The Changing Legislative Landscape of Trade Secret Protection in China

This blog is a supplement to my prior blog on the recent TM law and AUCL revisions.  Attached is a bilingual translation provided by the Quality Brands Protection Committee (QBPC) of the recent revisions to the Trademark Law and Anti-Unfair Competition Law (AUCL).   This blog focuses on the trade secret amendments.  And thank you, QBPC!

The trade secret amendments by themselves are promising.  The NPC, recognizing their importance, took the unusual step of making the amendments immediately effective, unlike the Trademark Law amendments which have a delayed effective date.

Perhaps the most critical change addressed the problem created by prior amendments to the AUCL which removed natural persons from the scope of covered entities.  The logic at that time appeared to be that natural persons were covered under the definition of trade secrets provided in the General Outline of the Civil Code (GOCC),  中华人民共和国民法总则 (Art. 123).  However, the inconsistency between the AUCL and the GOCC created unnecessity ambiguities that these amendments help address.

The AUCL revisions also expand the remedies for trade secret protection by imposing liability on “inciting” or “abetting” (教唆)trade secret theft.  Inciting or abetting is an inchoate offense under the Chinese Criminal Law (Art. 29), and it also appears in China’s Tort Law (Art. 9), as well as in actual or proposed IP legislation, such as a 2012 Judicial Interpretation regarding online copyright liability.   This would appear to expand the scope of liability for those who facilitate or organize a trade secret infringement.

The AUCL also “borrows” the concept of quintupled damages if bad faith infringement is found.  This is similar to the new TM law revisions that provide for quintuple damages if there is malicious 恶意infringement.  I am not certain, however, if this provision will have its desired effect of deterring infringement, at least in the short term for two reasons: statutory damages still remain the principal remedy in most IP cases, and cases where actual damages are imposed and could be multiplied are also rare. Nonetheless, this provision could become of increasing importance as Chinese courts experiment with calculating actual damages.  Moreover, quintuple damages may not only be in place to deter infringement and better compensate rightsholders but also to assist in improving the leading role of the civil IP system compared to the criminal and administrative systems in China.

The revised law also clarifies that “electronic intrusion” to obtain trade secrets is an enumerated infringing act (Art. 9), which is in line with other computer crime laws in China such as the Criminal Law  (Art. 285).  This language may be helpful in prosecuting those civil cases where a computer intrusion was involved.  Although my data on trade secret cases involving electronic intrusions in China was very limited (from 2012) it had suggested that cyber intrusions were a  small percentage of China’s civil trade secret docket, perhaps because these matters were pursued through other legal channels.   If readers have more recent data or analysis on this issue, please provide them to me in comments to this blog.

The revised AUCL also provides for a burden of proof reversal (Art. 32).  Jim Pooley described  this provision as the “most promising” among trade secret legislative developments, as it “involves shifting the burden of proof in cases where the circumstantial evidence seems strong—such as the development of a similar product in an unusually short time after access to the plaintiff’s secrets—and requiring the defendant to prove independent development.”  According to Article 32 a rights holder that has preliminarily proven that it  has taken reasonable confidentiality measures on the claimed trade secrets and has preliminary evidence reasonably demonstrating 初步证据合理表明 that its trade secrets have been infringed upon, can shift the burden of proof (BOP) to the infringer to prove that the trade secrets claimed by the right holder do not belong to those as prescribed in this law. The preliminary evidence that may be provided by the rights holder includes: “evidence proving that the alleged infringer has channels or opportunities of obtaining the trade secrets and that the information it uses is substantially the same as the trade secrets“ or “evidence proving that the trade secrets have been disclosed or used by the alleged infringer or have risks of being disclosed or used” or “there is other evidence proving that the trade secrets have been infringed upon by the alleged infringer.”

