A Good Time for Trade Secret Protection in China Part One

Part One

According to the Research Report on Judicial Adjudication of Trade Secret Cases published by the Research Group of the Intellectual Property Tribunal of Beijing Higher People’s Court on January 4, 2021, its searching of the civil judgments in China involving trade secret infringement from 2013 to 2017 showed a total of 338 unfair competition cases involving trade secrets were closed by judgment; and that plaintiffs were defeated in 210 cases, 140 of which were held there constituted no trade secret. The Research Report has reflected the long-term predicament of difficulty in adjudicating and proving a trade secret case in China to a certain degree.

The key to success lies in whether a plaintiff-company can adduce evidence to prove that the object claimed to be protected constitutes a trade secret. For a long time in judicial practice, due to the lack of legal appearance of right, trade secret is difficult to be defined of its boundaries of right, and it is also difficult for the right holder to adduce evidence, making it hard to legally recognize a trade secret, and leading to the unsatisfactory trade secret protection.

With the promulgation of relevant laws and supporting judicial interpretations since 2019, it is expected that the protection of trade secrets will get out of its predicament, and usher in a good time.

I.       Changes in the Legal Protection Environment

(I)   The AUCL clearly expands and increases the scope and types of trade secret infringement.

Article 9 of the Anti-Unfair Competition Law (AUCL), which came into force on April 23, 2019, specifies the scope of the trade secret infringer and the specific acts of trade secret infringement, and stipulates by enumeration that a business operator shall not commit the following acts of trade secret infringement:

(1) Improper acquisition: Acquiring a trade secret from the right holder by theft, bribery, fraud, coercion, electronic intrusion, or any other illegal means. Electronic intrusion is now expressly listed as an improper means.

(2) Disclosing, using or permitting others to use a trade secret acquired through improper means: Disclosing, using, or permitting others to use a trade secret acquired from the right holder by any means as specified in the preceding paragraph.

(3) Disclosing, using, or permitting others to use a trade secret in its possession, in violation of its confidentiality obligation or the confidentiality requirements of the right holder: Disclosing, using, or permitting others 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.

(4) [New] Abetting, or inducing, or aiding others into violation of their confidentiality obligation or the confidentiality requirements of the right holder: Abetting, or inducing, or aiding others into acquiring, disclosing, using, or permitting others to use the trade secret of the right holder in violation of their confidentiality obligation or the requirements of the right holder for keeping the trade secret confidential.

The AUCL clearly states that any illegal act in the preceding paragraph committed by a natural person, legal person or unincorporated organization, which is not a business operator, shall also be treated as act of trade secret infringement. This has expanded the scope of trade secret infringer from business operator to any natural person, legal person and unincorporated organization.

The AUCL clarifies that, 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 any illegal act as specified in paragraph (1)-(4) above but still acquires, discloses, uses, or permits others to use such trade secret, the third party shall be deemed to have infringed upon the trade secret.

(II) Judicial protection has been strengthened, with significant civil and criminal changes that are more beneficial to right holders.

1.      In civil cases, the burden of proof is reduced while the damages awarded enhance.

First of all, the burden of proof on the right holder of trade secret is reduced.

If the right holder makes a prima facie case of or provides evidence reasonably demonstrating a trade secret infringement, the burden of proof will shift to the alleged infringer. This is specifically reflected in the new Article 32 of the AUCL:

If the right holder of trade secret adduces prima facie evidence to prove that it has taken confidentiality measures for the asserted trade secret, and reasonably demonstrates that the trade secret is infringed upon, the alleged infringer shall prove that the trade secret asserted by the right holder of trade secret does not fall under the trade secrets stipulated in this Law.

