Of NDA’s and Smoking Guns: China’s Evolving Landscape of Trade Secret Protection

A recent class at Fordham law school with seasoned IP lawyer Benjamin Bai, of Allen & Overy’s Shanghai office, brought home to me some of the differences in substantive technological secret protection between the US and China.  The SI cases in particular, where technical trade secrets were litigated in both the United States and China suggested that some major differences between the US and China are that US IP practices tends to emphasize access over similarity of technology, while Chinese practice tends to focus on similarity.  In this sense, Chinese courts may appear to be “misappropriator friendly,”  although a more accurate assessment may be that the courts are friendly to the party acquiring or developing proprietary technology.

According to Mr. Bai, Chinese courts may tend to analyze each claim of trade secret protection (in a manner similar to a patent litigation) and be less inclined to accept arguments from plaintiff that a given technology, overall, is similar to the technology claimed by a plaintiff.   In Benjamin’s estimation, the Chinese courts in the SI group cases may have been correct in noticing that small differences in the subject technology have significant implications.   China’s trade secret law specifically provides, in a judicial interpretation, that reverse engineering is a defense to a claim of trade secret misappropriation.  This “similarity” approach goes a step further by providing a non-infringement defense based on modifying misappropriated technology.

The notion of whether a technology is “similar” is evocative of the “doctrine of equivalents” (“DOE”) in patent infringement matters.  However, patent law cases generally do not accept notions of reverse engineering as a defense to infringement claims.    The DOE also acts as an incentive to early disclosure of a patented invention by insuring that a given technology receives an adequate breadth of protection.  Trade secret cases do not share similar policy motivations.  Trade secret law is intended to protect instead against unfair misappropriation.   An undue focus on similarity can obscure the unfairness of the underlying  misappropriation.  Indeed, one of the few cases in China that determined that similarity by itself was not a defense Chongqing Long Life Xinxieli Chemical Company Ltd vs. Hu Xiantang et al. (重庆长寿新协力化工有限公司等诉胡宪堂等侵犯商业秘密纠纷案) was based in part on the original fraudulent acquisition of the technology. The court noted in that case that “the illegal obtaining of trade secrets and its subsequent modification still is a trade secret infringement.” (本院认为,首先,被告东荣公司通过非法手段获取了涉案商业秘密,不管其是直接实施还是略加改进后再实施,其行为的侵权本质并未改变。即非法获取并实施商业秘密是侵权行为,对非法获取的商业秘密进行改进同样是侵权行为。) (2010)渝一中法民初字第00055号).

Evolving trade secret jurisprudence in China suggests that a plaintiff is more likely to succeed while the “gun still smokes” and before the technology has actually been applied.  The Shanghai Eli Lilly case  involved a preliminary injunction while there was still a smoking gun, with no need to consider “similarity.”   This “early stage” access case  is also reflected in the dispositions of Chinese and US law enforcement.  One Shanghai police official told the press in 2012 “Only [trade secret] cases in which there are no reported perpetrators tend to be complicated.”   A recent criminal conviction in the United States involving theft of Dupont/Monsanto seed suggests is another example of early stage / smoking gun misappropriation.

US companies when they become obligees under non-disclosure agreements may find themselves in a difficult position in an access-oriented jurisdiction, as their NDA’s can easily become smoking guns for claims of trade secret theft if a court has an access-oriented approach.  A recent example of such a case was the recent decision involving Caterpillar’s “Bug Coupler” technology, which involved disclosure of technical secrets from a supplier pursuant to an NDA, and a court’s determination that Caterpillar continued to benefit from such disclosure in its subsequent product development.  Caterpillar was ordered to pay damages of $73.6 million, the largest in Illinois history for a trade secret claim.

As US lawyers use increasingly stronger non-disclosure, non-use and non-circumvention type agreements in China, the risks exists that they will also be subject to similar agreements from Chinese companies seeking to co-develop technology or products.  In such instances, a US company may wish to ensure application of Chinese law, which might give it the benefit of a less access-oriented approach to technology development.

The differences in approach of China and the United States also may reflect differences in legal culture in both countries.  As trade secret cases are adjudicated by IP judges, these same judges may be unduly informed by patent notions of prior art (or public availability of trade secret information), as well as the doctrine of equivalents (in looking at similarity).   US federal and state judges are likely to have less specialized backgrounds.  Moreover, state judges and federal appellate judges other than the Federal Circuit, do not adjudicate patent matters at all and may therefore be less inclined to make these comparisons.  China’s employee-friendly labor laws also view non-compete agreements with some skepticism, including not utilizing doctrines such as “inevitable disclosure” with as much frequency as US courts.

My hope is that as the bilateral technology transfer environment develops, there is greater harmonization  in our trade secret regimes. smokinggun

 

 

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