A. Introduction
In recent years, there have been numerous cases in Taiwan involving improper poaching and instances where employees have joined new employers bringing stolen confidential information from their former employers. These actions often rise to level of trade secret theft, an issue which has caused significant harm to the competitiveness of various industries. The establishment and implementation of an internal control and internal audit systems has become critical for listed companies aiming to enhance their corporate governance frameworks. An essential aspect of this is ensuring that the company effectively protects its trade secrets.
B. What are Trade Secrets
1. Definition
Trade secrets are defined under Taiwan’s Trade Secrets Act and can encompass a variety of information. There are several key factors that are used to determine whether a particular piece of information qualifies as a trade secret. First, it must be used in production, sales, or business operations. Second, it should have a level of confidentiality and be maintained under an appropriate protection, meaning it is not generally known or easily accessible to those in the relevant industry. Additionally, the information must have actual or potential commercial value.
2. Scope
Trade secrets can include technical information, such as manufacturing processes, formulas, research and development results, and product designs. However, they can also cover non-technical information, including customer databases, procurement strategies, internal development plans, and research direction. Essentially, any information that holds commercial value—whether it be methodologies, technologies, processes, or formulas and is of a confidential nature —can be protected as a trade secret. Interestingly, even records of past production mistakes, failures in business decisions, or erroneous strategies can be deemed trade secrets because they provide competitive insight and prevent others from incurring costs associated with redundant research.
In addition, the information must be under appropriate protection to qualify as trade secret to be protected under the Taiwan’s Trade Secrets Law. Please see Part D below for the proposed protection measures. There have been court precedents which rule out the information as confidential due to inadequate protection measures, such as failure to restrict access of the information in question.
C. The importance of protecting trade secrets and preventing infringement of trade secrets
Trade secrets are often critical to a company’s competitive edge and should be carefully managed, safeguarded, and prioritized. Every company must protect its own trade secrets, and part of this includes taking appropriate precautions to prevent employees from violating trade secrets. Under Taiwan’s Trade Secrets Act, if trade secrets are infringed upon, not only does the individual responsible face legal consequences, but their employer is also at the risk of related penalties.
1. Type of the Infringement of Trade Secrets
According to the provisions of the Taiwan Trade Secrets Act, the infringement of trade secrets primarily includes five scenarios:
- acquiring a trade secret by improper means;
- acquiring, using, or disclosing an acquired trade secret by improper means, either knowingly or unknowingly due to gross negligence;
- using or disclosing an acquired trade secret by improper means, either knowingly or not knowingly due to gross negligence;
- using or disclosing by improper means a legally acquired trade secret; and
- using or disclosing without due cause a trade secret to which the law imposes a duty to maintain secrecy.
2. Legal Consequences of Misappropriation
A company suffering from trade secret infringement can seek damages of up to three times the amount of actual damages as determined by the court, as well as recovery of the profits gained from the infringement. Additionally, the employer of an employee infringing on the trade secrets may bear joint liability with the employee unless it can demonstrate that it took all necessary measures to prevent the infringement. In contrast to U.S. trade secret laws, where only violations under the Economic Espionage Act of 1996 carry criminal penalties, Taiwan’s Trade Secrets Act prescribes criminal punishments for trade secret infringement.
D. How to actively protect trade secrets and passively prevent the risk of trade secret infringement through Employment Management
1. Implementing Protection Measures
First, companies should conduct a thorough inventory of their trade secrets, clearly labelling the relevant data with confidentiality levels and indicating that the information “must be kept confidential.” Depending on the classification of the trade secrets, different levels of protection measures should be implemented, along with corresponding confidentiality regulations. These measures should be clearly outlined in the company’s internal policies, such as the Work Rules or employee handbook, for all employees to follow.
The relevant protection measures often include the following aspects:
- Personnel: Based on the level and type of confidentiality, the company should designate the scope of access to confidential information (need-to-know), requiring adherence to standard operating procedures.
- Assets: This includes regulations on the use of confidential information, covering labelling, storage, access, viewing, modification, copying, transportation, and return of such information. Additionally, there should be guidelines for employees regarding the use of hardware and software, such as user authentication policies, restrictions on computer devices, screenshot limitations, software installation bans, external network access limitations, and guidelines for email usage.
