Treating the “Foreign” Differently in Trade Secret Enforcement

Chinalawtranslate has translated the second reading of the Criminal Law amendments (XI) 中华人民共和国刑法修正案(十一), including proposed changes to the trade secret provisions of the Criminal Law.  The Chinese is available here.  The NPC Observer is tracking the passage of these amendments here.  Comments were due by November 19, 2020.  The second reading provisions on trade secrets did not change from the first reading, which I discussed here.

Both the proposed amendments to the Criminal Law and the administrative rules on trade secret enforcement establish differential treatment for trade secret enforcement when a foreign element is involved. The proposed Criminal Law provisions provide enhanced penalties when a trade secret theft is undertaken on behalf of a foreigner.  Article 3 of SAMR’s  draft proposed trade secret enforcement rules offer administrative enforcement only for Chinese trade secrets.

For readers’ convenience, here are the excerpts from Chinalawtranslate:

“17. Amend Article 219 of the Criminal Law to read:

Where any of the following acts violating commercial secrets are committed and the circumstances are serious, a sentence of up to three years imprisonment or short-term detention is to be given, and/or a fine; and where circumstances are especially serious a sentence of between three and ten years imprisonment is to be given and a concurrent fine.

(1) Obtaining commercial secrets by theft, enticement, fraud, intimidation, electronic trespass, or other improper tactics;

(2) Disclosing, using, or allowing others to use a rights holders’ commercial secrets acquired by tactics provided for in the previous item;

(3) Disclosing, using, or allowing others to use commercial secrets in their possession, in violation of confidentiality obligations or the rights holders’ demands for preserving commercial secrets.

Where one clearly knows or should know of acts listed in the preceding paragraph, but obtains, leaks, uses or allows others to use commercial secrets, it is viewed as infringements of the commercial secrets.

The Rights-holder as used to in this article refers to the owners of commercial secrets and those permitted to use commercial secrets by the owner.

18. Add one article after Article 219 of the Criminal Law to be Article 219-1:

Where commercial secrets are stolen, spied upon, sold, or illegally provided to overseas institutions, organizations, or persons, a sentence of up to 5 years imprisonment or short-term detention is given, and/or a fine; and where the circumstances are serious, the sentence is to be 5 years or more imprisonment and a concurrent fine.”

SAMR’s Draft Trade Secret Rule: An Unchartered Step Forward?

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

SAMR Releases Draft Trade Secret Rules for Public Comment

On September 4, 2020, the State Administration for Market Regulation (SAMR) released Draft Trade Secret Protection Rules for public comment  [商业秘密保护规定(征求意见稿)] including an accompanying explanation. Comments are due by October 18, 2020. 

SAMR announced its intention to draft these rules in its 2020 legislative work plan.   As with the earlier rules that these supersede, they are directed towards handling of trade secret administrative enforcement by SAMR.  The earlier rules had been criticized for only providing protections for Chinese citizens and not foreign nationals in Article 2, which provided that  “the term ‘rights holder’ in these regulations refers to citizens, legal persons or other organizations that have ownership or use rights over trade secrets according to law. ” 本规定所称权利人,是指依法对商业秘密享有所有权或者使用权的公 民、法人或者其他组织.  This apparent discrimination against foreigners was identified to the Chinese delegation at the WTO in 2002. See WTO, IP/C/W/374, Sept. 10, 2002, “Review of Legislation” at p. 44.   These new rules appear to be far more comprehensive, and do not carry the same regrettable language about citizens. 

Statistics generally show a low level of utilization of the trade secret administrative enforcement mechanism.  In 2011, for example, the State Administration for Industry and Commerce yearbook (predecessor agency to SAMR), revealed that SAIC had only brought 57 administrative trade secret cases, with 2, 579 RMB in average fines (about $390.00) (SAIC Yearbook, at p. 855).  Notwithstanding this low level of utilization of the administrative enforcement system and discriminatory language in the earlier rules,  improving administrative enforcement of trade secrets was agreed to bilaterally in the 2012 Strategic and Economic Dialogue, by which China committed to place trade secret protection in the “2012 Annual Work Plan of the State Council Leading Group on Intellectual Property Enforcement.”  About that time, the State Council Leading Group had been especially active in coordinating and improving administrative enforcement.  One problem posed by this commitment is that trade secret enforcement is especially not susceptible to the kind of investigations of virtual or physical markets that SAMR (or SAIC) have historically excelled in.  It is therefore not surprising that despite the commitments by China in the Phase 1 Agreement on several IP-related special administrative campaigns involving various markets, the trade secret provisions focus on civil and criminal enforcement.  Perhaps the caseload will increase with the additional powers granted to SAMR and the increased focus on trade secret enforcement by China.  However, many people, including myself, believe that trade secret protection may be best handled by the courts.  Moreover, if the subject of the trade secret infringement involves technology, the IP courts may be best equipped to handle those matters.

Aaron Wininger has written a useful general overview of the draft which is available here.