On April 29, 2010, the Standing Committee of National People’s Congress of the People’s Republic of China (PRC) promulgated the revised Law of the People’s Republic of China for Protection of State Secrets (“State Secrets Law”), which will take effect and replace the current version of the law on October 1, 2010. In addition, on March 25, 2010, the State Assets Supervision and Administration Commission (SASAC) issued the Central Enterprises Trade Secret Protection Interim Provisions (“Interim Provisions”) to regulate trade secret protection with respect to Central State Owned Enterprises (CSOEs). The Interim Provisions took effect on its issuance date, i.e., March 25, 2010. Foreign companies and foreign invested companies that have significant business dealings with ordinary SOEs and CSOEs, are involved with government procurement, or are seeking advantage through an “inside” track on PRC market and financial information should take heed.
Revisions to the PRC State Secrets Protection Law
The revisions to the State Secrets Law are significant and include 18 new articles and one new chapter. The key revisions are summarized below.
- Who is Authorized to Determine and Hold State Secrets?
State secrets are classified under three categories and are subject to determination by governmental authorities and authorized units. The most sensitive state secrets are those classified as “top-secret” (jue mi ??). Only central and provincial level authorities and the units authorized by the aforementioned authorities have the authority to classify information as “top-secret.” Municipal level and higher authorities and their authorized units may only make a determination that information is a state secret of the “confidential” (jimi ??) or “secret” (mimi ? ?) variety, which are typically less sensitive than “top-secret” information. As such, it appears that after proper authorization, CSOEs may be qualified to determine all three levels of state secrets. In addition, it is quite likely that lower level authorities and SOEs may still have access to and hold “top-secret” information, even though they are not authorized to designate information as topsecret.
- Enumerated Violations
The State Secrets Law lists 12 specific violations that are subject to administrative and/or criminal sanctions. In addition, the State Secrets Law provides that if the violation does not constitute a crime and administrative punishment is not applicable to the responsible individual, the administrative authority for state secrets will urge the unit (i.e., employer) to deal with the situation. Accordingly, if the employee of a foreign invested company (FIC) violates the confidentiality obligations in respect of state secrets but does not commit an actionable violation, the FIC may still come under governmental pressure to take some kind of action, although no specific guidance is provided.
- Internet Website Operator’s Responsibilities
Under the amended State Secrets Law, website operators are required to cooperate with governmental investigations of online state secret leakage. Upon discovering any leakage of state secrets on a website, the operators should immediately stop the transmission, maintain relevant records and report the violation to authorities. Website operators should also delete the state secret upon the request of the government.
Key Points of the Interim Provisions
- Broad Definition of Trade Secrets
The definition of trade secret in the Interim Provisions is identical to the definition under the PRC Anti-Unfair Competition Law, which is essentially similar to that found in the U.S. Uniform Trade Secrets Act. However, the scope of trade secrets under the Interim Provisions is vague and extremely broad, including operational information such as: strategic plans, management methods, business models, ownership restructuring and IPO, merger, acquisition, restructuring, property transaction, financial information, investment and financing decisions, manufacturing, purchasing and sales strategy, resource storage, customer information, and tender and bid; as well as technical information, such as design, procedures, product formula, processing technology, manufacture method and know-how, etc. It is not clear whether a court will follow such scope when handling CSOE trade secret misappropriation cases.
- Interface Between Trade Secrets and State Secrets
In an effort to distinguish between the CSOE’s trade secrets and state secrets, the Interim Provisions provide that a trade secret may become a state secret after a statutory determination procedure has been completed. Due to this newly imposed determination procedure, it will likely become more difficult for CSOEs to claim that a piece of information is a state secret, possibly reducing anti-competitive behavior. However, it is still possible that CSOEs will more aggressively assert state secret status of information after they are granted authorization to determine whether information constitutes a state secret.
- Labeling of Trade Secrets
CSOEs are required to label trade secrets once its confidentiality is determined. Trade secrets will be classified under two categories, “core trade secret” (hexin shangmi ????) and “ordinary trade secret” (putong shangmi ????), and will be labeled separately.
- Confidentiality Measures
CSOEs are required to implement confidentiality measures in their business. When conducting activities involving trade secrets, including technology transfer, joint ventures, audit and due diligence, etc., CSOEs should sign a confidentiality agreement with relevant parties. In securities offerings, IPO and public disclosures, CSOEs are required to establish a confidentiality verification procedure and identify relevant parties’ confidentiality obligations. CSOEs are also required to assert their rights and request compensation when their trade secrets are infringed. It is expected that CSOEs may take a more proactive attitude and adopt more measures to protect their trade secrets than in the past.
- Observations and Issues
In light of growing concerns over protectionist trends in China, legislation relating to state secrets and trade secrets of CSOEs will likely meet with much skepticism and suspicion. Moreover, the questions continue to loom large as to whether state secrets law may be used improperly to hide negative developments from investors in SOEs that have a significant public float, to help keep their share prices high and cost of capital unfairly low. Admittedly, though China’s government does have many legitimate interests in play, the fact remains that many or most key players in China’s pillar industries remain government owned and/or controlled. Nonetheless, the prospects of new legal procedures — if implemented in a reasonable manner — for upgrading CSOE trade secrets to state secret status do hold a promise of limiting CSOEs’ ability to arbitrarily and unfairly use state secrets law to seek commercial advantage.