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 from them 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 dometic 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 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 respondents sought to overturn 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 cour

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 NPC comments 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 report, focusing on civil enforcement of trade secret.  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 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 coauthor 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 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.

 

 

 

 

 

 

 

US-China Entertainment Law Conference Highlights Business and Legal Developments

huayi

(From a presentation by Lisa Wang, General Counsel, Huayi Brothers Media Corporation)

The following is a readout of the US-China Entertainment Law Conference held at Loyola Law School of Los Angeles on November 2, 2016.  A list of the speakers is found at the end of the blog.  The program was co-hosted by USPTO and Loyola Law School.

Industry Trends:

 Although there have been several notable legal developments in entertainment law in China, the most dramatic changes have been in the market.  China is now the world’s second largest market for theatrical films, after the United States.  While box office revenue and attendance are down in the United States for motion pictures, China has experience incredible growth, with box office revenue nearly 50% in 2015 compared to 2014.   China will likely experience slower growth in 2016, and may enter a more sustainable rate of growth thereafter.   The industry is adapt to the increased importance of China through changing content to have wider appeal and including China in marketing and business development plans.   

Among the major China players, Wanda is now the largest owner of theatres in the world.  It acquired Legendary Pictures in a $3.5 billion media deal.  Tencent is the world’s largest purveyor of of videogames, with 4.2 billion USD in global revenues in 2015.  It is also the first ranked publisher on IOS and Apple app stores.  The Chinese market had 489.2 million video game users in the first half of 2016, with a growth rate of 30.1 percent compared to the first half of 2015.   Importantly, Chinese consumers now accept paying a fee for using online videogames.

 The investment trends for films from China include more direct investment in the United States and Europe, more collaborative production, and more local financing, especially for shows and including both television production and online productions.   Box office revenue will likely continue to grow, and online video will continue to disrupt ticket prices.  

Prof. Seagull Song of Loyola noted that in 2015, foreign films captured five of the top ten grossing films in China.  Market access restrictions are still impeding the market, and that the China market is still underperforming for its size.  However, with respect to market access restrictions, the dean of the Beijing Film Academy predicted that the current quota on foreign films is also likely to be relaxed, but that this relaxation is not likely to have much impact due to the preference of the public for locally made films.  

Regarding the on-line environment for content, Prof. Robert Merges of UC-Berkeley suggested that as platforms affect the distribution of content and provide increasing vertical integration, maintaining competition among the limited number of platforms is likely to become more difficult.  With vertical integration, Merges predicted that copyright is likely to become less important in China.  Branding will instead become more important to develop loyalty to a platform that provides a variety of content and services.   In addition, the development and ownership of data originating from platform services will become critical to platform success.

Taking a different approach, Prof. Eric Priest of the University of Oregon addressed the question of what happens when copyright is harder to enforce such as in the online environment.  With changing technologies, copyright allows its owners and creators to access new markets as they are created, providing them with some leverage with intermediary platforms, and helps stabilize the market for content creation by creating multiple revenue streams.  LeTV is an example of a company in China that began driving new copyright norms by investing in licensing of copyrighted content around 2009 and 2010.   The theme of a diversity of licensing revenue streams in addressing new markets and new technologies was later underscored by Shira Perlmutter of USPTO, who also look at trademark rights derived from copyrighted content in her key note speech, while also underscoring many of the continuing enforcement challenges foreign rights holders face.

As an example of the competitive challenges faced by copyright owners, Priest cited the example of ring back tones for music.  Seventy percent of China’s huge netizen population consume music.  However, most are not paying for this music – except for cell phone ring back tones.  Gross revenues received by mobile cell companies for ring back tones were nearly as high as gross revenue for the music industry in the United States.  However, the music industry received a paltry 105 million USD for its content from Chinese cell service providers compared to the 4 billion that was generated.  Thus, Priest’s discussion to a degree validated Merges’ discussion regarding how competition and integration were becoming increasing concerns.

IP Challenges:

Prof. Song gave a brief presentation on some of the top entertainment cases in areas such as defamation, ideas/expression dichotomy, merchandising rights, and first look rights of publishers.

