Companies can better protect trade secrets by implementing best practices for prevention and enforcement.Trade secrets issues with China have grabbed headlines in recent months, with a number of high-profile cases involving the discovery of trade secret theft or leaks to Chinese companies and individuals. For example, E.I. du Pont de Nemours and Co. (DuPont), Corning Inc., Pittsburgh Corning Corp., and American Superconductor have all brought recent cases of trade secret theft against Chinese individuals or Chinese companies. Many of the cases within the United States have prompted legal action in US courts, while cases facing US companies in China have been a part of bilateral commercial negotiations.

Trade secrets was cited as the top intellectual property (IP) concern in the US-China Business Council’s (USCBC) 2012 member company survey. Thirty-six percent of respondents across a range of industries flagged trade secrets ahead of other forms of IP, such as patents, trademarks, and copyrights. Despite the growing concern with trade secrets, companies are still figuring out how to best protect them in China. Many companies have focused on preventative practices rather than seeking to enforce their trade secrets in Chinese courts. Despite the small numbers of enforcement cases, the risk of trade secret infringement remains real. The rising importance of this issue means that companies should learn their options for trade secret enforcement in China, which include administrative, civil, and criminal channels.

TRADE SECRETS BASICS

Unlike other forms of IP, such as patents and trademarks, trade secrets are not formally registered with government authorities. While some trade secrets could be registered as patents, companies often choose to not register them and to protect them by essentially keeping them secret. Common practices can include installing physical controls and locks to prevent unauthorized access to trade secret information, regularly training employees about trade secrets policies, and signing confidentiality and non-disclosure agreements with relevant employees who might have access to trade secret information. These strategies help companies to ensure that such designs and processes stay out of the public eye, while also avoiding the time limit for protection that would be imposed with the granting of a patent.

This lack of a formal registration process, however, creates its own enforcement challenges because companies cannot benefit from the protection patents provide and lack a written document to rely on should infringement occur. Instead, when infringement is discovered, companies must prove that the trade secret is indeed a trade secret that merits protection by demonstrating to courts or other enforcement authorities that it meets the criteria used to define trade secrets in that legal jurisdiction.

CHINA’S LEGAL FRAMEWORK FOR TRADE SECRETS

Unlike the United States, which has a unified trade secrets law (the Uniform Trade Secrets Act, or UTSA), China’s rules defining and regulating trade secrets are scattered among a series of laws and regulations. The most important of these is the PRC Anti-Unfair Competition Law (AUCL), which was released in 1993. The AUCL formally defines trade secrets in Article 10 as “technical and business information that is unknown to the public, which can bring economic value to the rights holder that has applicability, and for which the rights holder take measures to protect their confidentiality.” The law defines illegal behaviors related to trade secrets, including direct acquisition of trade secrets via theft, inducement, coercion, use of those illegally obtained trade secrets, or other illegal means. This definition also covers use or sharing of trade secrets by third parties not authorized by the owner. A third party is liable for trade secret misappropriation under the AUCL, when the third party knows or should have known that a given trade secret that it obtains, uses, or discloses has been misappropriated.

Trade secrets are defined as confidential technical or business information that are not known to the public and have economic benefits for the rights holder. The legal definition of trade secrets in most jurisdictions is written to cover a wide variety of possible information that may be important building blocks of a company’s current and future competitiveness and thus worthy of protection. Examples include, but are not limited to, formulas, blueprints, product designs, manufacturing processes, customer lists, sales strategies, and management techniques.

In January 2007, the Supreme People’s Court released the Interpretation on Certain Issues Related to the Application of Law in Trials of Civil Cases Involving Unfair Competition, which addressed additional questions related to trade secret enforcement. This judicial interpretation clarifies how courts should define key terms in the AUCL’s definition of trade secrets, and states that some controversial types of information, such as customer lists, are eligible for protection as trade secrets in China. The interpretation also lays out the rules governing civil trade secrets cases in China, placing the burden of proof in these cases on the plaintiff. To be successful, the plaintiff must prove that the infringed information meets the definition of a trade secret; that the defendant is using information that is substantially similar to the trade secret; and that that information was obtained illegally by the defendant. The plaintiff must provide clear evidence of when and how the information was illegally obtained—a difficult evidentiary challenge. Other sections of the interpretation describe the rules for determining damages and granting permanent injunctions as remedies for trade secret misappropriation.

