Chinese whispers

Chinese whispers

Chinese whispers

The alleged theft of secret technology by Chinese employees continues to make headlines. 

A recent case[i] shows the English High Court’s readiness to take swift action where time is of the essence and the threat of price erosion looms.

Unfair competition

A key purpose of English and EU trade secrets law is to prevent unfair competition from products that have been manufactured abroad making illicit use of trade secrets. Such products are often cheaper, partly at least because the producers have not had to pay for the research and development. This case involved the research-intensive field of battery separator technology needed for electric cars, the claimant being the US dry battery specialist company Celgard.

Dr Zhang moves to China

Celgard alleged that a Chinese company, Shenzhen Senior Technology Material Co Ltd (Senior), obtained secret information about Celgard’s materials and processes from a former Celgard scientist called Dr Zhang. Dr Zhang had been working on the relevant technology for Celgard. He then moved to Senior to work on some of the same technology there.

Celgard sought a preliminary injunction in the UK

Celgard applied to the English High Court for a preliminary injunction prohibiting Senior from importing the relevant battery separators into the UK pending a full trial on the question of whether Celgard’s trade secrets had in fact been stolen and misused by Senior. Quick action was important because Senior was about to deliver its separators to a large UK customer for evaluation in relation to a contract for which both Celgard and Senior were bidding. Senior was likely to win if it was permitted to sell its cheaper version.[ii]

Injunction granted

The High Court granted a preliminary (interim) injunction preventing Senior supplying its separators in the UK pending a full trial. In this, it was influenced among other things, by the expansion of Senior’s relevant product ranges and market share after Dr Zhang’s arrival and by the nature of Dr Zhang’s role at Celgard. The injunction gives Celgard some welcome breathing space by preventing the immediate entry onto the UK market of Senior’s cheaper version, which would have made it difficult for Celgard to maintain its prices even if it later won at trial.

Was justice done?

Preliminary injunctions usually amount to rough justice. The court has not yet considered the evidence in detail: it may turn out at full trial that Senior is not at fault after all. The purpose of the injunction is to hold the position until trial in the least unfair way (referred to as the ‘balance of convenience’). In this case, a crucial difference between Celgard and Senior’s position was that if no injunction were granted and Senior’s cheaper product came onto the market it would cause price erosion that would be difficult for Celgard to reverse if it won; by contrast, the judge took the view that if Senior won at trial it could reasonably be compensated by damages to cover its losses resulting from the injunction.

Protecting against trade secret theft

What legal steps should an employer take to protect its position against trade secret theft of this kind? We do not know exactly what happened in this case, but it is clear from the judgment that Celgard had taken the important step of obtaining a non-disclosure agreement from Dr Zhang himself. Employees are in a special position as regards to disclosure of information, because they are generally entitled to use information which forms part of their general knowledge, skill and experience after they leave their employment even if some of this may be confidential. Confidentiality undertakings and restrictive covenants that limit this right may be unenforceable, so it is important both to include such provisions in employee contracts and also to ensure that they are carefully drafted. The UK Trade Secrets Regulations[iii] (which reflect the EU Trade Secrets Directive in UK law) expressly define protectable trade secrets as information having commercial value because it is secret and which has been subject to reasonable steps to keep it secret. So it is important to be able to demonstrate that steps have been taken to maintain its confidentiality, for example by restricting access on a need-to-know basis and making sure that employees understand its sensitivity. It is also important to document the information in order to be able to identify it clearly.

For practical, end-to-end advice on employee competition matters, please contact our top-ranked business protection team or the person you normally deal with at Stevens & Bolton.

[i] Celgard, LLC v Shenzhen Senior Technology Material Co Ltd [2020] EWHC 2072, 30.07.20

[ii] In fact, it turned out that the relevant consignment had already been delivered, but the customer agreed to hold this until the legal issues had been cleared away.

[iii] Trade Secrets (Enforcement etc.) regulations 2018.

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