China does not have a unified trade secret law, but the rules governing civil, administrative and criminal enforcement routes are scattered among a series of laws and regulations. The Anti-Unfair Competition Law (2019 revised, AUCL) is the principal law regarding trade secrets, which defines and regulates what is a trade secret, the misappropriation of trade secrets and the corresponding legal liabilities, etc. Although China follows the civil law system, judicial interpretations issued by the Supreme People's Court are binding on the courts. The Judicial Interpretation on Unfair Competition plays a significant role in the judicial practice of trade secret protection.
Other civil laws relevant to trade secrets protection include the Contract Law, the Company Law, the Labour Law and the Labour Contract Law. The Contract Law provides the general obligation of trade secret protection in contract negotiations and the rules related to technology licence contracts that may involve technical secrets. The Company Law provides the trade secret protection obligations for senior management, prohibiting directors or managers of a company from illegally disclosing the company’s trade secrets. The Labour Law and Labour Contract Law regulate the employees’ obligation to protect the trade secrets of their employers under labour contract and non-compete agreements.
Trade secrets can also be protected through administrative enforcement. The State Administration of Industry and Commerce’s Provisions Regarding the Prohibition of Trade Secret Infringement provides administrative procedures for handling trade secrets cases. Now this authority of the State Administration of Industry and Commerce is succeeded by the State Administration for Market Regulation (SAMR).
The Criminal Law (2017 revised) and the Judicial Interpretation Concerning the Application of Law for the Infringement upon Intellectual Property Rights regulate the acts that seriously infringe upon trade secrets and cause heavy losses to the right-holder as the crime of infringing trade secrets.
The AUCL defines a trade secret as technical, operational or other commercial information unknown to the public that is of commercial value and for which the owner has taken corresponding confidentiality measures.
Technical information generally refers to technical solutions obtained by way of scientific and technological knowledge, information and experience, while business information generally refers to various types of business information that can bring competitive advantage to right-holders other than technical information.
The relevant administrative regulations and court decisions have addressed the typical categories of information qualified as trade secrets, covering a wide spectrum of business and technical information. Technical information that can be protected as trade secrets mainly includes product formula, technical know-how, technological process, design paper, product model, computer source code programs, program documents and key data. Business information subject to trade secret protection mainly includes a name list of customers, a business plan, financial information, information about goods supply, the bottom price of a bid and contents of a bidding document.
Under the AUCL, information is entitled to trade secret protection if three elements are met:
The owner of a trade secret is required to show that it took reasonable measures to protect the trade secret. According to the Judicial Interpretation on Unfair Competition, when determining whether the owner has adopted reasonable confidentiality measures, the courts usually consider the following factors:
Under any of the following circumstances, where it is sufficient to prevent disclosure of confidential information under normal conditions, the owner will be found to have adopted reasonable confidentiality measures:
It should be noted that the following circumstances may not be deemed as proper confidentiality measures for trade secrets in judicial practice:
As one of the three constituent elements for a trade secret, the nature of confidentiality requires that trade secrets must be unknown to the public. However, “unknown to the public”, with the characteristic of relativity, only requires trade secrets not to be generally known to the relevant personnel in the relevant technology or business field rather than anyone other than the owner. In other words, the right-holder disclosing a trade secret to those who need to know it will not affect the secrecy of such trade secret if confidentiality measures have been taken. Therefore, if necessary, the right-holder may disclose a trade secret to its employees, which will not affect the availability of the legal protection for the trade secret. But the right-holder should also take strict confidentiality measures upon such disclosure (ie, concluding confidentiality agreements with the employees). Otherwise, once the employees illegally disclose the trade secret to the public, the right-holder may suffer severe losses.
According to Article 12 of the Judicial Interpretation on Unfair Competition, the trade secrets obtained through independent research and development or reverse engineering shall not be affirmed as a misappropriation of trade secrets stipulated in the AUCL. However, if any party knows the trade secrets of someone else by unjustifiable means and then claims its acquisition as lawful for the reason of reverse engineering, it shall not be supported.
Apart from claiming for protection under the Copyright Law or the provisions under a licence agreement, computer software owners may also protect their information under the AUCL. The courts have held that computer programs and related documents can constitute protectible trade secrets if certain requirements are met. As with other types of information, when determining the availability of the trade secret protection, the focus will be the three constitutive elements of “unknown to the public”, “being of commercial value” and “confidentiality measures having been taken”, and there are no laws or regulations regarding trade secret protection unique to computer software. Although the protection provided by trade secrets laws and regulations goes beyond the scope of copyright protection, which only protects the expression of computer programs and related documents of a software, it is not enough to demonstrate that trade secrets exist by referring to a broad scope of software technology. The trade secret owner should identify the specific lines of computer source code or the concrete software features of the software sought for protection.
The current laws and regulations in China have no limit on the duration of protection for trade secrets. In principle, as long as the relevant information remains to meet the three constituent elements of a trade secret, the owner is entitled to protection for trade secrets. If a trade secret is publicly disclosed, whether it is disclosed by the owner intentionally or accidentally, the requirement of “unknown to the public” will no longer be met so that it cannot be protected legally as a trade secret. Although disclosure to the persons on a need-to-know basis will not affect the existence of a trade secret, proper secrecy-keeping measures such as concluding a non-disclosure agreement (NDA) with the persons having access to the trade secret should be adopted.
