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Peculiarities of Legal Protection of Trade Secret in China

Feb. 2, 2017

Keywords: trade secret, protection of a trade secret in Russia, protection of a trade secret in China, legal regime of a trade secret, legal protection of a trade secret, civil law, intellectual property

Before considering the peculiarities of the legal protection of a trade secret in China, we shall consider for comparison what is meant by a “trade secret” and what regime of its protection in the Russian Federation exists.

In Russia, the legal regime for a trade secret is determined by a special federal law [Federal Law “On a Trade Secret” of July 29, 2004 No. 98-FZ]. The trade secret, in accordance with Article 3 of the Law, shall be “... the regime of confidentiality of the information that allows its holder, under existing or possible circumstances, to increase profits, avoid unnecessary costs, maintain theposition on the market of goods, works, services or to obtain other commercial benefits ...”. The information constituting a trade secret shall be“... the information of any character (industrial, technical, economic, organizational and other), including the results of the intellectual activity in the scientific and technical sphere, as well as the information on the ways of carrying out the professional activities that have a valid or potential commercial value due to the fact that third parties are unaware of it, to which third parties do not have  free access on a legal basis and in respect of which the holder of such information has introduced the regime of a trade secret.”

Thus, for the protection of a trade secret in Russia, the following conditions should be observed:

  1. The information that is a trade secret must have a certain commercial value, including a potential one, due to the fact that it is unknown to third parties.
  2. Third parties should not have free access to this information.
  3. The holder of such information should undertake certain actions to protect it, i.e. to introduce the regime of a trade secret.

The trade secret regime, in turn, involves the following measures:

  • the determination of the list of information constituting a trade secret;
  • the restriction of access to such information by establishing the procedure for handling this information and monitoring the compliance with such procedure;
  • the registration of persons who have access to such information/the persons whom such information has been provided or transmitted to;
  • the regulation of relations on the use of such information (on the basis of the labor and civil law agreements);
  • the use of classification “trade secret” on the material carriers or as a part of the requisites of the documents containing the relevant information.

If the aforesaid conditions are met, the holder of the information constituting a trade secret shall be entitled to protect his rights in the procedure stipulated by law in the event of the disclosure, illegal obtaining or illegal use by third parties of the information constituting a trade secret, including to claim compensation for the losses caused in connection with the infringement of his rights. In turn, it shall be illegal to obtain the relevant information “... deliberately overcoming ... the measures undertaken by the holder of the information for the protection of the confidentiality of the information, and also if the person who obtains this information knew or had sufficient grounds to believe that the information, the holder of which was another person, constituted a trade secret and that the person making the transfer of this information did not have a legal basis to transfer this information.”

The infringement of the provisions of the Federal Law “On a Trade Secret” entails the disciplinary, civil, administrative or criminal responsibility.

As we understand, the trade secret, among other things, can mean the information about the objects of intellectual property. Often there are situations when the trade secret issimultaneously a protectable result of intellectual activity. In this situation, the holder of the information should choose: either to disclose the information and obtain a patent, which means a guaranteed protection of his rights for a limited period stipulated by the legislation, or to leave this information in secret, but for a potentially unlimited period. However, the choice of the second variant may lead to a quite possible risk of the leakage of the information, to its rapid further spread with a significant decrease in the possibilities of protecting the rights (in contrast to the first variant – obtaining a patent). In the Russian Federation, because of this contradiction, many companies do not patent their technical solutions in order not to provide access to this information to the competitors. This contradiction is attributed to very significant shortcomings of the Russian legislation in this field.

Are there similar problems in China, and how different is the regime of the legal regulation of a trade secret protection in the PRC?

The authors who study this theme, first of all note that innovations are necessary to maintain the rapid economic growth of China. Moreover, effective mechanisms for protecting the rights to subject-matters of intellectual property and a trade secret are necessary for the development of innovations.

The legislation on the protectionof atrade secret was adopted in China more than twenty years ago. Moreover, it continues to develop, and the judicial practice on considering the cases related to this issue is developing, too. However, like in Russia, the effectiveness of the relevant legal institutions in China is often put under doubt.

The very concept of a “trade secret” appeared in China only in the 1980s. Due to the peculiarities of the political system, the exchange of the research results and technologies between the organizations was encouraged by the state. Consequently, the concept of a trade secret started to spread, first of all, in the companies involved in international transactions with foreign enterprises. The civil fundamental principles of a trade secret protection have been formalized only by 1993, and the criminal sanctions for unlawful obtaining and the disclosure of the corresponding information have been imposed by 1997.

The Chinese legislation defines a “trade secret” as the “technical or operational (organizational) information” which: is unknown (not available) to the “public”, which can provide the holder of such information with some economic advantages, which have practical applicability, and in respect of which the holder of such information has undertaken measures to protect it.

The concept of being “unknown (not available) to the public” is interpreted by the courts as the situation when the information constituting a trade secret is commonly unknown to the broad public or access of specialists to it is obstructed. The information, which by default is available to the public, shall be the so-called “commonknowledge” (the well-known information) or “commonpractice” (the general practice), as well as the information that has been deliberately disclosed to the public. It can also be the information about the characteristics of the goods that the third person can directly observe or calculate based on the direct perception of the products released to the market.

