Trade Secret Protection in China: Lack of Regulation or Know-How Mismanagement? (seconda parte)

27 giugno 2016

Civil Enforcement

Civil proceedings last longer and are more expensive than administrative enforcement. Courts require higher admissibility thresholds for both the claims and the supporting evidence. Evidence formalities are also tighter requiring that evidence formed outside of China be notarized and legalized before being admitted by a Chinese court. On the other hand, courts have more penetrating powers and can order evidence preservation and award pre- and post-litigation injunctions. However, injunctions in trade secret cases may be difficult to obtain. Trade secrets, unlike patents, are unregistered IP rights, and their content is by definition always disputable, which makes it difficult for a judge to take the responsibility to issue injunctions on such a volatile IP right .

Given that, unlike in the U.S., there is no discovery in China, the chances of success of a civil enforcement depend on the work done by the plaintiff before the filing of the lawsuit. Evidence collection and investigations are the most critical tools for construction of a believable civil case. In practice, it is often difficult to have ready-at-hand evidence of infringement, especially, for instance, when the theft surfaces one or two years after an employee has left the company. In such cases, indirect evidence will play an important role in that it may constitute the only and best form of evidence to convince a judge to order evidence preservation measures or shift the burden of proof onto the defendant.

In practice, an employer should consider having systems in place that automatically generate evidence that will later be useful in a trade secret lawsuit. Confidentiality agreements alone will not be sufficient to establish infringement. This reverts the discussion of efficacy of enforcement tools back to the preventive measures a company has in place, as we shall see and discuss later in more detail.

Criminal Law Enforcement

A trade secret’s owner may also start a criminal prosecution if the damages are significantly high and in an amount of minimum 500.000 RMB (about 80 K USD) – the so called “severe economic damages.” The infringer may be sentenced up to three years in prison, and up to seven years if the damages exceed 2.5 million RMB (about 400 K USD).

The issue with criminal law enforcement is that: a) the threshold defined in the law is interpreted arbitrarily; the “severe economic damages” requirement finds no more precise definition in the law; and b) convincing the police to take up a case is difficult in that complaints are filed with the locally competent police station, which will have discretional power in determining whether to pass the case along to the Economic Crime Unit (ECU) at the higher level of jurisdiction . To obtain case acceptance by the police requires good preparation in evidence acquisition and a build-up in lobbying capacities. The case must be carefully structured. In practice, only high profile cases that could benefit the career of a commanding police officer or provide more funds and credit to the local police station will be accepted. The problem is that packaging a case as high profile is easy to say, but difficult to do. In most cases, the attribute “high profile” is not determined by the case facts in themselves or the value of the know-how, but rather by the interest the involved police could have in using that case at that given time for its own gain. If a claimant can manage to lodge its criminal case successfully, this form of enforcement is by far the most effective.

After a criminal judgment favorable to the right holder is issued, the right holder can also file a civil lawsuit in order to recover pecuniary damages.
In all three kinds of procedure (but less in the administrative action), the key role is played by the evidence. Its admissibility and evidentiary weight will be carefully evaluated–especially in the case of criminal and civil proceedings—through cross-examination. There must be rings strong enough to form the “evidence chain” needed to prove the trade secret infringement.

Of particular importance is evidence to prove illegal access to the trade secrets; the plaintiff, figuratively, should prove that the infringer has “forced the Safe” where the confidential information where kept secure. This introduces us to the issue of measures companies have in place to create the “Safe Box” containing their trade secrets.

The “Tool Box” for Building the Safe

As highlighted at the beginning of this article, the management of trade secrets inside a company is of paramount importance if that same company wants to enjoy—undisturbed—the economic benefits and advantages derived by the use of its trade secrets. Maintaining the status of secrecy and control, the circulation of the trade secrets is therefore the primary objective of the right holder. Its loss and divulgence will result in the loss of secrecy and the connected economic advantages.

Companies must actively put long term tools and processes in place in order to effectively protect their trade secrets, which will increase the value of their intangible assets while satisfying the statutory requirements in order to enjoy legal protection. Tools can be of a legal and technical nature, and aim at protecting the trade secret, while processes can concern the creation, circulation, and exploitation of trade secrets including cross-departmental structures aimed at collecting and keeping record of all relevant information and data that can later form evidence against infringers. The effective protection measures put in place constitute the “self-protection” created by the owner while, at the same time, they are key elements for successful legal protection in case of infringement.

Commonly, the available tools for building such safeguards can be classified in two major groups: Hard protection and Soft Protection tools . Under the first kind fall all those physical and technological measures implemented in relation to, for example, the classification of trade secrets depending on their weight of importance, data storing and information flow’s record system, restricting of right-of-access procedures, implementation of software to strictly control/track access to company intranet and external email, locked/strictly-authorized possibility of downloading company files on personal devices, installation of screen-monitoring / CCTV on the company premises in order to facilitate investigation and evidence collection etc.

