Trade Secret matters have become a hot bilateral topic, involving some high profile companies, like Sinovel, and engagement at the level of the Secretaries of State and Treasury, in their Strategic and Economic Dialogue. During the past year, we have also had the Tianrui v. USITC case at the Court of Appeals for the Federal Circuit, confirming the application of the US International Trade Commission’s jurisdiction to cases arising in China.
I thought I would look into what some of the empirical sources of information have to say about litigating trade secret matters. Is it as bad as people think?
One of my favorite sources of information is the CIELA IPR database. It currently consists of 19699 cases from 115 courts over the past four years (www.ciela.cn). CIELA is accessible in English and offers quick statistical snapshots. For a quick snapshot of the problem, I made comparisons of trade secret infringement cases with patent, trademark and copyright infringement cases.
The data shows that trade secret cases are the least likely to succeed of any civil IP litigation in China. In addition, trade secret cases are least likely to result in an injunction, take relatively long to litigate, and have one of the lowest percentages of damages awarded in the relation to damages claimed. In sum, the CIELA data suggests that trade secret litigants may be having a very difficult time in the civil courts in China.
CIELA reports 209 trade secret infringement cases. There was an 11% chance of a complete “win” in these cases in the courts. The database records no complete win for a trade secret owner in 2006 or 2007. In addition, the average case duration was 8 months – which is as lengthy as patent cases. Injunctions were awarded 50% of the time. The relatively low incidence of trade secret infringement cases (0.1% of the CIELA database) also underscores the difficulty that litigants have in bringing successful cases.
Compare trade secrets to the 7,280 copyright cases – total win rates averaged 37% in copyright- over three times as much. The average length of the case was five months. Injunctions were granted about 77% of the time. Other rights are also better than trade secrets. Looking at CIELA’s 2,267 trademark cases, win rates averaged 33%, proceedings lasted six months, and injunctions were granted 85% of the time. Finally, for the 3,342 patent cases, win rates averaged 32%, average duration was 8 months, and injunctions were granted 78% of the time.
The damages awarded and damages claimed also reflect what is likely a higher frustration by the plaintiffs. Trade secret and copyright plaintiffs had low levels of damages granted to damages claims (18% and 16%). By comparison, patent litigants were the most successful in receiving damages as a percentage of the amounts claimed (29%). However trade secret litigants received damage awards that were among the highest of any successful litigation (132,199). Patents were second highest (118,691). The data suggests that trade secret cases are lengthy and complex (like patents), that plaintiffs bring cases when they see great harm being caused to their right (high claims), yet they have a low rate of compensation. Since injunctions are frequently the end game for foreign-related IP litigation, the cases also suggest that foreigners may be particularly frustrated in Chinese trade secret litigation.
You don’t need to stop with CIELA to get a sense of how trade secret litigants are faring in Chinese courts. A June 28, 2012 report of the Shanghai/Pudong Basic Court analyzed 62 trade secret cases from 2002 – 2011 in their jurisdiction. According to this report, only two cases resulted in a complete success, 10 were a partial success, and in 16 the plaintiff completely lost. The reasons for the losses included: difficulties by the plaintiff in protecting the trade secret, an unclear understanding by the plaintiff of what constitutes a trade secret, an inability to satisfy the statutory criteria for a trade secret, a lack of understanding of the relationship between trade secrets and non-competes, i.e., that not all employees that work for a competitor are revealing a trade secret, and difficulties in satisfying the evidentiary burdens.
Another on-line resource, a private website, of unknown provenance to me with the dubious name “ipr007” purported to analyze 2010 trade secret cases. The data that was collected for this site demonstrates that most trade secret theft arises out of the employment context, with technical information being a primary target of theft. Cyber intrusions were an insignificant proportion of the total cases. According to this site, in 2010, 78.25%, of the trade secret cases involve employee theft of trade secrets, and 21.75% involve theft from outside of the company. The motivations for employee theft, included: 59.40% who wished to use the trade secret for themselves, 28.06% who went to work for another company, 11.95% who tried to sell or license, and 0.60% who sought revenge. The breakdown by industry was as follows: Manufacturing: 66.89%; IT Sector: 9.22%; Services: 8.53%; Other: 13.36% In terms of the type of trade secrets stolen, technical information constituted 56.73% of the cases, while management information (such as customer lists) constituted 42.98%。 Regarding methods of acquisition of trade secrets, the following methods existed: internal employee theft: 80%; purchase, profit or assisting: 14.50%; and cyber intrusions, which were only 0.30%. This data, if credible, makes a compelling case for better internal management of confidential information.
