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Trade Secrets rules

Q: What is the“trade secret”?

A: China has a number of laws that address trade secrets, but the primary law on the topic is China’s Anti-Unfair Competition Law (AUCL), which came into force on December 1, 1993. Article 10 of the AUCL defines a trade secret as follows: “technical and operational information which is not known to the public, which is capable of bringing economic benefits to the owner of rights, which has practical applicability and which the owner of rights has taken measures to keep secret.”1

In order to enforce a trade secret against infringement, all four elements of the Article 10 definition must be met. Chinese courts and scholars have interpreted each element as follows:

1) “Not known to the public:” The “public” in this definition does not refer to the general public, but to current or prospective industry competitors or people who want to obtain economic benefit by exploiting the secret. The “public” is also limited to the Chinese “public” – if a trade secret is known outside of China but not inside China, it is considered “unknown to the public” under this definition.“Unknown” means secret and not accessible through public channels.2) “Potential economic benefits:” Through tangible or intangible means, the trade secret must be able to generate profit or commercial value, or provide a competitive advantage. 3) “Practical applicability:” The information should be specific and immediately useful and applicable to industrial and business applications. It cannot be mere theory or a general principle. 4) “Measures to keep secret:” Before an owner of a trade secret can claim infringement, he must show that he took proper and reasonable steps to keep the information secret, and he should be able to trace those steps through written records. For a list of the types of measures that can be taken, see below.

Q: What is the infringing on a trade secret?

A: Notably, China has legal provisions that clearly recognize third-party liability for trade secret infringement. Article 10 of the AUCL defines the following acts as trade secret infringement:

1) Obtaining trade secrets from the owner by stealing, promising gain, using coercion or other improper means;2) Disclosing, using or allowing others to use trade secrets obtained by stealing, promising gain, using coercion or other improper means;3) Disclosing, using or allowing others to use trade secrets that a party has obtained by breaking an agreement or disregarding the requirements of the trade secret owner to maintain the trade secret in confidence; 4) Where a third party obtains, uses or discloses someone else’s trade secret when he had, or should have had, awareness of the illegal acts mentioned above.

Q: What is the Enforcement and liability for infringement?

A: Enforcement of trade secrets can be difficult in China because there is a high burden of proof on the plaintiff. However, an owner of a trade secret has several options available in China in the event of infringement, if he can successfully prove that the information was indeed a trade secret:

1) Administrative Action: Under Article 15 of the Unfair Competition Law, when someone infringes on another’s trade secrets, the trade secret owner can request enforcement by the Administration for Industry and Commerce (AIC). The AIC can order the infringing party to stop the infringing acts, order the return of stolen materials and information, order the destruction of any goods made with the trade secret, confiscate the infringer’s illegal income, revoke the infringer’s operating business license, and, in some circumstances, impose a fine of RMB10,000 to RMB200,000.7 The AIC does not have the ability to award compensation to an aggrieved owner of a trade secret. AIC actions are most likely to be undertaken and succeed in clear cases of infringement, and even then, most pundits agree that the administrative fines are not big enough to act as a deterrent.

2) Lawsuit Claiming Civil Damages: A trade secret owner can file a lawsuit against an alleged infringer for damages. However, it’s widely said that it’s difficult for plaintiffs to prevail to any significant degree in trade secret infringement actions in China. While judges do tend to be fair, they are not obligated to follow precedent.

Monetary Damages: If damages to the trade secret owner are difficult to calculate, the court may instead base its damages calculation on the profits realized by the infringing party resulting from the infringement. A party found liable for infringement is also liable to pay the reasonable costs that the trade secret owner incurrent in investigating the case. It takes 4-7 years for a lawsuit to be heard, and significant damages awards are extremely rare.

Injunction: Injunctions are the most feasible and helpful remedy for a trade secret owner looking to stop infringement. A plaintiff can obtain a preliminary injunction if he can prove that: the information is a trade secret, the defendant’s acts are causing irreparable harm, and the plaintiff is likely to prevail on the merits of the case. The plaintiff must also post a bond.

3) Criminal Penalty: Article 219 of China’s Criminal Law cites to the first three acts defined as infringement in the Unfair Competition Law, and states that anyone who commits one of those acts in a manner that causes “serious damage” to the trade secrets owner (over RMB500,000 damage to an individual and more than RMB1,500,000 to an enterprise), is liable for up to three years in jail and a fine.8 There is an aggravation factor as well -- when the infringement causes “exceptionally serious” damage to the trade secret owner (RMB2,500,000 for individuals and RMB7,500,000 for enterprises), the infringer faces up to seven years in jail plus a fine. Many trade secret owners are hesitant to report bad acts to the police, however, because there is a risk of further exposure of the trade secret to public knowledge during the criminal prosecution.

 

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