As with other intangible properties, a trade secret can be licensed to any third party, whereby the right-holder can convert it into real benefits. In practice, both technological secrets and business secrets can be licensed by concluding relevant contracts. The Contract Law specifically addressed certain rules on technology contracts as they are the most common form of trade secret licence.
In general, the trade secret owner is entitled to a licensing fee or royalty from the licensee for exploiting the trade secrets licensed. The trade secret owner may flexibly agree on specific licensing terms and conditions by concluding a licence contract with the licensee. In practice, there are three types of trade secret licence:
When entering into a contract for the licence for the using of trade secrets, the owner should prudently agree on the key terms of such licence, such as the using scope, duration, geographical scope, method, licence fee, the licensee’s confidentiality obligations and liabilities for breach of the licence contract. For a technology licence, it is also advisable to specify in advance the issues, such as whether the licensee is allowed to reverse engineer, and who will own trade secrets generated from additional research and development undertaken by either party after the licence has been granted. During the performance of the licence contract, the owner should also closely monitor the use of the trade secret by the licensee. Once the owner learns any violations, the owner should immediately take actions.
Compared with other intellectual property rights, the protection of trade secrets has its own particularities, with the following characteristics:
The protection of trade secrets may in some cases overlap with the protection of other intellectual property rights, especially the copyright. For instance, an internal Equipment Maintenance Manual of an equipment manufacturer on the one hand can be protected as a work under the Copyright Law if it meets the originality standard. On the other hand, the technology information included in the Equipment Maintenance Manual can also constitute trade secrets if such information satisfies the three constitutive elements of a trade secret. In judicial practice, the plaintiff may claim both secret protection and copyright protection in the same case and the court may hold in favour of both claims depending on the specific situation of the case.
In addition to the infringement lawsuits based on the legal theory of misappropriation according to the AUCL, it is also possible to sue the counterparty for breach of confidentiality obligations based on the contractual stipulations. For instance, the trade secret owner may bring a civil lawsuit for breach of confidentiality obligations under a licence agreement, joint venture agreement or service agreement against the counterparty of such agreements. In the case that an employee steals a trade secret, the employer can bring a claim for breach of confidentiality obligations under the labour contract or for breach of non-compete (if applicable), normally first resorting to labour arbitration. Where a third party induced an employee to breach a contractual confidentiality obligation to the employer, the employer may directly file a claim against the third party for misappropriation according to the AUCL.
Apart from filing a civil action, the right-holder can utilise parallel proceedings: going to the SAMR seeking for administrative relief, and/or bringing criminal charges for the crime of infringing upon trade secrets if any party seriously infringes upon trade secrets and causes significant losses to the right-holder.
Article 9 of the AUCL defines misappropriation as follows:
Where a third party knows or should have known that an employee or a former employee of the right-holder of a trade secret or any other entity or individual has committed an illegal act as specified above but still acquires, discloses, uses, or allows another person to use the trade secret, the third party shall be deemed to have infringed upon the trade secret.
According to the Judicial Interpretation on Unfair Competition, the requisite elements to establish a trade secret misappropriation claim include:
However, as mentioned in the first paragraph, the 2019 revised AUCL broadens the scope of misappropriation and therefore the third requisite element above may not be limited to “adopting improper means to acquire the trade secret” but the specific conducts, such as “disclosing” and “allowing another person to use” in violation of its confidentiality obligation.
There are no laws or regulations that specifically concern infringement acts committed by employees and thus the case where the misappropriation involves an employee of the owner should apply the same constitutive elements of trade secret misappropriation as other cases.
The employee may also have a collateral obligation to keep trade secrets that he learned from work for the employer based on the labour contract even though the employer did not sign any confidentiality agreement or terms with the employee. Although the laws and regulations in China do not explicitly provide for it, in judicial practice, some courts state that once an employee establishes a labour relationship with the employer, he has an obligation to be loyal to the employer based on the principle of good faith. The obligation of loyalty is in essence a collateral obligation based on a labour contract, the content of which may include obligations such as obedience, attention, keeping trade secrets and promotion of interests. Therefore, when an employee who did not sign any confidentiality agreement or terms with the employer commits an infringement upon the trade secrets learned from work, the employer may also claim for his breach of collateral obligation to keep trade secrets based on the labour contract.
There are no specific provisions on the confidentiality obligations with respect to trade secrets between joint venturers in the Chinese legal system. The secret-protection obligations between the joint venturers largely depend on the terms of the joint venture agreement or separate confidentiality agreement. However, as a general rule under the Contract Law, any party to a contract is obliged to keep trade secrets for the other party based on the principle of good faith. To be specific, the parties shall not disclose or improperly use the trade secret learned in concluding a contract, no matter whether the contract is established or not. If any party discloses or improperly uses such trade secret and thus causes loss to the other party, it shall be liable for damages. Therefore, any party to a joint venture agreement shall be liable to keep the trade secrets it learns from the other party.
