Posted on June 5, 2013
by Mimiao Hu, Shelley Zhang and Xiang Wang

Trade secrets were first introduced into China law through the Article 10 of the “Anti-Unfair Competition Law of China” (effective Dec. 1, 1993).  This defines a “trade secret” as technological or business information that (a) is unavailable to the public; (b) creates economic benefits for its owner and is of practical utility; and (c) is subject to measures taken by its owner to maintain its secrecy.  And it defines “misappropriation” as taking place when:

• a party acquires the owner’s trade secret by improper means such as theft, economic inducement, or coercion;
• a party discloses, uses, or allows other parties to use the trade secret acquired by these means;
• a party discloses, uses, or allows other parties to use the trade secret in violation of an agreement with, or requirement by, the owner to protect the trade secret; or
• a third party acquires, uses, or discloses other parties’ trade secrets with the actual or presumed knowledge of the above-mentioned illegal acts.

The Supreme Court of the Republic of China interpreted certain trade secret and trade secret misappropriation issues in the Interpretation of the Supreme People’s Court on Certain Issues Concerning the Application of Law in the Trial of Civil Cases Involving Unfair Competition (Effective Feb. 1, 2007).  According to the Supreme Court, the party who asserts a claim for misappropriation of a trade secret bears the burden of establishing that (1) its trade secret meets the statutory requirements; (2) the defendant’s information is identical or substantially identical with its trade secret; and (3) the defendant used improper means.

Section 219 of the “Criminal Law of China” (effective Oct. 1, 1997; amended May 1, 2011) copies the definitions of trade secret and trade secret misappropriation from the Anti-Unfair Competition Law and criminalizes trade secret misappropriation when it causes “great loss” to trade secret right holder (including both owner and licensee). Criminal penalties can be elevated if the misappropriation causes “particularly serious consequences” to trade secret right holder.

The Supreme Court and the Supreme People’s Procuratorate of China defined “great loss” as loss of RMB 500,000 or more and “particularly serious consequences” as loss of RMB 2,500,000 or more in the Interpretation of the Supreme People’s Court and the Supreme People’s Procuratorate on Certain Issues Concerning the Application of Law in Handling Criminal Cases Involving Infringement of Intellectual Property Rights (effective Dec. 22, 2004).

In the Provisions of Supreme People’s Procuratorate and Ministry of Public Security regarding Criteria for Accepting Cases for Prosecution in respect of Criminal Cases under the Jurisdiction of Public Security Organ (Part 2) (effective May 7, 2010), the Supreme People’s Procuratorate and the Ministry of Public Security of China provide that trade secret misappropriation cases may be accepted for criminal prosecution under one of the following circumstances:

• it causes a loss of RMB 500,000 or more to the trade secret right holder;
• the misappropriator was unjustly enriched by RMB 500,000 or more from the misappropriation;
• the misappropriation leads to the bankruptcy of the trade secret right holder; or
• other circumstances where the misappropriation causes great loss to the trade secret right holder.

On November 23, 1995, the State Administration for Industry & Commerce of China (SAIC) issued regulations entitled, “Certain Provisions on the Prohibition of Misappropriation of Trade Secrets” (revised Dec. 3, 1998) (the “SAIC Regulations”), as a guide for enforcing trade secret rights through administrative proceedings in local government agencies called Administrations for Industry and Commerce (the “AIC”).  These regulations provide an alternative burden-shifting formulation favoring the trade secret owner under certain circumstances.  Specifically, if a trade secret owner can establish that a responding party had access to the owner’s trade secret and used information that is identical or equivalent to the owner’s trade secret, and the responding party does not offer evidence demonstrating that the information was legitimately obtained or used, then local AICs may presume that the respondent misappropriated the trade secret on basis of relevant evidence.

Even under the SAIC’s burden-shifting formulation, it is rather difficult for a trade secret plaintiff to carry its burden of proof as a practical matter.  To prove that a responding party’s information is identical or substantially identical to the trade secret, the trade secret owner must first establish what information the responding party used.  But this can be challenging because the Chinese legal system affords no formal discovery tools.  To investigate and collect relevant evidence from the defendant, a trade secret owner inevitably would have to involve:

• local AICs — as the competent authority for administrative enforcement against misappropriation of trade secrets;
• local Public Security Bureaus (“PSB”) — as the competent authority for criminal investigation of misappropriation of trade secrets; and/or
• courts — which have the power to investigate and collect evidence that cannot be collected by the parties for objective reasons, although in reality courts rarely assist plaintiffs in this manner.

AICs, PSBs, and courts have significant (if not full) discretion to decide whether to accept a complaint and initiate investigation against a defendant.  And unfortunately, it is fair to say that according to current practice they are very reluctant to initiate such investigations.

Due to the difficulty proving and obtaining effective remedies for trade secret misappropriation, it is essential for companies to take precautionary measures to protect their trade secrets in China.  It is highly recommended that international companies use internal computer and security systems to strengthen internal information management, limit internal and external access to trade secrets, pay attention to any unusual actions by their employees, be vigilant in detecting any unwelcome Internet visitors, and establish effective monitoring mechanisms of their IT and physical infrastructures.  The best way for a company to protect its trade secrets is to prevent them from being misappropriated.