In trademark, several speakers discussed the Kung Fu Panda / merchandising right case, which has also appeared in this blog.  Not all speakers were in favor of this modest trend of creating a new “merchandising right.”  In the United States, the issue was first addressed by our courts and later adopted into amendments in the Lanham Act which look at likelihood of confusion based on misleading endorsement or sponsorship of a product or service. (Trademark Law Revision Act of 1988 – concept of “confusion as to the sponsorship”), as well as the Federal Trademark Dilution Act of 1995 (protecting famous marks against either the blurring of their distinctiveness or the tarnishment of their reputation caused by unauthorized uses of identical or similar marks not solely on related goods but also on unrelated goods.)  In the United States case law requires a case by case analysis, particularly for unrelated goods and services, where the plaintiff can show a likelihood of confusion as to “sponsorship.”  Cynthia Henderson of USPTO underscored that in China, there may be a greater need for a merchandising right because of rampant bad faith filings,  lack of flexibility under China’s first to file system, lack of protection for lesser known marks, and difficulties in addressing infringements for protection across different classes of goods and services.

Prof. Zhang Ping. from Peking University, discussed the various possibilities for protecting the title of a work under Chinese law, including trademark protection, copyright protection and unfair competition.  Trademark protection in her view, could be deficient since  “in [the] real world, one does not pursue trademark protection for the title of a work until this work gains certain commercial value.”  In such instances, unfair-competition protection might be pursued as a supplemental remedy.   Prof. Zhang gave the example of the famous Wahaha mark (1989), which was originally the title of a popular song (1954).  A court determined that the creator of the song did not enjoy copyright protection in the title.  Unfair competition and merchandising rights may help in addressing these issues .

Several speakers addressed problems in copyright protection for live television entertainment, including but not limited to, live sports broadcasting.  Rebecca Borden of CBS noted that the scope of content that has uncertain protection under current Chinese copyright law incudes live broadcasts of sporting events (about which I have previously blogged), but also includes award shows, games shows, annual galas, etc.  Award shows have many similarities to sporting events, including filming of live reactions to awards/unexpected reactions, driving viewership in conjunction with unique performances or achievements, etc.  Prof. Jiarui Liu of the University of San Francisco noted that recognizing the creation of a professionally produced live sports broadcast as a creative work would likely provide the most stable protection for the investment in these works.

The video gaming industry also faces a number of IP challenges, as noted by Zhang Xin of Tencent and Song Haining of the Junhe Law firm.   Haidian District Court has been the epicenter of litigation involving onine gaming IP issues.  Total  adjudicated cases in 2014-2015 involving copyright were 183; trademarks 17, and unfair competition 9.  Courts have been willing to impose progressively higher damages, including damages based on actual or implied revenues attributable to the copyrightable infringement.  Due to the large amounts at stake, some cases will also satisfy criminal thresholds, and the public security agencies have been supportive.  See, eg., WeMade v. Xiaoxian (2016), which involves potentially billions of RMB in damages.

Charles Feng of East & Concord Partners gave an excellent presentation on preliminary injunction (PI) practice in China, an issue I have covered elsewhere on this blog.   Mr. Feng gave permission for me to post his ppt here.

In Mr. Feng’s view, the likelihood of prevailing on the merits is based on a calculation of the “certainty to prevail” minus “opposing evidence.”  If there is sufficient evidence and clear facts, which do not involve complicated comparison or necessitate judicial verification, a plaintiff is more likely to prevail.  PI’s are also rare in invention patent or software infringement cases.  The case should also not involve disputable or controversial issues, such as those involving the originality of a work, the doctrine of equivalents,  a prior-art defense, the similarity of marks  or goods, the well-known status of a mark, etc.  

In assessing the public interest, the court also looks at issues such as the necessity of intervening against fake and shoddy goods, supporting the security of people’s life, environmental conservation, etc. Generally, preliminary injunctions are rejected in case of a pharmaceutical products related patent and SEP’s.

