an employee of Eli Lilly’s Chinese subsidiary and he had signed a confidentiality agreement with the subsidiary agreeing not to reveal Eli Lilly trade secrets.  Huang downloaded 21 confidential documents from Eli Lilly’s server, without authorization.  Eli Lilly demanded Huang delete these documents, but he resigned “instead.”  Eli Lilly brought a trade secret misappropriation claim against Huang under China’s Anti-Unfair Competition Law, seeking injunctive relief and RMB 20,000,000 in damages.

The Shanghai court almost instantly issued an interlocutory injunction prohibiting Huang from disclosing, using or allowing others to use any trade secret information in the 21 documents he had downloaded.

This decision presents a number of good takeaways for foreign companies doing business in China or doing business with China, including the following:

1.  Put a trade secret provision in your contracts whenever appropriate.  These especially make sense in your employment contracts.  China does protect trade secrets taken by an employee even if you do not have a contract with that employee forbidding theft of trade secrets, but for various reasons, it is better to have it in your contracts as well, and that is exactly what Eli Lilly had done here.

2. If protecting your trade secrets are important to you, write your contract with that goal in mind.  This means figuring out the best forum for enforcing your trade secret provision. Typically, the best forum for enforcing your trade secret provision is going to be a court not an arbitration panel.  Yes, arbitration panels can sometimes get courts to issue orders stopping trade secret violations (and sometimes they can’t), but having to go through arbitration and then having to go through a court will greatly increase the time it will take to get such relief and also increase your chances of never getting such relief.  Typically, the best court for enforcing your trade secret provision is going to be the court with the most power over your Chinese counter-party.  Typically, that court is going to be a Chinese court because most Chinese companies do not have much that can be reached outside China.

3.  If getting your trade secret provision enforced quickly in a Chinese court is going to matter to you, do your contract in Chinese.  For more on this, check out Your China Contract Should Be In Chinese. Here’s Why.

How to write a China contract to protect your trade secrets?  Write it in Chinese, with a trade secret provision and the right forum set to enforce it.

Any questions?