In China, there are no laws and regulations specifically regulating industrial espionage currently. However, if any industrial espionage involves trade secrets, it can be regulated by other relevant laws. For example, the “other illicit means” stipulated in Article 9 of the AUCL should include the use of industrial espionage. Therefore, if any party infringes upon trade secrets by way of espionage, the right-holder can claim infringement liabilities against the infringer according to the AUCL. Besides, the right-holder may also pursue an SAMR proceeding or bring a criminal charge if the infringement is serious and causes significant losses to the right-holder.
The steps recognised as helpful to safeguard trade secrets can generally be divided into two categories.
Establish a Trade Secret Protection Policy
The first step to protect trade secrets is to have a written trade secret protection policy. An effective trade secret protection policy should include at least the following:
Implement the Trade Secret Protection Policy
It is advisable to implement the general secret protection policy in the following three key areas.
Establish trade secret protection rules in employment management
Take precautions for dealings with third parties
As with employees, when dealing with third parties such as outside vendors, independent contractors and joint venturers, it is necessary to sign confidentiality agreements in conformity with the corporate confidentiality policy.
Adopt proper security measures to protect trade secrets
The primary principle is to limit access to confidential information on a need-to-know basis. To this end, various general security measures should be implemented, including:
Employers will conduct exit interviews for departing employees to ensure that all trade secret information has been returned and to remind them of their confidentiality obligations. In practice, employers will usually take the following actions in the process of an exit interview:
For those who have access to significant trade secrets of the company, employers may further require the departing employee to provide written acknowledgment indicating that they had access to certain confidential information and specifying such information. In addition, employers will try to enquire where the employee will go (although an employee without a non-compete obligation is not obliged to disclose his or her new employer). If necessary, employers will notify the new employer of the employee’s ongoing confidentiality obligations.
The courts in principle recognise a distinction between an employee’s general knowledge and skills and protectable trade secrets.
The Supreme People’s Court stated in a working paper that knowledge, experience and skills mastered and accumulated by employees in the process of work shall constitute part of the personal characters of employees, and employees have autonomy to use them after quitting a job, except the trade secrets of their employers.
A ruling made by the Supreme People’s Court in a retrial case reflects a similar position. As labourers who have the ability to learn, employees are bound to master and accumulate the knowledge, experience and skills related to the work they perform during the employment. Except in the case of trade secrets belonging to the employer, the knowledge, experience and skills constitute a part of the employee's personality and are the basis of their viability and labour capacity. After employees leave, they have the freedom to use their own knowledge, experience and skills to win the trust of customers and thus form a competitive advantage, which does not violate the principles of good faith and generally accepted business ethics.
In China, there is no “inevitable disclosure” doctrine nor a clear-cut line between an employee’s general skills and experience versus expertise derived through exposure to the employer’s trade secrets. Employers should bear the burden to specify the scope of the trade secret, thereby distinguishing the trade secrets they claimed from an employee’s general knowledge and skills.
New employees holding trade secret information from their past may subject the new employer to third-party misappropriation liability. Employers should check and verify the new employee’s obligation of non-compete and confidentiality, including the scope and term effectiveness of such obligation. Employers should discuss trade secret protection with employees before they are hired. At pre-employment interviews, new employees should be given a copy of the Trade Secret Protection Policy and be required to provide a written commitment acknowledging having read it and understood and promising that new employees are not bringing trade secrets or disclosing the trade secrets when performing the new job.
In terms of procedure requirements, there is no prerequisite that a trade owner must satisfy before filing a lawsuit based on the legal theory of trade secret misappropriation. However, in the case that an employee steals a trade secret and the owner claims its right on the ground of breach of labour contract or non-compete obligation, the dispute would be identified as a labour dispute and therefore application for arbitration would be a prerequisite before initiating a civil litigation.
The general statutory limitation of three years provided in the General Rules of Civil Law applies to trade secret claims. The statutory limitation is calculated from the date on which the right-holder knows or ought to be aware of the damage to the rights and the exact offending party, and can be suspended or interrupted.
In addition, if a trade secret claim is filed as a labour dispute, then according to the Law on Labour-dispute Mediation and Arbitration, the limitation period for application for arbitration of a labour dispute is one year, which shall be calculated from the date on which a party knows or ought to be aware of the infringement of its rights, and such limitation period can be suspended or interrupted. Where a party has objection to the arbitral award of a labour dispute case, it may initiate a litigation to a people's court within 15 days from the date it receives the award.
To initiate a trade secret lawsuit, the plaintiff should submit a complaint with specific claim(s), facts and reasons, preliminary evidence for infringement and necessary identity documents, such as a business licence or power of attorney, to persons being entrusted as an agent in the lawsuit to the court having jurisdiction over the case. In addition, the plaintiff should pre-pay the court fees.
As there is no special provision on the jurisdiction of a trade secret claim, the general provisions of the Civil Procedure Law should apply.
