More Encouraging News of Trade Secret Reform… But Is It Always Good for the Foreign Community?

James Pooley posted a great blog on IPwatchdog on the recently released draft judicial interpretation on trade secrets (the “Trade Secrets JI”).  In his blog, “Has China Finally Embraced Trade Secret Protection ”,  Mr. Pooley discusses aspects of the draft JI that embrace or expand upon US practices including: “combination secrets”, “reasonable efforts”, “indirect misappropriation”, “head start injunction” and apportionment of damages based on fault.   Mr. Pooley also notes that “this most recent pronouncement seems in some respects to go beyond what was required [from the Phase 1 Trade Agreement], and in those respects also seems to reflect an imprint of U.S. practices.“  I agree.

Individuals who expect all of China’s recent IP reforms to be in response to US pressure are, for the most part, likely to be pleasantly disappointed — for the most part.   As an example, the Trade Secrets JI also reflect China’s own evolving practices in trade secrets and other areas, including the availability of punitive damages, the emergence of a limited discovery regime, and implied obligations of confidentiality notwithstanding the non-existence of an NDA (see Contract law, Art. 43, now amended by the Civil Code).  Moreover, the evolving system in China for trade secrets will likely also benefit by the increasing competence of the IP tribunals and courts, including the “three in one” courts which combine civil, criminal and administrative IP jurisdiction.  As noted in another recent blog, China is also seeking to improve its criminal IP enforcement regime through more further development of the three-in-one system, and further development of evidentiary standards in criminal cases, as well as more active roles for prosecutors and police, among other measures.

While the ink is hardly dry on this Trade Secrets JI, China has since announced two other draft JI’s for public comment:  “Some Provisions on Evidence in Intellectual Property Litigation (Consultation Draft)” (the “Evidence JI”)  and the “Opinions on Increasing the Level of Sanctions for Intellectual Property Infringement (Consultation Draft)”(the “Sanctions JI”)《关于知识产权民事诉讼证据的若干规定(征求意见稿)》《关于加大知识产权侵权行为制裁力度的意见(征求意见稿)》(June 15, 2020)。 Comments are due by July 31, 2020.

Here is a quick summary of the trade-secret related provisions in the Evidence  JI:

Article 19 addresses granting protective order for evidence preservation purposes and provides that if a party is a subject of an evidence protection order and claims that a trade secret is involved, the party that requests the evidence protection order cannot participate in on-site evidence preservation procedures,but can engage an attorney, patent agent or another person with specialized IP knowledge (collectively “authorized representatives”) to sign the protective order.

Article 23 authorizes the appointment of expert appraisers to determine if a claimed trade secret consists of information in the public domain, or to determine the differences between the claimed trade secret and the alleged infringing technological information.

The third chapter of this JI regulates the exchange of evidence and includes several provisions regarding protective orders.  Article 31 grants the court authority to structure a protective order to limit access to authorized representatives.  Disclosure of information subject to protective orders shall be limited to the proceeding where the protective order was issued.  Sanctions may be imposed for unauthorized disclosure (Art. 32).  Consent to a protective order once given cannot be withdrawn.  The parties are also free not to engage in an exchange of information  (Art. 34).  Procedures are also established for challenging the secrecy of evidence, including providing rebuttal evidence and cross-examination of witnesses.  If a party succeeds in having the information considered as non-secret, it shall be considered as such during the proceeding (Art. 35).

Here are some provisions in the Sanctions JI:

Expedited proceedings are provided for serial infringers.  In addition, punitive damages should be imposed on serial infringers (Arts. 9, 20, 21). If actual damages are proven, they should be provided to the rights-holder (Art. 10).  Punitive damages should be imposed for their deterrent effect (Art. 13). Reasonable attorneys’ fees may be provided if there is a willful infringement and in a complex case (Art. 17). Attorneys’ fees and other expenses shall be compensated for in the case of malicious litigation where the right is unjustly obtained or there is not a substantial basis for its exercise (Art. 19).

Of particular note is Article 20: 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 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.