Among the cases he cited: Telpa v. Media Plus(灿星)(Voice of China case), where  the defendant may have used trademarks completely incorporating plaintiff’s registered mark, and there was also trade name infringement.  A contrary case example is HBSA v. General Administration of Sport, involving the  跤王 “Wrestling King” mark in in Cl. 41 covering.  The General Administration of Sport organized games called “China Wrestling King Competition”. During the litigation, the defendant claimed the fair use defense. The Beijing No.2 Intermediate Ct.  noted that “Given the alleged mark of Wrestling King is a generic name, which may not be registered as a mark, and that the Trademark Review Adjudication Board has accepted the application for invalidation, the court does not believe that there is likelihood of prevailing on the merits.”

The concluding panel, which was moderated by me, included a lively discussion over IP, rule of law, the importance of the Chinese market, the role of the Chinese government, and the future direction of “entertainment law” in China.   Monique Joe highlighted the differences and unpredictability in the way the TM law is applied to address infringement and squatting issues.  Joshua Grode noted that he thought IP issues were not a major factor in deals.  Sheri Jeffrey noted that many deals do not contemplate the full scope of rights that may be licensed or created, including rights

Prof. Ma Yide refuted assertions that China is not protecting IP or that there were regulatory risks in China that made investment unattractive, noting that the growth in the market was likely the single biggest attractive force for foreign investor. Regulatory uncertainty was noted as a major factor in driving investors away from co-productions, despite a higher revenue share (47%) for coproduction versus an imported film.  The lack of certainty also dries down liquidity.  Putting together Robert Merges’ comments, the deal makers on the last panel, and the concerns about over the uncertainty of copyright protection in certain areas, several speakers questioned whether copyright was becoming the “chopped liver” of the entertainment sector – beautiful to look at, but rarely exploited in the proper way, which was a somewhat negative way to end an otherwise very positive and forward- looking program.

The preceding are my personal observations only.

SPEAKER LIST

Rebecca Borden Senior Vice President and Associate General Counsel, CBS
Mark Cohen Senior Counsel, United States Patent and Trademark Office
Jay Dougherty Professor, Loyola Law School, Los Angeles
Charles Feng Partner, East & Concord Partners
Neil Graham Attorney Advisor, Office of Policy and International Affairs,                                        United States Patent & Trademark Office
Josh Grode Partner, Irell & Manella LLP
Sheri Jeffery Partner, Hogan Lovells LLP
Monique Joe Head of Trademarks, Dreamworks Animation
LIU Chun-Tian  Dean,  Renmin University Intellectual Property Academy
LIU Jia-rui Assistant Professor, University of San Francisco School of Law
MA Yide President, Beijing Zhongguancun IP Research Institute
Robert Merges Professor, University of California Berkeley School of Law
Shira Perlmutter Chief Policy Officer, United States Patent & Trademark Office
Eric Priest Associate Professor, University of Oregon Law School
Bennett Pozil Executive Vice President and Head of Corporate Banking, East West Bank
SONG Hai-ning Partner, Junhe Law Firm
Seagull Song Professor, Loyola Law School, Los Angeles
Simon Sun Executive Vice President, Le Vision Pictures USA
Lisa Wang General Counsel, Huayi Brothers Media Corporation
Michael Waterstone Dean, Loyola Law School, Los Angeles
Martin Willhite Chief Operating Office and General Counsel, Legendary Pictures
WU Manfang Dean,  Beijing Film Academy School of Management
ZHANG Ping Professor, Peking University Law School
ZHANG Xin Legal Director, Tencent Interactive Entertainment

 

 

 

 

Beginning the Journey for Trade Secret Reform: the Recent AUCL Draft

A much awaited, proposed public draft revision to the Antiunfair Competition Law was released by the State Council Legislative Affairs Office on February 25, 2016. Comments are due by March 25, 2016.  An open source translation is available here.

This is not an easy law to comment on, as the law combines a range of various issues to varying degrees: competition and fair trade law, trade secrets law, trade dress law, cybersquatting and enterprise name infringements, advertising regulation, bidding law, compliance/anti-bribery, network management and other areas.  Strictly speaking it is not an IP law which focuses on giving individuals private rights.  Rather, it is geared towards ensuring that there is fair competition in the market, as its title suggests.