If a trade secret claim is filed as a tort lawsuit, according to Article 28 of the Civil Procedure Law, it should be under the jurisdiction of the people's court at the place where the tort occurs or at the domicile of the defendant. The aforesaid “place where the tort occurs” includes the place where the tort is committed and the place where the result of the tort occurs. For a trade secret lawsuit, the “place where the tort is committed” is the place where the defendant is accused of committing the infringement, which includes the place where the trade secret is obtained, the place where the trade secret is disclosed and the place where the trade secret is used; the “place where the result of infringement occurs” shall be interpreted as the place where the direct result of infringement occurs. Notably, the plaintiff's domicile cannot be simply deemed as the place where the result of infringement occurs.
If a trade secret claim is filed as a contract dispute case, according to Article 23 of the Civil Procedure Law, it should be under the jurisdiction of the people's court at the domicile of the defendant or at the place where the contract is performed.
The hierarchical jurisdiction varies depending on the amount of the case and the type of the trade secret in dispute.
Due to the professional nature and complexity of trade secret cases, trade secret cases should, in principle, be under the jurisdiction of intermediate people's courts. The primary people's courts approved by the Supreme People's Court can also accept and hear civil tort cases related to business secrets of first instance subject to the amount in dispute of the case. For cases concerning technology secrets, only intermediate people’s courts or above have the jurisdiction over cases of first instance.
There are three specialised courts – ie, the Beijing IP Court, the Shanghai IP Court and the Guangzhou IP Court – that have the same hierarchical jurisdiction as the local intermediate people's court. Those three specialised IP courts have jurisdiction over all the first instance technology secret cases and the business secret cases whose amount in dispute exceeds a certain amount in their respective regions.
The high people's courts and even the Supreme People's Court may also have jurisdiction over first instance trade secret cases. Such cases heard by the high people's court or the Supreme People’s Court shall have a significant impact or have a dispute of huge amount (at least RMB5 billion).
A trade secrets plaintiff will not face different pleading standards as compared with other types of cases. An eligible pleading should satisfy the following criteria:
Accordingly, the plaintiff needs to provide necessary identity information for both the plaintiff and the defendant, a pleading with statements of claims and supporting evidential materials in a preliminary level for filing to the court that has proper jurisdiction.
To fulfil the above initial pleading standards, the plaintiff is generally required to provide supporting evidential materials that could preliminarily prove the existence of the asserted trade secret, the plaintiff’s legal right over such trade secret and the infringement of the defendant. Thus, the plaintiff is not required to produce hard evidence to support the claims and facts stated in the complaint at the pleading stage.
In China, the discovery mechanism is not available for a party to obtain relevant information and evidence from the other party in the pre-trial phase of a lawsuit as practised in common law jurisdictions. As the plaintiff bears the burden of producing evidence, in principle, the owner of a trade secret has to collect evidence independently.
Notwithstanding the above general rule, where a trade secret owner encounters difficulties in collecting evidence, the owner can seek judicial assistance. According to Article 64 of the Civil Procedural Law as well as the Provisions of the Supreme People's Court on Evidence in Civil Procedures, the party, on objective grounds, who is unable to gather evidence independently may apply for investigation and evidence collection by the people's court.
According to the Civil Procedure Law, a trade secret owner can obtain the following types of evidence:
Apart from other types of evidence, appraisal opinions are commonly used in a trade secret lawsuit, especially for cases involving technology secrets.
The time period for producing evidences may be agreed upon by the parties subject to approval of the people's court. Generally, the parties should submit evidence to the court within such period.
In order to maintain the secrecy of trade secrets in litigation, China has made clear provisions on the confidentiality measures applicable to lawsuits in various laws, judicial interpretations and judicial policy documents. The basic rules to maintain secrecy include the following:
In practice, the court may further take the following measures to keep trade secrets confidential: restrict or prohibit the reproduction of confidential evidence, display confidential evidence only to the attorney, and/or order the signing of a confidentiality undertaking, etc.
The main defences against misappropriation that can be used by the defendant in a trade secret litigation include the following.
In addition, the defendant can also defend against the damages claimed by the plaintiff by rebutting the causation between the damage and the misappropriation, as well as the calculation method and composition of the damages.
In China, there is no equivalent practice for “dispositive motions” as in common law jurisdictions. A court trial cannot be avoided unless the court finds that the case does not fulfil the requirements for filing a litigation as provided in the Civil Procedure Law after accepting the case. The court will dismiss a case where:
The costs that the parties to a trade secret litigation may expect to incur mainly include (i) attorney fees; (ii) the costs for producing evidence, such as notarisation fees and investigation fees; and (iii) the court fees calculated based on the damages claimed by the plaintiff. Where the case involves complicated technology information, it is common for the parties to engage an appraisal agency or an expert witness to identify the critical matters in a trade secret case, such as the non-public nature of the trade secret at issue, and the similarity between the plaintiff’s trade secret and the information held by the defendant, which may incur additional costs for producing evidence.
In China, a contingency fee arrangement is allowed if the following requirements provided in the Administrative Measures on Fees for Lawyer Services are satisfied: (i) the case should be a civil case involving a property relationship, and (ii) the client has been clearly informed of the government-guided prices for legal services but still insists on being charged a contingency fee.
The PRC legislature or the administration authorities have not released any laws or regulations on litigation financing. As reported, some litigation financing service platforms have been established in recent years. Although litigation financing services have been available in China, such market is still underdeveloped.
