What are the key changes in Chinese intellectual property (IP) protections since the phase-one trade agreement? How credible are these commitments compared to previous ones in the absence of an independent judiciary to adjudicate claims?
The Judicial Interpretation from the Supreme People’s Court regarding trade secrets gives good reason to expect at least some modest progress. There are quite a few provisions, but two specifically may be key indicators of whether China is making real progress toward providing safe, effective, and robust mechanisms to enforce trade secrets.
The first of these is shifting the burden of proof (Article 8). Bringing a claim for trade-secret misappropriation can be prohibitively difficult if the court expects the plaintiff to marshal and present sufficient evidence at the outset of the case because China does not have a civil discovery procedure. Therefore, the idea is to set a minimal threshold requirement of initial proof to ensure that the case is reasonably grounded, following which the defendant would have the burden of establishing independent development of the trade-secret information. This notion was not new with the phase-one agreement; it had been introduced as an amendment (with immediate effect) in the 2019 revision of the Anti-Unfair Competition Law. Article 8 of the Judicial Interpretation states that the trade-secret holder first must submit “preliminary evidence” to prove the elements of the claim, and then if the accused infringer claims independent development, “it should provide proof.” The challenge here is to understand what is meant by “preliminary” evidence. In practice, will this come to look like the U.S. threshold of “reasonable suspicion” based on a plausible, but circumstantial, set of allegations? Or will preliminary evidence in effect be subject to the same assessment as at trial? We will not know whether the intent of Article 1.5 of the phase-one agreement, which requires changes in this vein to the burden of proof, has been implemented until there are sufficient examples of actual decisions.
The second key indicator in the Judicial Interpretation is found in Articles 14 and 15, which appear to describe indirect misappropriation. This could be significant because China has in practice only punished misappropriation of a form close to slavish copying. Obviously, improperly gained information can be used to influence the development of a competing product that may look nothing like the original. And there is substantial value in so-called negative trade secrets consisting of experiments through which what does not work, or what works less well, is determined. Although Articles 14 and 15 are not clear (at least in the translation that I read), it is possible that they could be interpreted to allow a court to find that a trade secret has been “used” if it has been “modified” or if “business activities” have been “adjusted” according to the plaintiff’s secret. Again, we will not know whether this portion of the Judicial Interpretation will be followed in that way unless and until we have enough examples of published case reports.
What is the likelihood that China ever makes it fully down the path toward protecting foreign IP? Will there always be significant risks to foreign firms as a result of the Chinese political and economic model?
There can be no doubt that China has been moving toward a more robust IP-protection regime for several decades. This has been in part an assumed obligation of membership in the World Trade Organization (WTO) and in part a classical reaction to the need to construct a framework to provide sustained incentives for domestic innovation. But China’s path, unlike that taken by, for example, Japan, Taiwan, and South Korea, has been strictly controlled by its Communist government, which has tilted the economic playing field to favor Chinese companies.
Therefore, in a sense the very significant and rapid progress made by China since the 1980s in constructing a world-class IP system is a bit like wax fruit: it looks good, but can you eat it? China’s current system, which in practice favors domestic players, must evolve to apply fairly to all litigants, in accord with the principle of national treatment. Moreover, China will move fully down the path toward protecting foreign IP only when its judicial system is sufficiently transparent that one can be confident of even-handed application of the rule of law. Although some within the Chinese judicial system are pushing for such reforms, I do not expect this kind of change will happen in the foreseeable future.
What future policy reforms or other developments would indicate that China will increasingly take trade-secret protection seriously? To what extent might these reforms be influenced by international pressure?
I believe that we need to see fulsome implementation by China of leading reforms, such as reversing the burden of proof and finding misappropriation based on indirect use rather than copying. That sort of demonstration naturally requires more transparency, and in particular the regular publication of judicial opinions. In my view, although there is some internal pressure on China to move in that direction (largely from professors who would like to have access to the reported data to inform their research), domestic forces will never be enough to effect meaningful change. This is simply because the government does not see a compelling reason to give up the inherent advantages of opacity.
Therefore, I believe that change will only come from external influence. As a multilateralist, I hope that such influence is exerted by countries operating through institutional frameworks such as the WTO, but of course there is room for unilateral action by the United States or the European Union, each of which can apply pressure relative to the size of its market.
If China does not fully implement the changes it has promised, or the pace of progress slows due to heightened tensions, what unilateral or multilateral policy measures would be most effective in getting things back on track?
The answer to this question depends very much on what one understands as getting things back on track. It is probably unrealistic to expect that China, without a fundamental change in government, will ever change its court system in a way that would allow us to be fully confident about the implementation of the most important reforms. If by being on track we mean being diplomatically engaged in active discussions about these issues, then I would say that direct economic pressure—perhaps not as drastic as some of the tariffs that have been levied by the United States, but of the same nature—is the most effective means for keeping China at the negotiating table and talking productively. Progress may be measured in inches, but if the parties are engaged, then it is a way of being “on track.”
