Trade Secrets 2021

Last Updated April 28, 2021

China

Law and Practice

Author



Zhong Lun Law Firm is one of the largest full-service law firms in China, with over 340 partners and over 2,200 professionals working in 18 offices in Beijing, Shanghai, Shenzhen, Guangzhou, Wuhan, Chengdu, Chongqing, Qingdao, Hangzhou, Nanjing, Haikou, Tokyo, Hong Kong, London, New York, Los Angeles, San Francisco and Almaty. Zhong Lun is capable of providing clients with high-quality legal services in more than 60 countries across a wide range of industries and sectors through its specialised expertise and close teamwork. The firm is able to assist both domestic and overseas clients in protecting their trade secrets when doing business in China through comprehensive solutions. The firm's legal services regarding trade secret protection consist of assisting clients in establishing and implementing trade secret protection rules, managing risk of trade secret leakage in dealing with business partners and resolving disputes through unfair competition and trade secret litigation.

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 (2020 revised) and the Judicial Interpretation on Trade Secrets (2020) play significant roles in the judicial practice of trade secret protection.

Other civil laws relevant to trade secrets protection include the Civil Code, the Company Law, the Labour Law and the Labour Contract Law. The Civil Code, in the Part III Contracts, 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 (2020 revised) and the Judicial Interpretation (III) Concerning the Application of Law in the Handling of Criminal Cases for the Infringement upon Intellectual Property Rights regulate the acts that seriously infringe upon trade secrets as the crime of infringing upon 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 Judicial Interpretation on Trade Secret has addressed the typical categories of information qualified as trade secrets, covering a wide spectrum of business and technical information, giving concrete examples to illustrate the types of information that courts have found are protectable under the AUCL.

Technical information that can be protected as trade secrets mainly includes structure, raw materials, components, formulas, materials, samples, patterns, propagating materials of new plant varieties, techniques, method or its steps, algorithms, data and computer programs. Business information subject to trade secret protection mainly includes original ideas, management, sales, finance affairs, plans, samples, bidding materials, customer information and data.

Under the AUCL, information is entitled to trade secret protection if three elements are met:

  • the relevant information should be confidential, which means that it should be unknown to, and be difficult to be obtained by, the relevant personnel in the relevant field;
  • the relevant information should have actual or potential commercial value and can bring competitive advantage for the owner; and
  • the relevant information shall be protected by the owner by adopting proper secret-protection measures suitable for the commercial value or other specific situation.

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 Trade Secret, when determining whether the owner has adopted reasonable confidentiality measures, the courts usually consider the following factors:

  • the features of the trade secret and its carrier;
  • the commercial value of the trade secret;
  • the identifiability degree of the confidentiality measures;
  • the degree of correspondence between confidentiality measures and the trade secret; and
  • the intention of the owner to keep it confidential and other factors.

Under any of the following circumstances, where it is sufficient to prevent disclosure of a trade secret under normal conditions, the owner will be found to have adopted reasonable confidentiality measures in:

  • signing a confidentiality agreement or stipulating the obligation of confidentiality in a contract;
  • putting forward the confidentiality requirements to employees, former employees, suppliers, clients and visitors, etc who may have access to, or obtain, the trade secret in such ways as articles of association, training, rules and systems, and written notification;
  • limiting visitors to, or conducting differentiated management on, the classified factory buildings, workshops or other production places;
  • differentiating and managing the trade secret and its carriers by such means as marking, classification, isolation, encryption, sealing up for safekeeping and limiting the scope of persons who may have access to, or obtain, such secret;
  • taking measures such as prohibiting or restricting the use of, visiting, storing or reproducing computer equipment, electronic equipment, network equipment, storage equipment and software, etc that can be used to access or obtain the trade secret;
  • requiring resigned employees to register, return, clear away or destroy the trade secret they have accessed or obtained as well as the carriers thereof, and to continue to assume the obligation of confidentiality; or
  • taking other 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:

  • collateral obligation of secret protection in a contract does not reflect the subjective desire and objective measures of the owner of trade secrets to take confidentiality measures and thus the existence of collateral obligation alone is not enough to establish reasonable measures;
  • only imposing competition restrictions on employees in labour contracts or confidentiality agreements without specifying the scope of trade secrets does not qualify as reasonable measures; and
  • labour contracts or the internal rules unilaterally issued by the company fail to clearly define the specific contents and the scope of trade secrets.

