Trade Secret Protection in China: Lack of Regulation or Know-How Mismanagement?

10 aprile 2016

Commercial and technical know-how, also referred to as trade secrets, are essential features to a company’s commercial success in today’s knowledge-based, global economy. Chinese regulations concerning the protection of trade secrets in China have been often criticized as being fragmented and ineffective. Their enforcement has also been criticized for lacking deterrence and offering inadequate compensation (both administrative and judicial enforcement) and, in some cases, even as being practically inaccessible (criminal enforcement). The fact that few important trade secret cases involving foreign parties have been litigated in China during the last few years testifies to the lack of trust foreign investors seem to have in the current system. Being aware of the downside of the actual set of regulations, the Chinese government has begun circulating—among the private sector—a draft unified trade secret code, after the U.S. example. Whether a change in norms will positively affect their enforcement remains to be seen. On the other hand, putting focus exclusively on the law may take attention away from the prevention of trade secret theft at the company level.

While waiting for better norms to be drafted by the Chinese legislators, it would be more useful for foreign investors to become more familiar with those currently in place. Such knowledge is a prerequisite for efficient management of trade secrets in foreign investors’ Chinese subsidiaries and R&D centers. In particular, it would help set parameters for early detection of possible acts of infringement by employees (either by accidental or willing acts), safekeeping and pre-constriction of evidence for judicial use, if all other measures have failed in preventing a trade secret leak. There is no denying that in China, as in the West, good preventive measures are the best and most effective way to preserve secrets and exploit their economic value. However, such measures cannot be designed without first considering the legislative and enforcement environment of the country where protection is sought.

This article will provide a general overview of the current regulations and their enforcement, as well as a close-up on the critical preventive measures a company should have in place to secure and manage trade secrets, detect early signs of infringement, and deal with evidence collection in civil or criminal litigation.

The main precondition for the very existence of a trade secret is for it to be unknown to the public. Therefore, the model of exploitation of the economic benefits deriving from trade secret depends mostly on the preservation of the element of secrecy. Once the secret is leaked, the only thing a right holder can do is to either prevent the continuation of the leakage, or to try recovering some economic losses derived from the loss of secrecy. However, once opened to the public, this know-how will no longer be a trade secret and will be lost forever to its original holder.

Unlike patents, a trade secret has neither geographical limitation nor fixed duration or requirement for specific governmental registration as precondition to its existence and enforceability. A trade secret is thus a special kind of IPR.

Keeping trade secrets safe in China is more challenging than in many other countries. The culture of doing business in China is indeed different from the west. It is not the law that rules commercial transactions among and with Chinese counterparts, but rather personal trust and building up of relations, along with an inborn lack of trust and transparency on the Chinese counterpart that prevents full disclosure of information and timely intervention by legal consultants. Furthermore, counterfeiting and IPR infringements are rampant in China and are perceived by Chinese companies as the only way to compete against foreign competitors. This results in industrial espionage not only by government bodies, but foremost by Chinese competitors of foreign investors. It also lowers ethical thresholds for Chinese employees of foreign companies that morally justify their committing such illegal acts of know-how theft for mere personal career advancement. If the phenomenon of trade secrets is widespread at all levels of business in China, it rarely surfaces at the judicial or criminal law level. In most cases, acts of trade secret theft will emerge as the background of patent infringement lawsuits. Such trends betray the fact that foreign investor victims of trade secret theft will normally refrain from trade secret enforcement, except when they can resort to more traditional legal tools, like a civil lawsuit for a parallel or related patent infringement.

Legal Requirements for Trade Secret Protection of Commercial and Technical Know-how.

In the current Chinese legal system, the norms for the definition and protection of trade secrets are contained in the 1993 Anti-Unfair Competition Law (AUCL). In particular, Art. 10 AUCL defines a trade secret (TS) as “Technical and Business Information that a) is unknown to the public; b) can bring economic benefits; c) has a practical value; d) for which the owner has adopted measures to maintain its confidentiality.” This definition poses interpretive challenges.