One may ask: why is theft of trade secrets for foreigners being singled out? Article 20 may be China’s response to cases brought against foreigners under the US Economic Espionage Act or similar foreign laws.   However, the EEA requires action “benefit[ing] a foreign government, instrumentality or agent” in 18 USC Sec. 1831.  Article 20 does not, however, single out these security concerns arising from state-drive trade secret misappropriation.

Fairness suggests that those engaged in IP theft on behalf of foreigners should also be afforded the opportunity to avail themselves of defenses otherwise available if a Chinese party were the beneficiary of the trade secret misappropriation. This is also consistent with the requirement under the TRIPS Agreement that punishment is proportionate to crimes “of a corresponding gravity” (Art. 61), and that judicial procedures are “fair and equitable” (Arts. 41 and 42).  The TRIPS obligations to afford national treatment (Art. 1) should also equally apply to a defendant in a proceeding – that he or she should not be singled out because of having worked for a foreigner.  A similar logic applies to the cases brought against the United States involving national treatment under our Section 337 remedy; a heavier defense burden had been placed on foreign entities compared to domestic entities. The provision could also lead to a de facto denial of national treatment for a foreign investor in China who finds that police or prosecutors may be less likely to initiate a case unless there is a trade secret theft that benefits an overseas entity where a heavier sentence could be imposed.  Moreover, this provisions flips US concerns on their head: it does nothing to address the concerns that the United States has expressed regarding trade secret theft in China of US-origin trade secrets, since this law addresses  thefts that were undertaken on behalf of a US entity, not from the overseas entity.

Once any country advocates for more deterrent penalties, it should consider that such penalties may also be applied to non-Chinese defendants, including one’s own nationals, which this provision could easily encompass through its focus on actions on behalf of foreign entities.  To the extent this provision is used to target foreign actors as well as actors for foreign entities, the TRIPS Agreement provides little in the way of guard rails to ensure equality of treatment in IP enforcement proceedings.  Many foreigners are already concerned, as they fear being denied authorization to leave China arising from allegations of civil violations.  In addition, there have also been several precedential IP cases over the years where foreign parties may have served as “guinea pigs” for more deterrent sanctions,  including such cases as Chint v. Schneider Electric [utility model patent damages award]; Qualcomm AML investigation [high antitrust penalty]  Veeco and Micron [preliminary injunctions involving semiconductor patents and unpublished judicial opinions as well as unpublished Customs seizure decision], and PRC v. Guthrie [criminal copyright cases brought against foreigners].

I believe that this draft of Article 20 may be sending the wrong signal.  Actions undertaken for foreigners and Chinese should be treated equally, with equivalent penalties and opportunities for probation.  Moreover, the concept of equality generally applies equally to any right.  If there are concerns regarding national security or difficulties in apprehending a party engaged in trade secret theft on behalf of a foreigners, those can be addressed through other measures such as through bilateral criminal justice cooperation, including mutual extradition arrangements and cooperation in gathering evidence. Such measures would also help restore trust between participating countries.  By providing harsher penalties for trade secret infringement benefiting foreigners, a potential precedent might also be established for any other case benefiting an overseas actor, notwithstanding that the principal concerns appear to be infringement occuring within China.

Note: this post was revised June 30, 2020 to address a reader’s concerns that Article 20 is directed to actions on behalf of foreigners and not simply by foreigners.

SPC’s 2020 IP-Related Judicial Interpretation Agenda

On March 19, 2020, the Supreme People’s Court’s Judicial Interpretation Agenda for 2020 (“2020 Judicial Interpretation Agenda”) 最高人民法院2020年度司法解释立项计划 was discussed and adopted by the SPC Trial Committee at its 1795th meeting on March 9, 2020. In 2020, there are 49 judicial interpretation (JI) projects, divided into two categories: 38 in the Class I Projects, which are required to be completed by the end of 2020; 11 in the Class II Projects, which are required to be completed in the first half of 2021. Generally speaking, the complete catalogue covers various fields such as the enforcement, security, pre-litigation property preservation, civil code, criminal cases, administrative cases and judicial appraisal. There are a number of  IP-related projects, all of which involve the recently established national Intellectual Property Court as a drafting and research partner with other SPC divisions or tribunals, and suggest an increasingly important role for this specialized court in IP policy making:   