A key focus for me has been on the trade secret provisions of the draft.  Pertinent provisions are discussed and copied below:

“Article 9: A business operator must not carry out the following acts infringing on trade secrets:

(1) Obtaining rights holders’ trade secrets by theft, enticement, intimidation, fraud, or other improper tactics;

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

(3) Disclosing, using, or allow others to use trade secrets in their possession, in violation of agreements or the rights holders’ demands for preserving trade secrets.

Where a third party clearly knows or should know of unlawful acts listed in the preceding paragraph, but obtains, discloses, uses or allows others to use a rights holders trade secrets, it is viewed as infringements of trade secrets.

(一)以盗窃、利诱、胁迫、欺诈或者其他不正当手段获取权利人的商业秘密;

(二)披露、使用或者允许他人使用以前项手段获取的权利人的商业秘密;

(三)违反约定或者违反权利人有关保守商业秘密的要求,披露、使用或者允许他人使用其所掌握的商业秘密。

“Trade secrets” as used in this Law refers to technological information and business information that are not publicly known, have commercial value, and are subject to corresponding secrecy measures taken by the rights holder.”

Importantly, the draft drops the earlier statutory requirement that trade secrets had to have practical applicability, a “TRIPS-minus” provision which may have had the effect of denying trade secret protection to experimental failures.  The distinction between technical information and business information in this draft may also reflect other laws and government agencies some of which, like the Ministry of Science and Technology and SIPO have expressed interest in “technical trade secrets” or “service invention” compensation for trade secrets. Chinas IP courts similarly have jurisdiction over technical trade secrets, but not business confidential information.

The law also expands the scope of a covered business operator, to include natural persons, which is a positive step:

“‘Business operators’ as used in this Law refers to natural persons, legal persons or other organizations engaged in the production or trade of goods, or the provision of services. (“goods” hereinafter includes services). “(Art. 2)

The draft offers very little in the way of improving procedures for trade secret litigation.  There are improvements to trade secret administrative enforcement.

“Chapter III: Supervision and Inspection

Article 15: When supervision and inspection departments investigate acts of unfair competition, they have the right to exercise the following powers of office:

(1) Enter business premises or other venues related to the conduct under investigation to conduct inspections;

(2) Question business operators under investigation, interested parties, or other entities or individuals, and request supporting materials, data, technical support or other materials relating to the acts of unfair competition;

(3) Make inquiries about, or reproduce, agreements, account books, invoices, documents, records, business correspondence, audio-visual materials or other materials relating to the acts of unfair competition;

(4) Order business operators under investigation to suspend suspected unlawful acts, to explain the source and quantity of property related to the conduct under investigation, and to not transfer, conceal or destroy that property;

(5) Carry out the sealing or seizing of property suspected to be involved with acts of unfair competition;

(6) Make inquiries into the bank accounts of business operators suspected of acts of unfair competition as well as accounting vouchers, books, statements and so forth relating to deposits;

(7) Where there is evidence of the transfer or concealment of unlawful funds, an application may be made to the judicial organs to have them frozen.

Article 16: When supervision and inspection departments are investigating acts of unfair competition, business operators under inspection, interested parties or other relevant units or individuals shall truthfully provide relevant materials or circumstances, shall cooperate with supervision and inspection departments performing duties according to law, and must not refuse or obstruct supervision and inspection.”

Although I believe most right holders seek improvements in trade secret enforcement, including more deterrent remedies, I am uncertain how much those desires extend to administrative enforcement.  Transferring of relevant confidential material to an SAIC official tasked with trade secret enforcement will raise concerns of further trade secret leakage, which are probably not of equal concern in the case of administrative enforcement of, for example, trade dress infringements covered under this draft law.    Moreover, the State Council has elsewhere stated that all administrative cases should be conducted ex-officio.  To me administrative ex-officio enforcement of trade secrets, with authority to enter business premises to inspect and conduct investigations, is problematic.

The draft law also seeks to increase administrative fines for trade secret theft, and improve burden of proof issues:

“Article 22: Where business operators violate the provisions of Article 9 of this law, the supervision and inspection departments shall order them to cease the unlawful acts, and shall impose a fine between 100,000 and 3,000,000 RMB depending on the circumstances; where the act constitutes a crime, criminal responsibility is pursued in accordance with law.

