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China patents: Draft Amendment to Anti-Unfair Competition Law

The Draft Amendment to Anti-Unfair Competition Law (AUCL) has long been awaited and discussion on its proposed revisions is now heating up. Drafted by the State Administration of Industry and Commerce (SAIC) and released by State Council for public opinion until March 25 2016, this Draft Amendment has substantially revised 30 of the 33 provisions and touched on a wide range of issues, including commercial bribery, trade dress, trade secrets, antitrust, administrative enforcement and compensation thresholds.

AUCL has always been a crucial weapon for intellectual property rights owners to stop infringement and freeriding activities, and this Draft Amendment would also have material impact on IP enforcement. Historically, trade secret cases are among the most difficult battles to win, due to too high criminal thresholds, inconvenient transfer from administrative to criminal proceedings and insufficient safeguard measures for trade secrets disclosed in enforcement proceedings among various other reasons.

The current AUCL regulates misappropriation of trade secrets, which are defined as technical and business information unknown to the public, which could bring economic interests to the rights owners, have practical applicability and are kept confidential by the rights owners' precaution measures. The requirement of practical applicability essentially denies protection of information generated from ongoing and incomplete experiments, which is also acquired through intellectual efforts and deserves equal protection. More generally speaking, it also impairs AUCL's overall positive impact and availability on trade secret protection. With that said, one noteworthy revision in the Draft Amendment is the removal of the practical applicability requirement in Article 9, which practically expands the scope of trade secret protection.

Another highlight in the Draft Amendment carrying weight on trade secrets is the upgraded enforcement power of local Administrations of Industry and Commerce (AIC). The powers enumerated in Article 15 include entering the business venues for inspection, questioning the business operators and interested parties, requesting evidence, data, technical support and other relevant materials, demanding the investigated operators to temporarily cease suspected activities, confiscating suspected property, checking bank accounts and accounting certificates, and most importantly, requesting the judicial branch to freeze assets if evidence suggests possible transfer or concealment of such illicit funds.

Many view this a boost of administrative protection. Indeed, the enlarged enforcement power could potentially propel administrative enforcement and its deterrent effects, but it is not flawless. The unprecedented entrustment of enforcement power seems to follow the steps of the recently amended Patent Law, which also stepped up the enforcement power so that patent administrative departments could confiscate suspected infringing products and investigate ex officio in cases of repetitive or group infringement. Concerns have been raised as to whether such enforcement power could be easily abused, because patent infringement is a difficult issue even before an experienced panel of judges. It is questionable whether the enforcement authorities should be granted such power that would substantially jeopardise the patent validity.

Similarly, the expansion of enforcement power in the Draft Amendment is arguably progress judging from the perspective of trade secret protection. What would constitute trade secrets is a highly complicated issue. Where misappropriation of trade secrets is suspected but not found, potentially trade secrets of the suspected company could be disclosed involuntarily if administrative authorities such as local AICs could easily enter the business venues or access supposedly confidential business information, especially bank accounts. It is also possible that such enforcement power be abused or taken advantage of by bad faith reports of misconduct. In particular, there is no mentioning of precaution measures in the Draft Amendment regarding trade secrets revealed in the administrative proceedings, which may aggravate trade secrets owners' fear of potential leakage and impede them from seeking administrative protection. Consequently, it makes people wonder: would it be counterproductive to entrust administrative authorities with such enormous power in trade secret cases?

Despite the above controversies, the Draft Amendment clearly demonstrates good intentions to impose harsh liabilities and administrative penalties in unfair competition activities. Notably, secondary liability is newly imposed on those who facilitate unfair competition activities, such as providing convenience and ease for sales, network services, advertising, and even payment services. An administrative fine of Rmb20,000 ($3,000) to Rmb200,000 ($30,000) is provided for in Article 30 in cases where business operators fail to cooperate in enforcement authorities' investigations. Both would have positive bearings on trade secret protection.

The Draft Amendment alone is not a cure for all problems in the current trade secret regime and its implications in practice remain to be seen. However, it is a good start for reform and explorations in this regard, and the good intentions behind the sweeping revisions should be a dose of confidence for trade secrets owners.

He JingLyu Pei

AnJie Law Firm26/F, Tower D, Central International Trade Center6A Jianguomenwai Avenue, Chaoyang District, Beijing 100022, PR ChinaTel: +86 10 8567 5988Fax: +86 10 8567

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