A Model Enterprise in Trade Secret Protection

2012/03/22,By Jody Lu, China IP,[Trade Secrets]

At a new product launching ceremony held in Beijing in October, 2009, Yulong Computer Telecommunication Scientific Co., Ltd. (“Yulong”) was surprised to find that its competitor Coship Electronics Co., Ltd. launched a sensation in the audience of smart business phones, which was exactly the same with its own flagship phone! All these coincidences were caused by a former employee’s job-hopping. This former employee used to be the R&D director in Yulong’s Mobile Software Department. After 8 years of working at Yulong, he left for a competing company in 2008, taking with him not only some back-bone staff members of Yulong’s smart phone R&D team, but also a copy of the source codes. The company which has created the well-known cell phone trademark COOLPAD suffered heavy losses over night. “The source code of a single smart phone is only about 100 mb and could be copied in a small USB memory disc. However, it is the fruit of our decades of research and the basis for the survival of our smart phones,” Li Jun, Director of Yulong’s IP Department told China IP.
Although the 8 former staff members were criminally sanctioned after hard and tortuous legal litigations, the bitter lesson still makes the company aware that it must never dare to relax its tense nerves again. “We learnt a lesson from this case: to set a proper trade secret managing system is not only the first step in enterprises’ self-protection, but also will make up for the losses caused by insufficient judicial protection to a great degree,” said Li Jun. “Since 2008, we began to strengthen the management of our trade secrets. So far, this system has been basically sound.”
Signing Confidentiality Agreements In ZTE Corporation, the protection of trade secrets is mainly under the charge of the Information Security Office of the Legal Affairs Department.
In Huawei Technologies Co., Ltd., there is an independent Information Security Department, in which more than 200 people are working for trade secret protection. When it comes to Yulong, the division for protection of trade secrets is more refined: the IP Department is responsible for designing the system as the “software;” the Information Security Department is in charge of an all-round technical protection, which could be viewed as the “hardware;” the Audit Department is responsible for auditing the system and technical support measures; and the Legal Department is dealing with legal liabilities.
As Director of the IP Department, Li Jun is mainly in charge of designing the trade secret protection system. “When establishing the protection system, we mainly take the following four points into consideration: those who shouldn’t get access to trade secrets should be kept away from the secrets; those who have access cannot take them away; the information being carried out must be lawful and in compliance with the company policy; and if any trade secrets were taken illegally, there should definitely be traces left through which we can seek legal actions against the perpetrator,” said Li Jun. “These are the design ideas and principles on enterprises’ trade secret protection systems.”
China IP learned that the breach of confidential information is mostly caused by job-hopping of former employees, rather than first hand acquisition by direct competitors. “We sometimes are misguided on the protection of trade secrets as to overlook the very purpose of protecting trade secrets, i.e., preventing leakage. Trade secret management is not to manage the trade secrets themselves; instead, it is the people that are to be managed. This has to be kept in mind all the time,” said Li Jun. “We design our security system on a basis of chronological order of having access to the confidential information. This is true from the first day, when an employee enters the work place, until his exit and a legally allotted period of time following that employee’s departure.”
“A major frontline for us is the entrance agreement whereby we set up the management scheme with the employee.” Li Jun told China IP that in the Yulong agreement with employees, there is a special chapter on the management of confidential information, which contains several clauses regarding duties of confidentiality. The most important one is the requirement of “No pains no gains,” which prohibits any new recruit from bringing in any proprietary commercial information or documents from previous employment, using any confidential information at work from previous employment without the company’s permission, and from entering if there exists any noncompetition agreement with any previous employment. Another important clause is the “confidentiality undertaking,” which provides for confidentiality obligations after entrance, and exit.
Since an exiting employee poses the greatest threat to corporate trade secrets, Yulong keeps a close eye on the exit, particularly of core technical staff members who must sign an exit agreement and a noncompetition agreement before they leave. “The exit agreement targets at core technical staff members who are very familiar with the company’s projects and job-hop to a competing company before the projects are completed,” said Li Jun. However, the non-competition agreement which was meant to prevent the staff from working in a similar relevant business during a certain time after they have left the position often fails to take effect. When changing their employers, some employees may even assume fake identities. In the present case of Yulong, 4 of the 8 accused even changed their names.
Therefore, exit management and exit interviews become indispensable. “The exit management deals chiefly with three aspects. Firstly, the exiting employee’s authorizations must be cleared.
Secondly, an audit should be conducted on the exiting employee’s outgoing e-mails and internet logs before his actual exit happens, especially on the logging files of the last three to six months—the most dangerous period. Thirdly, close attention must be paid to the transfer of the materials made to the employee,” Li Jun advised. At last, the company also conducts an interview with the exiting employee, during which a confidentiality pledge will be signed and the confidentiality duties the employee must bear after the exit will be emphasized again.
Accordingly, the company will also give the employee a one-time confidentiality fee, and require that the employee sign before accepting the money. “Thus, if our confidentiality is compromised, we will have solid evidence when staring at a lawsuit which is sustainable in court,” said Li Jun.