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.”

It is unclear to me from Article 22, that this “burden of proof” reversal in the second paragraph above applies to administrative enforcement or civil enforcement, or even criminal process.  Moreover, the requirement of substantial similarity of the technology for the shifting to take effect, is probably too high a threshold, having been an impediment for plaintiffs in trade secret litigation in China to date.

Does this law go far enough in addressing trade secret issues in China?

Although SAIC has historically conducted many administrative trademark cases on behalf of foreigners, historically trade secret administrative enforcement has not significantly benefitted foreign companies or small enterprises.  As I previously blogged:

That there were 174 trade secret cases [for 2008-2010] out of 110,896 cases involving the Law to Counter Unfair Competition, or about 0.2% of the total. In addition, the data shows that average fines were 11,624 Yuan, and only 7 cases or about 4 % of the trade secret case were referred to criminal enforcement.  Like the civil system, the administrative system also appears to be frequently used to address employee theft of confidential information.  Precisely one third, or 58 of these 174 cases involved individual respondents; 24 involved private companies  (14%) and 23 cases involved individual businesses (13%).   There were no cases where a state owned enterprise or publicly held company was named as a defendant in an administrative action.  

One may question, therefore, whether this draft revision of the AUCL addresses the full range of substantive and procedural improvements that need to be made to improve trade secret enforcement in China, much of which may be more uniquely linked to trade secret protection compared to other IP rights.  Moreover, many of the problems are amplified by comparison with trade dress or other provisions of this draft law.

Much of the problem with trade secret protection has been in the lack of discovery in the civil system.  One significant advantage of improved trade secret administrative enforcement however could be in facilitating the transfer of information obtained in administrative investigations to civil courts or law enforcement authorities, consistent with State Council guidance on facilitating case transfers.  Improving civil procedures for trade secret cases could also greatly help in civil prosecution of trade secret cases, including by making necessary changes in evidence collection, burden of proof reversals, and other areas.

The current draft appears unduly oriented to instances where trade secret theft has actually occurred.  One critical area concerns the availability of relief for threatened misappropriation of trade secrets including preliminary injunctions, adoption of “inevitable disclosure” type doctrines, and evidence or asset preservation measures.  Such measures can be especially important as the harm that may be caused by a misappropriation may be incapable of being compensated for by the misappropriator or beneficiary of the theft. Although revisions to China’s Civil Procedure Law now permit preliminary injunctions for trade secret theft (Eli Lilly vs. Huang Mengwei),  China may wish to consider specific provisions in this law to facilitate more liberal dispensation of provisional remedies.  China had specifically provided for preliminary injunctive relief in other IP laws, before the most recent Civil Procedure law amendments, and may want to consider appropriate provisions for trade secrets.

Regarding threat of trade secret law, the current law also only addresses “disclosing, using, or allowing others” to use the secret information.   This deficiency could easily be remedies by including language on threat or imminent trade secret theft.    The Uniform Trade Secrets Act in the United States, by comparison, specifically addresses “actual or threatened misappropriation” which may be enjoined, and also provides a remedy for trade secret inducement.  The TRIPS Agreement itself clarifies that a key focus of WTO member trade secret obligations is “preventing information lawfully within their control from being disclosed to, acquired by, or used by others without their consent in a manner contrary to honest commercial practices.” (emphasis added).  The need for preventative measures is also reflected in TRIPS Article 41, which requires WTO members to have “expeditious remedies to prevent infringements.”  In addition, inducement liability is being considered in other China IP laws (patent/copyright) and does not appear to be part of this draft.  A clear definition of inducement liability may be helpful in limiting losses due to third party misappropriation of trade secrets.

China’s trade secret regime also has several other challenges, including difficult criminal thresholds; unclear relationships with labor law, labor mobility regulations, and employee non-competes; difficulties in gathering evidence; unclear divisions among the appropriate role of civil, criminal and administrative remedies;  and even an emphasis on trade secret protection as an aspect of market regulation, rather than as a civil IP right, as is under consideration.    Some of these deficiencies may be cured by judicial interpretation and guidance, as was previously addressed by the Supreme Peoples Court in an earlier Judicial Interpretation.

