Trade Secrets and Employee Mobility in the U.S. and Asia

In 2010, Hewlett-Packard sued its former CEO for threatened misappropriation of trade secrets, after he took a position as President of Oracle. In 2012, Taiwan’s Acer, Inc. sued its former CEO for breach of a non-competition agreement after he quit and took a top position at Lenovo. And last month, criminal charges were filed against five employees of Taiwan’s HTC Corp., for allegedly conspiring to form a competing company using secrets stolen from HTC.

Employers often spend considerable resources recruiting, hiring and training key talent, only to face potential disaster when those trusted employees quit to join a competitor, often taking sensitive files on their way out the door. Even if they don’t act in bad faith, departing employees carry critical, confidential information inside their heads, which can’t be deleted. Fortunately, various remedies may be available for the former employer, from confidentiality and non-competition agreements, to lawsuits for actual or threatened misappropriation of trade secrets and the doctrine of inevitable disclosure.

But there’s a conflict. Employers have a legitimate interest in preventing misappropriation of trade secrets, while employees have a legitimate interest in utilizing knowledge and skills gained through work experience and working for employers of their choosing. Courts and lawmakers have long struggled to establish a balance between those competing interests. Below is a general overview of relevant laws and practices in the U.S. and Asia.

I. Trade Secret Protection

To protect confidential information, a company should first limit access to those who need to know; install practical solutions such as locked doors, locked cabinets and passwords; and require all persons with access to sensitive information to sign confidentiality agreements, agreeing not to disclose the information to third parties. However, so long as one takes reasonable precautions, trade secrets should be protected by law in most countries, without the need for any contract.

In the U.S., common-law trade secret protection dates back almost 200 years, but today protection is governed primarily by statute. Forty-eight states have adopted a form of the Uniform Trade Secret Act (UTSA), which defines a trade secret as any information that (a) derives economic value from being not generally known to the public and (b) is the subject of reasonable efforts to maintain its secrecy. Illegal misappropriation includes acquiring secrets by one who knows or should have known the information was obtained by improper means, or disclosing or using the secrets without proper consent.

In Asia, trade secret protection is much newer, with most countries having enacted their first trade secret laws in the 1990s and 2000s in response to pressure from the U.S., particularly after those nations joined the Agreement on Trade-Related Aspects of IP Rights (TRIPs) and World Trade Organization (WTO). Japan enacted its first significant trade secret legislation in 1990, South Korea in 1992, China in 1993, Taiwan in 1996 and Thailand in 2002.

Despite their late start, most countries in Asia define trade secrets similarly to the U.S.:

• China’s Anti-Unfair Competition Law defines trade secret as any technical or business information that is not known to the public, has actual or potential economic value, practical applicability, and is the subject of reasonable efforts to maintain its secrecy.
• Taiwan’s Trade Secret Protection Act defines trade secret as any method, process, formula, program, design, or information that may be used in production, sales, or business operations, is not generally known to the public, has actual or potential economic value, due to its secretive nature, and is the subject of reasonable efforts to maintain its secrecy.
• Japan’s Unfair Competition Prevention Act defines trade secret as any technical or business information that is not known to the public, is useful for commercial activities, and is the subject of reasonable efforts to maintain its secrecy.
• Thailand’s Trade Secrets Act defines trade secrets as business information that is not known to the public, derives commercial value from its secrecy, and is the subject of reasonable efforts to maintain the secrecy.

While the definitions of trade secret and misappropriation differ slightly in the U.S. and Asia (e.g., China and Japan impose an additional usefulness requirement), the similarities outweigh the differences.

II. Injunctive Relief

Injunctive relief is critical to any trade secret dispute. Once trade secrets are wrongfully used or disclosed, they lose their value and monetary damages are often insufficient. Therefore, victims of misappropriation usually seek prompt injunctive relief prohibiting further copying, use or disclosure of the secrets and otherwise attempting to contain the harm.

A. Actual Misappropriation

In the U.S., injunctive relief is deemed an extraordinary remedy, but is routinely granted for misappropriation of trade secrets. In one typical case, a jury found several defendants had maliciously misappropriated their former employer’s trade secrets and used them to make and sell competing products, so the court ordered them to pay millions of dollars in damages and permanently enjoined them from disclosing, using or transferring the trade secrets. ClearOne v. Bowers, 643 F.3d 735 (10th Cir. 2011)

In the U.S., to obtain injunctive relief for trade secret misappropriation, one must satisfy the standard four-factor test. The moving party must prove: (1) it suffered irreparable injury; (2) monetary damages would not provide adequate compensation; (3) the balance of hardships weighs in favor of granting relief; and (4) the relief sought would not contravene public interest.