Except for the confidentiality fee, will the employee receive any allowance if they fulfill the relevant obligations? Yulong’s answer is yes. “This has been taken into consideration by many enterprises. However, a court cannot enforce this unless there is an explicit section in their agreement in advance, and the allowance is clearly listed in the payment statement when the employee his confidentiality duty,” said Li Jun. “There were a lot of cases have occurred in China. In one case, the confidential allowance of 70 yuan per month saved the company from huge losses potentially accounting to millions of yuan. So I think it’s a must to pay this fee.”
Determining the Scope of Trade Secrets However, it is still not enough to only sign a series of confidentiality agreements with the employees.
In particular cases, it is usually hard to determine a trade secret. Many companies have to drop their cases because of a lack of evidence. A lawyer once said, “The exact scope of trade secrets must be defined.
These secrets cannot be accessed by unauthorized people and must be difficult to get in the first place.”
As a company depending on software, source codes are crucial to Yulong. Yulong has divided its information into different categories and carries out different management for each of them, such as information open to the public, like the source code of Android, information open only to its employees and information not open even inside the company.
Meanwhile, the source codes are also divided into several levels. “Classification means to service the management following up. As the confidentiality level varies, the works of right management and codes clean-up differ. We are currently working for a technical breakthrough. If we succeed, the software source codes leaked to competitors will become trash.”
At the same time, Yulong has a strict management system for confidential documents. Different information and materials will be marked with different confidential levels, like confidential, highly confidential and top-secrets. Different confidential level implies different management, thus potentially improving the work efficiency.
When cooperating with third parties, Yulong never forgets to keep a close eye on information security either. “Yulong needs to learn from the leader in the industry—Apple Inc.,” said Li Jun, “I once studied the trade secret protection system of Apple deeply, finding that there was so much worth learning. The reason for Apple’s success lies also in its brilliant management of trade secrets which leads directly to the stunning effects whenever it launches a new product.”
There are few companies around the world that care more about trade secrets than Apple. “Before Apple launches a new product, it will definitely prevent its competitors from making any predictions based on the parts or modules they may get. Take iPhone as an example, Apple will have different manufacturers produce only one or a few parts of iPhone, and assemble the parts itself rather than let Foxconn finish the product as OEM,” said Li Jun.
“There’s never any news before the new product is officially unveiled. However, Chinese companies are still unable to do such a good job. If we are developing a new product, there would be news everywhere on the Internet before it is launched. And when the new product enters the market, the users are already looking forward to a better one. In that case, new products never fully satisfy the consumers’ new expectations. That is why we must learn from Apple.”
Technical Support “Although we spend a lot of energy on designing the trade secret protecting system, we cannot rely solely on the system because there are, after all, a small number of staffs that may not follow the system. In that case, we should resort to technical measures to stop them from revealing the secrets, or at least leave traces when they do bring the secrets away,” said Li Jun. “Even if we have done 90% of the work perfectly, the remaining 10% will be a deadly shortcoming which can make all the efforts in vain. The work of protecting trade secrets cannot afford shortcomings.”
According to Li Jun, in Yulong, different levels of visitors have different levels of authority and access.
External visitors have to wear a card, through which his movements into certain areas will be followed and controlled. Meanwhile, Yulong is also in the process of developing a new technique, which could lock the employee’s computer automatically whenever he leaves his seat. In the future, Yulong is planning to put an ideal cloud-computing model into practice. If it comes into practice, there will be only a monitor before the employees while all information and materials will be saved in the server. It will ensure the safety as well as saving costs.
It is worth special attention that in Yulong, staff may not copy, fax or scan materials at will, but have to go through an approval process. By signing approval and the audit process, the materials will be printed by a special department, and they would leave backups on the server. Therefore, there will be detailed traces left about the materials printed, the specific time and the specific location. In addition, the company also supervises the employees’ internet records so that the right of uploading is strictly controlled.
Employees also need approval if they want to send outgoing e-mails. To protect trade secrets effectively, the measures must be really tough. It seems unlikely that those ordinary employees who are used to using microblog and kaixin001.com would understand a management so strict. However, Li Jun said: “Since such a system has been set up, there must be relevant technical measures to ensure that the whole process could be exercised smoothly and in time.” During the interview, an employee of an IC design company complained to China IP , “Everyday when we go to or back from work, there’s a conventional scanning and the company will also check the vehicles of the staffs. If it is found that there are boxes or other such things, the security guard will require that we open the box and allow them to check inside.” Sometimes, staff just cannot understand and accept it when the company’s protective measures are over strict.
“Before designing the system, the company should never forget to create a culture of protecting business secrets through the penetration of related concepts.
Otherwise, neither system design nor technical support would be understood. In the opposite, their resistance may be very strong.”
In Yulong, the strongest resistance against the trade secret protecting system is generated because the system has bad impacts on the affairs they are handling and often hinders their work. “As a software developing company, we spend a lot of money on R&D and protection of our work. It often occurs to us that the protection of information assets is at the expense of efficiency. This is the same with all companies.
But when problems occur, we will spare no effort in redesigning the system, adjusting the procedures and making breakthroughs on technical supports in order to solve these problems,” said Li Jun.
(Translated by Monica Zhang)

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