The focus on market regulation denies trade secret holders in China the ability to address infringement based on where a product that benefits from a trade secret misappropriation is sold, but instead may require litigation where the misappropriation occurred.  See Siwei v. Avery Dennison (Min San Zhong Zi No. 10/2007) (Sup. People’s Ct. 2009) (China).   This may also encourage foreign litigants, concerned about  local protectionism or undue influence of local companies on local courts, to seek remedies elsewhere (such as through Section 337 remedies in the United States).  In addition, the lack of discovery can also lead to the “exporting” of such litigation.  Making these necessary procedural improvements, including improving “success rates” for domestic trade secret cases and improving procedures for gathering evidence, may also enhance China’s position that Chinese judgements in trade secret cases are entitled to res judicata effect in other jurisdictions.

Former SPC Vice President, now Chief Procurator  Cao Jianming 曹建明, noted in 2005,  trade secret enforcement was the area with the “greatest difficulties” for the courts Industry has also raised concerns about many of these deficiencies.  While many of the changes in the AUCL on trade secret protection are positive, a more comprehensive approach could require reforms in other areas, including the practices of law enforcement and the courts, administrative law reform, civil law reform, and/or a stand-alone trade secret law.

My personal estimation: the AUCL draft is a beginning and not an end in the trade secret reform process.

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

 

 

Justice Tao Kaiyuan and the Role of the Judiciary

MadameTaoMichelleLee

Justice Tao Kaiyuan of the Supreme People’s Court, who had been to the United States in 2015 delivering important speeches on rule of law, has recently published an article on “Giving Full Play to the Leading Role of Judicial Protection of IP Rights“ 充分发挥司法保护知识产权的主导作用”(Dec. 31, 2015).  The article is receiving considerable attention in China, as it was published by Qiu Shi, 求是(“Seeking Truth”), a bimonthly political theory published by the Central Party School and the Central Committee of the Communist Party of China.  The publication of the article appears to be timed with the release of the recent draft of the Patent Law Amendments, comments for which were due the day after publication (January 1).  The proposed patent amendments would strengthen the role of administrative agencies in IP enforcement, to the possible detriment of the judiciary.

The author of the article is no less important than its contents.  Madame Tao knows patents.  She was the former Director General of the Guangdong Patent Office and therefor once had “vertical” reporting responsibility to SIPO (see picture above taken by me of Madame Tao [on the right] with USPTO Director Michelle Lee taken in 2015).  Although the article was authored in her name, many in China were speculating that the article was approved by higher authorities – perhaps Zhou Qiang, the President of the Supreme People’s Court, with Madame Tao serving as an appropriate messenger.

The concerns about this draft on patent law enforcement are not that different from those in the earlier (2012) draft when I blogged in “Why the Proposed Amendments to the Patent Law Really Matter … and Maybe Not Just For Patents” that “the changes strike me as a rather sudden about face in China’s march towards better civil protection of IP.” Madame Tao takes this several steps further.

Madame Tao’s article is divided into three parts: (1) The important meaning of giving full play to the leading role of the judicial protection of IP rights; (2) The key factors that constrain the leading use role of judicial protection of IP; and (3) Key measures in giving full play to the leading role of judicial protection of IP rights.   Here are some of the points she makes:

Madame Tao refers back to the National IP Strategy and related documents, such as the Third Plenum, the NPC’s decision to establish IP courts, and the Action Plan for the National IP Strategy to underscore the well-established, leading role of the courts in enforcing IP.

Her article compares certain key elements of judicial protection versus administrative protection.  In her view, judicial enforcement can curtail abuses of administrative enforcement.  It also has other advantages.  It has clear rules.  It is transparent.  It can help establish guidance for businesses by establishing clear standards for similar disputes (a possible nod to efforts at developing case law/guiding cases).  Moreover, civil enforcement comports with notions of private ownership and the development of markets and creation of a fair competitive environment in China.  Madame Tao especially underscores the role of the courts in supervising administrative agencies.  As I have noted, this is also an important part of the foreign IP docket in China.  Madame Tao states that the judiciary should also actively guide administrative law enforcement in investigation and review of evidence, and determination of infringements.

