The Hong Kong High Court has just handed down a judgment finding former employees of a biotech company liable for misuse of confidential information relating to prenatal genetic tests. The former employees set up a rival business in a very short time after leaving the plaintiff company but claimed that they had developed their technology independently. The court rejected this claim, as the presence of the plaintiff’s footprint in the genetic markers used by the defendants in developing their own test, was a strong indication that the plaintiff’s confidential information was used. The court also found it strange that the defendants had not kept proper documentation, or a contemporaneous record of the development process, concluding that, on the balance of probabilities, confidential information had been used to develop and launch the defendants’ test within a short period of time.
Interestingly, the court also ruled that two of the defendants who were related individuals involved in setting up the rival business, as well as the rival defendant companies, had acted in concert with the former employees to further a common design to misuse the confidential information. The related individuals had no technical background, and were not involved in the misappropriation, but provided necessary funding and other assistance.
Managing insider threats
Most trade secret infringement cases involve employees or former employees. This case is a timely reminder of the importance of information security. Increased employee mobility, the prevalence of working from home, and rapidly developing technologies including AI, mean that protecting trade secrets is more of a challenge than ever. From the famous Coca-Cola recipe, to Google’s search algorithm, and the formula for WD-40, trade secrets can be fundamental to the success of a business. However, despite their value, they are often not afforded the same degree of attention given to traditional intellectual property, such as patents.
Trade secret protection should be regarded as a core risk-management issue. Businesses should conduct an audit to identify what trade secrets they may have, and make sure that they have adequate policies and security protocols in place (including encryption and secure IT systems), to ensure that they are kept safe. The act of marking a document as “confidential” or “secret” is simple but can be critical. Many businesses are also not aware that things such as their manufacturing process and know-how can be valuable assets, and may not have taken the time to consider how it is stored, and who has access to it. The management of employees, including taking appropriate protective measures such as contractual provisions, controlling access to confidential information, training, and monitoring unusual behaviour and digital activity is also crucial. It is vital to strengthen onboarding and offboarding practices, and to act swiftly when misappropriation is suspected.
The theft of trade secrets is of great concern to companies wishing to do business in the mainland. The recent number of trade secret cases, where significant compensation has been awarded by the mainland courts, is an indication of the importance attached by the authorities to the misappropriation of trade secrets. The Supreme People’s Court recently awarded Hefei Meyer Optoelectronic Technology nearly RMB200 million (US$28 million) in relation to unlawful disclosure and use of trade secrets by ex-employees, relating to 3D imaging dental equipment.
Although obtaining evidence of the misappropriation of trade secrets in the mainland can be difficult, changes to the Anti-Unfair Competition Law, that have been in place for some time, reduced the traditional burden of proof on a plaintiff. As long as the owner of the trade secret is able to provide preliminary evidence that they have taken measures to keep the trade secret confidential, and can reasonably demonstrate that the trade secret has been misappropriated, the burden shifts on the alleged infringer to show it has not misappropriated the trade secret.
Preliminary injunctions are also available to stop infringement and to preserve evidence, and the owner of a trade secret may also apply to the court to order the infringer to produce books of accounts and other financial documents, in order to calculate damages. If the infringer fails to comply with the court order, the court may order damages based on the claim and evidence provided by the plaintiff.
It is important to be aware that trade secret protection may also be pursued under the criminal law and through administrative enforcement in China. In fact, pursuing criminal action for the misappropriation of trade secrets can be critical, as it can sometimes be the only way to obtain the evidence of infringement needed to pursue a civil claim, where there is a better chance of obtaining more significant compensation. Criminal action can also act as a significant deterrent.
Cases of employee misappropriation of confidential information frequently involve cross-border activities and, in our experience, China’s standards and requirements for the protection of trade secrets can be more stringent than Hong Kong. It is important to have an effective cross-border strategy in terms practical protection as well as enforcement. The arrangement for reciprocal enforcement of judgments between Hong Kong and the mainland, which came into force in 2024, is an important development. The regime includes judgments relating to the infringement of intellectual property rights for the first time, and covers punitive and exemplary damages for the infringement of intellectual property (apart from patent infringement), but not specific performance. Trade secrets are singled out for special treatment and the arrangement allows for both the enforcement of punitive damages and specific performance in trade secret cases.
For further information, please contact:
Catherine Zheng, Partner, Deacons
catherine.zheng@deacons.com