This is a notable development.   However, the history of BOP reversals in China suggests that such provisions have not always had their expected impact.  Importantly, BOP reversals in process patent cases are required to be available under Article 34 of the TRIPS Agreement and under China’s Patent Law (Art. 61). Stringent requirements, such as requiring that the infringing product is identical with the one accused of violating the manufacturing process, have made it difficult to successfully bring these cases in China.  Most importantly, the low level of publication of trade secret cases, as well as the non-publication of interim orders, may mean that the public will have little insight into how courts handle actual cases, including this BOP reversal.   Trade secrets are perhaps the most opaque area of China’s IP enforcement regime, making it also very difficult to judge when significant improvements are being made.

Another difficulty may occur in ascertaining what constitutes a willful infringement and compensating for it.  Trade secret cases necessarily involve an act that circumvents or ignores precautions taken by the rightsholder.  The fact that such an inappropriate act may have been wrong, willful or even premeditated, also does not necessarily mean that the rightsholder suffered serious losses.  A good example of this is the recent case brought by the US Department of Justice against Huawei, involving the theft of T-Mobile technology and related behavior.   A  prior civil jury verdict related to one aspect of that case found that Huawei’s acts constituted trade secret misappropriation, but declined to award damages or to find that the actions were willful and malicious.

Another challenge, also identified by Jill Ge at Clifford Chance, is that Chinese courts may yet remain intent on using patent doctrines such as ‘novelty’ to determine that a given technology is not a protectable trade secret because it is otherwise in the public domain according to patent law doctrines.  Additionally, as I have noted this approach inappropriately “provid[es] a non-infringement defense based on modifying misappropriated technology,” that is a court may determine that the accused infringer did not use the precise technology and therefore there is no trade secret theft, borrowing perhaps from patent law doctrines regarding conduct that constitutes infringement (make, use or sell).  This problem of borrowing patent law doctrines into technical trade secret cases may be magnified by the experience and background of the technologically oriented IP judges in the IP courts or their IP assessors whose experienced has principally been informed by patent litigation.

In an unrelated development which also highlights the importance of making appropriate linkages between the civil and criminal trade secret regimes, US Deputy Assistant Attorney General Adam Hickey  recently gave a speech on national security and trade secret theft (April 24, 2019).  Reflecting on recent criminal prosecutions against Chinse nationals he noted:

“[T]here are trade secret cases where we cannot prove beyond a reasonable doubt that the Chinese government itself directed the theft.  …  But although we could not prove in court that these thefts were directed by the Chinese government, they are in perfect consonance with the Chinese government’s economic policy. “

China’s problem seems to be the reverse of the United States, by its historical underemphasizing of criminal remedies.  Although the AUCL amendments incorporate many notable improvements, they also do not address weaknesses in the criminal IP regime for trade secrets, the low level of criminal trade secret cases, and the widening differences that now exist between civil and criminal cases in such areas as proof of infringement.    All countries seeking to protect trade secrets need to strike the correct social balance between civil and criminal enforcement of trade secret theft.  DOJ’s inabilities to secure convictions also demonstrate the necessity in the US of having effective civil remedies, including 337 actions.    An integrated, stand-alone trade secret law in China that incorporates civil, criminal and administrative remedies, as well as doctrines from labor law, contract law, corporate law, and other areas, could help secure a more advanced, holistic perspective on how China should address trade secret infringements.  To address cross-border trade secret infringements, foreign government judicial cooperation in facilitating discovery, taking depositions, and enforcing judgments would also help improve the bilateral environment in this area.  In addition, China might consider additional policies that make it harder to engage in “efficient” trade secret theft, where costs of being caught are less than the cost of innovating on one’s own.  Such policies might include government procurement debarment for products using stolen technologies, invalidation of patents granted on the basis of misappropriated technologies and debarment from the Chinese patent office, return of any subsidies or grants for developing the technology, and denial or revocation of recognition capital contributions of technology for tax or other purposes, amongst other possibilities.