In China, a trade secret case is tried and decided by a collegial bench consisting of judges or both judges and people’s jurors. A collegial bench normally consists of three members designated by the court. The parties do not have the right to decide the composition of a collegial bench.
Notably, the role of people jurors in a collegial bench is different from the jurors under the jury system in common law jurisdictions. Such people jurors enjoy the same authorities and bear the same obligations as judges, responsible for both factual and legal issues, and each of them has one vote in the decision-making process.
Generally, trade secret cases follow the general civil procedures like other types of cases. A complete trial process of civil litigation normally includes the following stages:
At the end of the trial proceeding, the court may seek the parties’ opinion on whether they accept mediation. If either party refuses mediation, the court will adjourn the hearing. Then the court will conduct internal deliberation and will render the judgment in due course.
The time required for a trade secret trial depends on the complexity of the case. The trial generally lasts from several hours to several days.
Chinese law does not set out special provisions on expert witnesses or identify expert witness testimony as an independent type of evidence. The so-called expert witness may present his or her opinions on certain issues to the court according to the following rules.
The Civil Procedure Law has established a behaviour preservation system that is functionally similar to a preliminary injunction. Such behaviour preservation may be granted by the court according to the claimant’s application or ordered directly by the court even without the claimant’s application. The factors in determining the application of behaviour preservation are as follows:
The duration for behaviour preservation shall be reasonably determined by the court based on the claimant's request. Generally, an order to suspend infringement of trade secret shall be upheld until the ruling for the case takes effect.
A bond is required for the behaviour preservation ordered either before or during the litigation process. The amount of such bond shall be equivalent to the loss that may be incurred by the respondent as a result of enforcement of the preservation.
According to the AUCL and the relevant judicial interpretation for the trial of civil cases concerning trade secrets, the damages to a successful claimant may first be calculated based on the following measures:
To prove the losses suffered by the claimant, evidences such as annual output and profit margin of the claimant, sales performance before and after the infringement in comparison and sales amount of the infringing products would be required. To prove the gains obtained by the respondent, evidences such as annual output and profit margin of the respondent and sales amount of the infringing product would be required. To employ the measure of royalty fees, a licence agreement qualified as a reasonable reference and corresponding payment documents would be required.
However, under the circumstance where the above three measures of damages are unavailable, the court may determine a compensation below RMB5 million according to the specifics of each case.
Also, it should be noted that under the circumstance where the trade secrets become known to the public due to the infringement, the amount of damages thereof shall be determined based on the commercial value of the trade secrets determined on the basis of factors such as costs of research and development, the revenue derived from the implementation of such trade secrets, the potential benefits, and the time during which the competitive advantage might be maintained.
For general misappropriation, damages are still awarded with a principle to compensate the losses of the aggrieved party by measures as illustrated above. Therefore, a successful respondent may seek damages only when there are losses incurred in certain specific cases, such as improper application of interim relief.
However, for malicious misappropriation, punitive damages are available to a successful claimant according to the amendment of the AUCL in 2019, amounting to one to five times the amount calculated based on the losses suffered by the claimant or the gains obtained by the respondent. However, it should be noted that such punitive damages shall be applied in cases with serious consequences only, the standards of which remain to be observed in future judicial practices.
In China, permanent injunctions are awarded in the form of cessation of infringement, exclusion of hindrance, elimination of risks and/or specific performance based on establishment of infringement.
Among the permanent reliefs, cessation of infringement is a typical remedy applied in a trade secret case. The duration of such relief shall generally expire when the trade secret is known to the public. However, if such duration is obviously unreasonable, a judgment may be made to limit a certain duration or scope.
Chinese law does not offer the remedy of recalling the product that is the subject of the accusation to the claimant in a trade secret misappropriation case.
In addition, limiting an employee’s subsequent employment is not an applicable permanent relief either since the principle of inevitable disclosure has not yet been applied and the free flow of the talent is highly valued in China. However, if there is a proper non-competition agreement ahead, which is commonly used in China, the claim to limit an employee’s subsequent employment may be supported by the court in a labour dispute case.
In China, civil seizure is available as a measure of property preservation that is served as an interim relief to the claimant before a final judgment in the case. Property preservation measures including seizure, detainment and freezing of assets could be applied for a trade secret case as with other types of cases. Notably, the seizure as a measure of property preservation is not limited to the accused products containing the trade secret at issue but to a broader scope, which aims to guarantee effective enforcement of the ruling if the claimant wins.
The application for property preservation could be made before or during a litigation if the claimant may suffer losses or a future ruling on the case would become difficult to enforce without such preservation.
For a property preservation application made before the litigation, the applicant shall provide a bond equivalent to the preservation amount it requested. Under special circumstances, the court may exercise its own discretion in determining the magnitude of the bond.
For a property preservation application made during the litigation, a bond is also necessary in general except in certain specific cases. To illustrate, under the circumstances where the trade secret case is already crystal clear and the preservation order is unlikely to be misused, or where the claimant is a financial institution with independent solvency established with approval from the financial regulatory authorities, the bond may be exempted by the court.
