On September 4, 2020, China’s State Administration for Market Regulation (“SAMR”) released the Draft Provisions on the Protection of Trade Secrets (“Provisions”) for comments with the aim of strengthening the protection of enterprises’ trade secrets, stopping the infringement of trade secrets, encouraging R&D and innovation, optimizing the business environment, and maintaining fair competition in the market order.
The Provisions intervene on certain important aspects concerning trade secrets and their infringement, already regulated by the Anti-Unfair Competition Law (“AUCL”) – that was adopted September 2, 1993, amended for the first time in 2017, and most recently, on April 23, 2019 – in order to update the relevant legal provisions and enhance the application of the AUCL.
Under the AUCL and clarified by the Provisions – trade secrets are defined as technical, operational, or other commercial information unknown to the public, which is of commercial value for the ‘right’ holder of that information and who has taken corresponding confidentiality measures.
To this regard, the Provisions clarify the notion of trade secrets stating that trade secrets are those “commercial information such as technical information and business information that are not known to the public, have commercial value, and have been subject to appropriate confidentiality measures taken by the right holder”, where “commercial information” refers to any type and form of information related to commercial activities, including but not limited to technical information and business information.
Further, the Provisions specify that technical information refers to the technical solutions obtained by using scientific and technological knowledge, information, and experience, thus including design, procedures, and formulas. On the other hand, the concept of business information refers to all kinds of information related to the business activities of the right holder, including management know-how, customer lists, among other aspects.
For the sake of clarity, the Provisions also delineate what is meant by “commercial value” and what should be considered as “unknown to the public”.
Information with commercial value
Information is considered to have commercial value when it brings either commercial benefits or competitive advantages to the natural persons, legal persons, or unincorporated organizations that have the right to own or use trade secrets (as “right holder”) as long as it is kept as confidential and it is not publicly known.
Information that is unknown to the public
The term ‘unknown to the public’ means that the information is not known to the relevant personnel that work in the field or cannot be easily obtained from public channels. However, there are certain circumstances specifically listed by the Provisions, under which it is excluded that the information is considered as unknown (meaning that under these circumstances, it is assumed that the public know the information):
The information must meet specific criteria (as stated earlier) to be considered a trade secret, and if this is the case, the right holder has to take the appropriate measures to keep it confidential and prevent an information leakage.
It is worth noting that, to further guarantee the protection of trade secrets, the Provisions also state that the SAMR’s personnel as well as China’s other state agencies and public servants have a duty of confidentiality regarding trade secrets they may obtain in the course of performing their official duties.
For example, the Provisions state that these state agencies and officials shall not disclose, use, or allow others to use the right holder’s trade secrets beyond the scope of their duties.
According to the AUCL, a trade secrets’ infringement can be either direct, such as through theft, bribery, fraud, coercion, electronic intrusion, or other illicit means or indirect, such as through soliciting, seducing, or assisting others to obtain, disclose, use, or allow a third party to use the trade secrets in violation of their confidentiality obligations or violating the trade secret owner’s confidentiality requirement.
The Provisions confirm the definition of trade secret infringements given by the AUCL, but also provides a non-exhaustive list of the behaviors that lead to such violations –
According to both the AUCL and the Provisions, business operators, individuals, and other entities can be liable for trade secrets’ infringement. What the Provisions specifies, crucially, is what does not constitute an infringement:
The Provisions, with reference to the legal liabilities, directly refer to Article 21 of the AUCL, which states that in case of trade secrets’ infringement, the supervisory inspection department shall order the violator to cease the illegal act, shall confiscate any illegal income, and impose a fine of not less than RMB 100,000 (US$14,757) nor more than RMB 1 million (US$147,581), or if the circumstances are serious, a fine of not less than RMB 500,000 (US$73,789) nor more than RMB 5 million (US$737,898). (USS$1 = RMB 6.77).
According to the Provisions, a violation is deemed to be serious in the following circumstances:
The Provisions, with specific reference to foreigners, state only that the SAMR, as the competent authority to handle trade secrets infringements, may initiate infringement investigations on foreigners’ illegal acquisition, disclosure, and use of the trade secrets of Chinese trade secret owners, order them to stop the infringement, and may also seize the infringing products. Hence, foreign government’s judicial cooperation will play a key role in facilitating discovery and enforcing SAMR or China’s legal judgements.
Looking at the overall legal framework regulating trade secrets, it seems that China is not only strictly complying with the obligations and promises undertaken at the international level – with particular reference to the Phase One Agreement signed with the US – but also suggests that China is building up a solid trade secrets’ protection system.
Indeed, before the above discussed reforms, Chinese legislation did not include electronic intrusions among the means for infringing trade secrets; the plaintiff had to provide evidence to prove the infringement and, consequently, the scope of damage was limited.
Now, thanks to the shift of the burden of proof onto the defendant, the plaintiff shall provide just prima facie evidence, thus being an obligation of the first to prove that the asserted trade secret does not constitute a trade secret under the law.
In simple speak, the defendant has to provide evidence to show that the asserted trade secret is not a trade secret because somehow it does not match the qualifying criteria, and hence must not benefit from the protection given under the AUCL and the Provisions.
Besides this, the clarification of what constitutes a trade secret and the identification of behavior that will be deemed as infringement of trade secrets also help in determining what will be considered punishable under the AUCL and the Provisions.
To this regard, it is worth noting that on September 10, 2020, the Supreme People’s Court issued the Provisions of the Supreme People’s Court on Several Issues Concerning the Application of Law in the Trial of Civil Cases Involving Trade Secret Infringement (effective from September 12, 2020), through which it guides the lower courts in applying the AUCL and the related Provisions, by specifying which are the ways in which such courts will have to implement the new rules.
In conclusion, it will be of utmost importance to monitor the courts’ decisions on future cases involving trade secrets violations, this being the best way to have a better understanding of the practical on-the-ground impact of the new rules on regulating trade secrets and punishing their infringement in China.
China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done so since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the firm for assistance in China at firstname.lastname@example.org.
We also maintain offices assisting foreign investors in Vietnam, Indonesia, Singapore, The Philippines, Malaysia, Thailand, United States, and Italy, in addition to our practices in India and Russia and our trade research facilities along the Belt & Road Initiative.
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