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Secret solutions: a stronger protection of trade secret in China

There has been a definite policy to enhance protection of IP rights in China, for the purposes of prompting China’s industrial development and shifting from manufacturing to creation, and encouraging bilateral cooperation between China and other countries. Among the different kinds of intellectual properties, trade secrets have been in the spotlight for a long time.

Relevant laws

The laws regulating trade secrets protection in China have been frequently updated in recent years, such as:

  • The Civil Code, which became effective on January 1, 2021, and includes in article 123 trade secret in the list of IP rights;
  • The Anti-unfair Competition Law amended on April 23, 2019, (the amendment became effective from the same day), which provides in article 9 the main basis for initiating an action against a misconduct over another’s trade secrets;
  • The Criminal Law amended on December 26, 2020, (the amendment [XI] became effective on March 1, 2021), which provides for the crime of infringing a trade secret;
  • The Provisions of the Supreme People’s Court on Several Issues Concerning the Application of Law in the Trial of Civil Cases Involving Infringements upon Trade Secrets, which became effective on September 12, 2020;
  • The Interpretation (III) of the Supreme People’s Court and the Supreme People’s Procuratorate of Several Issues Concerning the Specific Application of Law in the Handling of Criminal Cases Involving Infringements upon IP Rights, which became effective on September 14, 2020.

These laws provide the basis for protection of trade secrets from the civil route and the criminal route. Both routes can be adopted alternatively or in combination by a sophisticated plaintiff in China.

A historical review

Traditionally, a trade secret was deemed to be an interest of the holder instead of a right in China and was usually protected through the civil route according to the Anti-Unfair Competition Law, which requires businesses to adhere to the free will, equality, fairness, and good faith principles and abide by laws and business ethics, in their production and distribution activities.

Unlike other IP laws, the Anti-Unfair Competition Law is basically directed to the conduct of a business, while a trade secret was sometimes considered to be an asset in nature.

The controversy on the nature of trade secrets, as well as the burden of proof on the plaintiff, had hampered their protection. There was great uncertainty and a low win rate when seeking protection of trade secrets. Plaintiffs would have to show trade secrets infringement from both the subject matter branch and the conduct branch.

On the subject matter branch, a trade secrets holder had to bear much burden of proof as a plaintiff, such as defining the scope of his trade secrets and showing that considerable measures had been taken to protect them.

On the conduct branch, the holder had to show that the defendant had misconducted in obtaining, using or disseminating his trade secrets. In many times, the holder had to trace back to solidify the relevant evidence of misconducts since he didn’t find trade secrets infringement until the accused infringer put the competitive products into the market. This made it much difficult to prevail in the case.

Most often, the judges had to combine the subject matter branch and the conduct branch, to comprehensively determine whether to give protection to the asserted trade secrets.

Perspectives

Judicial cases have shown greater interest in trade secrets holders who sue those persons and/or competitors illegally obtaining, using or disseminating their trade secrets, such as their former employees and the current employer of their former employees.

Besides civil procedures, some trade secrets holders assert their trade secrets through criminal procedures. Civil and criminal cases are both increasing constantly, although the absolute number is small as compared to patent, trademark or copyright cases. The IP Tribunal of the Supreme People’s Court, as an example, received 12 technical secret cases in 2019, while in 2020 the number went up to 44.

Judges are becoming more friendly to trade secrets holders in the context of stronger IP protection, and the laws have put heavier burden of proof on defendants. Once a plaintiff has submitted the preliminary evidence of trade secrets infringement, the burden of proof shifts to the defendant, who has to show, for example, that he is using a different technology; that the claimed trade secrets are already known in the sector before the critical date; or that he obtained the trade secret through reverse-engineering or his own research and development.

To some extent, the previous disadvantages in claiming trade secrets infringement have become strengths of plaintiffs.

On the subject matter branch, the claimed trade secrets of plaintiffs can cover an extremely broad spectrum of subject matters, which can be a very particular feature or a complete technical solution and need not to be absolutely new. On the conduct branch, the judges prefer to take a more flexible approach to allocate the burden of proof than before—a rights holder-friendly judge means a higher win rate.

Law enforcement agencies and prosecutors also carry out investigations when a trade secrets holder files a complaint and initiate criminal procedures if the misconduct of the infringer is serious. It is expected that more trade secret cases will be instituted before the courts in China through both the civil and the criminal routes.

This may imply potential abuse of litigation rights by some businesses, which may interfere with the business of their competitors by instituting trade secret litigation, or even worse, try to obtain trade secrets of defendants during legal proceedings. It is therefore necessary to strike a balance while enhancing protection of trade secrets.