Solving trade secret disputes via arbitration

Trade secret disputes rank among the most complex cases in intellectual property protection. Unlike patents and trademarks, whose rights and scopes are publicly accessible, trade secrets are non-public, complicating the definition of rights and identification of infringements.

Traditional judicial practices have largely focused on technical information, often neglecting the regulation of market economic behaviour. Recent judicial developments, however, have shifted attention to the conduct itself.

For instance, in the trade secret infringement case of Geely Automobile v Weltmeister Motor, introducing a fresh judicial perspective with a Supreme People’s Court ruling in 2023 that determined the defendant had made “organised, well-planned and large-scale infringement” underscored the systematic and market impact of such actions.

Meanwhile, plaintiffs often pursue litigation with broader objectives beyond seeking monetary compensation. Legal tools such as injunctions, evidence preservation and investigation orders serve as critical strategies, alongside enforcing non-monetary infringement liabilities by courts.

However, the lengthy litigation process carries practical risks. Without timely measures for behaviour or asset preservation, defendants may quickly establish new operations or transfer assets, undermining the effectiveness of legal remedies.

In this context, arbitration offers a more flexible remedy as an alternative dispute resolution, becoming a strategic choice for both parties in trade secret disputes.

Legal basis

A solid legal basis is essential for initiating arbitration in trade secret disputes. China has developed a comprehensive legislative framework for trade secret protection, aligning with international standards set by the World Intellectual Property Organisation and World Trade Organisation, while meeting the requirements of bilateral agreements.

Most notably, the 2020 Economic and Trade Agreement between China and the US, signed in Washington, includes specific provisions on trade secret protection and the shifting burden of proof in related trials. This robust legal system provides critical support for resolving trade secret disputes through arbitration.

Reaching consent

Arbitration is a dispute resolution mechanism based on an arbitration agreement. In trade secret disputes, how can parties establish arbitration consent in advance, similar to breach of contract cases? Current judicial practice in trade secret dispute cases is basically “contact + substantial similarity — legally obtained”.

Trade secret disputes commonly arise in two scenarios: (1) departure of senior executives or employees with access to critical business or technical information, leading to confidential information leaks; and (2) performance disputes in technology licensing agreements. Either scenario establishes “contact” as a factual basis and often results in a concurrence of breach of contract and infringement.

As a way of dispute resolution, arbitration clauses can be included in executive employment contracts, labour service agreements, confidentiality agreements and technology licensing agreements. In Mars Incorporated v Szarzynski (2021), the US federal court explicitly upheld that arbitration agreements can effectively govern trade secret disputes arising from the departure of executives.

A number of international organisations have also established arbitration rules for resolving trade secret disputes, including the WIPO Arbitration Rules and the Patent and Trade Secret Arbitration Rules of the International Institute for Conflict Prevention and Resolution.

Highlighting the growing practice and vitality of resolving trade secret disputes through arbitration in China, the China International Economic and Trade Arbitration Commission launched its Intellectual Property Arbitration Centre in 2022, which handled 215 IP cases between 2022 and 2023 with disputes amounting to RMB3 billion (USD409 million), including trade secret cases.

Parties may also opt for arbitration as a dispute resolution after a conflict arises, benefitting from its confidentiality to better safeguard trade secrets.

They can also appoint experts in the industry to form the tribunal. With ongoing revisions to the Arbitration Law, provisions on interim measures and evidence rules are being improved.

The combination of arbitration and mediation in China effectively resolves disputes between parties, fostering win-win outcomes.

Further improvement

Despite significant progress, there is still room for optimisation of arbitration for resolving trade secret disputes. The 2019 Anti-Unfair Competition Law and the 2020 US-China trade agreement both emphasise “electronic intrusion” as a form of infringement, yet clear rules for identifying and addressing such acts remain underdeveloped. China should draw on international practices to enhance its legislation in this perspective.

In a technology-driven era, protecting trade secrets is crucial for safeguarding innovation and advancing national strategy. Stakeholders to the rights should effectively utilise arbitration to resolve disputes, ensuring robust support for innovation and strategic development.

Guo Xiaoqi is a senior partner at Kangda Law Firm. She can be contacted by phone at +86 10 5086 7666 and by e-mail at xiaoqi.guo@kangdalawyers.com