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

Translation of Draft Patent Law Available

Thanks to He Jing of the Anjie Law Firm, attached please find an unofficial line-by-line translation of the recently released Patent Law Amendments 2nd reading.   Comments are due August 16, 2020.

Some highlights of this draft:

Partial Design Protection

Article 2 adds language back in to allow partial design protection.  This is a welcome development.  Article 42 also maintains the earlier draft’s extension of the duration of the design patent to 15 years.

Patent Abuse

Article 20 clarifies that the abuse of patent rights to exclude or restrict competition constituting a monopoly shall be dealt with under the anti-monopoly law.  The AML is itself under revision.

Good Faith/Public Interest

Article 20 continues to require “good faith” in patent filings and the exercise of patent rights, an important concept borrowed from the Trademark Law revisions which is having an increasing substantive impact.  The limitation that patents shall not be “allowed to harm public interests” raises similar concerns to me to the recently proposed amendments to the Copyright Law, about the definition of “public interest.”

Pharma Issues – Patent Term Restoration and Linkage

The notices of the NPC regarding the draft law, state that pharma-related IP issues were drafted to implement ‘”trade agreement(s).”   These are reflected in proposed Article 42 which provides for patent term restoration.  This draft removes the requirement of the “synchronous” launching of marketing approval outside of China with approval in China in order for patent term restoration to be granted.

Article 75 also sets forth an outline for a patent linkage regime, and calls for the drafting of more detailed measures to further implement the provisions.  Under this proposal, the innovator challenges a generic applicant for marketing approval within 30 days of the announcement of the application.  If the patentee does not file a lawsuit, a generic company may also request a determination from the courts or patent office of non-infringement based upon the China Patent Information Registration Platform for Listed Drugs.  A court or administrative procedure on patent infringement should render its decision within 9 months.  This draft lacks an incentive provision for a generic to successfully challenge an innovator through granting of a first generic marketing exclusivity due to a successful challenge to the patents. This skeletal section is also drafted as an addendum to the statutory exemptions to infringement, which appears to be an awkward placement.

Damages and Liability

Joint liability of Internet service providers for patent infringement has been removed.

Minimum statutory damages of RMB 100,000 has also been removed.  Statutory damages are capped at 5 million RMB.  Quintuple punitive damages up to 5 times remain from the prior draft.   The statutory damage maximum increases to RMB 5 million (Art. 71). In addition to the continuing focus on increases in damages, this draft also continues the momentum for a larger role for patent administrative enforcement.

The extension of the statute of limitations to three years has been retained from the prior draft (Art. 74).

Several provisions address the proposed “open licensing” system (Chapter 6).

The draft also encourages a flexible remuneration system including “equity, options, and dividends” to enable inventors or designers to reasonably share the proceeds of innovation (Art. 16).

Update of August 16, 2020:  The American Bar Association Intellectual Property Law Section and Section of International Law have made their comments on the draft Patent Law Amendments available here.

 

 

 

Upcoming IPR and R&D Program in Nanjing

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SIPO and USPTO will be co-sponsoring a program on IPR issues of concern to conducting R&D in China.  The seminar will bring together government officials, senior IP and accounting experts, and corporate IP counsels to provide information of value to R&D centers in China.   The event will be held on May 31, 2016 at 8:30 a.m.-5:00 p.m. at the InterContinental Nanjing, address: 1 Zhongyang Road, Gulou District, Nanjing, Jiangsu.

A summary of the sessions are included below:
研讨会由如下7个主题构成:

Session 1: U.S.-China Current R&D and Collaboration Environments

主题1: 中美当前的研发和协作环境

Session 2: The Roles of IP in the Research and Development Process

主题2: 知识产权在研发过程中的角色

Session 3: Protecting Your IP: Discussion on IP Filing Strategies in U.S. and China

主题3: 保护你的知识产权:对中美知识产权申请战略的讨论

Session 4: Commercializing Your Innovations

主题4: 创新的商业化

Session 5: Drafting and Negotiating IP License Agreements – Domestic and Technology Imports; Intercompany Ownership and Transfers

主题5: 知识产权许可协议的起草和谈判–技术进口;公司间的所有权和转让

Session 6: High and New Technology Enterprises and R&D Tax Breaks

主题6: 高新技术企业和研发税收减免

Session 7: Panel Discussion of US and Chinese Experts on IP related opportunities and challenges for companies with R&D facilities in China

主题7: 圆桌讨论:中美专家就在华设立研发中心的企业面临的知识产权机遇和挑战的讨论

Please RSVP by May 24, 2016 to Aster CHEN at PTO_Shanghai_Office@trade.gov (Please include your name, title and company/organization).  Seats are limited to 100 on a first-come first-serve basis.

请在2016524日前回复陈书新 PTO_Shanghai_Office@trade.gov 确认出席,回复时请提供您的姓名、职务及单位/机构名称。100个席位,先到先得

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