Madame Tao also calls for greater coordination in administrative and judicial roles in IP protection, noting that administrative enforcement played an important leading role in the beginning of China’s IP enforcement environment.  Administrative enforcement has “in a short time met the need for building effective IP protection.”  However, the “growing maturity” of the judicial system has caused increasing problems in the coordination process.

Madame Tao also calls for specific policy initiatives, many of which are already underway.  She calls for greater deterrent civil damages, including by revising patent, copyright and unfair competition laws based on experience of the trademark law revisions.   She also suggests that a discovery system should be considered.  Civil and criminal divisions in IP should be unified.  She suggests that a specialized national IP court should be researched and promoted, and she calls for the unification of technical appellate cases, perhaps like the CAFC.  She also notes that the division between infringement and validity determinations in the courts in patents and trademarks should be addressed, and calls for improvements in the availability of provisional measures.

She calls for greater improvements in judicial protective measures, including in obtaining evidence and the convenience and effectiveness of remedies.  Among other specific judicial reforms, she also suggests exploring intellectual property case law, improving judicial accountability and developing judicial professionalism.  Finally, Madame Tao also calls for expanding international awareness by IP judges to better protect national interests and to increase China’s IP influence.

Altogether, a tour de force.

Here’s what her speech looks like in a machine-translated wordcloud:taowordcloud

 

 

 

Lilith Games v. uCool – Seeking Preliminary Relief in the US

Attached is the order denying a preliminary injunction in Lilith Games v uCool (N.D. Cal., Sept. 23, 2015).  According to the order of Judge Conti, Lilith is a video game developer that released the game Dao Ta Chuan Qi (translated as “Sword and Tower”)  in China in February 2014. Lilith holds Chinese copyright registrations in Sword and Tower’s source code and alleges that it owns the copyrights to that code pursuant to Chinese copyright law. Sword and Tower has enjoyed great commercial success, and as of August 2014, was the leading game in Asia.   Defendant uCool is a video game marketer who allegedly obtained access to Lilith’s copyrighted software code for Sword and Tower and used it to create its own game, Heroes Charge , which it published in the United States in August 2014.

Lilith filed this case in March 18, 2015, four months after talks with uCool had broken down. Lilith argued that a four month delay was justified because Lilith is a small start-up  and was reluctant to become involved in costly litigation until it was necessary, although the court noted “It is unclear what Lilith means by ‘small start-up,’ particularly given that Lilith owns the most popular game in Asia.”

There are a few interesting points in this case worth comparing to Chinese practice:

  1. Application of Law and Recognition of Evidence: The court determined that Lilith “owned valid Chinese copyright registrations and therefore has provided prima facie evidence of copyright ownership under Chinese law.” In addition, it was “undisputed that Lilith is the entity that filed for and obtained the copyright registrations and that these registrations expressly list Lilith as the copyright owner. Thus, Lilith was the developer of the Sword and Tower source code and the copyright for Sword and Tower consequently belongs to Lilith.” The court also noted that “Lilith brings its copyright infringement claim under the Berne Convention, an international agreement governing copyright.”

The court directly  applied Chinese copyright law and the Berne Convention, which are rather unusual.  To its credit, there was no evidence that the court required notarized and/or consularized documentation, as might be required of a US company submitting similar evidence in China.   

  1. Regarding copying, the court concluded that “a finder of fact is likely to conclude that the source code for Heroes Charge is substantially similar to the source code for Sword and Tower,”and that “the evidence shows that the games are almost identical from the user’s standpoint, with only minor modifications.”

Although the court noted that Lilith sought to apply the Berne Convention, the court’s determination of copyright infringement appears squarely based on US practice.  Screen shot comparisons can be found here.

