A Manufacturer Does Business with Its Distributor’s Clients Directly, Whether the Manufacturer Has Infringed the Distributor’s Trade Secrets?

In practice, many manufacturers would sell products to authorized distributors, and then the authorized distributors would sell to the end customers. Manufacturers focus on R&D and manufacturing, while distributors focus on market development. If both parties could cooperate well, then it is a win-win situation. However, due to many reasons, for example, the distribution contract has been expired and both parties have no willingness to renew; or both parties have disputes on the payments or quality and so on, which leads the termination of the contract. After then, if a manufacturer does business with its distributor’s clients directly, normally, the distributor may claim that the clients’ information belongs to trade secrets, and the manufacturer has infringed its trade secrets.

Then, whether the manufacturer’s behavior shall be deemed as an infringement?

In order to answer this question, there are 2 issues shall be clarified. Firstly, whether the information of the distributor’s end customers (customer list) shall be deemed as trade secrets? Secondly, if it constitutes trade secrets, whether the manufacturer has a confidentiality responsibility, and has violated such responsibility while doing business with the distributor’s end customers?

According to the “Anti-unfair Competition Law”, trade secrets must have 3 elements, which are, (1) “secret”, the information shall not be known to the public; (2) “value”, the information has commercial value; and (3) “confidentiality”, the right holder has taken appropriate confidentiality measures. Therefore, while the information of the distributor’s end customers includes in-depth information, such as the name of the contact person, phone number, trading conditions, trading habits and so on, then normally, such information will be deemed to have element (1) and (2). If the distributor has taken appropriate confidentiality measures, then element (3) has been met, and the relevant information would be deemed as trade secrets.

Under such circumstance, if a distributor has entered into a confidentiality agreement with a manufacturer; or inserted a confidentiality article in the contracts signed with the manufacturer, which stipulates that the manufacturer could only use the relevant information in performing the contracts, then the manufacturer shall have the confidentiality responsibility, and the manufacturer’s such behavior would be highly possible to be deemed as an infringement. In addition, if both parties have agreed that the manufacturer shall not do business with the distributor’s clients directly or through other third parties, then even if there is no confidentiality responsibility between the two parties, the manufacturer’s behavior would be deemed as a breach of contract.

In practice, from the perspective of the manufacturer, it is recommended to take a special occasion into consideration. Paragraph 2, Article 13 of the “Interpretation of the Supreme People’s Court on Some Issues Concerning the Application of Law in the Trial of Civil Cases Involving Unfair Competition” stipulates that, in case a client develops market transactions with the entity due to relying on an employee thereof, after this employee leaves his post, if it can be proved that this client voluntarily chooses to perform market transactions with the said employee or the new entity he works for, it shall be ascertained that no unfair methods has been adopted, except it is otherwise stipulated between this employee and the former entity. If the information of the distributor’s end customers has the 3 elements, and the manufacturer still has done business with the relevant customers, whether the manufacturer could defend that the customers voluntarily chooses to do business with it due to relying on the quality of the products or service of the manufacturer.

We have not found any judicial opinions. But we found a case judged by Pudong District People’s Court, in which the judges have the tendency on this opinion. In the case (2015) Pu Min San (Zhi) Chu Zi No.1880, although the court rejected the plaintiff’s claim by deciding the customer list should not be deemed as trade secrets, because the distributor had not taken any confidentiality measures. However, the court also pointed out that, “this case is special, because products are manufactured by Japan Gao XX Company, when the authorized distributor has been changed, in order to purchase the same products, the customers could only purchase relevant products from the newly authorized distributor. So there is nothing wrong with such behavior.” That is, the court held that the distributor’s end-customers relied more on the products instead of the distributor. In view of this, in individual cases, the manufacturer could consider to defend with this article.