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, or easily available 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.

According to Article 14 of the Judicial Interpretation on Trade Secret, 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 has obtained the trade secret of someone else by unjustifiable means and then claims no infringement upon the trade secret on the ground 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 protectable 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 Civil Code, in Chapter XX, 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:

  • sole licence, under which the owner licenses a trade secret to only one licensee for using, and the owner is also prohibited from using such trade secret;
  • exclusive licence, under which the owner licenses a trade secret to only one licensee for using, but the owner is allowed to use such trade secret; and
  • non-exclusive licence, under which the owner is entitled to license a trade secret to more than one party, and the owner is also allowed to use such trade secret.

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:

  • trade secrets can be protected indefinitely – patents, trade marks and copyrights are protected by law only within a certain period and conditions; while the legal protection for trade secrets can be indefinite as long as such trade secrets meet the three constituent elements of trade secrets;
  • protection for trade secrets is relative – trade secrets are generated by “taking certain confidentiality measures”, which determines that trade secret right is relative to specific subjects within the scope of confidentiality and cannot be used against those who obtain such trade secrets by proper ways, such as independent development or reverse engineering;
  • the target object of trade secret protection is different – laws and regulations related to trade secrets aim to protect non-public information, which requires that the target object must be unknown to the public; while the target objects of other intellectual property rights are public;
  • trade secret rights are obtained in different ways – subject to administrative review and approval, both patent right and trade mark right are the rights granted by relevant administrative authorities; copyright is obtained automatically by the owner from the time when the work is completed, while trade secret right, as long as it meets the three elements as a trade secret, will be obtained by the right-holder through lawful labour or other legitimate means; and
  • the cost of protecting trade secrets is different – since administrative review and approval are not required, there is no need to pay the fees for approval, authorisation, registration or maintenance to relevant administrative authorities for the protection of trade secrets.

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 to such agreements.

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. Even though there is no clear contractual stipulation, according to the Judicial Interpretation on Trade Secret, the confidentiality obligation of the alleged infringer may also be derived from the collateral obligation based on the principle of good faith. Especially for the case where an employee is sued for infringement upon trade secrets, in judicial practice, some courts state that once a labour agreement has been reached, the employee will bear the collateral obligation of loyalty to the employer, the content of which may include keeping trade secrets for the employer. Therefore, when an employee who did not sign any confidentiality agreement 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.

With regard to the tortious interference with contractual confidentiality obligation, the AUCL identifies tempting a person in acquiring, disclosing, using, using or allowing any other person to use the trade secret of the right-holder in violation of his or her confidentiality obligation as one of the misappropriations upon trade secrets. Therefore, the right-holder may bring a claim for infringement upon trade secrets against a defendant where it has induced an employee to breach a contractual confidentiality obligation to the owner/employer.

The Criminal Law, in Article 219, regulates the acts that seriously infringe upon trade secrets as the crime of infringing upon trade secrets. According to this article, whoever commits any of the following conducts to infringe upon a trade secret shall, if the circumstances are serious, be sentenced to fixed-term imprisonment of not more than three years and a fine or be sentenced to a fine only; or if the circumstances are especially serious, be sentenced to fixed-term imprisonment of not less than three years nor more than ten years and shall also be fined:

  • obtaining a right-holder’s trade secret by theft, bribery, fraud, coercion, electronic intrusion, or any other illicit means;
  • disclosing, using, or allowing any other person to use a trade secret obtained from a right-holder by any means as specified in the preceding subparagraph;
  • disclosing, using, or allowing any other person to use a trade secret in its possession, in violation of its confidentiality obligation or the requirements of the right-holder for keeping the trade secret confidential;
  • whoever knows any conduct set forth in the preceding paragraph but still obtains, discloses, uses, or allows any other person to use the trade secret shall be punished for the crime of infringing upon trade secrets.

In addition to the above provisions, the Criminal Law also provides that whoever steals, pries into, buys, or illegally provides any trade secret for any overseas institution, organisation or individual shall be sentenced to fixed-term imprisonment of not more than five years and a fine or be sentenced to a fine only; or if the circumstances are serious, be sentenced to fixed-term imprisonment of not less than five years and a fine.

