Trade secrets law in China and Sino-US Phase One agreement

By Hu Ke, Jingtian & Gongcheng
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On 15 January 2020, China and the US signed the Phase One Economic and Trade Agreement in Washington, in which both sides came up with a variety of specific measures concerning the protection of “trade secrets and confidential business information”, in section B, chapter One. This article will analyze and compare section B with China’s Anti-Unfair Competition Law (AUCL) and other applicable laws, and on that basis envision the prospects for the law and the practice of trade secrets protection in China.

Hu Ke
Partner
Jingtian & Gongcheng

“Actors” of misappropriation. Article 1.3 of the agreement provides that all natural persons, groups of persons, and legal persons could be liable for trade secrets misappropriation. Article 9 of the AUCL is in line with this requirement in defining “natural persons, legal persons and unincorporated organizations other than business operators” as potential trade secrets misappropriators. However, whether the government may be held liable for trade secrets misappropriation is not so clear cut under the AUCL.

Types of misappropriation acts. Article 1.4 of the agreement requires full coverage for the types of trade secrets misappropriation acts, and in particular sets out methods of electronic intrusions, breach or inducement of a breach of confidential duty, and unauthorized disclosure or use. Article 9 of the AUCL shares this requirement and extends the scope by adding a miscellaneous provision of “other improper methods”.

In the US Code, section 1839 of title 18 explicitly excludes “reverse engineering, independent derivation and any other lawful means of acquisition”, which, in the author’s view, is a helpful carve-out, and the AUCL should consider a similar clause.

Shifting of burden of proof. In article 1.5, the agreement stipulates that the burden of proof shall shift to the accused party if the right holder has produced prima facie evidence indicating the accused party’s misappropriation, and that the accused party is obliged to prove whether the information is known to the public if the right holder provides preliminary evidence proving that measures have been in place to keep the information confidential.

In this regard, the AUCL also satisfies the requirement of the agreement. The AUCL has codified the principles of “access plus similarity, minus lawful source”, developed in judicial practice (In a case where the accused party has gained access to the accusing party’s trade secret, the accused party may be presumed to have infringed upon the accusing party’s trade secret if it is proved that the information in the accused party’s possession is substantially similar to the accusing party’s trade secret, and if the accused party fails to prove that the information is legitimately obtained).

Furthermore, it shifts the burden of proof to the accused party in the circumstances that the trade secrets have been, or are in danger of, being disclosed, used, and misappropriated, and it stipulates that the accused party is obliged to prove that the information that the right holder has taken measures to keep confidential does not fall into the scope of trade secrets.

Provisional protective measures. Article 1.6 of the agreement stipulates that parties shall provide for prompt and effective provisional measures to prevent the use of misappropriated trade secrets, and “the use or attempted use” of the claimed trade secret information is regarded as an “urgent situation”, upon which a preliminary injunction can be granted by the judicial authority.

According to the related judicial interpretations of China, in principle, risk of “irreparable harm” is required to create an “urgent situation”; the risk of “imminent disclosure” is specifically mentioned, which might insinuate that “the risk of being used” is not sufficient for an “urgent situation”. Hence, the judicial interpretation needs to be adjusted.

Criminal protection. Article 1.7 of the agreement requires lowering the thresholds for the initiation of criminal enforcement in regards to the trade secrets misappropriation, and eliminates establishing actual losses as a prerequisite, and as an interim step before the revision of the legislation, the remedial costs shall be deemed as the actual losses.

China’s Criminal Law requires “incurring great losses” as a prerequisite to the crime of misappropriation of trade secrets. According to relevant judicial interpretation, criminal investigation will be initiated in the cases that the actual losses exceed RMB500,000 (US$70,500). In practice, it is very difficult for the right holder and the public security organ to prove losses, and so a great number of malicious misappropriation acts went unpunished for being in the preliminary stage without incurring actual losses. The agreement requires prominently enhancing the role of criminal enforcement organs in trade secrets protection, and amendment to the Criminal Law is needed.

Government authorities’ confidentiality obligations. Article 1.9 of the agreement requires both parties to take measures to ensure that the undisclosed information, trade secrets and confidential business information in any criminal, civil, administrative or regulatory proceedings will not be disclosed by government agencies or third-party experts and advisers without authorisation, and any third party in competition with the submitter of the information will not access the confidential information. It is noteworthy that this article extends the confidential subjects to “undisclosed information” and “confidential business information”, beyond trade secrets.

The AUCL only sets out the obligation of market regulation authorities to keep the trade secrets confidential under article 15, while the same obligation of other authorities is scattered in special legislation, and rules and regulations. There is a lack of systematic law defining the confidentiality duties of government. In practice, government confidentiality obligations in relation to the confidential information submitted by pharmaceutical companies in clinical trials or drug registration proceedings, and the source codes by companies that use computer programs for certain business activities, are of great concern to enterprises. Since the agreement has stipulated this obligation of the government authorities, systematic legislation for government authorities’ confidentiality obligation seems inevitable.

The agreement plays as a roadmap for the enhancement of China’s protection for trade secrets and government authorities’ relevant obligations. The gap between China’s existing trade secrets protection legislation and that defined in the agreement is quite narrow. However, in practice, the protection provided for the trade secrets still falls far below the expectation of the right holders.

There is an urgent need to boost the administrative and criminal enforcements concerning trade secrets protection, as well as to revise the existing laws, and efforts shall be made to make it more convenient for the right holders to seek civil remedies.

Hu Ke is a partner at Jingtian & Gongcheng. He can be contacted on +86 10 5809 1182 or by email at hu.ke@jingtian.com