A successful plaintiff could recover its attorneys’ fees in a trade secret litigation. According to the AUCL, the compensation amount shall also include reasonable expenses paid by the plaintiff to stop the infringement. In judicial practices, such reasonable expenses also include the attorneys’ fees subject to the precondition that the plaintiff has clearly claimed the attorneys’ fees in the pleadings and the attorneys’ fees claimed by the plaintiff are within reasonable limits.
On the other hand, a successful defendant is in principle not entitled to attorneys’ fees, except that:
In a trade secret litigation, a successful plaintiff may recover the reasonable expenses to stop the infringement. The typical expenses that may be supported in judicial practice include the court fees, investigation and evidence collection fees (eg, notary fees, document copy fees, appraisal fees) and attorneys’ fees. The plaintiff should raise a claim of recovering such fees and provide the relevant evidence. The court will assess the reasonableness of the amount and make a decision in the judgment.
A successful defendant will not be required to bear court fees. In addition, the fees for applying for judicial appraisal would usually be borne by the losing party in a trade secret case.
As with other types of cases, against a first instance judgment of a trade secret case, the plaintiff and the defendant shall both have the right to file an appeal with the next higher level court within 15 days after the service of the written judgment, except if it is made by the Supreme People’s Court.
Most orders in a trade secret case of first instance cannot be appealed, except for orders on non-acceptance of case, objection to jurisdiction or dismissal of case. For such types of orders, parties shall appeal within ten days after their service.
Notwithstanding the foregoing, according to relevant judicial interpretation for trial of intellectual property cases, judgments and specific orders in cases of first instance concerning technical trade secrets should be directly appealed to the Supreme People’s Court instead of the next higher level court from 1 January 2019.
In principle, the trial of an appeal case shall be completed within three months after the appeal is filed. Such period could be extended subject to the approval of the court.
The appeals courts will review both factual and legal issues. Generally, the appellant has the right to decide which issues are to be preserved or waived for appeal in its petition. And the review will focus only on the factual and legal issues related to the appeal petition, except where the judgment of first instance violates the prohibitive provisions of the law or harms national interests, public interests or the legitimate rights and interests of others.
The court of second instance shall form a panel for the appeal case and conduct a hearing to try the appeal case. However, upon examination of the case file, investigation and questioning of litigants, where there is no new fact, evidence or reason, and the panel deems that a hearing for trial is not necessary, the case may be tried without a hearing.
Criminal penalties shall be imposed on whoever commits any of the following acts of trade secret misappropriation and causes heavy losses to the aggrieved party:
The criminal prosecution for trade secret theft could be made by the procuratorate or the aggrieved party itself. Potential criminal penalties differ in accordance with the consequence of the crime. If the losses suffered by the aggrieved party are heavy – that is, the losses exceed RMB500,000 – the criminal shall be sentenced to fixed-term imprisonment of not more than three years or criminal detention and shall also, or shall only, be fined. If the consequences are especially serious – that is, the losses exceed RMB2,500,000 – the criminal shall be sentenced to fixed-term imprisonment of not less than three years but not more than seven years and shall also be fined.
Possible defences used in civil cases as illustrated in 5.8 Defending against Allegations of Misappropriation may also be effective defences available for a criminal charge for theft of trade secrets.
Some potential defences are typical only in criminal cases, such as:
Arbitration and mediation are common ways of alternative dispute resolution that are available for resolving trade secret disputes. For both arbitration and mediation, the clear consent of the parties is the prerequisite to trigger such proceedings; however, the parties are unlikely to reach such consent in a trade secret misappropriation dispute. Thus, arbitration and mediation are not commonly used in trade secret infringement cases.
Mediation generally includes court mediation, people’s mediation and commercial mediation. Strictly speaking, court mediation is not recognised as an ADR mechanism as it forms part of litigation procedures.
People’s mediation committees and commercial mediation centres have been widely established in China. The parties may voluntarily conclude mediation agreements to resolve trade secret disputes, which are legally binding upon the parties. The violation of the mediation agreements can be brought to the court for future dispute settlement.
Mediation is generally the most convenient and cost-efficient way to settle disputes. The confidentiality of trade secrets can be secured during the mediation via more flexible ways as compared with litigation proceedings. Different from arbitration, parties in the process of mediation are not entitled to apply for interim reliefs from the court, and thus mediation may not be suitable when the case is urgent, which requires interim reliefs from the court, or when the disputes are under an irreconcilable and strong conflict between the parties.
Updates on Trade Secret Law in China – a New Era?
In April 2019, slightly more than one year after its previous amendment in 2017, China made further amendments to the Anti-Unfair Competition Law (AUCL) with immediate effect. The AUCL is the specific piece of law dedicated to the protection of trade secrets, amid trade tensions with the USA. Trade secrets have always been one of the focal points between China and the USA when it comes to trade disputes, so it is not surprising that the amendments specifically address trade secret infringement, among other things.
Not surprisingly, the Phase One Economic and Trade Agreement (“Phase One Agreement”) entered into by China and the USA on 15 January 2020 makes intellectual property one of the priorities, and incorporates all previous discussions and resulting mutual agreements over protection of intellectual property rights, including trade secrets. The trade secret provisions under the Phase One Agreement not only formalise amendments already made to the AUCL, but also go beyond the AUCL.
