trade secret protection

Had a telephone conversation with a client today (yes I am working today) regarding the steps it should be taking to protect its trade secrets in China.  Client is an American company that has been doing business in China for nearly a decade but is “for the first time being forced by its competition to bring over its good stuff to China.”

Strangely enough, this was the first time a client has asked me this question, at least in this form.  I am often asked to draft a contract that contains a trade secret provision and we are constantly drafting Non Disclosure Agreements designed to protect trade secrets.  But this question went beyond that.  The question was directed at all of the methods, both legal and non-legal, this client should employ to protect its trade secrets.

I thought for a while (and checked the notes from a speech I recently gave on protecting IP from China) and eventually spewed forth with the following five keys to China trade secret protection (or something fairly close):

1.  First thing you must do is figure out what you want to protect.

2.  Second thing you must do is figure out how your trade secrets can be taken and what you can do to protect them.  This involves answering a number of questions.  Does it make sense to have your suppliers/vendors sign a code of conduct or a contract making clear that they recognize and will protect your trade secrets?  What operational structures can you put in place (anywhere along the chain) to protect your trade secrets?

3.  Make sure your contracts provide trade secret protection.  In particular, look at your employment and sub-contracting agreements.  Make sure that these contracts safeguard your trade secrets both during the business relationship and after the relationship terminates — you would be surprised at how many contracts seem to end with the termination of the business relationship.

4.  Make sure that all of your people understand the importance of protecting your trade secrets. I don’t have any hard numbers on this, but if I had to guess, I would say that well over half of all trade secret thefts come from your own people and well over half of those come from sloppiness.  It is your job to make sure that you are employing the right personnel, and using the right physical and technical security measures to prevent leakage of trade secrets.  Do the same thing with your suppliers and anyone else that has access to your trade secrets.  Make sure to do whatever you can to ensure that your trade secrets remain a secret even after your business relationships end.  Go ahead and remind your former business partners and employees of the requirement to maintain your trade secrets.

5.  Don’t be afraid to sue to protect your trade secrets.

Did I miss anything?

What do you think?


Lawyers love checklist and China lawyers are, of course, no exception.

Me, I love clients, not only because they are the lifeblood of my law firm and thus my livelihood, but also because they so often are the ones who stimulate the ideas for this blog. I just spoke with a client who asked me to outline the legal issues he needs to consider as his company looks at doing business in China.

Amazingly enough, this is the first time I have been asked so explicitly for such a checklist.

This post “issue spots” the most common legal issues companies face when going to China. Though far from exhaustive (and not intended to be so), this list highlights the key legal issues foreign companies must consider when doing business in China.

  • Are You Legal? China has all sorts of requirements for doing business in China. If you are going to be doing business there anything more than occasionally, you probably will need to form a legal entity to do so. This entity can be a WFOE, a JV, or a Representative Office. Some businesses that are perfectly legal in the United States or in Europe are illegal in China.
  • Contract.  In almost every instance, it is wise to have a written contract and it is almost always best to have this contract be in Chinese. Chinese contract law is far less willing to imply things than western law.
  • Intellectual Property/Trade Secret Protection. Your intellectual property (IP) rights in your own country do not generally extend to China. To secure protection of your trademarks and patents (and to a lesser extent copyrights) in China you must register your rights there. Do it or do not complain when they are “stolen.” You should also be using your contracts (and not just your NDAs) to protect your IP in China.
  • U.S. Foreign Corrupt Practices Act. The United States vigorously enforces the FCPA, which penalizes improper payments to foreign officials by U.S. companies. In certain situations, U.S. companies can be liable under the FCPA for payments made by their Chinese partners. The most common situation is when the U.S. company uses the Chinese company as a distributor of the U.S. company’s products. Know these laws and know how to avoid running afoul of them. And make sure that your employees are trained in these laws. Canada and Europe have similar corrupt practices acts.
  • Compliance with Export Control Laws. Late last year a company asked one of our China attorneys to draft sales contracts for their technology product. Our first question to them was whether the U.S. would even allow them to export their product to China. This question had never even occurred to them, but it turned out that exporting their product to China would be illegal under U.S. law. Years ago, I was approached by a client ready to ship product to North Korea that would have violated U.S. prohibitions on doing business with that country. The client was simply unaware of the law. Some products (certain types of software are a good example of this) can be sent to China only with a validated license.
  • Product Liability Laws. Not sure this would have made it to this list a month ago, but in light of the recent issues surrounding toxic pet food, it deserves to now.
  • Antitrust/Labor/Tax/Termination Issues. If you are going to be doing business with China or, even more so, within China, these issues are often relevant, particularly since Chinese laws on these can be so different from those to which you are accustomed.

I think this covers the basics.