Class I Projects (to be completed before the end of 2020) 

  1. Several Provisions on Evidence in Civil Procedures of Intellectual Property 关于知识产权民事诉讼证据的若干规定 [ As previously noted, this draft was discussed at a conference hosted by the SPC in Hangzhou in 2018. As Chinese courts experiment with more expanded discovery, evidence preservation and burden of proof reversals, clearer rules regarding the obligations of parties to produce evidence are becoming more critical. ]

 Organizers: Civil Adjudication Tribunal No.3, Civil Adjudication Tribunal No.1, Research Office, Intellectual Property Court 

  1. Interpretation of Several Issues concerning the Application of Law in the Trial of Administrative Cases for Patent Validity 关于审理专利授权确权行政案件适用法律若干问题的解释 [Note: A draft was issued for public comment in the summer of 2018; see the earlier blog].

 Organizers: Civil Adjudication Tribunal No.3, Intellectual Property Court 

  1. Interpretations of Several Issues concerning the Application of Law in the Trial of Trade Secret Secret Infringement Cases 关于审理侵犯商业秘密纠纷案件适用法律若干问题的解释 [Note: Regarding the Interpretations of Several Issues concerning the Application of Law in the Trial of Trade Secret Infringement Cases, it was also on SPC’s 2019 JI Agenda. As mentioned in Susan Finder’s November 26, 2019, blogpost, this judicial interpretation is flagged in the Party/State Council document (November, 2019) on improving intellectual property rights protection with a goal to “explore and strengthen effective protection of trade secrets, confidential business information and its source code etc. Strengthen criminal justice protection and promote the revision and the amendment and improvement of criminal law and judicial interpretations 探索加强对商业秘密、保密商务信息及其源代码等的有效保护。加强刑事司法保护,推进刑事法律和司法解释的修订完善.”]

Organizers: Civil Adjudication Tribunal No.3, Criminal Adjudication Tribunal No.1, Intellectual Property Court [Note the involvement of the Criminal Adjudication Tribunal is a positive sign for seeking an integrated civil/criminal/administrative enforcement approach] 

  1. Provisions on Several Issues concerning the Application of Law in the Trial of Pharmaceutical Patent Linkage Dispute Cases 关于审理药品专利链接纠纷案件适用法律若干问题的规定 [Note: this appears consistent with the requirement for adopting a patent linkage system in the Phase 1 IP AgreementAs we have discussed in a previous blog, the Pharmaceutical-Related Intellectual Property section of the Phase 1 IP Agreement requires China to adopt a patent linkage system, much as was originally contemplated in the CFDA Bulletin 55, but subsequently did not appear in the proposed patent law revisions of late 2018]

(New Project)

Organizers: Civil Adjudication Tribunal No.3, Case Filing Tribunal, Intellectual Property Court  

  1. Provisions on Several Issues concerning the Application of Law in the Trial of Civil Dispute Cases Arising from Monopolistic Conduct () 关于审理因垄断行为引发的民事纠纷案件应用法律若干问题的规定() (New Project)

 Organizers: Intellectual Property Court, Civil Adjudication Tribunal No.3

 Class II Projects (to be completed in the first half of 2021)

  1. Provisions on Several Issues concerning the Specific Application of Law in the Trial of National Defense Patent Disputes 关于审理国防专利纠纷案件具体应用法律若干问题的规定 (New Project)

Organizers: Civil Adjudication Tribunal No.3, Intellectual Property Court 

  1. Interpretation of Several Issues concerning the Application of Punitive Compensation for Intellectual Property Infringement 关于知识产权侵权惩罚性赔偿适用法律若干问题的解释

Organizers: Civil Adjudication Tribunal No.3, Intellectual Property Court  

  1. Interpretation of Several Issues concerning the Application of Law in the Trial of Civil Cases Involving Unfair Competition 关于审理不正当竞争民事案件适用法律若干问题的解释 (New Project)

