Defending trade secrets in China

By Ma Dongxiao, Zhong Lun Law Firm
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According to data from China Judgements Online, only 14% of claimants won in the first instance of civil cases involving trade secret (know-how) infringement that closed from 2012 to 2017. Given the fact that trade secret infringers in China can be subject not only to civil responsibilities but also to administrative and criminal sanctions, what are the key considerations for defending trade secrets?

马东晓 MA DONGXIAO 中伦律师事务所合伙人 Partner Zhong Lun Law Firm
马东晓
MA DONGXIAO
中伦律师事务所合伙人
Partner
Zhong Lun Law Firm

Claimants’ slim chances of winning trade secret cases in civil courts is attributable particularly to their inability to submit strong evidence combined with their heavy burden of proof under laws that pose a substantial challenge to them. Another reason relates to the lawyers’ lack of experience in dealing with trade secret cases. Most lawyers do not even know how to instruct their clients to collect evidence effectively.

To begin with, the author would like to share two cases that he represented. In Yantai Vast’s trade secret infringement case, Yantai Intermediate People’s Court held in the first instance that the defendant was liable for trade secret infringement and ordered damages of RMB5 million (US$750,000 million), which was a large sum that could be rarely expected from Chinese courts. In another trade secret infringement case, initiated by Cathay Industrial Biotech against Shandong Hilead Biotechnology, the claimant succeeded in filing a criminal case with Jining Police Bureau and the infringer was arrested.

To succeed in taking recourse against trade secret infringers through legal proceedings, trade secret holders must pay attention especially to the following considerations.

Identifying the “secret” in a trade secret. What makes a trade secret, a trade secret? And what is the carrier that reflects this trade secret appropriately? Usually the court would require the party claiming a trade secret to answer these two questions, because identification of the secret, providing the basis for claiming rights to a trade secret, is critical both in determining whether relevant information constitutes a trade secret and in the subsequent comparison for similarities.

In practice, the biggest challenge in identifying a secret comes from the trade secret holder’s failure to provide a precise and accurate scoping description of the trade secret involved when initiating the lawsuit. On many occasions, even expert testimony and technical comparison cannot end controversy over why the information is considered secret. That is why courts generally establish a deadline for the claimant to demonstrate the secret. A claimant’s petition to expand or change the scope of the secret is generally denied if it is submitted upon exchange of evidence or at the stage of cross examination.

However, it is not uncommon that criminal allegations are not supported by courts due to some public security organs’ failure to observe the above-mentioned principle that results in publicly available information being deemed an element of a trade secret. For example, by utilizing this principle in a trade secret case heard in Dalian, the author has helped the client succeed in defending against criminal allegations. The client was immediately released after the verdict was issued.

Effective confidentiality measures. In order to be entitled to legal protection, the party claiming a trade secret must have taken appropriate confidentiality measures. According to the judicial interpretation of the Supreme People’s Court, the confidentiality measures should be “reasonable protective measures appropriate to specific circumstances, particularly business value, of the secret”.

Confidentiality measures that are considered “reasonable” must meet four essential elements. First, they do not need to be rigorous or sufficient, but must be necessary. Second, the form or the manner in which they are taken, not legally prescribed, should be appropriate to the features of the carrier of the secret. Third, the measures can be identified by the party on which a confidentiality obligation is imposed. Fourth, they should be able to ensure that the secret is not easily accessible. To sum up, confidentiality measures should be “adequate to prevent unauthorized disclosure of confidential information”, despite lack of legal provisions on the form or manner in which they should be taken.

Identification of infringement through comparison. After proving its rights to the trade secret and the effectiveness of confidentiality measures taken, the claimant has to meet the burden of proving the respondent’s infringement upon its trade secret. In a civil case where the respondent has gained access to the claimant’s trade secret, the defendant may be presumed to have infringed upon the claimant’s trade secret if it is proved that the information in the respondent’s possession is substantially identical to the claimant’s trade secret and if the respondent fails to prove that the information is from a lawful source.

The challenge faced by the claimant at this stage is to prove that any information in the respondent’s possession is identical with the secret held by the claimant. Usually they need to leverage the expertise of professional accreditation bodies but, in practice, this is where problems are very likely to occur.

Criminal and administrative protection. The holder of a trade secret may resort to criminal proceedings if it incurs a direct financial loss of RMB500,000 or more due to the suspected infringement. The advantage of criminal proceedings lies in the intervention of public security organs that helps alleviating the difficulty in meeting the burden of proof and makes the process of holding infringers liable easier and faster.

But criminal proceedings do have disadvantages. First, it is difficult to get the case filed. Usually it is more difficult to get a case filed in tier-one cities than in cities of lower level. Second, it is impossible to seek damages through public prosecution. That is why there are cases where trade secret holders hold infringers criminally liable through private prosecution instead of prosecution by pubic security organs. This is a feasible option for defending their rights.

It should be noted that trade secret holders may seek administrative protection under the PRC laws. In the trade secret case of Beijing Shihua Fine Chemical Technology Development Co., Ltd. that the author represented, the client succeeded in filing the case with the Administration for Industry and Commerce of Fangshan District, Beijing and eventually won the subsequent administrative litigation.

In all, trade secret holders should leverage the expertise of lawyers and select the method of dispute resolution reasonably, taking into account the specific circumstances of their cases and assessing various factors prudently.

Ma Dongxiao is a partner in the intellectual property department of Zhong Lun Law Firm and a member of the National Intellectual Property Expert Tank. He can be contacted on +86 10 59572099 or by email at madongxiao@zhonglun.com