- Physical Locations: The company should implement regulations for control areas that store trade secrets, including site division, access control, identity verification, and control over items that can be brought into those areas.
2. Adopting dynamic management of employees
Upon joining the company
- Confidentiality
- It is imperative that new hires sign confidentiality agreements. Such agreements require employees to agree to keep specific information confidential and not disclose it externally. In practice, confidentiality agreements often specify that even after the termination or expiration of a contract, the agreed-upon confidential information must continue to be protected for a specified period. This is well-illustrated by a case in which a company’s confidential documents were taken by its former employee, and the former employer claimed that it was an infringement of trade secret. However, it was found that the former employer did not have confidentiality agreements with its employees, and the leak of the information was due to that company allowing employees to bring their own computers into the workplace and the company failing to implement measures to protect the documents it claimed to be trade secrets, including the lack of marking them as ‘Confidential.’ Ultimately the court concluded the company did not take reasonable actions to implement confidentiality measures, and that such infringement would not be subject to the Trade Secret Act.
- Assignment of Inventions and acknowledgment of no conflicts
- Intellectual property clauses are a common tool used to ensure that employees do not retain or infringe the confidential information and intellectual property rights of their former employers and further acknowledge that all work results during their employment in the future will belong to the company. Under the Taiwan Copyright Act, once a work is completed, the identified author has both moral rights and economic rights in such work. The moral rights belong exclusively to the author and include the right of public publication, the right of name representation, and the right of identity preservation. Only the economic rights could be further transferred or succeeded. Therefore, directly identifying the company as the author of any works created during the course of employment in the intellectual property clauses is crucial.
- Non-solicitation
- Companies may also consider requiring new hires to enter into non-solicitation agreements at the commencement of employment. Such agreements stipulate that the employees cannot solicit, make an approach to, hire or recruit the company’s employees, consultants, suppliers, or distributors after departure to avoid unfair competition.
During employment
Throughout the employment process, companies should conduct regular audits, education and training to promote awareness of the consequences of violating confidentiality measures. Violators may face internal penalties, which could result in a serious breach of their employment contract or work rules, potentially leading to termination under Taiwan laws. Companies also reserve the right to pursue legal action.
Upon leaving the company
After an employee submits their resignation, it is essential to conduct an exit interview and review process. This process should include requesting that the employee return all relevant trade secret information or materials, and immediate steps should be taken to prevent their access to any trade secrets in time. Employees should be reminded of their ongoing obligations in writing at the time of their resignation and the consequences of them breaching such obligations.
After employment
To prevent employees from disclosing the company’s trade secrets during or after their employment, which could cause significant harm or loss to the company, the company may further ask such employees to agree that, during their employment and for a specified period after departure, employees are prohibited from working for or being employed by competing companies or vendors. However, it is important to note that under Taiwan’s Labor Standards Act, the effectiveness of such non-compete clauses is subject to statutory conditions. These conditions include the necessity for the company to demonstrate legitimate interests to protect their trade secrets by the non-compete clauses and that the employee had access to relevant trade secrets during their employment, the use of which by a competitor would cause the former employer loss and damage. Moreover, the restriction of scope and area must be specific to not unduly restrict or interfere with the employees’ right to work. Also, the company shall reasonably compensate the employee concerned for the losses incurred by him or her by complying with the non-competition obligations. If any of these conditions is not met, the non-compete clause will be deemed unenforceable.
E. Conclusion
In response to the increasing importance of trade secrets, Taiwan implemented the Trade Secrets Act in 1996, which was revised in 2012 and 2020 to strengthen the criminal liability provisions for commercial infringement. The area of trade secret infringement places onerous obligations on employers in two ways. First, they must take appropriate steps to protect their own trade secrets being infringed. In addition, they must ensure when hiring new employees that they do not inadvertently permit those employees to use another company’s trade secrets thereby giving rise to the risk of joint liability for that infringement.
By adhering to these legal frameworks and implementing robust policies, companies can safeguard their trade secrets and maintain their competitive edge while minimizing liability.