There is more good news from China for intellectual property (IP) owners. The 10th Session of the 13th Standing Committee of the National People’s Congress has just passed amendments to both the PRC Trademark Law and the trade secret provisions in the PRC Anti-Unfair Competition Law (the “AUCL”). The simultaneous amendments of two major IP laws, in the midst of the current China-US trade dispute and on the heels of the new PRC Foreign Investment Law and the amended Regulations on the Administration of Technology Import and Export, further demonstrate the determination of the Chinese government to ease points of contention with the US and the rest of its global trading partners and stimulate investment and innovation. That said, China’s IP “Achilles heel” has always been effective enforcement and how it implements the new trade secret provisions of the AUCL will be the real test.
The AUCL was last amended in 2017, but those amendments were disappointing to those who were expecting more substantial changes in the trade secret provisions. The new amendments focus on and make sweeping changes to the trade secret provisions. These changes, effective from April 23, 2019, are summarized below.
- Broadened Definition of “Trade Secret” (AUCL, Article 9)
Under the previous AUCL, only “technical information” and “operational information” were protected as trade secrets. The amended AUCL expands the definition of “trade secret” to include “other business information.” The broadened definition, however, is a double-edged sword insofar as it might encourage the assertion of rights in information that arguably should not be protected as trade secret.
- Expanded Scope of Infringing Activities (AUCL, Article 9)
The amended AUCL adds “computer trespass” as one of the inappropriate means to obtain trade secrets, in addition to theft, coercion, fraud and bribery. Further, it includes indirect infringement as an enumerated category of trade secret infringement, expressly making it an infringement for one to “solicit, seduce or assist others to obtain, disclose, use or allow a third party to use the trade secrets in violation of their confidentiality obligations or of the trade secret owner’s confidentiality requirement.” This is a significant change to the AUCL, and puts those who might contribute to or induce others to commit trade secret theft on notice of their potential liability.
- Clarified Who is Liable for Infringement (AUCL, Article 9)
The previous AUCL only referred to “business operators,” and thus it was unclear whether liability for trade secret infringement extended to non-business operators, such as former employees. The amended AUCL resolves this issue, expressly stating that, in addition to “business operators,” all individuals and entities may be liable for trade secret infringement. This is a welcome change as the majority of trade secret theft in China is committed by employees or former employees.
- Increased Liabilities for Infringement (AUCL, Article 17, 21)
The protection of trade secrets in China has tracked the development of patent protection, and, similar to patent enforcement, trade secret enforcement has been marred by low damage awards that fail to fully compensate trade secret owners for their loss. The amended AUCL addresses this by (1) increasing the cap on statutory damages from RMB 3 million to 5 million (approximately USD 740,000) and (2) introducing punitive damages in the amount of up to five times the regular damage award. For administrative liabilities, the amended AUCL added the confiscation of illegal gains as one of the administrative penalties, in addition to a fine and an order to cease the infringement, and increased the cap on administrative fines from RMB 3 million to 5 million. These changes, while not a panacea for trade secret theft, are a step in the right direction for more effective enforcement in China.
- Reversed Burden of Proof (AUCL, Article 32)
In China, where plaintiffs have the burden to prove each element of their claim and Western-style discovery is non-existent, trade secret infringement claims are challenging to prove. While some courts have tried to alleviate this by reversing the burden of proof in practice, this has not been incorporated into the law - until now. The amended AUCL expressly provides for the burden of proof to shift to the defendant when the plaintiff has produced prima facie evidence of infringement. In this situation, the defendant must prove the asserted trade secret does not constitute a trade secret under the law.
The defendant must also prove the asserted infringing act does not constitute infringement under the law if the plaintiff produces prima facie evidence of infringement and one of the following types of evidence:
- indicating the accused infringer has channels or opportunities to obtain the asserted trade secrets and the information used is substantially the same as the asserted trade secrets;
- indicating the asserted trade secrets have been used or disclosed, or are at risk of being used or disclosed, by the accused infringer; or
- otherwise indicating the asserted trade secrets are infringed by the accused infringer.
The above amendments to the AUCL, in particular the amendments increasing liabilities for and shifting the burden of proof to accused infringers, should be welcome news for trade secret owners in China. However, as mentioned above, the real test is how the amendments are implemented in practice. We are cautiously optimistic that China is up to the challenge.