China confidentiality agreements trade secret agreementsAs part of our China company formation work, our China lawyers help our clients with their employment matters that arise before, during and after their China entity (usually a WFOE) is formed. Among other things, we draft the employment documents needed for a newly established WFOE. When a WFOE is up and running, it needs employee agreements in place for all its employees and we usually recommend what we call an “Initial Employment Package,” which includes the following for each employee:

  1. Employment Contracts
  2. Rules and Regulations
  3. Trade Secrecy and Intellectual Property Protection Agreements and
  4. Sign Off Agreements (acknowledging each employee’s receipt of the Rules and Regulations)

These China employment packages also often include Non-compete Agreements and Education/Training Reimbursement Agreements as well.

One of the common questions we get from both existing and prospective clients is why they need their employees to sign a trade secrecy agreement at all and in this post I briefly explain why our China employment lawyers always recommend having such an agreement.

Consider this scenario. A China employer hires an employee and gives the employee access to some or all of the company’s trade secrets. The employee then leaves employment and takes the material with her. What can the employer do? Suppose the employee never signed either a trade secrecy agreement or a non-competition agreement.

Since the theft of trade secrets is a both a crime in China and gives rise to a civil claim, the lack of a signed trade secrecy agreement does not bar the employer from suing the employee and/or reporting her to the police. But to succeed on either front there must be clear evidence that the employee took something and that what the employee took was in fact a trade secret. And that is where things can get difficult. Very difficult. For information to qualify as a trade secret in China, all of the following must be true:

1. The information is technical or business information unknown to the public.

2. The information must have economic value.

3. The owner of the trade secret undertook reasonable measures to maintain its confidentiality.

Are you certain you will be able to prove all of the above about everything you do not want your employees taking with them? In our experience, this usually ranges from difficult to impossible simply because most companies are not terribly careful about preserving their secrets.

Though it is possible to bring a trade secret lawsuit in the absence of an agreement protecting confidential information, a trade secrecy agreement almost invariably makes that lawsuit faster, cheaper and — most importantly — better. This is because if your trade secrecy agreement says not to steal X, Y and Z and an employee steals X, Y or Z, you can sue that employee for what should be a relatively clearcut breach of contract, rather than having to prove out everything related to trade secrets, as mentioned above. You will not need to prove that what was taken was a trade secret because your trade secrecy agreement with your employee will make clear what the employee can and cannot use outside your company, regardless of whether it is or is not a trade secret.

Trade secrecy agreements also make clear to your employees what is okay and what isn’t and they let your employee know that you can sue and win if they violate it. And by doing so, they greatly decrease the risk of an employee walking out the door with your trade secrets — as defined by you, not by complicated regulations and a random Chinese court.

One of the things our employer audits consistently reveal is that even companies that require trade secrecy agreements often (like about 90 percent of the time) fail to get all of their employees to sign these. We have learned this from our employer audits and we have learned this from companies that come to us after one of their employees has taken their trade secrets and joined a competitor or started their own competing business.

China employers should also have a clearly documented secrecy/confidentiality policy that sets forth how they handle and protect their confidential information. This coupled with a trade secrecy agreement will give the employer the maximum legal benefits and protections.

Bottom line: Make sure all your employees execute an English/Chinese trade secrecy agreement at the beginning of their employment and make sure your rules and regulations deal appropriately with your trade secrets as well.