Trade secrets have long been recognized as a valuable tool in competing with local and foreign companies. Key to maintaining the value of trade secrets, is a strong local regulatory regime. Despite many comments to the contrary, China has a strong legal system in place regarding the protection of trade secrets, with relevant provisions and enforcement paths being found in the PRC Law Against Unfair Competition, PRC Criminal Law, and PRC Contract Law.
Definition of Trade Secrets
Paragraph 3 of Article 10 of the PRC Law Against Unfair Competition stipulates that “trade secrets” is subject to the following technical information and management information: a) it is unknown by the public; b) it may create business interests or profit for its legal owners; and c) it also is maintained in secrecy by its legal owners. According to business practices and cases that we have been involved in, the following information may constitute trade secrets: customer lists, customer information, customer preferences, supplier lists, pricing information, marketing / product strategy, internal cost information, production processes, formulations and technology/ process cannot be granted patent right or haven’t applied for the patent.
One of the key issues for many corporations to keep in mind when looking at protecting their trade secrets, or taking action against someone or some entity, who may have had unauthorized access to trade secrets, is that the courts and administrative authorities strictly require that the relevant data or know-how, be “unknown by the public” in order for it to meet the definition of “trade secret” under the PRC Law Against Unfair Competition. In this regard, we note that the Shanghai No.2 Intermediate People’s Court’s recent decision in SI Group Inc. (“SI Group”) v. Sino Legend (Zhangjiagang) Chemical Co., Ltd. (“Sino Legend”) (17 June 2013) provides useful reference. In the case, initially filed in 2007, the plaintiff, SI Group, claimed that Sino Legend had colluded with a plant manager at SI Group’s Shanghai plant, to steal SI Group’s methods for manufacturing rubber tackifier resins, and in due course, then coerced the manager to leave SI Group and join Sino Legend as a manager.. In June 2013, the court issued a decision which found that more than hapf of SI Group’s alleged trade secrets, did not meet the definition of “trade secret” in the PRC Law Against Unfair Competition. The court found that the requirement that they be “unknown to the public” had not been proved. In addition, it ruled that none of Sino Legend’s resin manufacturing methods were actually identical to or materially similar to, any of SI Group proven trade secrets. Therefore, the court refused to uphold SI Group’s claim that Sino Legend ha used and disclosed SI Group’s trade secrets, on the basis that some know-how could not be classified as “trade secrets” and regarding that know-how which met the definition, no evidence was provided that proved actual use and disclosure of the trade secrets
China has an extensive range of laws and regulations that enable an entity to protect its trade secrets:
- Article 10 of PRC Law Against Unfair Competition provides the definitions for trade secrets and illegal use of trade secrets; Articles 20 and 25 formulate the basis for civil and administrative penalties regarding illegal use;
- Article 219 of the PRC Criminal Law and relevance Judicial interpretations provide that if illegal use of trade secrets causes heavy losses to the owner of the trade secrets, the cases can be treated as criminal cases under the PRC Criminal Law leading to imprisonment as a remedy;
- Article 43 of PRC Contract Law states that a party may not disclose or improperly use any trade secret which it became aware of in the course of negotiating a contract, regardless of whether a contract is formed or not. If the party is in breach of the obligation, the other party has the right to seek orders and damages in a civil court;
- Articles 9 to 17 of the Interpretation of the Supreme People’s Court on Some Issues Concerning the Application of Law in the Trial of Civil Cases Involving Unfair Competition set out the basis for hearing trade secret enforcement cases; and
- Several Provisions on Prohibiting Infringements upon Trade Secrets (98 Revision) issued by the State Administration of Industry and Commerce provide the basis for the imposition of administrative penalties for trade secret theft.
Illegal Dealings with Trade Secrets
Article 10 of the PRC Law Against Unfair Competition states that the following acts constitute illegal dealings with trade secret, and are actionable:
- to steal, coerce, or use any other unfair method to obtain the other's trade secrets;
- to disclose, use or permit others to use the trade secrets; or
- to violate the contract or the requirement to publish, use or permit others to use trade secrets, which were maintained as secret by the legal owner of the trade secrets.
A useful reference for considering how the courts can go about dealing with the enforcement of trade secret laws, is the 2006 case of Xian Heavy Machinery Research Institute (“Xian Heavy”) v. Pei Guoliang (“Pei”) (Xian Intermediate Court). Pei was the senior engineer in Xian Heavy, and he was found to have copied the drawings of the main components of a slab caster – these components were considered to be the trade secrets Xian Heavy, as developed by its staff under secrecy from 2001. In August 2002, Pei left Xian Heavy and became the deputy chief engineer in Zhongzhi Casting Co., Ltd. (“Zhongzhi”) – whilst in this position, he finished two important projects for Zhongzhi based on the drawings which he had copied prior to leaving Xian Heavy. In 2003, Xian Heavy’s engineers found the two projects involved Xian Heavy’s trade secrets/know-how, so they reported the matter to the local PSB (i.e. police). The Xian Intermediate People’s Court eventually ruled that Pei had stolen the trade secrets and made them available to others, and that this behavior constituted the illegal use of trade secrets, and that these acts met the criminal threshold under PRC Criminal Law due to the losses suffered by Xian Heavy. The court sentenced Pei to three years imprisonment and imposed a fine of RMB 50,000 – further, it ordered Pei and Zhongzhi to pay compensatory damages to Xian Heavy in the amount of RMB17,820,000 (approximately US$2.85m).
As can be seen from the discussion above, the owner of a trade secret has a number of options open to it regarding remedies:
- Administrative Penalties: trade secret rights holders may apply to the relevant State Administration of Industry and Commerce (“AIC”) office for the imposition of orders and penalties - the AIC may:
a) order the respondent to cease selling products produced by using any such trade secrets; b) impose a fine of between RMB10,000 and RMB200,000 depending on the circumstances involved; c) order the respondent to return drawings, software and other relevant documents containing any trade secrets; or d) supervise the destruction of products produced by using any trade secrets.
- Civil Procedure: rights holders may commence a civil action for injunctions, and damages.
- Criminal Proceedings: criminal cases related to trade secrets, may be investigated by the PSB and then prosecuted by the People’s Procuratorate - orders for imprisonment (which may be suspended) of up to seven years can be imposed.
Trade Secret Management
Obviously, the cases and discussions referred to above, show how important it is for businesses to have in place, a trade secret management program. These programs should deal with:
- The development of systems for identifying business information and technical information which have the basic characteristics of trade secrets, and protecting them such that they will meet the definition of trade secrets under the PRC laws;
- The formulation of detailed security measures for trade secrets;
- The education of all employees regarding the laws and management systems so that they understand their rights and obligations, potential remedies;
- The signing of strong confidentiality agreements with persons (employees, contractors, consultants, partners, etc) who may come into contact with trade secrets, so that they understand that the trade secrets are being maintained in confidence at least;
Finally, such a management program needs to be considered alongside a businesses patenting program, as some know-how may be better protected under a patent.
In our experience, the Chinese authorities and courts, usually take trade secret theft claims very seriously as they understand the value of trade secrets and the damage that unauthorized use or disclosure can cause to a business, be it a small or large business. Surprisingly, in many cases that we have been involved in, we have found that key and often senior employees of businesses in China are not aware of China’s strong laws regarding trade secret protection, as well as the potential remedies that can be imposed by the courts and authorities for illegal use of trade secrets. It is hoped that regular training programs, as well as the publicizing of major trade secret cases, will lead to employees better understanding of this area of the law, leading to less trade secret theft occurring.