Conditions for Customer Lists to Constitute Trade Secrets
By/Ningbo Intermediate People’s Court, Zhejiang Province
Ma Hong (Second Instance Case Handler) Hong Jing
【Judicial Summary】
To constitute a trade secret, a customer list must reflect certain competitive advantages due to the specific customer names, contact details, and the unique transaction habits, intentions, and contents that differentiate it from publicly known information. The plaintiff must prove that they have made relevant business efforts, such as maintaining long-term stable trading relationships with specific customers.
【Case Number】
First Instance: (2018) Zhe 0203 Min Chu 5975
Second Instance: (2018) Zhe 02 Min Zhong 4957
【Case Facts】
Plaintiff: Xintang Company.
Defendant: Wen, Dean Company.
The plaintiff claims that it is a foreign trade company primarily exporting candy and chocolate machinery, engaged in foreign trade sales for 14 years. Defendant Wen worked as a salesperson for the plaintiff from April 3, 2011, to May 30, 2015. The plaintiff and Wen signed a confidentiality agreement in January 2011, stipulating that Wen must not disclose or permit others to use the company’s trade secrets during his employment, must not work for competitors, and must not take company materials upon leaving. Wen left in May 2015, citing poor sales, and subsequently joined Dean Company, a competitor. In fact, Wen had already prepared to switch to Dean Company, gradually transferring the plaintiff’s customers to Dean, causing a significant drop in the plaintiff’s sales. After Wen leaked the plaintiff’s trade secrets, the plaintiff lost many long-term clients, resulting in severe financial losses and infringement of its interests. Dean Company, knowing that the plaintiff had a large number of stable and trustworthy clients, maliciously induced Wen to obtain important customer information for their benefit, constituting unfair competition. To protect its legal rights, the plaintiff filed a lawsuit.
Xintang Company filed the following claims: 1. Request for the court to order the defendants to cease infringing on the plaintiff’s trade secrets; 2. Request for defendant Wen to pay a penalty of 5,000 yuan and return the confidentiality fee of 10,600 yuan (for 53 months from January 2011 to May 2015); 3. Request for both defendants to jointly bear the losses caused to the plaintiff (amount TBD). The first-instance court clarified that the plaintiff had not specified the third claim prior to the verdict.
【Judgment】
The first-instance court found that Xintang Company claimed that the defendants infringed its trade secrets, but the evidence was insufficient to support this claim. Firstly, while Xintang provided a customer list, it did not provide transaction details with the listed customers, failing to prove that they were stable clients. Secondly, according to customs materials obtained at the plaintiff’s request, there were no transaction records between the claimed customers and Dean Company, failing to prove that Wen or Dean disclosed or used the plaintiff’s alleged trade secrets. The evidence was insufficient to support the plaintiff’s claims of infringement by Wen and Dean, and therefore the court did not support the plaintiff’s requests for penalties or refunds. The first-instance court dismissed the plaintiff’s claims.
Xintang Company was dissatisfied with the first-instance judgment and appealed.
The second-instance court held that according to legal provisions, a customer list as a trade secret generally refers to customer names, addresses, contact details, and transaction habits, intentions, and contents that differentiate it from publicly known information. Therefore, the plaintiff must prove that the specific customer list claimed as a trade secret meets these criteria to seek legal protection against unfair competition. A customer list constituting a trade secret requires the plaintiff to demonstrate that they have made business efforts and that it reflects certain competitive advantages, consisting of specific customer names, contact details, and unique transaction habits, intentions, and contents, rather than simply a list of clients. The plaintiff must prove that they have made relevant business efforts, such as maintaining long-term stable trading relationships with specific customers. Only a customer list that constitutes a trade secret can enjoy rights protected by anti-unfair competition law, allowing the plaintiff to prohibit others from dishonest appropriation. Otherwise, if simply compiled customer information grants rights to restrict other operators from freely trading with those customers, it would harm the competitive order and violate the principles of voluntary, equal, fair, and honest competition protected by anti-unfair competition law. In this case, Xintang Company failed to fulfill its burden of proof in both the first and second instances, demonstrating that the claimed customer list met the statutory requirements and constituted a trade secret. Therefore, the first-instance court’s judgment to dismiss the plaintiff’s claims was correct, and the law was appropriately applied.