What is the role of the World Intellectual Property Organization (WIPO) in trade-secret protection, especially with respect to China?
Having spent five years at WIPO, much of it engaged in attempting to facilitate negotiations to improve international IP systems, I am of the view that the organization is highly unlikely to play a meaningful role in securing improvements in China’s trade-secret-protection regime. In large part, this is because the concerns we have with China are about enforcement of the laws, not so much about their content. And enforcement in general is a forbidden subject at WIPO because it is largely perceived to invade the sovereignty of the member states’ judicial systems. This issue is both too diplomatically sensitive and arguably outside WIPO’s mandate. Additionally, there is the problem that trade secrecy in general is largely misunderstood in the international diplomatic community. Among many countries, any discussion of trade secrecy often focuses exclusively on Article 39(3) of the Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement. Many believe that this article, which requires protection of pharmaceutical test data, was an unfortunate giveaway to the drug industry. More broadly, the notion of secrecy simply seems inconsistent with the general idea of transparency and so has a sinister connotation.
This debate suggests that WIPO’s primary contribution to protecting trade secrets in China could be to provide a forum to facilitate better understanding of the role of robust protection in enabling technology transfer. This issue itself is a subject of broad interest, particularly among developing countries. If there were a more sophisticated view of the role that secrecy plays in accelerating innovation, it might over time provide very helpful context for a continuing examination of the shortcomings of China’s trade-secret regime.
Given the rather decisive defeat of the Chinese-backed candidate for director general earlier this year, how will China work to influence WIPO in the years to come?
One can conclude from China’s promotion of its own candidate for director general at WIPO, following several successful campaigns for the lead spot at other UN agencies, that China has shifted rather dramatically from a lead-from-behind approach of exercising its influence to a much more aggressive posture that looks like a broad grab for power at the United Nations. This is occurring at a time when the United States has retreated somewhat from its traditional multilateral engagement, which has significant implications for the structures and mandates of multilateral institutions. Notwithstanding its failure in the WIPO elections, I have no doubt that China will continue to assert leadership, at least behind the scenes, where it exerts very powerful influence over a number of other developing countries. On this point, it is important to keep in mind that stopping something from happening at WIPO takes very little political power (as is probably true at most other UN agencies). In general, I would expect China to continue to assert itself at WIPO in ways that will help the country maintain control over the speed and substance of domestic IP reforms. If the United States wishes to understand how that will play out in the coming years, not to mention have any influence over the process, it must engage vigorously in the organization.
The most important and immediate goals for reforming patent eligibility are predictability, predictability and predictability. This framework, coming from legislators who understand the value to our country of a robust and sensible patent system, is exactly the right approach. It will restore much-needed certainty to the acquisition and enforcement of patent rights, reducing costs for all stakeholders.– James Pooley
The trade secret laws of most countries – including the recent U.S. federal Defend Trade Secrets Act – contain the same requirement: in order to enforce its rights, a trade secret owner has to show that it has made “reasonable efforts” to protect its information from loss. In other words, before judges get involved in your dispute, they want to know what you’ve done to help yourself.
But what’s “reasonable?” The laws don’t tell us. Like the “reasonable person” standard in negligence, courts are supposed to decide each case in the context of its unique facts. That said, looking back at several decades of decisions, we can get a good sense of the principles at work, and also how they may be shifting as the business environment becomes more digital and more global.
The good news is that the standard is flexible, taking into account the value of the information, the risk of loss or contamination, and the cost (in money and effort) of measures to reduce those risks. For most businesses, this means simply taking a close look at what drives your competitive advantage, and then applying ordinary risk management analysis to define the broad outlines of a protection plan. In practical terms, this can lead to a variety of specific actions, including the basic ones you find on a lot of checklists with items like confidentiality agreements, IT system access controls, staff rules and training, and facilities security.
So if you’re following one of those checklists, you should be fine, right? Not necessarily. Although judges historically have been forgiving of less-than-robust security measures, they now seem to be paying much closer attention to this issue, and have even thrown out claims without trial where the trade secret owner has been sloppy in its practices.
The best known of the early cases was decided in 1970. DuPont had been building a new chemical processing plant when the construction manager noticed a low-flying plane making several passes over the site. It turned out that a competitor had hired the plane to take aerial photographs of the layout of the facility, which would reveal information about the secret process that DuPont intended to use. Forced to defend its actions in court, the competitor argued that it was just taking a look at what was in plain view. The judge thought that was preposterous, calling the surveillance a “schoolboy’s trick,” explaining that DuPont didn’t have to pitch a tent over the construction site in order to protect its secrets, and that the competitor was guilty of misappropriation by “unfair means.”