Most Asian countries also allow for injunctive relief in response to misappropriation of trade secrets. Japan, South Korea, Singapore and Thailand have all granted injunctions on that basis. Taiwan’s courts apply a four-factor test roughly the same as the U.S. In fact, a Taiwan court granted a preliminary injunction in a trade secret case just last week, freezing the assets of a company that allegedly sought to gain unfair advantage through the use of secrets stolen by four of plaintiff’s former employees. Largan v. Ability, (Taichung Dist. Ct. 2013).

And in China the first injunction for trade secret misappropriation was granted last month, based on recent amendments to Article 100 of the Civil Procedure Law. Prior to those amendments, injunctions were available for violations of patent, copyright and trademark law, but there was uncertainty regarding trade secrets.

In that China case, an employee of Eli Lilly Co. downloaded 21 confidential documents from the company’s server in violation of a confidentiality agreement. The company demanded that he delete the files, but the employee refused, so Eli Lilly terminated his employment and filed suit, requesting damages and an injunction barring further copying or dissemination of the files and requiring their destruction. The injunction was granted, but one should not make too much of it, as cases in China lack precedential value, non-compliance with court orders is routine and rarely are there serious consequences for non-compliance.

B. Threatened Misappropriation

Of course, seeking an injunction after an employee has wrongfully misappropriated, used or disclosed trade secrets, or started working for a competitor is akin to shutting the door after the horse has bolted.

Fortunately, in the U.S. one need not wait for actual violations, because the UTSA provides that, “actual or threatened misappropriation may be enjoined” and many injunctions have been issued based on threatened misappropriation. “Based on the unambiguous words of the statute, we reject [defendant’s] argument that California law does not permit injunctive relief to be based on threatened misappropriation of trade secrets.” Central Valley General Hospital v. Smith, 162 Cal. App. 4th 501 (2008).

Unfortunately, every state and federal court in the U.S. seems to have its own interpretation of what constitutes threatened misappropriation and what remedies are available. For example, one court admitted that injunctions are available for threatened misappropriation, but refused to prohibit an employee from going to work for a competitor, because the record failed to show he had taken confidential information when leaving his prior employment and he claimed he could not remember the confidential information with precision. Del Monte v. Dole, 148 F. Supp. 2d 1326 (S.D. Fl. 2001).
Asian countries also authorize injunctive relief for threatened misappropriation:

• Thailand’s Trade Secret Act authorizes such relief where there is clear evidence that an infringement of trade secrets has been committed or is imminent.
• South Korea’s Protection of Trade Secrets Act authorizes such relief when a person engages in violations of the trade secret act, or is likely to engage in violations, which damage or are likely to damage the business interests of the owner of the trade secrets.
• Japan’s Unfair Competition Prevention Act authorizes such relief when a person’s business interests are infringed, or are likely to be infringed, by a violation of the act.

However, as in the U.S., it is unclear in most countries what evidence is required to prove threatened misappropriation and what types of conduct the courts will enjoin.

C. Inevitable Disclosure Doctrine

Absent actual or threatened misappropriation, many persons believe there’s a third theory that one may – or may not – rely upon in the U.S. as a basis for injunctive relief, prohibiting an employee who has gained confidential information in one job from going to work for a competitor: the doctrine of inevitable disclosure. Those persons are mistaken; inevitable disclosure is not a stand-alone claim, but a potential basis for threatened misappropriation.

One of the leading cases is PepsiCo v. Redmond, 54 F.3d 1262 (7th Cir. 1995), which involved a high level employee who signed a confidentiality agreement, but no non-competition agreement, before quitting his job at Pepsi to work for Quaker’s Gatorade division. Pepsi sued, requesting an injunction barring the employee from taking the job, because he had critical knowledge of Pepsi’s competing sports drink plans. The district court granted the injunction and the Court of Appeal affirmed based on “the demonstrated inevitability that Redmond would rely on [PepsiCo’s] trade secrets in his new job at Quaker.” That inevitability was based on not wrongdoing by the defendant, but just the fact that he had learned the trade secrets and could not unlearn them.