The second-instance court thus dismissed the appeal and upheld the original judgment.
【Analysis】
“The business world is like a battlefield.” With the rapid and continuous development of the socialist market economy, market competition and commercial warfare in various industries have become increasingly fierce. Disputes involving trade secret infringements related to customer lists often involve complex legal relationships and substantial evidence, making case fact-finding and legal application challenging. Therefore, it is necessary to clarify the standards for recognizing business information such as customer lists as trade secrets and to outline corresponding defenses.
1. Definition of Customer Lists
In legal terms, a customer list refers to the information that people must spend time and effort to extract and organize from publicly known information, and then purposefully use. The Supreme People’s Court’s interpretation regarding the application of laws in civil cases of unfair competition defines a customer list as generally referring to customer names, addresses, contact details, and transaction habits, intentions, and contents that differentiate it from publicly known information, including a compilation of numerous customers and specific customers with long-term stable trading relationships.
2. Conditions for Customer Lists to Constitute Trade Secrets
According to China’s current anti-unfair competition law, the definition of trade secrets refers to technical and business information that is not known to the public, has commercial value, and is subject to appropriate confidentiality measures by the rights holder. As a type of business information, customer lists must meet the following conditions:
First is secrecy, meaning the information is not known to the public, which is a prerequisite for the customer list to provide competitive advantages to the rights holder. The term “public” generally does not refer to everyone but rather a specific group related to the rights holder’s industry and geographical limitations, i.e., a specific group directly in competition with the rights holder. Secrecy also implies that the information is not easily obtainable. To ensure secrecy, the rights holder must invest certain costs and efforts to obtain the information.
Second is confidentiality. If secrecy refers to whether the information itself is known to the public, confidentiality refers to whether the rights holder has taken reasonable measures to prevent the information from leaking. Judicial interpretations of the anti-unfair competition law indicate that reasonable confidentiality measures include limiting the knowledge of specific sensitive information to only those who must know it; taking preventive measures such as storing it in a safe with a complex password; marking “confidential” on the information; signing confidentiality agreements, etc. The confidentiality measures do not need to be absolute, as long as they are reasonable. The standard of reasonableness is mainly judged by the value of the customer list, the scale of the enterprise, and the business situation.
Third is value. Value refers to the current or potential commercial value of the information, which can provide the rights holder with competitive advantages within the same industry. The value of trade secrets can be reflected in two aspects: direct benefits, meaning positive information, where the enterprise can gain wealth through the use of the trade secret and achieve a competitive advantage in similar industries; and indirect benefits, meaning negative information, which refers to the potential economic value derived from failed business information.
Fourth is practicality, meaning that trade secrets must meet the conditions of certainty and specificity. In other words, the rights holder of a customer list as a trade secret must invest certain human and material resources to obtain it, thus requiring a degree of stability. This stability mainly reflects the stability of the benefits derived from the customer list and the stability of the transactions associated with the customer list. The plaintiff must provide evidence that the claimed customers have a relatively stable trading relationship, rather than being one-time or incidental trading objects. Of course, potential customer information obtained through certain efforts and investments (including human, financial, and material resources) cannot be universally denied its trade secret attributes simply because no actual trading relationship has occurred; rather, it should be recognized based on a comprehensive consideration. Additionally, the customer list must be specific and clear, indicating how it differs from publicly known information. The plaintiff asserting that its business information constitutes a customer list must specify the exact content, such as transaction habits, unique customer needs, delivery times, transaction price ranges, etc., to avoid including publicly known information within the protection scope of the customer list.
3. Common Defenses in Customer List Infringement Litigation
First is the public knowledge defense. For this defense, three main aspects should be examined: whether the customer list is difficult to obtain from public channels, and whether the rights holder has invested significant time, human, material, and financial resources to specify the economically valuable customer information; whether the rights holder has taken reasonable confidentiality measures; and whether the public can easily obtain the information through proper channels and procedures.