A third document, the State Administration of Industry and Commerce’s Provisions Regarding the Prohibition of Trade Secret Infringement, describes administrative procedures for handling trade secrets cases. Additional aspects of trade secret protection and management are covered in other laws and regulations, including the Contract Law (technology licenses and trade secret protection in contract negotiations), the Labor Contract Law (confidentiality-related agreements), the Labor Law (liability for violating confidentiality-related agreements), the Company Law (trade secrets obligations for senior management), and the Criminal Law (criminal thresholds for trade secrets cases).

While there has been some discussion among legal professionals about the benefits of a unified trade secrets law— and some work was done to draft a trade secrets law in the mid 1990s—there has been no indication to date that Chinese authorities will draft such a law. Nor is there any indication that the Chinese government is actively working to revise the AUCL or other existing trade secrets-related regulations.

CHANNELS FOR TRADE SECRET ENFORCEMENT

Companies facing trade secret infringement can choose from three options to enforce trade secrets: administrative, civil, and criminal. Each involves different government agencies, and offers different levels of penalties to deter infringers. While some issues that companies face are specific to the type of enforcement chosen, common challenges include:

  • High evidentiary burden  Companies face a high evidentiary burden for trade secrets cases, particularly in administrative and civil cases where they must essentially assemble a complete case using private resources. China does not have a discovery process that would support these efforts. Companies also confront a strong preference for documentary evidence over witness testimony.
  • Limited Chinese experience with trade secret cases  Chinese officials and courts see a small number of trade secrets infringement cases each year and have limited experience ruling in these cases. The breadth of possible information that could constitute a trade secret also means that local courts and administrative officials may not fully understand why a given piece of information constitutes a trade secret. This can affect the quality of decisions on trade secrets cases or can lead to burdensome procedures, such as lengthy expert panel reviews in civil cases to determine if a piece of confidential information counts as a trade secret.
  • Reluctance of government officials to tackle complex cases  Trade secrets cases can be tricky to tackle. Local officials in administrations of industry and commerce (AICs), public security bureaus (PSBs), and courts are often reluctant to take cases unless they are seen as straightforward or high-value. Convincing local officials to devote limited resources to these cases only adds to the challenges companies face.

Administrative enforcement

Local AICs are responsible under the AUCL to tackle trade secrets infringement, as they are with other actions considered to be anticompetitive behavior. Should they find misappropriation of trade secrets behavior under the competition law, AICs have the authority to order a variety of remedies, including destruction of products manufactured using stolen trade secrets, the return of trade secret materials to the original owner, and fines of between ¥10,000 ($1,600) and ¥200,000 ($32,000).

As in administrative proceedings for trademark cases, companies wishing to pursue trade secrets cases have to submit a request to their local AIC for adjudication. In practice, companies looking for help from local administrative officials may have to not only submit a request for investigation, but also present local AICs a fairly complete package of evidence and educate local officials about the trade secret in question. These burdens are difficult to meet, and many companies express doubt about the ability of AICs to handle trade secrets cases. As a result of these constraints, many companies do not view administrative enforcement channels as a viable option for most trade secrets cases.