If the right holder of trade secret provides prima facie evidence to demonstrate reasonably that the trade secret is infringed upon and provides any of the following evidence, the alleged infringer shall prove that there is no infringement of trade secret:

(1)    there is evidence to prove that the alleged infringer has the means or the opportunities to obtain the trade secret, and the information used by the alleged infringer is substantively identical to the trade secret;

(2)    there is evidence to prove that the trade secret is disclosed or used by the alleged infringer, or there is a risk of disclosure or use of the trade secret; or

(3)    there is other evidence to prove that the trade secret is infringed by the alleged infringer.

This revision also reflects China’s commitments in the ECONOMIC AND TRADE AGREEMENT BETWEEN THE GOVERNMENT OF THE PEOPLE’S REPUBLIC OF CHINA AND THE GOVERNMENT OF THE UNITED STATES OF AMERICA.

Moreover, the statutory damages have been increased with the introduction of punitive damages.

Article 123 of the Civil Code, which came into effect on January 1, 2021, by listing trade secrets and works, inventions, trademarks, geographical indications, etc. as the protected objects of intellectual property rights, establishes that trade secrets are intellectual property rights, and thus brings an end to the long-standing dispute over whether a trade secret is a right or an interest. Article 1185 of the Civil Code introduces punitive damages, that is, in case of an intentional infringement of intellectual property rights of others, where the circumstance is serious, the infringed person has the right to request for corresponding punitive damages.

According to Article 17 of the Interpretations of the Supreme People’s Court on Certain Issues Concerning the Application of Law in the Trial of Civil Cases Involving Unfair Competition (hereinafter referred to as the “Interpretations”), which came into effect on January 1, 2021, the amount of damages for infringement of trade secrets may be determined with reference to the method of determining the amount of damages for patent infringement, that is, to enhance the statutory damages to a maximum of RMB5 million, and introduce the punitive damages equivalent to 1 to 5 times of the compensatory amount.

These changes are expected to provide better remedies for the right holders of trade secret, and reduce the occurrence of trade secret infringement by increasing the cost of infringement.

2.      In criminal cases, the sentence threshold has been lowered with the inclusion of remedial costs into material losses.

Article 4 of the Interpretations of the Supreme People’s Court and the Supreme People’s Procuratorate on Certain Issues Concerning the Specific Application of Law in Handling Criminal Cases of Infringement of Intellectual Property Rights (III) (hereinafter referred to as the “Interpretation of SPC & SPP”) lowers the threshold for sentence from RMB500,000 to RMB300,000 by specifying “where the losses caused to the right holder of trade secret or the amount of illegal gains due to trade secret infringement is more than RMB300,000” as “causing material losses to the right holder of trade secret”.

Article 5 of the Interpretation of SPC & SPP adds that “the remedial costs incurred by the right holder of trade secret in order to mitigate the losses to commercial operations and business plans or to restore the security of computer information systems and other systems shall be included in the losses caused to the right holder of trade secret”, which explicitly includes remedial costs into materials losses.

And the Amendment (XI) to the Criminal Law of the People’s Republic of China, which came into effect on March 1, 2021, introduced the crime of trade secret infringement by foreign person, that is, anyone who commits theft, espionage, bribery, or illegal provision of trade secrets for the benefit of a foreign institution, organization or individual, shall be sentenced to fixed-term imprisonment of not more than five years and shall also, or shall only, be fined; if the circumstances are serious, he shall be sentenced to fixed-term imprisonment of not less than five years and shall also be fined. The crime of trade secret infringement is an offense of consequence, which requires serious circumstances to constitute a crime, while the crime of trade secret infringement by foreign person is an offense of act, as long as any of such acts is committed, regardless of the consequence, it will constitute a crime.

Strengthening the protection of trade secrets is a double-edged sword. It can provide better protection for the right holders [, but it also means that the risk and liability of infringing trade secrets of others will increase for the third party. Any person can be both a right holder of a trade secret and a counterparty or third party of another trade secret. It is necessary to fully consider and recognize the focus and difficulty of these two identities in the protection of trade secrets, and be prepared, that is, to reasonably protect our own trade secrets while respecting the trade secrets of others.