The first challenge is to identify the meaning of ”technical and business information.” Art. 2 of the 1998 Amended Provisions of SAIC specifies that it includes designs, product receipts, manufacturing processes, production methods, management know-how, customer lists, sources of products, production and marketing strategy, bidding offer and bidding information, etc.

The 2007 Supreme People’s Court (SPC) Interpretation on Trade Secrets (SPC Interpretation) provides further explanation that clarifies the features that such “information” needs to possess in order to enjoy legal protection as a trade secret. The same provisions elaborate on the concept of “Confidentiality measures” to be adopted by the owner. In particular, the SPC Interpretation lists a number of examples of confidentiality measures as defined by the law: limitation of access to the info on a “need-to-know basis,” “confidential” mark and encryption code on medium of classified information, execution of confidentiality agreements, strict control to access factories/workshop etc. Measures can be more and different than those listed as examples by the SPC Interpretation. However, as underlined by the same SPC Interpretation, the trade secret holder can enjoy this right only if he implements measures that are proportionate and reasonable, compared to the value of the information.

This definition of “confidentiality measures” is quite generic and leaves room for discretion by the enforcing judge or administrative body when deciding infringement cases. These norms have been generally interpreted in a rather conservative manner, however, the lack of consistent decisions by the enforcement authorities creates uncertainty as to case outcome predictability, which in turn appears to be one of the most significant deterrents for foreign companies to initiate enforcement in China.

Trade Secret Infringement and Legal Remedies in China

Trade secret infringement is defined and regulated in the AUCL. According to the law, acquiring trade secrets by illegal means like theft, inducement, and duress, as well as disclosing, using or allowing others to use trade secrets in breach of a confidentiality agreement, and trade secrets acquired by illegal means are acts of trade secret infringement.

Thus, it is critical to define and understand the practical methodology Chinese courts follow when asserting trade secret infringement claims.

After asserting that the claimed technical or business information constitutes a trade secret (four requirements check), the Court must conduct a detailed and deep comparison between the claimed trade secret and the information allegedly misappropriated. Once the comparison shows consistency or identity of the information, the right holder needs to prove that the accused infringer accessed the information by illegal means, breaching the confidentiality measures put in place.

If the above is successfully proven, the burden of proof shifts to the defendant. In case the alleged infringer refuses or fails to produce evidence that he legally acquired the trade secret, then the court could “infer” the existence of an infringing conduct.

Legal protection can be sought through administrative or civil proceedings, or through criminal prosecution. The choice of the type of enforcement has critical impact on whether the legitimate holder of the trade secret will be able to prevent further losses by the illegitimate leak and use of his trade secret, prevent further repetition, and obtain compensation for already incurred losses.

Administrative Enforcement

Administrative enforcement of trade secrets must be filed with the territorially competent Administration for Industry and Commerce (AIC). Normally, the territorially competent AIC will be the place where the trade secret was stolen, i.e. the place where the tortious conduct was committed. The most appealing benefit of administrative enforcement is the rapidity of the procedure and the lower threshold for both acceptance of the case and evidence admissibility. On the other side, AIC officials have little enforcement powers and cannot seize documents or computers if the counterpart refuses cooperation. Also, AICs retain rather large discretion in determining and interpreting facts, especially in a legal system that has no specific binding administrative norms concerning protection of trade secrets. Eventually, the legitimate holder of the trade secret cannot claim damage compensation in administrative proceedings. At most, infringers will face a pecuniary fine . Administrative decisions carry low deterring power, which results in the risk that none of the normal goals of trade secret enforcement will be easily achieved—infringement will continue after such decisions and previous losses will not be recovered .

** A fuller version with footnotes will be published in the March issue of the IP Licensing journal of Wolters Kluwer/Aspen Publishing.

Avv. Paolo Beconcini, with the Beijing office of Squire Patton Boggs
Dr. Carmelo Parisi, Argo Consulting Co. Ltd.