Civil cases

Civil cases are generally seen as the most viable option for trade secrets enforcement. Administrative and criminal cases face too many challenges; civil cases are the only one of the three methods that allow the rights holder to receive damages and permanent injunctions. Damages in these cases are determined using one of the various methods defined in the 2007 judicial interpretation: lost profits of the plaintiff, defendant’s profits that can be traced to the misappropriated trade secrets, or a reasonable royalty. However, the plaintiff bears the burden of proof and needs to collect evidence via legal means and submit it to the court. This is a major challenge given the lack of a discovery process to obtain evidence from the defendant, and common means used by companies to collect evidence—such as use of private investigators—may not be admissible in these cases. Court-issued evidence preservation orders can help, and there is some evidence of success in obtaining these orders. In either case, however, court preferences for written documentation (versus witness testimony)—and the need under the competition law to document the act of misappropriation—add to the challenges of building a trade secrets case.

Criminal cases

Criminal court cases become an option when companies can demonstrate sizable losses due to trade secret infringement. Definitions of “serious” and “exceptionally serious” losses are described in a 2004 judicial interpretation for IP crimes that defines criminal thresholds and penalties for each of the major types of IP. Under this interpretation, serious losses should be more than ¥500,000 ($80,000), while exceptionally serious losses should be more than ¥2.5 million ($400,000). Criminal tribunals can apply fines and prison sentences of up to three years for serious losses, and between three and seven years for exceptionally serious losses. When invoked, these could provide effective deterrents against trade secret infringement. Getting the local police on board can alleviate the heavy evidentiary burden for companies because of the police’s authority to gather evidence. Like administrative cases, however, criminal cases are difficult to pursue because of the challenge of convincing local police to take on cases, particularly if the police view the case as not being high-value.

BEST PRACTICES FOR ENFORCING TRADE SECRETS

Given the challenges of accessing the enforcement options, many companies have focused on preventing trade secrets theft. Nevertheless, a comprehensive view of trade secrets protection should incorporate best practices for both preemptive protection and responsive enforcement in case of leaks. Some best practices for trade secret protection include:

  • Determining which information should be deemed as trade secrets, as well as the appropriate levels (and methods) of protection for each type of trade secret
  • Controlling access to trade secrets, including both physical controls, such as sign-in systems and facility set-up, and digital controls, such as passwords, pop-up windows, network security, and policies for use of information transfer devices like flash disks
  • Instituting human resources policies to protect trade secrets, including provisions in employment agreements, regular training on trade secret issues, and careful handling of employee departures
  • Developing contract provisions and working mechanisms in relationships with outside business partners, including joint venture partners, to protect trade secrets
  • Working with Chinese government regulators when requested to submit proprietary information to limit the confidential information provided and protect the confidentiality of submitted information

To boost trade secret enforcement, documentation is critical, providing companies with a paper trail as to what information counts as a trade secret and why, what policies are in place to prevent trade secret theft, and to educate employees. For example, for trade secret-related human resources policies, companies can help to prepare for possible trade secrets cases by carefully documenting what policies are implemented as part of a comprehensive trade secrets program, who has access to trade secret information (and if applicable, when they had access to it), and noting in detail when employees receive training on trade secrets and trade secrets-related responsibilities.

Documentation is critical for at least two related reasons. First, companies alleging trade secret infringement must show that they have taken reasonable efforts to protect the information as a trade secret to claim protection. Second, they must be able to prove the act of misappropriation as part of building their case. Documentation can help to prove when and where theft occurred or to pinpoint the act of misappropriation.

It is also important to build proactive relationships with government agencies that have a hand in trade secret protection, particularly investigative agencies like AICs and PSBs. These relationships can be valuable since companies must convince local enforcement officials to allocate limited staff and resources to investigate their cases. While building relationships with key stakeholders prior to any negative incident is common practice for government affairs professionals in other regulatory areas, it appears to be less common within the realm of trade secrets.

While these best practices do not represent a complete list of trade secret enforcement methods, companies in China may benefit from adapting these policies and enforcement options. These considerations are an important part of a well-developed, comprehensive strategy to both protect and enforce trade secrets within China’s challenging intellectual property rights landscape.

[author] Ryan Ong ([email protected]) is director of business advisory services at USCBC’s Washington, DC office. [/author]

Posted by Christina Nelson