Following the PepsiCo decision, many courts have issued injunctions based on the doctrine, but others reject it. One court stated, “[A] court should not allow a plaintiff to use inevitable disclosure as an after-the-fact noncompete agreement to enjoin an employee from working for the employer of his or her choice.” Del Monte v. Dole, supra, at 148 F.Supp.2d 1337. Another held, “the inevitable disclosure doctrine cannot be used as a substitute for proving actual or threatened misappropriation of trade secrets” Whyte v. Schlage Lock Co., 101 Cal.App.4th 1443, 1464 (2002). Another declared, “[C]ourts have resorted to the doctrine only where there is evidence of the actual misappropriation of trade secrets, or where the plaintiff asserts a claim for breach of a non-compete agreement.” Janus v. Kahnke, (S.D.N.Y. 2013).

The above comments appear to reflect a misunderstanding of the doctrine. First, it is nothing new. The underlying principle was enunciated more than one-hundred years ago in Harrison v. Glucose Sugar Refining Co., 116 F. 304 (7th Cir. 1902): “[I]t would require something more than his mere denial to convince us that . . . he would not employ the secrets of the business . . . which had been confidentially communicated to him. He could not well do otherwise. He was employed by the rival for that purpose . . . He could not in good faith serve the one without breach of duty to the other.” Second, it makes no sense that actual misappropriation or a non-compete agreement should be required. The law in most states provides that, “actual or threatened misappropriation may be enjoined.” Inevitable disclosure is simply a sub-set of threatened misappropriation.

Few, if any, Asian court decisions expressly use the words “inevitable disclosure doctrine,” but a Hong Kong court strongly rejected the doctrine in Double Rise Development Limited v. Leung Kit Chuen [2013] HKCU 23. As in the PepsiCo case, an employee had signed a confidentiality provision but no non-compete, then sought to work for a competitor. Unlike PepsiCo, the court declined to issue an injunction ruling, “The use of confidential information restrictions in order to fetter the ability of these employees to use their skills and experience after determination of their employment to compete with their ex-employer is, in my view, potentially harmful. It would be capable of imposing a new form of servitude or serfdom . . . Employers who want to impose fetters of this sort on their employees ought . . . to do so by express covenant.”

Regardless, most companies should strongly consider raising the doctrine in appropriate cases, because most countries prohibit threatened misappropriation and inevitable disclosure seems a valid argument in support of such a threat.

III. Non-Competition Agreements

Compared to actions for misappropriation, actions to enforce restrictive employment covenants may seem easy. (If the inevitable disclosure doctrine is an implied covenant not to compete, why not make it explicit instead?) For that reason, non-compete agreements are common in the U.S. According to a recent Wall Street Journal article, more than 78% of all chief-executive employment contracts at US businesses contained such a provision in 2010.

Admittedly, California is different. Since 1872, California statutes have prohibited most non-compete agreements. Under B&P Code §16,600, except with respect to the sale or dissolution of corporations, partnerships and limited liability corporations, “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” A line of federal cases in the Ninth Circuit holds that non-competes may be permissible in California where narrowly tailored. See IBM v. Bajorek, 191 F.3d 1033 (9th Cir. 1999). But California’s state Supreme Court has emphatically rejected that interpretation holding, “noncompetition agreements are invalid, even if narrowly drawn, unless they fall within the applicable statutory exceptions . . .” Edwards v. Arthur Anderson, 44 Cal. 4th 937, 955 (2008).

Most states are more receptive. For example, in Seneca v. Harden (S.D. Iowa 2013), the court upheld a non-compete agreement prohibiting an employee of a biodiesel production company from working for a competitor, based on a three-prong test. Is the restriction: 1) reasonably necessary to protect the employer; 2) unreasonably restrictive of the employee; and 3) prejudicial to the public interest? Applying that test, the court found the employee had received special training and exposure to trade secrets, which the employer had a legitimate interest in protecting, there was a real threat of wrongful use or disclosure, and the non-compete was narrowly drafted to prevent such harm. As for public interest, the court ruled – in bracing contrast to California – that, “the enforcement of valid non-competition agreements serves the public interest . . . The Court finds this to be largely a private dispute, governed by contract law, and as such the public has little interest in the outcome of this dispute.”

