China has seen a number of recent damages claims in trade secrets theft cases between local Chinese companies. Many involve advanced technology with damages claims rivalling those of patent civil actions. IP observers in China believe that more high damages claims in relation to trade secrets theft can be expected in the future.
Recent cases include: Baidu suing a former employee for trade secret theft in relation to self-driving cars and artificial intelligence, claiming RMB 50 million ($7.5 million); Gaode Map suing a former employee and Didi Chuxing for RMB 75 million in relation to trade secrets for mapping; and Robstep suing several employees and Inmotion for trade secrets concerning self-balancing vehicles for RMB 60 million and initiating criminal proceedings as well.
Legal mishmash to protect trade secrets
There is no unified national trade secret law in China. Instead, China protects trade secrets through several laws and regulations including:
PRC Anti-Unfair Competition Law (AUCL) which stipulates the definition of trade secret, types of behaviours that infringe trade secrets, and the legal liability
SPC Certain Issues Related to the Application of Law in Trials of Civil Cases Involving Unfair Competition
State Administration of Industry and Commerce’s Provisions Regarding the Prohibition of Trade Secret Infringement
PRC Contract Law
PRC Labour Contract Law
PRC Labour Law
PRC Criminal Law Article 219 stipulates the crime of infringing trade secrets
The General Principles of Civil Law stipulates that trade secret is a kind of IP right enjoyed by the right owner
Dongxiao Ma, partner at Zhong Lun Law Firm, explains that while the provisions in the Anti-Unfair Competition Law and Criminal Law identifying trade secret infringement action are almost identical, they are different in legal responsibility. In addition, prohibition of business strife is closely related to trade secret protection, which involves labour law and labour contract law.
The revised Anti-unfair Competition Law, which was revised and promulgated on November 4 2017, and came into force on January 1 2018, has a number of features targeting trade secrets.
George Chan, partner at Simmons & Simmons, explains that the recently revised law broadens the definition of trade secrets to technical or business information that is unknown to the Chinese public, and has potential commercial value, while removing the need to demonstrate that a trade secret also has practical value.
The revised Anti-Unfair Competition Law also introduces an objective standard for trade secret infringement. Article 9 of the revised Law addresses third parties that should have known that they are unlawfully benefiting from trade secrets, which will have important implications in the employment context, where trade secret theft is most common amongst employees taking their former employers' trade secrets to their new employment.
Additionally, it provides that compensation for trade secrets may be assessed with reference to the actual losses suffered by the owner of a trade secret as a result of a theft of their trade secrets, the gains of a party who misused another party’s trade secrets without authorisation, and when the losses suffered by the rights holder and the benefit gained by infringer are both too difficult to determine, a court may award statutory compensation up to RMB 3 million.
Challenges in trade secret cases
One of the most challenging aspects of trade secret cases is that trade secret owners face a high evidential burden to establish infringement of a trade secret, particularly in administrative and civil cases where they must essentially assemble a complete case using private resources, without discovery. A private practice lawyer told Managing IP that he observes Chinese companies are even opting for the US courts to litigate against Chinese companies due to the lack of a discovery system in China.
“Most businesses fail in preserving evidence of access and have no paper trail of what someone has accessed and the evidence of what data was taken,” says Benjamin Bai, chief IP counsel at Ant Financial. “The burden of proof is high. There should be a shift in the burden of proof to the defendant, but that goes against the general civil law principle of ‘he who asserts must prove.’”
Another challenge is the lack of experience in the courts. “Chinese officials and courts only see a small number of trade secrets infringement cases each year and have limited experience handling these cases,” explains Simmons & Simmons’ Chan. “The breadth of what may constitute a trade secret also means that local courts and administrative officials may not fully understand why a specific piece of information qualifies as a trade secret.”
Chan also points out that local Administration of Industry and Commerce (AIC) and Local Public Security Bureaus and courts are often reluctant to take cases unless they are seen as straightforward or of high-value. To improve trade secret protection, the Chinese government must emphasise the importance of protecting trade secrets, and direct all branches of government to give full protective measures to the protection of trade secrets.
Strategies to tackle trade secrets
In terms of trade secret protection strategy, IP practitioners offer a number of recommendations.
An in-house IP counsel indicates that in addition to employee training, data node protection and the monitoring of important data to prevent data from being transmitted outside the company is essential. The in-house counsel says that evidence collection is the most challenging when it comes to trade secret cases as businesses often can’t prove with confidence the actions of their former employees. “In practice, it is important to seek the help of local security bureaus to help with collecting the relevant evidence that there was confidential information exchange between employees and outside parties,” adds the in-house IP counsel.
Jerry Xia, chief IP counsel, APAC at Honeywell, thinks that the biggest challenge for trade secret cases is the lack of a discovery system in China. “There is a heavy burden of proof on the plaintiff and it’s very difficult if the defendant keeps silent,” says Xia.
He explains that while the threshold for criminal prosecution is half a million RMB, the loss is hard to determine. “In one case, we were trying to pursue a trade secret leakage case for more than two years without a breakthrough yet. We showed a certified evaluation report that our trade secret that was disclosed without authorisation was worth millions of dollars, but the police insisted that we provide the evidence on our R&D cost as the loss instead which is almost impossible because our trade secret was developed twenty to thirty years ago,” says Xia. “There needs to be a specialised trade secret law to make enforcement easier.”
Ma at Zhong Lun Law Firm suggests that it is important to secure employees’ computers but not hinder employee productivity. For instance, certain technologies and software can reduce the access employees have to proprietary information. One of the more successful ways companies can protect their IP is through a secured server network. This is a clear wall outside that allows employees to only do certain things from inside the company on internal computers. Internal networks allow IT departments to monitor usage when it's in a controlled environment inside the company.
Another way to protect sensitive information is to put limits on employee access to particular files and installing software that prevents employees from copying certain files to external storage devices, such as thumb drives. Another protective measure that companies can implement is a system that separates certain files so employers can be alerted when employees access protected documents.
Ma points out that businesses should make their expectations clear regarding private information upon an employee's exit. Employers should conduct an exit interview with departing employees and make sure they sign an exit agreement that says the employee is returning all company materials.
In the protection of trade secrets, enterprises must take the initiative to design the trade secret protection system. Ma emphasises that there is no active legal protection if the right holder does not take adequate protection measures. In addition, after the leakage of trade secrets, difficulties in obtaining evidence and the furtive use of the infringer all put right holders at a disadvantage.
Xia Zheng, partner at AFD China Intellectual Property Law Office, points out that different from trade mark and patent rights which are approved by authorities and have certificates, trade secrets are confidential. “During a trade secret dispute, it is of great challenge to prove the owner possessed the trade secret, which is specifically reflected in how to define the content/scope of the trade secret and how to prove that the owner has taken effective measures to protect the confidential information claimed,” says Zheng.
In case of a trade secret dispute, Zheng points out that the weight and sufficiency of evidence should be enough to prove that the confidential information, including information about technologies and information about business operations, possesses confidentiality, and the requirement of confidentiality is neither commonly known to nor can be easily obtained by the people in the area. Secondly, it is important to avoid second-disclosure. The content/scope of the trade secret should be explicit so as to avoid unnecessary disclosure. In terms of measures for protection, the owner should take effective measures to protect trade secrets through contracts. Zheng observes that the confidentiality clauses constituted between an enterprise and its employees are often too general and/or do not explicitly define the scope of the object being kept confidential.