As Soft protection measures, we may identify all those non (strictly speaking) technological tools. For instance, threats coming from external sources like business partners or people/entities within the chain of distribution can be mitigated with well-designed confidentiality and non-disclosure clauses inserted into NDA agreements and cooperation contracts. Additionally, due diligence and monitoring of the partners’ activities, developments, sales, etc. through hidden auditing and investigative checks will also help raise red flags and intervening at the earliest time possible to reduce the risk of trade secret loss by accident or willful misconduct of business associates and partners.

The risks related to internal factors, such as trade secret loss due to the illicit conduct of unfaithful employees, are controlled not only through proper clauses in the employment contract (tools aimed at reducing the risk itself in a direct way), but by implementing and managing adequate processes to reduce the risk of both fraudulent or accidental disclosure and misuse of trade secrets such as: early scans of job candidates, candidate interviews and questionnaires, clear desk internal regulations, adoption of policies for the presentation of corporate information to outsiders and partners, specific training about the importance of the trade secret, and especially consequences of their misappropriation, etc. If efficiently designed and implemented, these tools and processes may have the power (the Soft power) to enhance the value of the trade secret protection in the company DNA and in its employees’ working philosophy.

How to Improve the Effectiveness of Preventive Measures: Creation and Use of Custom Made Trade Secret Management Tools

The above-mentioned tools and processes are indeed important from a legal point of view because, if they cannot completely prevent a company’s trade secret from willful or accidental disclosure, they are nonetheless necessary steps to prove that the trade secret’s owner has taken reasonable and adequate measures to protect the confidentiality of the trade secret in an enforcement action.

The efficacy of tools and processes to prevent trade secret theft cannot be measured by a mere legal parameter. It is more important for a company to make sure that these tools and processes are useful in effectively preventing trade secret abuse in the first place. In order to achieve this, the deployment of tools and processes should not focus only or exclusively on creating evidence that meets the legal standards for later enforcement (at that point, the trade secret is already lost and enforcement will only provide compensation and punishment).

Therefore, the deployment of such preventive measures should be given, first and foremost, the goal of timely raising red flags, according to predetermined profiles and

pre-conditions, and quickly activate safety procedures and protective actions within the company.

This goal can be achieved only if these tools and processes are managed through integrated and cross-departmental software that can support managers programming, deploying and using tools and processes according to the pre-set goals , and ensure timely recognition of alarm signs. The same software can also initiate parallel processes for the creation and preservation of evidence for a possible litigation. Protection of trade secrets involves several players within the company. Knowledge of trade secrets is a fluid type of knowledge tending to spread itself through different departments and should be used in different company processes and activities. Reliance on paper trail systems or basic data collection software and mere human vigilance and control often allows for early signs of partners’ or employees’ infidelities to go unchecked for stretches of time . In the best case, the alarm is sounded only when the knowledge has been illegally appropriated or accidentally leaked. In summary, having processes and tools in place is not enough to enhance preventive protection if there is no system that supports the management in recognizing and understanding early signs of infringement .

Therefore, it appears necessary that companies consider the creation of specific managing software that runs established processes and tools in an integrated manner . Products of this kind cannot exist as one good-for-all solution. Each company should consider investing in creating processes and putting them in ad hoc management software to ensure that the preventive measures can meet the challenges which put them there in the first place.

Conclusion

Preventive measures have often been seen and conceived as a function of enforcement and legal protection. The key question posed to business people by lawyers is, “Did you build a strong-enough safe?” or “Did you build a safe that can leave clear traces of its break-in?” It is true that legal protection (or at least the preconditions for a positive judgment) of a trade secret starts much earlier than the litigation phase. Correct management of the physiological phase is fundamental to succeed in the pathological phase. This is true for all IPRs, but it is even more true for trade secrets. However, such an approach to preventive measures in trade secret protection is also limited and has not helped companies in developing new and more effective preventive measures to avoid and anticipate theft or loss of trade secrets.

Tools and processes to prevent trade secret loss should therefore be engineered and managed first and foremost with the goal of providing managers with early warnings of possible infringement activities, which allow protective measures that can salvage all or as much as possible of a trade secret. Legal protection, on the other hand, can only provide substitute remedies which are normally insufficient in making good the lost trade secret’s commercial value.

All this underlines the complexity of protecting trade secrets. More creative approaches are needed in light of the continuing rise of trade secret theft. For this reason, conceptual changes in the management of trade secrets are necessary. One such change should be the refocusing of the centrality of legal approaches to the creation and deployment of preventive tools in favor of a mixed and more flexible strategy that blends both legal and managerial goals, and produces new ideas and products that could move the defenses of a company trade secret from their legal enforcement to early reaction and protective measures .


** 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.