Organizers: Civil Adjudication Tribunal No.3, Intellectual Property Court 

  1. Provisions on Legal Issues concerning the Specific Application of Law in the Trial of New Plant Variety Right Infringement Cases 关于审理植物新品种权纠纷案件具体适用法律问题的规定 (New Project)

Organizers: Intellectual Property Court, Civil Adjudication Tribunal No.3

 Judicial interpretations that are not marked as the “New Projects” have already been on the SPC’s Judicial Interpretation Agenda for 2019 or 2018. Several of them, including Several Provisions on Evidence in Civil Procedures of Intellectual Property (2019) and Interpretation of Several Issues concerning the Application of Law in the Trial of Administrative Cases for Patent Authorization and Confirmation (2018 and 2019), were to have been completed by the end of 2019 or 2018. 

Class I Projects JI No. 37 and Class II Projects  Nos. 3 and 11 all have prior effective versions that were issued in 2012 or earlier.  It is likely that these “New Projects” will be in the form of amendments, perhaps significant, to the previous JI’s.

 

Of Trade Secrets, Section 337, AUCL Reform and Evidence Production

When faced with trade secret misappropriation, the United States International Trade Commission can provide a forum for U.S. companies faced with unfair competition resulting from the misappropriation, even if the “theft” occurs entirely in China and/or a misappropriated process is used in China to manufacture a product imported into the United States.  In Certain Cast Steel Railway Wheels, Certain Processes for Manufacturing Or Relating To Same and Certain Products Containing Same, 337-TA-655, Amsted Industries Inc. which licensed certain confidential manufacturing technology to two Chinese companies, Datong ABC Castings Co. (DACC), and Xinyang Amsted Tonghe Wheels Company Limited (Tonghe), claimed the respondent, TianRui Group Co. Ltd., had poached employees from DACC and Tonghe and stolen their materials and other proprietary information sufficient to establish an identical, competing manufacturing line.  The ITC found a violation of Section 337 and issued a ten-year exclusion order.  On appeal of this landmark case, the U.S. Court of Appeals for the Federal Circuit held that the ITC has jurisdiction to reach trade secret misappropriation that occurs entirely abroad, so long as there is a nexus between the misappropriated trade secrets and the imported product.  Tianrui Group Co. v. ITC, 661 F.3d 1322, 1337 (Fed. Cir. 2011).  Interestingly, in that instance, the Chinese domestic authorities aligned with the United States.  Because railway wheels must be certified for use in China (as is the case in the U.S.), the Chinese Ministry of Railways declined to certify the Tianrui wheels until the U.S. matter was concluded.  The willingness of the Ministry of Railways to decertify Tianrui’s wheels while an ITC action was pending. This case stands as an important contra-factual that suggests the relationship between trade secret theft in China and Chinese domestic industrial policy may be overstated.

More recently, in Certain Rubber Resins and Processes for Manufacturing Same, 337-TA-849, the ITC found a violation of Section 337 based on trade secret misappropriation that occurred entirely in China.  In that case, the Chinese authorities had ruled that there was no trade secret misappropriation in both civil and criminal proceedings.  In Sino Legend Chemical Co. v. International Trade Commission, 623 F. App’x 1016 (Fed. Cir. 2015), the Chinese respondents sought to overturn the legal doctrines in Tianrui, arguing that the ITC does not have jurisdiction to reach misappropriation taking place entirely abroad and that the ITC should have deferred to the Chinese authorities as a matter of comity.  In a nonprecedential judgment, the Federal Circuit affirmed the Commission’s finding.  On September 30, 2016, the respondent in the ITC case, Sino Legend, filed a petition for certiorari asking the U.S. Supreme Court to overrule Tianrui, arguing that Section 337(a)(1)(A) contains no clear indication that it should apply extraterritorially and barring the importation of goods made using trade secrets misappropriated in China constitutes the impermissible regulation of conduct occurring overseas.  As an indication of how important this matter is to the Chinese government, in a rare filing, the Ministry of Commerce submitted an amicus brief supporting certiorari.  On January 9, 2017, the Supreme Court denied the certiorari petition.  Thus, U.S.-based companies can continue to turn to the ITC as a viable alternative for relief from trade secret misappropriation taking place in China.  Equally problematic, however, was the willingness of China’s judiciary to misconstrue the 337 decision as a victory for the Chinese defendants and to deem a lower court case as a model case while a related case was still pending on appeal to the court.  This case has also been an important counter-contra-factual indication regarding the relationship between trade secret theft in China and independence of the courts is not as rosy as the cooperation that the Tianrui decision might suggest.