This article discusses the impact of the amendments to the AUCL and Phase One Agreement on trade secrets in China.
Trade secrecy is of paramount importance for businesses, being potentially more valuable than patents or trade marks in many cases, with the most well-known examples being Coca-Cola's recipe and McDonald's sauce.
In China, protection for trade secrets is predominantly provided under the AUCL, with pertinent provisions also set forth under labour law, contract law and the criminal law. However, there have traditionally been far fewer civil or criminal suits for trade secret infringement than patent and trade mark cases in China. Unfortunately, this is perhaps not a result of less infringement involving trade secrets, but is rather more likely due to the overwhelming challenges for rights owners in trade secrets litigation, for various reasons.
Fighting trade secret infringement has always been tough, and the reasons are apparent. Identifying the infringers is not always easy in many cases. Furthermore, under the previous version of the AUCL, there was a limited scope of infringers who are punishable under the law, with many infringers not covered under the scope of legally recognised defendants. Even more frustrating is the fact that, even in successful cases, the damages awarded might not always be worth the effort and cost incurred in pursuing them. Lastly, the burden of proof placed on trade secret owners, which is hard to discharge due to the uniqueness of trade secrets, renders the chance of winning a legal suit rather slim.
The amendments to the AUCL respond specifically to these challenges and aim to beef up the fight against trade secrets violation. International investors operating in China will find themselves in a much better position to defend their intellectual property than before. The amendments to the AUCL mark a major step towards strengthening the interests of intellectual property owners.
Expansion of Scope of Application
The amendments define trade secrets as technical information, operational information and other business information, which is not known to the public, has business value and has been under protection by the rights owner through confidential measures. This has broadened the definitions of trade secrets, which in the previous version of the AUCL only included technical and operational information.
Following amendments, the AUCL now expressly adds electronic intrusion as a form of illegal activity among a variety of acts of infringement upon trade secrets such as theft, bribery, fraud or coercion. It is becoming increasingly true that illegal acts of infringing trade secrets in the form of electronic invasion have become rather frequent. This form of invasion is often covert and hard to detect. It serves as a deterrence that the AUCL now expressly targets such infringing acts.
In addition, a new paragraph is included into Article 9 of the AUCL, which provides that “individuals, legal persons and non-legal person organisations other than business operators, committing illegal misappropriation acts, shall be deemed to have infringed trade secrets.” This new paragraph enlarges the scope of potential infringers recognised under the AUCL, which means that intellectual property proprietors may now pursue a wider range of defendants who could conduct illicit activities against trade secrets in the past without fear of being held liable.
Previously, the AUCL was interpreted as dealing with competition between business operators – ie, commercial entities instead of individuals. Nonetheless, ex-employees or individuals having access to trade secrets are the ones that are most likely to be tempted to disclose or take advantage of trade secrets that they have obtained through employment or business relations. Thus, whether employees and individuals could be held liable under the AUCL or whether they could only be categorised as general tortfeasors under the tort law has been a subject of academic discussion. The burden of proof under tort law is rather stringent as a rule and, in practice, usually proves too difficult for intellectual property owners to establish a good case. Whether the AUCL should include individuals as potential infringers has been widely debated for many years. Now that the amendment has finally adopted a new stance, it is a welcome move that the law now explicitly states that employees are punishable under the AUCL.
Moreover, a new provision is added to Article 9 to include infringing activities that any party, either an individual or an entity, that has been engaged in involving instigating, inducing, or assisting others in obtaining, disclosing, using, or allowing others to use trade secrets shall be considered an infringement. This means those who facilitate trade secret infringement will also be pursued.
Increased Sanctions for Infringement
In response to rampant violation of trade secrets despite many years of continued efforts by legislature and administrative departments, as well as complaints from US and European countries, the amendments to the AUCL further strengthen the legal liabilities for trade secret infringement and introduce much heavier punitive damages.
Article 17 provides that a business operator who maliciously infringed trade secrets can be ordered to pay damages of one to five times the amount of actual damages sustained by the right owner or illicit gains obtained through any misappropriation activities. It is noteworthy that this is the first time that five times punitive damages are introduced into Chinese law regarding intellectual property (the same is true of the amendments to Chinese trade mark law and patent law in 2019), which demonstrates the determination of China to crack down on intellectual property violation.
To further strengthen sanctions, the revised AUCL increases the statutory maximum damages in instances where damages are hard to be calculated purely based on losses sustained from RMB3 million (approximately USD430,000) to RMB5 million (approximately USD715,000). These dramatic changes of potential damages now available might offer sufficient economic rationale for intellectual property owners to proactively enforce their legitimate rights and redefine their intellectual property strategy, including budgets for enforcement in China. In the meantime, the cost and risk for potential intellectual property offenders will increase substantially.
