New legal regimes mean an increase in trade secret litigation in both China and the US, but what measures are needed to protect trade secrets? Seth Gerber, Zhu Shaobin and Lucia Tang give their views
Twenty years ago, the US Congress granted the People’s Republic of China permanent normal trade relations with the expectation that opening Chinese markets would increase American prosperity. In 2019, the US reacted to perceived unfair trade practices by imposing tariffs on US$360 billion worth of Chinese products.
Now that a Phase One China Trade Deal has been announced, which addresses some disputes concerning intellectual property, the parties should continuously focus on improving the international legal regimes to protect trade secrets.
Trade secrets often are a company’s most valuable form of IP. Trade secrets include financial, business, scientific, technical, economic or engineering information, such as customer lists, manufacturing methods, formulas, prototypes, designs or codes, which are subject to reasonable measures to keep such information secret, and which derive independent economic value that is not readily ascertainable by proper means by another person who may obtain economic value from the disclosure or use of that information.
US trade secrets law developed from various state court opinions. By 1979, these court decisions were memorialized in the Uniform Trade Secrets Act (UTSA), which has been adopted in 49 states and the District of Columbia.
Claims under California’s version of the UTSA have been asserted against China-based companies where, for example, the trade secrets that were allegedly stolen had been developed in California, and former high-ranking employees moved from California to China, founded a competitive business, and announced the sale of similar products embodying the trade secrets within one year of starting business in China.
In 1996, the US Congress enhanced trade secret protections by enacting the Economic Espionage Act (EEA). This statute allows federal prosecutors to pursue criminal charges arising from the theft of a trade secret. Under its extraterritoriality provision, this criminal statute applies to the overseas theft of trade secrets in situations where the offender is a US citizen or permanent resident, alien, or an organization organized under US law, or where an act in furtherance of the offence is committed within the US.
Because of the EEA’s jurisdictional limitations, US law enforcement officials do not typically receive reports of trade secret thefts from American businesses that occur entirely in other countries. In recent years, however, the US Department of Justice (DOJ) has increasingly brought high-profile indictments against foreign military officials, and prosecuted foreign individuals and corporations it believes are responsible for trade secret theft on behalf of foreign-owned entities.
For example, in 2018, the DOJ announced indictments against a Chinese state-owned enterprise, a Taiwan company and three individuals for their alleged conspiracy to misappropriate trade secrets of an American semiconductor company for the benefit of a company controlled by the Chinese government.
Trade secret owners can also seek exclusion orders from the International Trade Commission (ITC) to ban the importation of goods into the US that embody stolen trade secret information, even if the misappropriation occurs outside of the US.
In one case, a federal appellate court ruled that the pursuit of an order to exclude products from entry into the US does not foreclose contemporaneous claims in China under Chinese trade secret law, because the ITC has no authority to regulate conduct that is purely extraterritorial, and there was no identifiable conflict between the principles of misappropriation that the ITC applies and Chinese trade secret law.
In 2016, the US Congress once again reacted by enacting the federal Defend Trade Secrets Act (DTSA). The DTSA provides a private civil right of action in federal court if the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce.
Under the DTSA, an owner of trade secrets may seek an emergency seizure order or an injunction to prevent actual or threatened misappropriation, and recover an award of damages for actual loss or unjust enrichment, or a reasonable royalty, as well as attorneys’ fees and an award of exemplary damages in the amount of two times the damages, if the trade secrets were willfully and maliciously misappropriated.
Some courts have relied on the extraterritoriality provision of the EEA to allow DTSA claims to proceed concerning overseas misappropriation, if an act in furtherance of the offence was committed in the US. According to data from IP litigation research company Lex Machina, the enactment of the DTSA in 2016 has notably increased the number of federal lawsuits involving trade secret claims to approximately 1,200 federal cases annually.
China has also upgraded its trade secret laws in recent years. In China, trade secrets are protected under the Anti-Unfair Competition Law (AUCL), which was originally enacted in 1993 and amended in April 2019. Under the statute’s new definitions, “trade secrets” include information that is unknown to the public, has business value, and is subject to measures to maintain secrecy.