How does this relate to legislative reform of the Anti-Unfair Competition Law in China?

China is currently revising its AntiUnfair Competition Law, which is the foundational law for trade secrets.  An important first step in addressing trade secret theft in China was the recognition that trade secret protection is a proper subject of the civil code in recent amendments to the civil code; i.e., that is not simply a matter of market regulation but of theft of a private property rightThe inclusion of trade secrets in the revisions to China’s general principles of the civil code was advocated in this blog, and also noted as appearing in an earlier draft.  The SPC, including Madame Tao Kaiyuan, were also involved in providing expert opinions on the draft.  The comments of the National Peoples Congress on  the recent proposed revisions of the AUCL specifically calls out the important role of the SPC in revising the most recent draft of the AUCL, and note that civil compensation should assume a primary role in enforcing the anti-unfair competition law generally (善民事赔偿责任优先、与行政处罚并行的法律责任体系。不正当竞争违法行为首先损害了其他经营者的合法权益,需要民事赔偿优先,调动其他经营者制止不正当竞争行为的积极性。)  The primacy of civil enforcement is also found in Article 20 of the draft law itself with a clarification that a business operator who violates the law shall “bear civil liability” and that civil liability shall take priority over fines (Article 30).  I believe these efforts reflect some of the momentum generated by the SPC’s highly useful recent report on civil enforcement of trade secrets.  Also of note is that at about the same time as that report, the US China Business Council outlined a number of the evidentiary problems in trade secret cases in its proposals for Chinese trade secret reform (2013), including burdensome notarization procedures, procedures which risk further disclosure of confidential information, difficulties in cooperation with the police, etc

The inclusion of trade secrets as a civil right was accomplished with civil code revisions adopted on March 15, 2017, with an implementation date of October 1, 2017.  (中华人民共和国民法总则)。  Article 63(5) includes trade secrets as a subject of intellectual property rights protection:

第一百二十三条 民事主体依法享有知识产权。知识产权是权利人依法就下列客体享有的专有的权利:    (一)作品;    (二)发明、实用新型、外观设计;    (三)商标;    (四)地理标志;    (五)商业秘密;    (六)集成电路布图设计;    (七)植物新品种;    (八)法律规定的其他客体。

Section 337 and the New Trade Secret Regime?

How do these reforms in trade secret litigation interact with US Section 337 procedures? Issues involving the production of evidence between the US and China can be at the heart of many IP cases but are especially critical in trade secret cases.   While some reforms have already been made in China, such as availability of preliminary evidence preservation measures in trade secret cases, the removal in the recent draft of the AUCL of a provision in an earlier draft that would have provided for a modest burden of proof reversal in trade secret matters is also troubling:

“Where the rights holders of trade secrets can prove that information used by others is substantially the same as their trade secrets and that those others had the capacity to obtain their trade secrets, those others shall bear the burden of proof to show that the information they used came from lawful sources.” (proposed Art. 22)

As the co-author of this blog, Jay Reiziss, points out in his attached presentation to my recent class at Fordham, difficulties in gathering evidence have often been critical to use of Section 337 proceedings.  US Administrative Law Judges have granted motions to use the Hague Convention, such as where a foreign government formally weighs in (Switzerland indicated that it would cooperate with such a request (Certain Sintered Rare Earth Magnets, Inv. No. 337-TA855, Order No. 8). However other cases have determined that Hague Convention procedures would not be timely due to compressed ITC schedules (Certain Hardware Logic Emulation Systems, Inv. No. 337TA-383, Order No. 65).  Because of the threat of adverse inferences, there have also been several instances where Chinese respondents have reluctantly permitted plant tours to accommodate discovery requests (Certain R-134a Coolant, Inv. No. 337-TA-623.  FlexsysAmerica v. KumhoTire U.S.A., 5:05-cv-156 (N.D. Ohio)  Issues involving obtaining timely production of evidence have also appeared in other civil cases, notably the Gucci/Tiffany cases in the Second Circuit.