  1. In its trade secret analysis the court noted that “Lilith’s efforts to maintain the confidentially of its source code, while not as rigorous as they could have been, were sufficiently reasonable to maintain the code as a trade secret. Lilith keeps its source code on a secure server and limits access only to those employees who need it to perform their duties. Lilith also encrypts the Sword and Tower source code so that it cannot be easily deciphered. Although Lilith failed to secure confidentiality agreements from all of the employees that had access to the code, Lilith has presented evidence to show that these employees understood Lilith’s code to be confidential business information. Further, there is no evidence to suggest that any of these employees disclosed the code to a third party.”

Difficulties in demonstrating that a trade secret owner has established appropriate measures to protect the confidentiality of a trade secret are one of the obstacles in trade secret litigation in China.   The court’s approach is not unreasonable given that there appeared to be adequate procedures in place, and any gap in protection was not a cause of the leak of confidential information.

  1. Preliminary Injunction “E-Bay” Factors

Although the court determined that there was a strong likelihood that Lilith would succeed on the merits, it denied the motion for a preliminary injunction.  In the court’s view Lilith could not demonstrate that there was adequate imminent injury, either by reason of reputational injury in a market where it had little presence or by difficulties in developing that market through an exclusive distributorship.  The court took note that eight months had passed from when Lilith discovered the alleged copying to when it filed for a preliminary injunction. The court’s apparently suspicious view of Lilith’s argument that it was a small start-up, which accounted for the delay, may also have been a factor in this determination.

These cases are part of a growing trend of Chinese companies using the US courts to address claims of infringement by Chinese, US or third country actors.  There are also several obvious comparisons in recent Chinese cases to this one.  The case may be compared to the preliminary injunction granted by the Guangdong IP court in Blizzard Entertainment and NetEase versus Chengdu Qiyou Limited, involving a US rightsholder.  In that case, I noted the importance of having an active licensee as a co-plaintiff to succeeding in a preliminary injunction matter; the lack of an active licensee may have been a problem with the US case in demonstrating irreparable harm due to difficulties in obtaining an exclusive licensee. 

This is the second recent case brought by a Chinese company seeking a preliminary injunction in the US courts for copyright infringement.  In the earlier CCTV case, the Chinese plaintiffs were granted a preliminary injunction applying US law.    As I noted in the CCTV cases, had the US court applied Chinese law it might have found that no copyright infringement existed at least with respect to sports broadcasting.

Another comparison is with the   Eli Lilly v. Huang Mengwei (黄孟炜) case, where a preliminary injunction was granted in China for a trade secret matter.  However, that case was publicly discussed but never published.  The Lilith case is published, according to US practice, with confidential information removed.   

Perhaps the most interesting comparative aspect of the Lilith case was the delay in initiating litigation by the plaintiff.  Had this case been tried in China, the delays in seeking preliminary injunctions might have been more problematic in light of the expectations of tight time frames, where litigation and IP matters change in “a New York minute.”    After all, in eight months, most IP litigation has been finally adjudicated.

 

Draft JI Issued by SPC for Action Preservation Measures in IP and Competition Law Matters

On February 26, the Supreme People’s Court published for public Comment a draft SPC Judicial Interpretation on Concrete Issues in Application of Law in Determination of Action Preservation Measures in Intellectual Property and Competition Controversies (最高人民法院关于审查知识产权与竞争纠纷行为保全案件适用法律若干问题的解释)(征求意见稿). Comments are due Mach 30.  The SPC also issued an accompanying explanation of the draft JI.

When final, this JI will supersede prior JI’s involving preliminary injunctions in patent and trademark cases, which also served as reference for copyright matters.  The JI also further solidifies the extension of the civil procedure law reforms involving provisional measures to trade secrets, while also clarifying its expansion to civil competition law matters. The JI may open up the possibility of greater use of the civil courts for antimonopoly law litigation.

“Action Preservation” measures in the draft include measures to require a party to act by the court, or to prohibit them from acting. The draft JI specifically clarifies the circumstances by which licensees (exclusive or non-exclusive) may seek injunctive relief.   The time frame for rendering a preliminary injunction decision is a non-emergency matter may be as long as 30 days.  The draft JI also details such aspects of preliminary injunctions as the jurisdiction of the court, what constitutes “irreparable harm”, nature of guarantees, handling of appeals of cases and handling of oppositions to provisional measures, the effect of changed circumstances, fees, and other matters.