When serious infringement upon trade secrets occurs, the right-holder may pursue both civil and criminal claims against the alleged infringer and the infringer may bear both the civil tort damages liability and the criminal liability. The civil proceeding and the criminal proceeding are independent of each other; however, it should be noted that, in general terms, the principle of "criminal priority" can be applicable to the cases regarding both criminal and civil liability, which means that the criminal case will be handled first and the civil proceedings will proceed after the criminal proceedings conclude.

No information is available in this jurisdiction.

Article 9 of the AUCL defines misappropriation as follows:

  • acquiring a trade secret from the right-holder by theft, bribery, fraud, coercion, electronic intrusion, or any other illicit means;
  • disclosing, using, or allowing another person to use a trade secret acquired from the right-holder by any means as specified in the preceding subparagraph;
  • disclosing, using, or allowing another person to use a trade secret in its possession, in violation of its confidentiality obligation or the requirements of the right-holder for keeping the trade secret confidential; and
  • abetting a person, or tempting or aiding a person into or in acquiring, disclosing, using or allowing another person to use the trade secret of the right-holder in violation of his or her non-disclosure obligation or the requirements of the right-holder for keeping the trade secret confidential.

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:

  • the trade secret at issue satisfies the statutory requirements;
  • the information held by the alleged infringer is the same or substantially the same as the owner’s trade secret; and
  • the alleged infringer has adopted improper means to acquire the trade secret.

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 or she 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. In judicial practice, some courts state that once an employee establishes a labour relationship with the employer, he or she has an obligation to be loyal to the employer based on the principle of good faith. 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 or her 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 Contracts Part of the Civil Code, 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.

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:

  • identify what information should be regarded as a trade secret;
  • make clear how to manage and use the confidential information; and
  • clearly state the consequences of any violations – such as unauthorised, improper use, or disclosure of confidential information – including employment termination, civil legal action or even criminal prosecution.

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

  • It is recommended for companies to require all key personnel who have access to trade secrets to sign confidentiality agreements in which the scope of trade secrets should be specified. In addition, the requirement that the ownership of any intellectual property including trade secrets created by the employee during his or her employment shall be automatically assigned to the company should be incorporated into the employment contract or adopted as a company policy.
  • Companies should implement a system to educate employees and prevent an employee’s wilful or negligent wrongdoings, including ensuring that the trade secret protection policy is reflected in the employees’ handbooks or similar manuals and all employees have been fully informed of such policy, and providing regular training on confidentiality requirements.
  • Companies should also pay attention to new hired employees and departing employees and take necessary measures such as conducting background due diligence when hiring new employees and holding exit interviews with employees leaving the company.

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:

  • safeguarding and monitoring hard and electronic copies of the information;
  • marking confidential information;
  • maintaining computer security; and
  • restricting public access to the company’s facilities.

Employers will conduct exit interviews for departing employees to ensure that all trade secret information has been registered, returned, cleared or destroyed and to remind them of their confidentiality obligations. In practice, employers will usually take the following actions in the process of an exit interview:

  • provide a reminder regarding the obligations of confidentiality and non-compete (if any); and
  • require the departing employees to sign a written acknowledgment certifying they have returned all documents and company property and promising that nothing is saved on a personal computer or storage devices.

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 and understood it 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 Civil Code 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.

Territorial Jurisdiction

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.

Hierarchical Jurisdiction

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:

  • the plaintiff has a direct stake in the case;
  • there is/are specific defendant(s);
  • there is/are specific claim(s), fact(s) and reason(s); and
  • the court has jurisdiction over the case.

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, 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. For a case in which the claimant may suffer losses or a future ruling on the case would become difficult to enforce, the court may, pursuant to an application by the claimant or its own discretion before or during a litigation, rule on property preservation measures.

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.

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.

In addition to the property preservation mentioned above, where an evidence may be lost or difficult to obtain in future, the court may, pursuant to an application by the claimant or its own discretion during the litigation, adopt preservation measures on such evidence.