The China's legislation contains a list of actions that constitute the infringement of the rights of the trade secret holder. Firstly, access to a trade secret can not be obtained by thieving, promising profits, forcing or by other illegal means. Secondly, the person can not disclose, use or allow other persons to use the information constituting a trade secret that has been obtained by the aforesaid illegal means. Thirdly, the trade secret, access to which has been provided to the person legally, should not be disclosed or used by this person or by any other persons in the infringement of their obligations, including under the agreement. Fourthly, the person can not obtain, use or disclose the information constituting a trade secret, if he knows that such obtaining relates to one of the aforesaid types of the infringement of the law.

In practice, these types of infringements can be classified as three types of situations: when the person obtains illegally and uses the information relating to his competitor’s trade secret; when the person hires a former employee of his competitor, who has had access to a trade secret; when the relevant information, access to which has been provided to the person legally, is used by this person illegally. The last two situations are the most common ones.

Unlike the Russian Federation, in China, the illegal use or disclosure of the information constituting a trade secret must necessarily lead to adverse consequences to be recognized a criminal act entailing criminal sanctions. If such infringement leads to “significant losses” for the holder of the relevant information, then the infringer may be imprisoned for the term up to three years and/or he may be penalized. If the holder of a trade secret incurs losses “on a grand scale,” the term of imprisonment may be from three to seven years. “Significant losses” shall be the losses of more than 500,000 yuan. The losses “on a grand scale” shall be from 2.5 million yuan.

By now, the China's courts have judged more than a thousand cases of the infringement of a trade secret regime. The civil cases are usually heard in courts of more developed coastal regions. The criminal cases are distributed more evenly throughout China. Of course, the level of judging these cases is rising together with the development of the legislation, legal techniques, special procedures and the methods of proof. However, in comparison with other cases related to the protection of intellectual property, the percentage of cases won by the applicants is much lower.

One of the problematic issues in the judicial proceeding relating to the fact of the illegal use and disclosure of a trade secret is: who bears the burden of proof? Some researchers believe it should be an applicant: it is his obligation by default. However, in order to establish the existence of a trade secret, it is necessary to prove that the “public” has not had access to the relevant data. That is, it is necessary to prove the lack of access. However, it is much easier to prove something existing, but not missing: access, but not the fact it was missing. So, in this case, the burden of proving the existence of access, following the logic, should be shifted to the defendant.

This imperfection of the legislation has been eliminated to a significant extent recently. The burden of proof still rests with an applicant. However, the standards of proof have been significantly loosened. If the applicant manages to show the court how the information has been developed, what measures he has undertaken to keep this information confidential, and what characteristics which make it confidential this information has, then the court will most likely admit that the public has not had free access to this information. Of course, if the defendant manages to prove otherwise.

Another question: what does phrase “the measures undertaken to establish a regime of protection of a trade secret” mean? During hearing the case, the applicant should persuade the court that the undertaken measures were sufficient, and here, as a rule, the problems arise. The developing judicial practice has allowed focusing on two issues. At first: do these measures obviously express the intention of the holder of the information to keep it a secret? In this respect, the holder of the information should not only express such an intention through the agreements or corporate policies, but he also should identify specific information, which must remain strictly confidential. The second question: are these measures effective and “relevant”? The effective measures should prevent the legal receipt of the confidential information by third parties, without infringing any contracts or local regulations. For example, it is not enough to put classification mark “confidential” on the document. The mechanisms, which control the spread of the information, the employees training and auditing should be used to ensure that all employees of the company follow the corporate policy.

Further, as soon as the existences of a trade secret and the regime for its protection have been established, the applicant must prove the fact of the infringement of this regime by the defendant. This is the most difficult stage, as in practice it is almost impossible to obtain a direct proof of the infringement. As a result, the burden of proof will be partly shifted to the defendant: if the holder of the information constituting a trade secret manages to prove that the defendant has the information which is in a substantial way similar to his trade secret, and that he had access to this information, then the defendant will have to prove that he has obtained access to a trade secret legally. In complex situations, when the information constituting a trade secret is technical or narrowly specialized, the experts' decisions shall be used in the judicial proceedings.

The difficulty in obtaining proof often forces victims to initiate criminal cases instead of the civil ones, as if the case is admitted for hearing within the framework of the criminal proceedings, the chances of obtaining proof (with the participation of the law enforcement authorities) increase significantly.

The issue of the effectiveness of bringing the court decisions to execution remains urgent for China.

As we see, there are gaps and contradictions in the legal regulation of the protection of a trade secret in China. Therefore, we often hear opinions about the necessity to carry out appropriate reforms to achieve a balance between the protection of a trade secret and the freedom to do business and innovative activities without unjustified risk of being involved in court proceedings. In any case, both the legislation and judicial practice are developing quite actively in this direction. This fact gives hope that new legal means of solving the most complicated issues related to the protection of a trade secret will be found, and the effectiveness of its legal protection will increase.

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Author of article

Daria Labut

Daria Labut

Assistant to Patent Attorney