Introduction

As one of the largest markets in the world, China offers significant opportunities for multinational life sciences companies, including access to the Chinese market, world-leading research facilities, institutional and private Chinese investors and partners with manufacturing, distribution and other supply chain expertise. Trade secrets can be worth tens or hundreds of millions of dollars. With today’s interconnectedness in the biotechnology and pharmaceutical fields, more collaborations, joint ventures and outsourcing arrangements among firms and increased employee mobility, it is imperative that life sciences companies have robust policies and procedures for protecting trade secrets.

As far as China is concerned, life sciences companies have relied upon patents to protect their innovation. Trade secrets, however, are often the overlooked sibling. This is, in part, because trade secrets litigation in China had historically been less common than patents and more challenging for plaintiffs, with lower win rates. The difficulty was largely due to the heavy burden of proof placed on IP owners and the lack of a discovery or disclosure process in the Chinese legal system.

The 2019 amendment to China’s Anti-Unfair Competition Law and a 2020 Supreme Court judicial interpretation have brought about positive changes. Of significance are the reversal of the burden of proof from IP owners to alleged infringers under certain circumstances and the availability of punitive damages up to five times for wilful infringement. Additional changes include lowering the threshold for criminal liability such that it becomes easier to prosecute trade secret crimes. The 2025 Interpretation of Supreme People’s Court and Supreme People’s Procuratorate on Several Issues Concerning the Application of Law in Handling of Criminal Cases of Intellectual Property Infringement further strengthened the criminal enforcement regime in China, and it clarifies the scenarios of ‘theft’ and ‘electronic intrusion’ and various ways to determine the amount of losses, including reasonable royalties, loss of profits of the right holder and commercial value of the trade secrets. Thus, Chinese courts are now increasingly inclined to provide meaningful redress for trade secret wrongs and render record-setting damages awards. A trade secret strategy refresh for China is therefore warranted and, more fittingly, the time to repair the roof is when the sun is shining.

Trade secrets and misappropriation defined

China’s Anti-Unfair Competition Law defines ‘trade secret’ as:

  • technical, operational or other commercial information that is unknown to the public;
  • that has commercial value; and
  • for which the trade secret owner has taken measures to maintain its confidentiality.

Examples of trade secrets include technical drawings, production processes, design specifications, test results, toxicity information, dosing research, source code, marketing strategies and compiled lists of customers and suppliers. Misappropriation includes the following acts:

  • acquiring trade secrets by theft, bribery, fraud, coercion, electronic intrusion or other illicit means;
  • disclosing, using, or allowing others to use trade secrets acquired by the above means;
  • disclosing, using or allowing others to use trade secrets in breach of an agreement or a confidentiality obligation imposed by a legal owner;
  • encouraging, inducing or helping others to violate confidentiality obligations or violate a rights holder’s requirements to keep secrets, obtain, disclose, use or allow others to use the rights holder’s secrets; and
  • acquiring, using, disclosing or allowing others to use trade secrets when a third party knows or should have known that the trade secret has been misappropriated in any of the above ways.

Therefore, liability can attach to individuals or entities that are involved in the above five acts of misappropriation. In particular, third-party liability arises where a third-party acquires, uses, discloses or allows others to use trade secrets that they knew or should have known to have been misappropriated.

Acts of trade secret misappropriation can be criminal if such misappropriation causes an economic loss of at least 300,000 yuan. Criminal prosecution should always be considered as an enforcement option because Chinese police have the power to seize any relevant evidence, which can be used in subsequent civil litigation. It is an excellent discovery tool to aid civil litigation.

In addition, whoever steals, spies, buys or illegally provides commercial secrets to foreign institutions, organisations or individuals commits a criminal offence and may be sentenced to up to five years’ imprisonment, a fine, or both; where the circumstances are serious, a sentence of five or more years’ imprisonment and a concurrent fine is to be given.

Changing judicial tides

Before 2020, it was uncommon to see multimillion dollar damages awards for trade secrets misappropriation. US$50,000 was considered as an average. Starting in 2020, however, courts have consistently applied an approach that is more favourable to trade secret owners, resulting in high damages awards.