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. Besides, the Judicial Interpretation on Trade Secret also stipulates that the right-holder may apply to the people’s court for the investigation and collection of the evidence related to the claimed infringement that is kept by a public security organ, procuratorial organ or other court, if it fails to collect such evidence by itself due to objective reasons.

According to the Civil Procedure Law, a trade secret owner can obtain the following types of evidence:

  • statements of litigants;
  • documentary evidence;
  • physical evidence;
  • audio-visual materials;
  • electronic data;
  • witness testimony;
  • appraisal opinion; and
  • investigation records.

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:

  • the court should hold a non-public hearing upon application;
  • the parties should not present the evidences that involve the trade secrets in public when presenting such evidence in the courtroom; and
  • the parties should not cross-examine the written evidences that involve the trade secrets in public.

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:

  • the "trade secret" claimed by the plaintiff does not meet the statutory requirements of a trade secret;
  • the plaintiff is not a proper right-holder of the "trade secret";
  • the plaintiff fails to take reasonable measures to maintain secrecy;
  • the information used by the defendant is not the same or similar to the "trade secrets" claimed by the plaintiff, or materially different from such "trade secrets"; and
  • the defendant did not access or use the information at issue through an improper way; eg, relevant information can be easily obtained through public channels without paying a certain price; the defendant obtained the relevant information through independent development or reverse engineering; the defendant has lawful right to use the relevant information, such as lawful purchase, lawful acceptance of the licence and acquisition in good faith; the defendant did not know that the source of the relevant information was illegal; and there was no intentional infringement of the right-holder's trade secrets.

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 plaintiff does not have a direct interest in the case;
  • there is no identifiable defendant;
  • the pleading fails to provide specific claims and facts and reasons; and
  • the court does not have jurisdiction over the case.

The costs that the parties to a trade secret litigation may expect to incur mainly include:

  • attorney fees;
  • the costs for producing evidence, such as notarisation fees and investigation fees; and
  • 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:

  • the case should be a civil case involving a property relationship; and
  • 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:

  • pre-hearing preparation;
  • announcement of disciplines of the court hearing, and rights and obligations of the parties;
  • opening statements by the parties;
  • court investigations focusing on evidence presentation and examination (including hearing testimony from live witnesses, if any);
  • court debate; and
  • closing statements by the parties.

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.

  • Appraisal opinions issued by a qualified appraisal agency are recognised as a statutory type of evidence under the Civil Procedure Law, which, to some extent, could be deemed as opinions of experts. The parties to a trade secret case may apply for appraisal on complicated issues such as the scope of the trade secret at issue and the similarity comparison between the trade secret at issue and the information held by the defendant. The court may also decide to engage an appraisal agency to issue appraisal opinions on its own initiative depending on the needs of a case.
  • The Civil Procedure Law also established the “expert auxiliary system”, which allows the parties to apply to the court for having a person with special expertise present before the court to provide opinions regarding the appraisal opinion or to explain specialised issues such as technical matters to the court. The opinions given by such person with specialised expertise are deemed as statements of the parties, which is subject to examination of the court and the other party.
  • The court may assign technical investigation officers to participate in litigation activities when adjudicating IP cases that are highly specialised, such as patents, technical secrets and computer software. The opinions of the technical investigation can be used as a reference for the technical facts of the collegiate bench.

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.

Notably, the Judicial Interpretation on Trade Secret also stipulates a special provision for the behaviour preservation applicable to trade secret cases. Where the alleged infringer attempts to obtain, disclose, use or allow others to use the claimed trade secret by improper means, or has done so, and if the failure to take preservation measures will make a future ruling on the case difficult to enforce or cause irreparable damage to the right-holder, the  court may render a ruling to take preservation measures.

The duration for behaviour preservation shall be reasonably determined by the court based on the claimant's request. Generally, an order to suspend infringement upon a 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 Judicial Interpretation on Trade Secret, the damages to a successful claimant may first be calculated based on the following measures:

  • the losses suffered by the claimant;
  • the gains obtained by the respondent; or
  • a reasonable estimation based on referable royalty fees.

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 may 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 period of 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 AUCL, 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 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 for not more than two years may be supported in a labour dispute case.

