Nowadays, one of the major concerns for international businesses operating in China has been the protection of IP and in particular trade secrets. This essay looks at some of the characteristics of Chinese law in this regard and offers some suggestions on how to ensure that trade secrets are well protected in China.

 

In China, the legal framework for the protection of trade secrets is set forth in section 10, Chapter II, of the Anti-Unfair Competition Law (AUCL) published in September 1993. AUCL has been further updated by other regulations, such as the Several Regulations on the Prohibition of Acts of Unfair Competition Involving the Passing-off of a Name, Packaging or Trade Dress Peculiar to Well-known Merchandise, effective 1995, and the Several Regulations on the Prohibition of Acts of Infringement of Trade Secrets, effective 23 November 1995.

Section 10 of the AUCL defines trade secret as “technical information and operational information which is not known to the public, capable of bringing economic benefits to the rights owner, has practical utility, and which the rights owner has undertaken measures to maintain its confidentiality.” Section 10 of the AUCL further prescribes trade secret misappropriation as:

• acquiring a trade secret of another by theft, inducement, duress, or other illegal means;

• disclosing, using, or allowing others to use a trade secret of another acquired by the above illegal means; 

• disclosing, using, or allowing others to use a trade secret in breach of an agreement or a confidentiality obligation imposed by the rights owner.

 

It is clear from the above provision that the third party can be deemed to have infringed on a trade secret if the third party has full awareness that the trade secret it obtains, uses, or discloses has been subject to the foregoing illegal acts.

 

In January 2007, the Supreme People’s Court (“SPC”) issued an Interpretation on Some Issues Concerning the Application of Law in the Trial of Civil Cases Involving Unfair Competition (“SPC Interpretation”) to clarify issues, among others, relating to unfair competition claims. The SPC Interpretation sheds light on the term, “information which is not known to the public”, as provided under AUCL and explains that such information shall refer to information that is unknown and difficult to obtain by a relevant person in a relevant field. 

 

The SPC Interpretation expressly excludes the following information as being “unknown to the public”:

i. information that is common sense or industry practice as known by a relevant person in a relevant technical or economic field;

ii. information that only involves the simple combination of dimensions, structures, materials and components of products, and can be directly obtained by observing the products by the public after the products enter the market;

iii. information that has been publicly disclosed in a publication or other form of mass media;

iv. information that has been publicised by open conferences or exhibits;

v. information that can be obtained through other public channels; and

vi. information that can be easily obtained for free.

 

According to the SPC Interpretation, any information which has actual or potential commercial value and can bring competitive advantages to the owner shall be regarded as having “economic benefits and practical utility.” The SPC Interpretation provides guidance as to what may constitute sufficient confidentiality measures. The following is a non-exhaustive list:

a) limiting access of the classified information and disclosing it only on a need-to-know basis; 

b) locking the physical container holding classified information;

c) labeling the container of the classified information as confidential;

d) adopting passwords or codes for the classified information; 

e) executing a confidentiality agreement;

f) limiting visitor access to the classified machinery, factory, workshop or any other place, or imposing confidentiality obligations on visitors; 

g) adopting other reasonable measures to ensure the confidentiality of the information.

 

 

There are two options available for an owner of trade secret rights to enforce its rights in the event of suspected trade secrets infringement, which are administrative or judicial actions. 

 

For administrative enforcement, the office of the Administration for Industry and Commerce (AIC) is the authority in charge of IP protection enforcement. Generally speaking, AIC is the government agency responsible for business registration, licensing, consumer protection, anti-unfair competition enforcement, and market regulation etc. AIC above the county level will, upon the owners’ report and after an investigation and determination of the misappropriating acts, order the infringing party to cease its infringing acts. AIC can order the return of the stolen materials and information, order the destruction of any goods made with the trade secrets, confiscate the infringers’ illegal income, revoke the infringers’ operating business license, and in some circumstances impose a fine of CNY 10,000 to CNY 200,000. If the infringer does not comply with the cessation order, a fine of more than twice and less than three times the amount of the value of goods sold can be imposed. All decisions of AIC may be appealed to the Courts. AICs do not have the authority to award damages.

 

The other option for a trade secret owner is judicial action. The infringed party can institute proceedings in the courts to seek compensation for damages under Section 20 of AUCL. In cases where damages cannot be reliably calculated, the amount of profits obtained by the infringing party can be used as the basis for the compensation claim. In addition, expenses and fees arising from investigating and obtaining evidence of the infringement can be included in the claim for damages. Injunctive relief is also available, subject to the satisfaction by the court, that such measures are warranted under the circumstances.

 

Unlike the laws of the US where the procedure of discovery will enable parties to have access to all relevant evidence, China does not have such proceedings. According to the SPC Interpretation, the plaintiff carries the burden of proof in a trade secret misappropriation action, which in many cases is not always easy for the plaintiff to establish a good case. Specifically, the plaintiff must present admissible evidence in a Chinese court that the trade secret:

• is not publicly known;

• has economic benefits and practical utility;

• was protected by adequate confidentiality measures; 

• has been misappropriated.

 

It goes without saying that it is of critical importance for international businesses operating in China to take careful steps to protect themselves from any harmful disclosure of confidential trade secrets. The following suggestions could be of assistance for such businesses:

• Designate specific personnel to be responsible for formulating and overseeing internal IP protection programs and policy including trade secrets which need to be evaluated and updated regularly;

• Regularly review and update the scope of trade secrets and who has or should have access to such trade secrets;

• Implementing proper security measures and restricting access to computers, equipment, documents, and implementing password protection for electronic information and locks for physical information ; 

• Clear contractual obligations such as a non-disclosure clause in an employment contract  to protect the trade secrets of the company. For certain management level employees, a non-competition clause with reasonable reimbursement may be included in the employment contract;

• All sensitive information should be labeled confidential and physical copies of the information should be shredded after use;

• Conduct exit interviews with all employees “in-the-know” when they resign or otherwise leave the company, bringing to their attention the non-disclosure obligation.