Trade secrets now include all business information, and apply to individuals and entities who engage in misappropriation, rather than only business operators. The scope of infringement activities concerning trade secrets was also expanded to include misappropriation via electronic intrusion, breach of a confidential duty, and activities in furtherance of such misappropriation. These changes allow trade secret owners to have a broader means to assert a cause of action for trade secret protection in China.
The most significant change in the Chinese law is a new burden of proof provision, which reduced the prior heavy burden of trade secret owners to prove the existence of asserted trade secrets and misappropriation activities in order to institute civil proceedings. As amended in 2019, the AUCL now provides that a trade secret owner need only present prima facie evidence of maintaining secrecy of the asserted trade secrets, and reasonably indicate an occurrence of trade secret misappropriation, and then the suspicious infringers shall have the burden to disprove these elements. These changes may encourage more trade secret owners to initiate civil proceedings concerning trade secret misappropriation in China.
The AUCL, as amended in 2019, also changed the available remedies in China. Statutory damages were increased to US$700,000, and punitive damages may be a maximum five times the amount of damages if the misappropriation was conducted with bad faith and there were circumstances of aggravation.
However, Chinese courts rarely grant preliminary injunctions to protect trade secrets. The first preliminary injunction concerning trade secrets that was granted in China was in 2013. In 2014-2018, Chinese courts received 232 motions to grant preliminary injunctions concerning all types of intellectual property, 204 of which were granted. Limited experience of adjudicating trade secret cases and a short history of legislative protection for trade secrets are two main reasons for the issuance of so few injunctions in China. Encouragingly, on January 1, 2019, the Supreme People’s Court defined “trade secrets” in a manner that has paved the way for a more uniform approach to obtaining a preliminary injunction in China.
Besides civil protection, criminal protection is also available for trade secrets holders in China. The crime of infringing trade secrets was originally codified in China’s Criminal Law in 1997, enumerating four situations of infringing trade secrets and requiring “significant damages” suffered by victims (approximately US$72,000). Based on the US-China Economic and Trade Agreement signed on 15 January 2019, China will subsequently eliminate the prerequisite of showing actual loss to initiate a criminal investigation.
Despite the enactment of the Criminal Law, the crime of trade secrets theft was seldom prosecuted in China until 2012. Because of the burden of proof required to institute a civil proceeding in China, trade secret owners often pursue criminal charges first in order to gather evidence that subsequently can be used as a basis to pursue civil proceedings.
In China, 97% of prosecuted cases concerning the crime resulted in guilty verdicts, but punishments were relatively minor – more than 80% of defendants were sentenced to less than three years in jail and about 60% were imposed a fine of less than US$7,000.
The latest amendment to the Administrative Licensing Law in China specifically prohibits administrative agencies in licensing proceedings from disclosing an applicant’s trade secrets and confidential business information without the applicant’s consent, or unless otherwise authorized by law. Further prohibiting third-party experts and advisers in any criminal, civil, administrative and regulatory proceedings, according to the agreement, will deepen the protection of trade secrets. These may resolve a longstanding concern by certain industries.
Given the new legal regimes in China and the US, there is likely to be an increase in civil and criminal trade secret litigation in both countries. However, in order to further advance trade secret protections, phase two of the trade deal negotiations could consider the following: First, Chinese law could be changed to allow for the discovery of evidence, including on an expedited basis, in support of a motion for injunctive relief.
Second, the Chinese requirement of notarizing all evidence and documentation could be abandoned or relaxed. Third, Chinese courts could adopt the use of confidentiality protective orders to reduce the risk that court proceedings or discovery will disclose trade secrets to competitors. Fourth, China could continue to increase the presence of foreign law firms in the country.
Finally, US courts could consider giving more preference to the international discovery procedures under the Hague Evidence Convention and the Agreement on Mutual Legal Assistance on Criminal Matters between China and the US when seeking evidence in China, and China’s Ministry of Justice could likewise more expeditiously review and handle requests from US courts for evidence and testimony from witnesses in China, including for computer forensics.
Reinforced co-operation in cross-border litigation will serve to accelerate China’s strides toward becoming a world powerhouse in research and development, innovation and high-tech.