Unlike the U.S., most Asian countries, including Taiwan, China, Japan, Korea, Thailand, Vietnam, Indonesia and Malaysia, enshrine the right to pursue an occupation within their Constitutions. Consequently, for the most part, any restrictions on an employee’s mobility are strongly disfavored, the restrictions must be narrowly tailored and often the employer may be required to pay compensation during the non-compete period.

For example, China’s Employment Contract Law authorizes non-compete agreements, but only if it does not exceed two years, the terms are not overly restrictive, it applies only to senior employees or technical staff, and the employee receives sufficient consideration during the non-compete period. What constitutes sufficient consideration may be unclear, so companies sometimes play it safe by paying the employee’s full salary during the non-compete period (basically “garden leave”). However, the Supreme People’s Court issued an interpretation earlier this year stating that 30% of the prior monthly salary may be deemed reasonable. That is a national standard, though, and local standards differ (50% is deemed reasonable in Shenzhen), so a company should investigate local standards before making a decision.

In Taiwan, courts considering the validity of non-competes will examine the employee’s position, activities restricted, temporal and geographic scope, employer interest to be protected, employee bad faith, and compensation paid during the non-compete. Two years is often said to be reasonable, but a one year non-compete was struck down in a 2010 case involving Hon Hai Precision Industry Co. The court found the non-compete overly broad, because it prohibited an employee from engaging in any business that Hon Hai conducts in any region where Hon Hai does business. Hon Hai has over one million employees manufacturing virtually every conceivable electronic device, all over the world, so the ruling is understandable. To be valid, the restriction should have been tailored for the specific individual, not one size fits all.

In Hong Kong, a court upheld a six-month restriction prohibiting a popular fitness instructor from working in the same line of work within 1,000 meters of his former employer’s primary location. Pure International v. Lo Yan Chan, HKEC 1092 (2013). And in one of the most extreme non-competes upheld by any court in Asia, the Supreme Court of Thailand approved an agreement prohibiting a low-level logistics manager from working in the industry for five years in five countries (Thailand, Vietnam, Cambodia, Laos and Myanmar). JVK International Movers v. Howell, No. 1275/2543 (2007). However, as with most cases in Asia, companies should not rely on that case as binding precedent, because the courts will consider each case on its own merits.

IV. Practice Pointers

While laws and practices differ in the U.S. and Asia, some basics are universal. To prevent employees from misappropriating confidential information a company should first implement practical security measures, limit dissemination to those with a need to know, and require the signing of confidentiality agreements. Not only will that lessen the risk of misappropriation, but such precautions are necessary for information to meet the definition of trade secret.

The company should consider requiring employees to sign non-competition agreements, but only for senior staff and those with access to trade secrets. The terms should be clear, unambiguous and reasonable, restrictions limited to the extent necessary, and each agreement specifically tailored for the individual. The agreement may list certain companies or businesses that qualify as competitors; state that it is necessary to protect employer’s trade secrets or other legitimate interests and damages would not adequately compensate for a breach, so injunctive relief is proper; and state that in event a court deems the provision invalid, the court may re-write it as needed to make it valid. Where permitted by law, it may include a liquidated damages provision.

In China, disputes arising from an employment agreement must be submitted to a labor dispute arbitration commission, but the commission lacks jurisdiction over third parties (such as competing companies), so companies may wish to state non-compete obligations in a separate contract, rather than in the employment contract.

Discovery is much more limited in Asia than the U.S., which makes trade secret cases especially challenging, due to their fact-intensive nature. A common tactic used to surmount that obstacle is to file a criminal complaint first, in the hopes that the authorities will launch criminal raids and gather evidence, which may then be used in any civil action. That tactic provides other advantages, too, including the right for a complainant to dismiss the criminal charges in exchange for settlement of the civil suit.

Finally, the best solution to avoid losing key talent to the competition is to improve employee retention through careful assessment and hiring of applicants; employee orientation, professional development and training programs; a positive work environment; competitive salary and benefits; and reward and recognition programs. After all, trade secrets and other confidential information may have immense value to an organization, but well-trained, devoted employees are often the most important asset that a company has.

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If you require assistance, contact an Asia trade secrets attorney.

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