 

EPISODE 900: THE STOLEN COMPANY

Recently National Public Radio’s Planet Money aired an extensive radio broadcast entitled “Episode 900: The Stolen Company” about a counterfeiting case involving a US adhesives company, ABRO.  The case occurred over 10 years ago but continues to have meaning today.  Owing to my role at the US Embassy at the time, I was interviewed along with Bill Mansfield, who implemented ABRO’s anti-counterfeiting strategies, ABRO’s executive team, and others.   The Planet Money segment recalls the extreme measures that the counterfeiter undertook as well as Bill Mansfield’s creative countermeasures.  I won’t spoil the show by telling you now.   The case continues to stand for the proposition that it is possible to win complex counterfeiting cases in China.

One of the individuals who was not included in the final broadcast was Jack Chang 张为安.  Jack is a friend and fellow veteran of many anti-counterfeiting campaigns, and he has been particularly active in the Quality Brands Protection Committee (QBPC), an association of foreign-invested enterprises (FIE’s) that work together to improve China’s IP system.  He remembered those early days involving ABRO.  Jack noted the following to me in a recent email exchange regarding ABRO after this program aired:

“1) After the Hunan counterfeiter was arrested in London but managed to return to China, he conducted a press conference blaming on USG and ABRO for cheating and framing him. His story was widely spread in China. Even within QBPC, many Chairs circulated the counterfeiter’s one side story. It was Mark Cohen, whom I checked with and who provided me with ABRO’s story. Mark did not disclose that he was involved in the operation at that time though. After learning that the Hunan counterfeiter was the bad guy, I asked the QBPC Chairs and members not to repeat the counterfeiter’s one side story and they did.

2) I know Bill [Mansfield]  for many years. His drinking tea and presenting appreciation plaques served in fact as an important value that “a U.S. citizen, who was so frustrated with China’s counterfeiting problem, ended up recognizing Chinese authorities’ sense of honor.” … Chinese Customs and Economic Crime Police are the heroes in the minds of many U.S. (European as well) companies. … Having said that, why the western world is still so frustrated? The simple answer is that the magnitude of counterfeit trade is huge and the technology related IP issues have caught almost every western leaders of public and private sectors’ attention.

3) …In terms of fighting counterfeiting trademark and copyright piracy, there is no difference between industries. Pfizer, J&J and many other pharm giants got tremendous support from the Chinese police to conduct serious criminal investigations on counterfeit rings. Our semiconductor members got the support too. The problem was with prosecutors and courts, which believe that IP owners were not the victims of IP crimes … and that paying civil damages would suffice while no need to put people in jail. The Chinese police are on our side. Some procuratorates are too… [I]n terms of fighting counterfeiting, industrial differences is not an issue at all. However, I agree with Mark partially that technology-related IP protection may be a different story. As I said earlier in this email, forced tech transfer is NOT a real issue from the perspective of many QBPC front line IP soldiers. But lack of effective legal framework for trade secret protection, which threatens both foreign and domestic companies, national treatment for FIEs in terms of the implementation of national innovation and technological policies, FIEs’ participation in the national technological standard setting, the harmonization of “Regulations on Administration for Import and Export of Technology Transfer” and the tech transfer section of Contract Law etc. are the real concerned areas of QBPC IP experts. …”

The ABRO case may also have some parallels with the current controversy involving extradition of Meng Wanzhou of Huawei.  In the ABRO case, the Chinese government also reacted strongly to the arrest of Yuan Hongwei, the alleged Hunanese counterfeiter in London, on a writ of extradition to the US.  Ultimately the ABRO case quieted down as the facts became better known.

Jack also graciously noted of my own involvement in the ABRO case: “Without your telling me the ABRO story in the old days, QBPC might have rejected ABRO’s application to join QBPC and the Chinese colleagues might turn their anger to the USG. You probably did not know how critical your contribution was to the QBPC (possibly to China’s anti-counterfeiting momentum). I thank you now!! All the best!”

Thank you Jack, Bill Mansfield, the team at ABRO and NPR and others for working together on this important case and sharing your memories and insights.