Second is the legitimate source defense. If the defendant has previously accessed the disputed customer list and the information they hold is similar to the plaintiff’s list, there may be a possibility of illegal acquisition. However, if the defendant can prove that the disputed customer list was obtained through legitimate means with significant investment of human and material resources, then they do not constitute infringement and bear no legal responsibility.
Third is the customer consent defense. This refers to customers choosing to engage in market transactions with the new entity based on trust in the departing employee. If the employee has evidence that the customers voluntarily choose to transact with the new entity, it should be recognized as legitimate, except where otherwise agreed with the former employer. Determining whether customers acted voluntarily mainly involves two aspects: first, whether there is sufficient evidence to prove that customers voluntarily engaged in market transactions with the employee’s new entity, with customer declarations serving as reference; second, whether there was any prior business interaction between the customers and the employee, based on the employee’s personal strength leading to customer trust and voluntary transactions. Additionally, it must be ensured that the departing employee did not engage in misleading or purposeful inducement behaviors. Purposefulness refers to the departing employee expressing a strong intention to engage in transactions with the customer; misleadingness refers to the departing employee causing misunderstandings in the customer, making them believe they must transact with them or that the former employer is no longer engaging in transactions.
In this case, Wen and Dean Company argued that Xintang Company had no evidence proving that the disputed customer list constituted stable clients, nor evidence proving that Wen or Dean disclosed or used the claimed trade secrets. They also did not specify the so-called secret aspects of the trade secrets. According to the court’s findings, while Xintang provided a customer list, it did not provide transaction details with the listed customers, failing to prove that they were stable clients. According to customs materials obtained at the plaintiff’s request, there were no transaction records between the claimed customers and Dean Company, failing to prove that Wen or Dean disclosed or used the plaintiff’s alleged trade secrets. Furthermore, Xintang failed to fulfill its burden of proof in both the first and second instances, demonstrating that the claimed customer list met the statutory requirements and constituted a trade secret. Therefore, the court dismissed Xintang’s claims.
4. Value Orientation for Improving Customer Trade Secret Protection
In reviewing the legislation and judicial practices of various countries, some protect trade secrets through anti-unfair competition laws, such as Germany and Japan, and related provisions of the World Intellectual Property Organization; others treat trade secrets as a subject of industrial property protection, such as regulations from the International Chamber of Commerce and international treaties like the TRIPS Agreement. Overall, using intellectual property to protect trade secrets is becoming a trend in future legislation. China’s laws and regulations regarding trade secret protection are scattered across different legal departments, with the relevant provisions of anti-unfair competition law being more concentrated. In judicial practice, it is essential to consider the legislative value and specific orientation of anti-unfair competition law.
The anti-unfair competition law, as a regulation of market competition order, clearly states in its first article that its legislative purpose is to promote healthy economic development, encourage and protect fair competition, curb unfair competition behaviors, and protect the legitimate rights and interests of operators and consumers. As a behavioral law, the anti-unfair competition law also regulates the behaviors of operators participating in competition, as stipulated in its second article, stating that operators must abide by the principles of voluntariness, equality, fairness, and integrity in their production and operation activities, comply with laws and business ethics, and defines unfair competition behaviors as those that disrupt market competition order and harm the legitimate rights and interests of other operators or consumers. Additionally, the anti-unfair competition law protects the legitimate competitive advantages obtained by operators through business efforts, opposing dishonest gains, prohibiting misleading behaviors, such as counterfeiting business identifiers leading to public confusion, and prohibiting appropriation, such as stealing trade secrets, to maintain a fair competitive market order and the principles of honest and trustworthy market competition.
Meanwhile, customers in the market transaction network, in general, are rational economic agents who tend to seek more suitable trading partners to obtain better trading conditions. For this purpose, traders in the market transaction network are willing to voluntarily seek more suitable counterparties or are happy to introduce their contact information and trading intentions to multiple unspecified traders or potential traders. As a participant in the same market transaction network who has previously traded with the customer, they have no right to restrict the customer’s actions in seeking better trading conditions, nor the right to restrict other traders in the market transaction network from engaging in legitimate transactions with that customer, as free trade and the free flow of market elements are the essential characteristics and demands of a market economy.
(This case was published in People’s Justice,2021Issue8)