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 false litigation and malicious lawsuits that result in direct damages to the defendant, the court may, on the basis of specific circumstances, support the reasonable compensation for attorneys’ fees and other valid claims proposed by the non-fault defendant according to the law; and
  • under the circumstance where the parties once made an agreement stating in writing that the attorneys’ fees shall be borne by the party losing the lawsuit, such agreement shall be binding.

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.

The Criminal Law, in Article 219, regulates the acts that seriously infringe upon trade secrets as the crime of infringing upon trade secrets. According to this article, whoever commits any of the following conducts to infringe upon a trade secret shall, if the circumstances are serious, be sentenced to fixed-term imprisonment of not more than three years and a fine or be sentenced to a fine only; or if the circumstances are especially serious, be sentenced to fixed-term imprisonment of not less than three years nor more than ten years and shall also be fined:

  • obtaining the aggrieved party’s trade secret by theft, bribery, fraud, coercion, electronic intrusion, or any other illicit means;
  • disclosing, using, or allowing any other person to use a trade secret obtained from the aggrieved party by the means as specified in the preceding subparagraph;
  • disclosing, using, or allowing any other person to use a trade secret in its possession, in violation of its confidentiality obligation or the requirements of the aggrieved party for keeping the trade secret confidential; or
  • whoever knows any conduct set forth in the preceding paragraph but still obtains, discloses, uses, or allows any other person to use the trade secret shall also be punished for the crime of infringing upon trade secrets.

In addition to the above provisions, the Criminal Law also provides that whoever steals, pries into, buys, or illegally provides any trade secret for any overseas institution, organisation or individual shall be sentenced to fixed-term imprisonment of not more than five years and a fine or be sentenced to a fine only; or if the circumstances are serious, be sentenced to fixed-term imprisonment of not less than five years and a fine.

The criminal prosecution for trade secret theft could be made by the procuratorate or the aggrieved party itself.

Possible defences used in civil cases as illustrated in 5.9 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:

  • there is no adequate criminal evidence indicating the infringement and the “access and substantial similarity” standard is not enough for criminal cases; and
  • the infringement is out of negligence since the crime for trade secret misappropriation can only be an intentional crime.

In China, there is no crime of economic espionage under the Criminal Law. In the case of meeting the above-mentioned constituent requirements for the crime of infringing upon trade secrets, the economic espionage offences can be prosecuted with reference to such trade secret crime.

In the criminal prosecution proceedings for the crime of infringing upon trade secrets, the right-holder, as the usual victim, has the right and bears the obligation to co-operate and co-ordinate with the relevant public security organ or procuratorate in the investigation on trade secret misappropriation.

Firstly, the right-holder should report the misappropriation upon its trade secrets to the relevant public security organ and provide preliminary clues, so that the organ can file a case for investigation. Secondly, at the stage of investigation, the right-holder may actively provide the public security organ with substantive evidences concerning the misappropriation. According to the Criminal Procedure Law, the statement made by the victim itself can be used as important evidence to prove the facts in a trade secret infringement case. Thirdly, at the review and prosecution stage, the procuratorate shall, in accordance with the Criminal Procedure Law, hear and record the opinions of the victim on both the factual issues and the applicable law, and the victim can also take the initiative to provide written opinions to the procuratorate.

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.

Zhong Lun Law Firm

23-31/F, South Tower of CP Center
20 Jin He East Avenue
Chaoyang District
Beijing 100020
P.R China

+86 10 5957 2057

+86 10 6568 1022/1838

xueyi@zhonglun.com www.zhonglun.com
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Zhong Lun Law Firm is one of the largest full-service law firms in China, with over 340 partners and over 2,200 professionals working in 18 offices in Beijing, Shanghai, Shenzhen, Guangzhou, Wuhan, Chengdu, Chongqing, Qingdao, Hangzhou, Nanjing, Haikou, Tokyo, Hong Kong, London, New York, Los Angeles, San Francisco and Almaty. Zhong Lun is capable of providing clients with high-quality legal services in more than 60 countries across a wide range of industries and sectors through its specialised expertise and close teamwork. The firm is able to assist both domestic and overseas clients in protecting their trade secrets when doing business in China through comprehensive solutions. The firm's legal services regarding trade secret protection consist of assisting clients in establishing and implementing trade secret protection rules, managing risk of trade secret leakage in dealing with business partners and resolving disputes through unfair competition and trade secret litigation.

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