Alleviated Burden of Proof for IP Owners
Civil actions initiated by intellectual property owners, particularly those involving trade secrets, used to be an uphill battle because the burden of proof for the plaintiff was virtually impossible in some cases; the burden of proof in intellectual property cases can be the ultimate game-changer. The rule in this regard under the law is significant because it dictates whether the plaintiff or the defendant is obliged to bear the consequence of failure to adduce evidence to make its case. Previously, in accordance with interpretations by the Supreme People’s Court of China, trade secret rights owners had to make a reasonable case that the alleged infringer had access or exposure to the trade secret and that the suspected infringement by the infringer involves substantively the same as the trade secret in question, before shifting the burden to the defendant to prove that the information at issue is not trade secrets or that it did not engage in infringement conduct. These thresholds of burden of proof for trade secrets holders are not as easy as they sound. As a matter of fact, most trade secret infringements are carried out in stealth. It is difficult, if not impossible, to establish how the offenders gained access to trade secrets and it could be equally hard to prove infringement using the same information. As a result, intellectual property offenders find these legal requirements an effective shield they can conveniently use to get away with infringement.
Now the AUCL adds a new provision under Article 32 which provides that if the trade secret holder has adduced preliminary evidence that it has adopted confidentiality measures for the trade secret and has prima facie established that the trade secret has been infringed upon, then it is the alleged infringer’s obligation to prove that the trade secret claimed by the right owner should not be afforded protection under the AUCL.
According to Article 32, if the trade secret rights owner adduces preliminary prima facie evidence and reasonably demonstrates that the trade secret has been infringed upon, the suspected infringer is liable to prove they have not conducted any infringing activities. The prima facie evidence includes the following:
Thanks to the amendments, the burden of proof for the trade secret owners is now no more than “preliminary evidence”, not adequate evidence to the satisfaction of the court, which is of course subject to further clarification by the judiciary in the future by means of judicial interpretations by the Supreme People’s Court or at the discretion of the competent courts for specific cases. Moreover, establishing the threat or risk of intellectual property misappropriation may now also qualify as a cause for civil action. This substantially alleviates the burden on the plaintiff.
Availability of Interim Injunctions
Article 1.6 of Section B under the Phase One Agreement provides for provisional measures to be taken against trade secret misappropriation in civil proceedings, and requires China to provide for preliminary injunctions in trade secret cases where there is an “urgent situation”. In particular, early-stage trade secret infringement acts such as the use or attempted use of the alleged trade secret will be recognised as an “urgent situation” where the rights owners may petition the Chinese courts to grant a preliminary or interim injunction. Generally speaking, the test is whether there is irreparable injury arising from such urgent situation, which necessitates provisional relief. China’s judicial practice as it currently stands permits the use of preliminary injunctions where there is a risk of the disclosure of confidential information. More judicial interpretations are expected to be issued, to further clarify this provision with regard to the standard and scope of its application.
Lowering Criminal Enforcement Threshold
According to the Criminal Law of China and its pertinent judicial interpretations by the Supreme People’s Court, a threshold of RMB500,000 in relation to losses suffered by the trade secret owner has to be met, in the absence of which no criminal sanctions will be available against those that are suspected of misappropriating the alleged trade secret, including imprisonment and fines. The legal requirement stipulates that the trade secret owner assumes the burden of proof to establish that its actual loss has reached RMB500,000, in order to seek criminal relief. In practice, the Public Security Bureau – ie, the police department in China that is in charge of initiating criminal investigations against alleged trade secret misappropriation crime – requires the owner to adduce sufficient and convincing evidence to prove its loss. This often poses a major obstacle for trade secret rights holders since verifiable financial losses are not always easy to ascertain and there could be cases where no substantial losses have been incurred to date, although more losses could very well happen if the infringement was to continue.
Addressing the practical obstacle encountered by trade secret owners, Article 1.7 of Section B under the Phase One Agreement substantially lowers the threshold by eliminating the prerequisite of “actual loss” for the initiation of criminal investigations by the Public Security Bureau, and instead allowing the trade secret owner to use its remedial cost, like the cost to mitigate damages to business operations or cost incurred to respond to misappropriation, as the “actual loss” proof. Such measure will to a large extent ease the burden of proof for trade secret rights owners, and enhance efficiency for both rights holders and the police to take swift action in the fight against illegal activities.
Additional guidance from the procuratorate, the State Administration for Market Regulation and the Ministry of Public Security may be issued to address criminal enforcement issues in 2020.
As a result of the provisions under the Phase One Agreement, pertinent laws and judicial interpretations in China will be amended in the future to codify relevant provisions of the Phase One Agreement that will become an integral part of domestic law in due course.
Through the amendments to existing laws and trade deals with the USA, China is willing to reiterate its stance on intellectual property protection. China is also committed to reinforcing such protection now that the reality on the ground continues to be somewhat unsatisfactory, in spite of many years of effort. The ramifications of the amendments of the important laws of China – ie, the AUCL (together with trade mark law and patent law), as well as the Phase One Agreement – will be significant for the landscape of intellectual property in the long term. Although it is anticipated that more detailed implementation regulations might be in the pipeline at a later stage, the balance has now largely shifted in favour of intellectual property owners, who will from now on be much better positioned to be on the offensive as opposed to being helplessly on the defensive, as was the case in past decades. Although it remains to be seen how those amendments and changes will be implemented in the future, many observers and legal practitioners are more confident than ever that a new era for intellectual property protection in China is on the way.