On 24 November 2020, the Chinese Supreme Court handed down the first decision on punitive damages for intellectual property infringement. The case concerned misappropriation of trade secrets for manufacturing Carbomer products. The Court awarded quintuple punitive damages of 30 million yuan. A few months later, on 26 February 2021, the Court affirmed the award of 159 million yuan in compensatory damages to a vanillin maker, which was the largest trade secret damages award at the time. This, however, was quickly surpassed by a Supreme Court judgment on 27 December 2023, which affirmed a trade secret damages award of 201.54 million yuan in favour of Sennics Co, Ltd, whose trade secrets involved rubber additives technology. This now stands as the largest trade secret damages award in China.

Subsequent to the Sennics case, a combined patent and trade secret enforcement strategy ultimately led to a total recovery of 658 million yuan. The plaintiff in the case is Sichuan Golden-Elephant Sincerity Chemical Co Ltd, a foreign-invested entity. Golden-Elephant, a leading melamine producer, owns proprietary pressurised gas phase quenching melamine production technology. In the end, the litigation resulted in damages of 218 million yuan in favour of Golden-Elephant. Subsequently, Golden-Elephant launched a follow-on melamine-related trade secret lawsuit against the same defendants, demanding 600 million yuan in damages. A settlement amounting to 440 million yuan was reached in a couple of months. As a listed company, Hualu Hengsheng had to make public disclosure of the court judgment and settlement. Through tenacious litigation, Golden-Elephant was able to recover a total of 658 million yuan.

On 22 February 2024, the Supreme Court announced China’s Top Ten Most Influential IP Cases for the past five years. The Golden-Elephant case tops the list as it demonstrates strong judicial protection of IP rights and stands for the equal treatment principle – all litigants are treated equally regardless of whether they are Chinese state-owned companies, Chinese private companies, foreign-invested companies or foreign companies.

On 14 June 2024, the Chinese Supreme Court handed down a 640 million yuan judgment for trade secrets misappropriation in Geely v Weltmeister, making it the highest damages award in China’s IP history and ending a six-year legal batter between the companies. There, the Court found that the case involved organised, large-scale poaching of technical talents and resources using unfair means that constituted trade secrets misappropriation. The Supreme Court ordered Weltmeister to compensate Geely for economic losses and reasonable expenses, amounting to approximately 640 million yuan. The damages figure was calculated with reference to Weltmeister’s sales profits of EX series SUVs and 2X punitive damages.

Prevention is the best medicine

Litigation is the last resort for trade secrets protection. Prevention should always be the first priority. Trade secrets protection strategies should aim to stop leaks happening and to maximise the chances of success in legal actions should misappropriation occur. One of the key elements for a protectable trade secret is that the trade secret owner has taken measures to keep the trade secret confidential; therefore, is important to establish and enforce a company-wide confidentiality policy. Establishing a confidentiality and trade secret policy and creating a corporate culture for trade secret protection is critical.

Industry best practices should be implemented in China. Utilising encryption, multi-factor authentication and intrusion detection systems can fortify digital walls and safeguard sensitive data. Regular security audits and vulnerability assessments aid in identifying potential weak points. Employment contracts, non-disclosure agreements and vendor agreements play a crucial role in explicitly spelling out rights, responsibilities and consequences related to trade secrets. Clear contractual provisions can mitigate disputes and facilitate enforcement. For China, implementation of a heightened trade secret policy is essential. For example, written acknowledgment must be obtained when an important trade secret or confidential information is passed onto a recipient. The following is considered the minimum necessary to protect trade secrets in China.

Establishing a confidentiality policy

The necessary steps of any effective confidentiality policy should include at least the following:

  • identifying what information the company deems confidential and how its employees should handle such information;
  • clearly spelling out the consequences of any unauthorised, improper use, or disclosure of confidential information; and
  • clearly stating that improper use or disclosures can and will be grounds for employment termination or even criminal prosecution.

