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China’s Supreme People’s Court Rules Customer Lists are not Trade Secrets

In decision  (2019)最高法民再268号 dated December 16, 2019 and just recently published,  the Supreme People’s Court of China (SPC) held that customer lists are not trade secrets even with signed confidentiality agreements. One of the defendants, former employees of the plaintiff, Huayang Xinxing Technology (Tianjin) Group Co., Ltd. , left Huayang to start Mai Da Keer (Tianjin) Technology Co., Ltd. after almost 20 years at Huayang. With their departure, the defendants took a customer list containing 43 customers’ data including the customer names, number of sales orders, order dates, product name and specifications, unit price, contact person, telephone number, and address. The SPC reasoned that the customer list was not a trade secret because the names and contact information were easily discoverable with online searching and the other data do not reflect a customer’s purchasing habits nor intentions.

Huayang Company is an enterprise engaged in R&D, production and sales of industrial cleaning and maintenance products. The product range mainly includes cleaning chemicals, lubricants, sealants and other industrial chemicals.  Defendant Wang Chenggang joined the Huayang Company in 1996. He served as director, deputy general manager, general manager, and vice president of Huayang Company. From 2012 to 2016, he served as the legal representative of Huayang Company. At the end of October 2015, he founded Mai Da Keer. Co-defendants Zhang Hongxing and Liu Fang  were also employees at Huayang and joined Mai Da Keer afterwards. 

Huayang signed a confidentiality agreement with Zhang Hongxing and Liu Fang but apparently not with Wang Chengang. The scope of the agreement covers business secrets related to customer business, products and services. Huayang uses an Enterprise Resource Planning (ERP) system to manage customer information. In Huayang’s ERP system, the stored customer information includes: customer name, product name, product specifications, sales order quantity, unit price, contact person, phone number, address, etc. 
 
Huayang said that its sales with its customers in the customer list in 2014 and 2015 were 2.61 million RMB. After the establishment of Mai Da Keer, its sales decreased to 1.29 million RMB.
 
In the first instance, the The Tianjin First Intermediate People’s Court issued an injunction to stop the use and dissemination of the customer list as it was a trade secret and awarded damages of 600,000 RMB.  On appeal, the Tianjin Higher People’s Court upheld the lower court’s ruling.  Mai Da Keer then appealed to the SPC, which reversed.
 
The SPC explained that per Article 13 of the Interpretation of the Supreme People’s Court on Several Issues Concerning the Application of Law in the Trial of Civil Cases of Unfair Competition, customer lists need to include “special customer information” that is different from well-known information – that is, not all customers lists are automatically protected.
 
The SPC went on to explain that while Huayang took measures to keep the customer list confidential (e.g., confidentiality agreements and a password protected ERP system), the list is not a trade secret.  Customer information, such as name, phone number and address, can easily be found via an online search.  The other data in the customer list do reflect a customer’s purchasing habits and intentions that is different from general transaction records in the list. A customer list, to be considered a trade secret,  must include the customer’s specific purchasing habits, intentions and other in-depth information – not just past order information.
 
Accordingly, as there was no non-compete agreement signed with the former employees and the customer list is not a trade secret, the defendants have no obligation to restrict competition. The actions of the defendants do not violate the anti-unfair competition law.
 

Despite the SPC’s statement that “[t]his court believes that in the trial of trade secret cases, the people’s courts must strengthen the protection of trade secrets in accordance with the law, effectively stop the violation of trade secrets, create a safe and reliable legal environment for corporate innovation and investment, and properly handle the protection of business,” this case seems to weaken the minimal trade secret protection currently available in China.  It would seem that past order information, such as price paid, would be extremely valuable to a competitor as the competitor would know the price needed to undercut competition. Further, past orders may indicate the timing of purchases and therefore customer intent. 

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Author:
Director of China Intellectual Property Practice

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