China IPR

Proposed Amendments to the Criminal Code on Trade Secrets

Amendments to the Criminal Law regarding trade secret theft have been announced by the NPC.   A new provision is proposed to be added to the end of  Article 219 of the Criminal Law:

“Whoever steals, spies, buys, or illegally provides commercial secrets to overseas institutions, organizations, and personnel shall be sentenced to fixed-term imprisonment of not more than five years or detention, in addition to being fined or with a single fine; if the circumstances are serious, the penalty shall be more than five years’ imprisonment with fines.”

This provision complements Article 20 of the Opinions on Increasing the Level of Sanctions for Intellectual Property Infringement (Consultation Draft),  as well as Article 10 of Interpretation on Several Issues Concerning the Specific Application of Law in Handling Criminal Cases of Infringement of Intellectual Property (3) (Draft for Comment)  which provide that “ Serial infringers of IP rights, as well as those who steal commercial secrets for foreign agencies, organizations or individuals, shall be subject to severe penalties according to law and generally no probation shall be applied” (为境外的机构、组织、人员侵犯商业秘密的情形,依法从重处罚,一般不得适用缓刑.  ).  The official explanation of the draft criminal code revision notes that the changes are intended to address “commercial spying”.

These changes have also been discussed in a blog by Aaron Wininger, and a recent article in the South China Morning Post, which called the proposed amendments a “tit for tat” provision in retaliation for US economic espionage cases.  Although this provision may have been drafted to retaliate against the United States, the structure and purpose is different from the Economic Espionage Act of 1996  (EEA)  18 USC Sec. 1831.  The EEA defines  “economic espionage” as the “theft or misappropriation of a trade secret with the intent or knowledge that the offense will benefit any foreign government, foreign instrumentality, or foreign agency.”  A casual reading may suggest that the EEA is similar to proposed amendments to Section 219 in that it covers any trade secret theft that would benefit a foreign “instrumentality” or “agency.” This is an incorrect readingThe definitions of a foreign agent or foreign instrumentality leave no doubt that the individual or entity must be the agent of a foreign government, 18 USC Sec. 1839(1).  In addition, a second provision of the EEA criminalizes the more common commercial theft of trade secrets in foreign or instate commerce regardless of who benefits, 18 U.S.C. § 1832.

Importantly, the US Sentencing Guidelines do provide for an enhanced penalty if “ the offense involved misappropriation of a trade secret and the defendant knew or intended— that the trade secret would be transported or transmitted out of the United States,” or “ the offense would benefit a foreign government, foreign instrumentality, or foreign agent.”  The US Sentencing Commission has stated that enhanced penalties are needed to address “the transmission of stolen trade secrets outside of the United States [which] creates significant obstacles to effective investigation and prosecution and causes both increased harm to victims and more general harms to the nation. With respect to the victim, civil remedies may not be readily available or effective, and the transmission of a stolen trade secret outside of the United States substantially increases the risk that the trade secret will be exploited by a foreign competitor.”

The motivations for China’s enactment of this amendment does not appear to be issues of private international law.  As drafted, the provision retaliates against companies and individuals rather than foreign governments.  It is conceivable, as the SCMP article implies, that Chinese companies that have been targets of EEA actions may desire this tool to exact greater leverage in their US cases.   Nonetheless, it is worth discussing how private international law issues are not very germane to this amendment.  Individuals can be prosecuted overseas with greater ease than the government.  Hence, there is no need to target individuals.  Of course, if the basis of China’s adopting this provision were to address difficulties in bringing cases overseas, more effective judicial and law enforcement cooperation between our countries could help reduce the need for China’s enactment of this provision and strengthen mutual trust.   For example, the United States government has sought on numerous occasions for over a decade to solicit cooperation from Chinese law enforcement to address transborder IP crimes, with limited success through the Joint Liaison Group between law enforcement agencies, as well as through trade-related dialogues. See Tools to Address US-China Economic Challenges, at 98.  Moreover, the need to address judgment-proof defendants in trade secret cases that are located overseas is less pressing for Chinese plaintiffs.  Money judgments for trade secret cases are likely enforceable in the United States. US money judgments for a trade secret theft are not yet similarly enforceable in China.

The greatest risk presented by this provision may be that it could also have a further chilling effect on a range of commercial conduct by foreigners in China.  It may encourage domestic litigants to search for a foreign party in otherwise domestic litigation in order to exert additional leverage on the litigant.   As the crime is also now considered more serious, police and prosecutors may also commit more resources to the investigation and prosecution of foreigners.  Foreign companies investing or collaborating with Chinese counterparts may also now discover that an allegation of trade secret theft is more common in order to exact a commercial advantage in a commercial divorce from a foreign partner, such as when a prospective investment in a Chinese company is rejected, or there is a dispute over ownership of a patent or other technology.   If enacted as drafted, foreign companies may wish to consider adopting defensive measures, including revising their NDA’s and other agreements with Chinese parties, as well as implementing more stringent controls to minimize the risks of such allegations.

The United States has long sought revisions to China’s Criminal IP Laws.  In 2007, it filed a WTO case against China to lower existing criminal thresholds on copyright and trademark crimes.  Additional reforms are also contemplated by Section I of the IP Chapter of the Phase 1 Trade Agreement.

Comments on this provision are due by August 16, 2020.

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