Enforcing a confidentiality policy

The following are the recommended practices on how to enforce a company confidentiality policy and effectively protect the company's trade secrets:

  • require all key personnel who have knowledge of trade secrets to sign confidentiality agreements;
  • conduct regular training on the company’s confidentiality policy to cultivate a culture of awareness and responsibility regarding trade secrets;
  • verify that all employees have received a copy of the confidentiality policy in their employee handbook and have signed a statement acknowledging that they have read, understood and will comply with the policy as a condition of their employment;
  • keep confidential information in restricted areas and in clearly marked binders or storage media. Items should be marked as ‘confidential’, ‘do not disclose’, ‘do not copy’ or other appropriate methods particular to the company’s business;
  • restrict access to confidential information and disclose it only on a need-to-know basis; adopt a physical locking system or electronic access control to confidential information, such as a check-in and check-out system; and use encryption or passwords on confidential information;
  • impose confidentiality requirements on all visitors to the company’s factories and premises;
  • to the extent possible, require all employees to sign a written acknowledgement prior to receiving important company information. If not, a subsequent written acknowledgement must be obtained. For a consultant, subcontractor or any other third party, a written acknowledgement must be obtained in advance;
  • conduct exit interviews of departing employees to ensure that they are not taking to their new jobs any information that the company would not want to disclose to a competitor. This also serves to remind all key employees that their obligation not to disclose trade secrets extends beyond their employment with the company. Departing employees must also provide written acknowledgment that they had access to certain confidential information and attach a list of such information. It is advisable to have departing employees return all electronic storage devices, such as USB drives, upon resignation. More importantly, image the hard disk of the computer of departing employees before such computer gets reassigned to other employees and save such files;
  • terminate electronic access for departing employees immediately prior to termination. Alternatively, closely monitor electronic access in accordance with company computer policies because one of the most common avenues for loss of trade secrets is disclosure through electronic means. It is also advisable for the company to have computer policies in place that permit monitoring of electronic transmissions, such as regular imaging of an employee's computer, in a manner that would alert the company if confidential files are being transmitted outside the company without the company’s consent. It should also trigger an alarm if an unusual amount of sensitives files is downloaded;
  • to the extent possible, keep the key computers or servers bearing critical confidential information off the network;
  • to the extent possible, limit unauthorised downloading or installation of software that is not work-related;
  • to the extent possible, but without invading personal privacy and in compliance with data protection laws, monitor employee web surfing and email communication both in and out of the company computers;
  • obtain reference and background checks on all managers, key employees and persons who will have regular access to critical confidential information;
  • build and maintain good relationships with the local police and Chinese government agencies, such as the State Administration for Market Regulation; and
  • use technology to protect trade secrets. Companies should use state-of-the-art data loss prevention and cloud access security broker tools to monitor and protect confidential data.

If all the above recommendations are followed, a trade secret owner should be able to minimise the risks of misappropriation and enhance the chance of enforcing its trade secret rights in China. Keep in mind that these are necessary to prove that the trade secret owner has taken adequate confidentiality measures to effectively pursue any type of enforcement action against misappropriation.

An overwhelming majority of trade secret misappropriation cases involves former employees taking trade secrets to new employers. Therefore, if an employee has departed and taken employment with a new employer, the first step for the company to take is to give immediate notice to the new employer of the employee’s continued obligation to not disclose the company’s trade secrets. This can be accomplished by sending a letter to the new employer indicating that the new employee has knowledge of the company’s trade secrets. The letter should include an explanation of the legal basis for the employee’s confidentiality obligation. If this is done, the trade secret owner may have a cause of action against the new employer should the employee disclose the trade secret to their new employer. The notice may prompt the new employer to take steps to ensure that its new employee will not disclose or use their former employers’ trade secrets. The letter must be carefully drafted so that it would not become a basis for a claim of defamation or unfair competition.

Balanced China IP strategy

Recent successful stories of trade secret enforcement in China are encouraging. Trade secrets constitute a critical component of the R&D fruits in the life sciences industry. Trade secrets protection complements patent protection for life sciences innovation. For example, a diagnostic device having a unique combination of biomarkers that is patent protected may only provide a meaningful diagnosis when paired with proprietary software. In addition, information captured by a diagnostic device could be kept confidential and used to further evaluate and fine-tune analytical methods. Hence, a combination of patent protection on unique arrays of biomarkers and trade secret protection over analytical software could provide comprehensive protection of IP assets. Therefore, the best strategy is to have a balanced approach to protecting trade secrets and patents in China. Life sciences companies should look to China’s recent legislation and court decisions as a framework to build a robust China IP strategy that integrates both patents and trade secrets.

Benjamin Bai, Miao (Mia) Qu, Jia (Jane) Wu

King & Wood Mallesons