The State Administration for Industry and Commerce has administrative enforcement authority for trade secrets. The official data for 2008-2010 shows that the administrative system remains quite weak in addressing trade secret infringement. It is rarely used, and is primarily used against individuals and small companies.
Cumulatively, the data shows that there were 174 trade secret cases out of 110,896 cases involving the Law to Counter Unfair Competition, or about 0.2% of the total. In addition, the data shows that average fines were 11,624 Yuan, and only 7 cases or about 4 % of the trade secret case were referred to criminal enforcement. Like the civil system, the administrative system also appears to be frequently used to address employee theft of confidential information. Precisely one third, or 58 of these 174 cases involved individual respondents; 24 involved private companies (14%) and 23 cases involved individual businesses (13%). There were no cases where a state owned enterprise or publicly held company was named as a defendant in an administrative action.
Interestingly, the SAIC data also is rather similar to New York State criminal IP enforcement data, which also shows a very low incidence of state enforcement against unlawful use of secret scientific material (NY Penal Law 165.07), particularly when compared to trademark and copyright-related crimes. These cases do not present the same profile as raiding a counterfeit market – where infringement may be much easier to prove.
There are several efforts underway to improve trade secret enforcement. At the recent SED in 2012, the United States and China stated that they “affirm that the protection of trade secrets is an important part of the protection of intellectual property rights, and are to intensify enforcement against trade secret misappropriation.” China affirmed that enforcement against trade secret misappropriation is “to be included in the 2012 Annual Work Plan of the State Council Leading Group against [infringement of] Intellectual Property [and manufacture and sales of counterfeit and substandard goods] “. The Chinese language was: “中方表示，全国打击侵犯知识产权和制售假冒伪劣商品工作领导小组2012年年度工作计划将包括针对商业秘密不正当使用的执法行动。”
Importantly, the recent amendments to the Civil Procedure Law may now provide procedures for preliminary evidence and asset preservation as well as enhanced provisions for noncompliance with evidence production orders, which can significantly enhance prospects for success in a civil trade secret case.
There are other efforts under way to look at improving trade secret enforcement through legislation or improved administrative or judicial practice. Perhaps the September 12 regulations from the State Council on improving administrative coordination with criminal enforcement in intellectual property matters will also help systemic challenges in gathering evidence and meeting evidentiary thresholds for a successful trade secret case.
One area of reform that would likely help in handling of trade secret cases in China would entail recognition of the doctrine of “inevitable disclosure” in trade secret theft matters, which should improve the availability of injunctive relief and prevent harm.
Issues involving management of trade secrets as well as infringement and compensation for trade secret theft are also the subject of various local rules on trade secret protection. However, there is also reason to believe that the current legal environment for trade secret protection is already too chaotic – with too many ministries and local governments enacting their own regulations and guidance documents. The complexity of the local environment also led USG to ask the Chinese delegation about some of these local rules shortly after WTO accession; the situation today may be even more complicated.
In addition to the Tianrui case, these issues can also have international implications. For example, in the 90’s, I once served as an expert witness in a US litigation where the question of which local rule governed became an important “sticking point” in determining whether a US employee of a joint venture was bound by a non-compete agreement under Chinese law, which might inevitably lead to disclosure of confidential information. Foreign pharma companies and other regulated industries also continue to be concerned about handling of their confidential information by Chinese regulatory authorities, including providing clinical data exclusivity pursuant to TRIPS 39.3.
Importantly, none of the case analyses to date looked at industrial policy motivations for trade secret theft: acquiring information to satisfy national or local industrial plans or targets, particularly for state owned or state subsidized companies, whether or not they are directed by the State to do so. Some further research in this area would be helpful. There have certainly been high profile unethical behaviors in the past by Chinese R&D institutions to satisfy state demands – such as the research scandal involving the Hanxin digital signal processing chip, which led to the dismissal of Chen Jin, head of Shanghai Jiaotong University’s Microelectronics School in 2006. Regardless of what any empirical data shows, if a foreign company does own information that is a subject of China’s various technology plans, it would be well advised to be extra-cautious in how it handles this information in China.
Some would argue that much of the difficulty encountered in trade secret cases is due to difficulties in compelling production of evidence and lack of adequate deterrence in the civil system. The data and legislative responses do, however, suggest that trade secrets are a rapidly evolving area where improved protection is needed for Chinese and foreign rights holders.
Fordham is currently planning on holding a seminar on trade secret infringement as part of the second annual “China Day”, on April 10, 2013 – one day before the annual Fordham IP Conference. Stay tuned for details.
An interesting post by Jim McGregor on black boxing of technology by multinationals and the culture of mistrust in technology exchange between China and MNC’s: http://jamesmcgregor-inc.com/2012/11/10/distrust-between-multinationals-and-chinas-government-can-be-deadly/.