As previously discussed, SAMR released a draft trade secret protection rule for public comments on September 4 (the “Rule”).  Comments are due October 18, 2020.  I have attached here a draft translation of the Rule. 

The Rule supersedes prior SAIC rules on trade secrets enacted in 1995 and amended in 1998. Like the earlier rules, this Rule is primarily directed towards administrative enforcement of trade secrets.   The Rule does drift into the jurisdiction of many other agencies and laws, many of which are not within the jurisdiction of SAMR.

A noticeable element of the Phase 1 Trade Agreement with China of January 15, 2020 is that it failed to require China to take any administrative measures or campaigns against trade secret infringement, although it did request administrative measures in other areas.  This omission may not have been an oversight.  My hope is that the negotiators may have recognized that a JCCT commitment made between the US and China in 2013 which obligated China to take administrative enforcement measures including “adopt[ing] and publish[ing] an Action Program on trade secrets protection and enforcement” accomplished little due to the inherent weaknesses at that time in trade secret administrative enforcement and the unwillingness of foreign companies to come forward with administrative trade secret complaints. It is unclear to me whether SAMR can address these institutional challenges due to the inherent sensitivity of most trade secret cases.

Broadly speaking, the Rule seeks to further expand and legitimize administrative enforcement as a viable vehicle for trade secret enforcement.  However, ambiguities in the Rule, uncertainties over jurisdictional issues, as well as uncertainty around SAMR’s available resources may limit its effectiveness.  The ambiguities begin with the title to this document: it is nominally a “rule” (gui’ding) rather than a State Council enacted regulation (fagui). Under the Law on Legislation, this will limit the effectiveness of the Rule in governing other agencies’ actions or directing judicial actions.  Another overarching concern is how the Rule aligns with judicial interpretations and other guidance from the courts on trade secret infringement.  These documents were previously discussed here.

The earlier rules overtly discriminated against foreign natural persons by only providing protection for Chinese citizens.  This draft Rule does not significantly improve on that discriminatory provision.  It only offers protection for Chinese trade secrets (Art. 3).    

Foreign companies who have generally preferred civil or criminal remedies for trade secret infringement may consider initiating administrative cases as an alternative or precursor to such lawsuits owing to such factors as their greater speed, their ability to gather and preserve evidence, available of administrative injunctions and the support that may be given by local authorities.  However, I believe that China’s IP courts have the greater capacity to handle technologically complex issues, have not been burdened by a record of statutory discrimination against foreigners, and may continue to be the preferred destination for resolution of most cases. 

Here are some other concerns:

Art. 5: The rule encompasses technical information, business information and other commercial information.  This may reflect a commitment made by China in the Phase 1, footnote 1 defining trade secrets.  The Phase 1 Agreement also includes “electronic intrusions” within the scope of trade secrets.  To me, an electronic intrusion is an act, not a type of information.  See Article 9 of the Anti-Unfair Competition Law revisions (AUCL), which defines electronic intrusion as an infringing act.

Art. 7: Defines “commercial value” as arising when an intruder tries to obtain a trade secret by “improper means.”  To me this is a method of conduct, not something that defines a value.  Perhaps this language is intended to address a situation where a “luckless infringer” mistakenly believes a trade secret has significant value, as was the case in T-Mobile v. Huawei dispute over the “Tappy” robot, where no damages had been found by the jury.  As in the criminal investigation of Huawei in the United States, the impact of this provision may be to permit a public remedy (administrative enforcement) where a private civil remedy was lacking due to no damages.

Article 8: Lists confidentiality measures, any of which may be held to be sufficient to protect confidential information.  This seems too lax to me: the adequacy of the protective measures should be based on the type of information and how it is used, not on whether there is one adequate measure in a range of possible measures to address some of the risks of misappropriation.

Article 10: Sets the criteria for determining ownership of a trade secret.  Trade secrets are a subject of the civil law (Article 123 of the General Provisions of the Civil Law, 中华人民共和国民法总则).  Questions about employee ownership of IP rights have been hotly debated in China  I believe it is inappropriate to try and resolve such questions in a administrative rule making.  SIPO had previously attempted such an effort involving all IP rights, which involved extensive interagency coordination.  Given the complexity of the issue, and the close relationship between trade secrets and other IP rights,  a high level agency or party effort, or a coordinated inter-agency process involving the courts is the appropriate way to address these issues. 

The Rule also does not fully contemplate the impact of other statutes and regulations on determining what constitutes reasonable efforts to protect a trade secret, including cybersecurity laws, company laws, labor laws, contract law, technology licensing regulations and other national interests.  See also Article 14(3), Article 18 (regarding privacy laws) and Article 32 (regarding compulsory licensing of trade secrets) and Article 37 (state secrets).

Article 12: Refers to business “operators” rather than rightsholders.  This addresses Phase 1 Agreement concerns (Art. 1.3) that all natural and legal persons should be considered business operators.  The change first appeared in Article 2 of the AUCL.  It would ultimately be simpler if references to “business operators” were eliminated entirely, as it leaves open the question of under what circumstances an individual is a business operator and unnecessarily underscores the lineage of the AUCL as an unfair competition law rather than an IP law.

Article.13: The definition of what constitutes “disclosure” of a trade secret leaves open a catch-all “etc.”  The draft would benefit by specifically enumerating the unauthorized publication of a patent as constituting an unauthorized use of a trade secret.  Allegations that individuals have misappropriated trade secrets from the United States and used the underlying information to file patents have been made in US litigation.

Articles 18:  Trade secret complaints are lodged with the county government.  There are over 2,800 county level administrations in China. This process was dictated by the AUCL revisions (Art. 4) and may ultimately represent a huge expansion in administrative enforcement of trade secrets, similar to the expansion of administrative patent enforcement and the contemplated expansion in administrative copyright enforcement in proposed copyright law revisions. The expansion could pose risks of abuse by well connected local companies suing their competitors for trade secret theft.

An exception regarding filing of trade secret complains exists if the complaint involves a foreigner.  The complaint must then be filed at the provincial government level (Art. 38). 

Article 19: Potentially broad exceptions to trade secret protection are established by the Rule, including for reverse engineering, shareholders accessing company information, and disclosing information in the public interest.  The Rule does not limit these exemptions by requiring that any confidential information that is obtained is appropriately protected or limited.

Art. 24: The Phase 1 Trade Agreement requires a burden of proof reversal in civil trade secret proceedings (Art. 1.5) as does the AUCL (Art. 32).  This Article contemplates a similar mechanism for administrative enforcement proceedings.   

Art. 29: SAMR may mediate trade secret disputes and arrange for compensation.  This provision, along with other provisions on referring matters to civil or criminal litigation, raises issues about the type of coordination that will be instituted among civil, criminal and administrative enforcement.  As SAMR fines are a means of punishing infringement, a better approach might be to let judicial institutions mediate disputes, as they are often engaged in mediation in the context of on-going litigation.    

Art. 31: Another issue of enforcement coordination involves high civil fines.  Such fines may be used to substitute for criminal enforcement or could reduce the availability of civil compensation, and should be avoided in such circumstances.

Art. 33: A good faith infringement defense is provided where the infringer can show that it has paid reasonable compensation. This may open up a window for fictitious or under-valued contracts to minimize trade secret litigation exposure.

Article 36: This Article requires that state organs not reveal trade secrets.  This is also required by Article 1.9 of the Phase 1 Agreement.  However, it is questionable whether SAMR has jurisdiction over the behavior of other agencies. This provision is welcome, but may also be another legislative overreach.

Please send your comments or corrections on this blog and my draft translation