The Strategic Importance of Protecting Trade Secrets – Lessons from Lao Gan Ma

In the global food industry, which is worth trillions of dollars, proprietary recipes are more than just ingredients—they are crucial competitive assets. The longstanding efforts of Coca-Cola to safeguard its formula and the notable 2016 case involving the theft of Lao Gan Ma’s chili sauce recipe, which caused losses exceeding ten million renminbi, clearly demonstrate the high stakes involved. For food companies, choosing how to protect intellectual property is a vital strategic decision: patents provide twenty years of exclusivity but require full public disclosure, whereas trade secrets can offer indefinite protection if strict confidentiality measures are maintained. Data from China Judgments Online shows a worrying trend, with lawsuits over food trade secrets increasing by an average of 37% annually from 2020 to 2024, and formulation theft making up 68% of these cases, highlighting the growing risks.

Risk 1: Insufficient Compliance with Legal Requirements for Trade Secret Protection

Many companies fall short of meeting the strict legal standards needed to protect trade secrets. A common weakness is relying too heavily on vague confidentiality clauses in employment contracts, which courts reject in about 42% of cases. Additionally, companies may inadvertently disclose key processes when complying with regulations like China’s General Rules for Nutrition Labeling of Prepackaged Foods (GB7718). A more fundamental problem is the frequent lack of proper documentation for proprietary knowledge, leaving important formulas as unwritten expertise held only by technicians, without verifiable records or clear confidentiality notices.

According to Article 9 of China’s Anti-Unfair Competition Law, a successful trade secret claim must prove three things: the information is not publicly known (secrecy), it has economic value (commercial benefit), and reasonable protective measures are in place. Legal cases confirm that inadequate protections—such as a condiment maker’s failure to encrypt R&D documents in a 2023 Shandong High People’s Court ruling—can result in losing all protection. To reduce these risks, companies should implement three key protocols.

• First, establish a multi-level information classification system: label core formulation ratios and process parameters as Top Secret, store them fragmented across secure systems with multi-factor authentication; classify raw material specifications as Confidential, protected by digital watermarking and detailed access logs; and treat general production workflows as Restricted, with role-based access controls.

• Second, develop a three-dimensional identification system combining physical security measures like ultraviolet-reactive codes on documents with invisible forensic watermarks in digital files linked to user credentials. Introducing decoy data into non-critical production steps can also deter reverse engineering.

• Third, adopt a hybrid intellectual property strategy where patentable parts are disclosed through patents, while core proprietary knowledge remains protected as trade secrets—for example, patenting the polyphenol content range in bubble tea but keeping the unique thermal shock extraction method secret.

Risk 2: Undetected Theft of Proprietary Formulations

The ways in which theft occurs reveal ongoing vulnerabilities. Departing employees cause 51% of incidents, illustrated by a case where a former R&D director of a beverage company joined a competitor with proprietary milkshake recipes, resulting in a 20 million renminbi revenue loss. Supply chain leaks account for 29% of breaches, such as ingredient suppliers selling secret soup base recipes to contract manufacturers. IT weaknesses contribute 17%, including cases where production specs were intercepted via unsecured messaging apps.

To combat these risks, companies must enforce comprehensive personnel controls throughout employment. At onboarding, require detailed Confidentiality Agreements and legally compliant security deposits capped at 20% of monthly salary. During employment, disable external messaging apps in R&D areas, replace them with secure internal document transfer systems, and conduct quarterly forensic audits of critical personnel devices focusing on USB and email usage. For offboarding, revoke document export permissions 30 days before departure, secure signed Post-Employment Confidentiality Agreements on the last day, and monitor former employees’ industry activities monthly for six months. To protect supply chains, implement Multi-Tier Confidentiality Agreements binding secondary and tertiary suppliers, and use split ingredient sourcing—e.g., Manufacturer A supplies base solutions, Manufacturer B provides proprietary additives—to compartmentalize sensitive information.

Risk 3: Difficulties in Proving Misappropriation with Evidence

Food trade secret litigation faces unique forensic challenges that complicate proving infringement. Sophisticated infringers often modify 3–5% of formulation components to mask origins, and traditional production methods relying on tacit knowledge—like a technician’s subjective judgment of “simmering” temperature—are hard to quantify legally.

To produce legally robust evidence, a strict methodology is needed. Development teams should use blockchain timestamping from the start to create immutable records of formulation changes, ensuring reliable proof of origin. To show substantial similarity, incorporate chemically identifiable trace markers—such as specific maltitol ratios—that serve as forensic identifiers; courts accept this method in 92% of contested cases where it’s used. Additionally, meticulously document research costs with phase-specific allocation separating expenses by development milestones. Third-party verification enhances credibility; certified flavor profile reports quantifying sensory traits (e.g., caramel aroma intensity measured at certain light wavelengths or acidity curve gradients) provide objective comparison standards.

Risk 4: Challenges in Quantifying Damage Claims

Claimants often struggle to prove economic losses, with courts frequently dismissing damage claims due to poor documentation. Common issues include failing to separate research costs by product and inability to obtain defendants’ financial records showing illicit profits. To establish valid evidence, adopt a three-pronged cost documentation approach. Keep detailed chronological expenditure records for each stage—for example, noting 420,000 renminbi spent on culture medium development from March to June 2025. Implement process-oriented accounting to isolate costs per technical phase, such as 350,000 renminbi for extraction research. Conduct personnel audits tracking technologists’ time, like logs showing a lead researcher spent 1,200 billable hours on a specific formulation. In court, use a bifurcated damages model calculating actual losses from reduced sales volume times unit margins, and infringer gains from verified production volume times the difference between market price and industry-average cost, subject to statutory caps currently at 5 million renminbi.

An Enhanced Protection Framework: Twelve Integrated Safeguards

A strong defense combines technical, legal, and organizational measures into a unified system. This includes multi-layered information security, such as dividing formulations among departments so no one person has the full recipe. Secure critical R&D systems with biometric and one-time-password authentication; store key formulas on isolated servers with USB ports disabled. Log all document activity at millisecond precision, and protect supply chains using coded ingredient labels—for example, referring to β-carotene as “A-37.”

Beyond technology, proactive legal and personnel strategies are vital. These include distributing counterfeit formulations on the black market as decoys to trace leaks, conducting annual unannounced drills to test evidence preservation, and enforcing post-employment restrictions like non-compete agreements worth up to 30% of annual salary for two years. Emergency measures such as cryptographic self-destruction of documents upon unauthorized access attempts provide a critical last defense. Financial oversight must be rigorous, with separate R&D accounts and audit trails, and employee accountability reinforced by linking confidentiality performance to compensation. Finally, adding isotopic tracers to non-essential processes offers forensic markers detectable in lab analysis, providing definitive proof of theft.

Conclusion: Making Formulation Protection a Business Priority

In summary, safeguarding proprietary formulations is not just a compliance issue but a strategic imperative for success in today’s food industry. Forward-looking companies should adopt three key practices: invest 0.5–1% of annual revenue to strengthen secrecy infrastructure; hold quarterly Trade Secret Steering Committee meetings including legal, technical, and executive members; and regularly update protection strategies based on new research and developments. To evaluate vulnerability, executives must ask: Can a key formulation be fully exported electronically within 120 minutes? Do former employees who left over 180 days ago still have unnoticed access? By rigorously applying both technical and organizational safeguards, businesses can effectively defend their most valuable innovations against increasingly sophisticated threats of misappropriation.