Even if the AUCL may not provide enough support for evidence production in China, the SPC has identified several bottlenecks in cross-border adjudication of disputes, including “hearing cross-border cases–service of process to overseas parties; obtaining evidence crossborder; determining facts that have occurred abroad; determining and applying foreign law”, which suggest that future cooperation with US courts may also improve.   Hopefully, as China improves its mechanisms to obtain foreign evidence and if it takes more proactive stances towards cross border cases, towards allowing production of evidence China, and as it improves its civil system, foreigners will be less reluctant to bring IP cases, especially trade secret cases, in China. In the meantime, it appears that the ITC and U.S. civil actions will continue to play a very important role in driving evidence-based decisions on trade secret infringement involving China.

Coauthored by Mark A. Cohen and Jay Reiziss.  This blog represents the authors’ personal views only and should not be attributable to any client, employer or any third party.  Revised March 14, 2019 by Mark A. Cohen to improve style and clarity.

 

Peter Humphrey and the Uncertain Status of the Private Investigator

Private investigation firms are important for many aspects of commercial life in China, particularly given the weaknesses in China’s evidence gathering system and the high thresholds that exist for criminal investigations. PI firms conduct every thing from due diligence for investment projects, background checks on business partners and investigations on trademark squatters, counterfeiters and patent infringers.

Peter Humphrey and his wife Yu Jingeng, private investigators hired by GSK, were recently sentenced by a Shanghai court during a one day trial, which followed 13 months detention. According to a Reuters report, the sentences were for two and a half and two years, respectively, plus fines. Humphrey is being deported. Prosecutors charged that the couple had illegally obtained and sold more than 250 items of private information, including household registration data, real estate documents and phone records. Yu is quoted by Reuters as noting that “In other countries, we were able to conduct similar checks, including personal information and private transactions, legally through courts.”

Private investigation firms are a critical component of an IP enforcement campaign in China. Thankfully, according to noted anti-counterfeiting lawyer Joe Simone, the conviction was not for “illegal business operations”, which can carry a harsh sentence.  Ironically, illegal business operations is routinely employed in IP cases for illegal publications in lieu of the lesser offense of copyright infringement (Criminal Code Art. 225).   Joe notes that there was a 1993 Ministry of Public Security rule on the illegality of private investigation firms.   However, as this was an administrative rule it is of limited binding effect. Nonetheless the Humphrey case has led many private investigation firms to question whether their operations are legal.

The status of PI firms has been of concern to many companies and governments for some time. As I recall, private investigators have also been used for a variety of domestic purposes, including, predictably, marital disputes. Evidentiary burdens in Chinese litigation, including difficulties of compelling the production of evidence by an adverse party, can make PI firms a key component of an IP enforcement team

Here was the question that the US government asked China about PI firms two years after it joined the WTO, back in 2003:

79. We understand that China currently restricts the operation of foreign private investigation firms in IPR matters. At the same time, police and administrative authorities are frequently limited in their ability to gather evidence in criminal and administrative prosecutions, making private investigative firms even more important. Current thresholds for criminalization of counterfeiting and piracy, if applied to case initiation, create a high barrier for police or administrative agencies to refer cases to criminal prosecution, making the necessity of private gathering of information even more critical. Please advise what rules apply to the operations of such firms, as well as any plans to permit these firms to more actively assist China’s administrative, criminal and civil enforcement authorities (IP/C/W/414, 12 November 2003).

China responded to that question a year later by noting:

60. With regard to the issue of private investigating firms, [the Chinese side] said that the Ministry of Public Security of China was taking active steps to consider it. However, there was still no new regulation being issued. (IP/C/34, 9 December 2004

Prof. Don Clarke of GW law school has collected the weibo transcripts for those who want to follow this issue further.

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