So the DuPont case taught that judges will not be too demanding when it comes to the amount of self-help that they expect from trade secret owners. However, in a 1999 case a federal judge granted summary judgment to a defendant in part because the confidentiality legend on the plaintiff’s secret document was deemed not large enough. This result aligns with my personal experience, indicating that today’s courts – and federal courts in particular – are more skeptical and less forgiving than they used to be on this subject.
Context is everything, and circumstances change with time. The expectation of privacy from the skies is less settled today, with Google Earth and other satellite imagery readily available, not to mention the thousands of privately owned drones. The same point applies with even greater force when it comes to computer system security. With the proliferation and increasing sophistication of hacker networks, the risk profile for most businesses has changed dramatically in the last several years. Just ask Target, Sony, Anthem, and J.P. Morgan.
Naturally, as the risks increase, the market responds with tools and systems to prevent cyber attacks, or at least discover them early and frame an appropriate response. And government agencies, most notably the National Institute of Standards and Technology, have suggested frameworks for managing cybersecurity risks. It’s not hard to imagine that these voluntary processes may over time be interpreted by courts as best practices, and even as minimum standards of conduct.
Bottom line: what constitutes “reasonable” efforts is dynamic, and expectations may be increasing, so pay attention. Of course, there’s more to self-help than just preparing for litigation. Don’t confuse the minimum requirement to get into court with the practical goal to prevent loss and contamination of your most valuable assets. To keep your information secure and clean, you should think beyond “reasonable” efforts.
A new Defend Trade Secrets law may give Latin American companies reason to move computer servers to the United States.
This past week the US Congress passed the Defend Trade Secrets Act (DTSA), less than two weeks after the European Parliament voted through the EU Trade Secrets Directive. What might at first seem like an extraordinary coincidence in fact has a lot to do with pressure applied by industry on both sides of the Atlantic to improve the remedies that are available for theft of trade secrets.
Businesses are relying increasingly on secrecy as the preferred way to protect their innovations, as well as the massive amount of analytics, financial and customer data that drive competitive advantage. But this valuable information is also vulnerable, not just to hacking and other kinds of espionage, but also to careless behaviour by employees and business partners. Having access to robust and predictable legal remedies is important.
Those aren’t available in Europe, the Commission found in a 2013 report. That concern led to its proposal for the EU Trade Secrets Directive, an attempt at minimum harmonisation.
Meanwhile, in the US, where thanks to broad discovery rights and a (mostly) uniform set of state laws, trade secret protection has been viewed as relatively powerful, business called for amendment of the federal Economic Espionage Act – which provides only criminal remedies – to include an option for companies to bring their private trade secret disputes to federal court as well. (Up to now, they have been able to do that only in cases where there is “complete diversity” of citizenship among the parties, an unusual occurrence in trade secret cases, or where there is another federal claim – such as patent infringement – pending based on closely related facts.)
Introduced only nine months ago, the DTSA enjoyed unusually bipartisan political support, buoyed by enthusiastic intervention from industry groups. In fact, the only organised opposition came from a group of law professors who were worried that provisions for seizure of infringing property could lead to a new class of “trade secret trolls” terrorising unsuspecting companies. After a Senate hearing last December, at which I was called to rebut the professors’ arguments, work began on a set of amendments that were all accepted by the end of January. On 4 April, the Senate voted unanimously to accept the legislation, and the House followed suit on 27 April. President Obama is expected to sign it soon.
The DTSA adds a private right of action to the existing federal criminal law, using the same standards expressed in the Uniform Trade Secrets Act, which is the basis for almost all US state laws, and was also the pattern for Article 39 of TRIPS. As a result, it can now be said that the US has fully complied with its TRIPS obligations, since it has a single national law covering the subject. However, the new federal law will not displace existing state statutes. Instead, it will be used optionally for trade secret disputes where the federal courts provide a distinct advantage: cases with
interstate or foreign actors, where attorneys can initiate discovery anywhere in the country, and where judicial experience is needed to handle complex jurisdictional issues.
State courts in the US, even though having similar substantive laws on trade secret protection, apply local procedural rules that can vary enormously, impacting multi-state cases where speed matters. This is why industry was so supportive of the legislation: instead of having to go to various county courts with unpredictable local customs, they can take advantage of a single nationwide system and set of rules.
The DTSA also provides an ex parte seizure when the trade secret holder has advance warning that someone is about to destroy a stolen secret or leave the jurisdiction. This provision has been quite controversial; however, applications have to be so well supported, and the penalties for a mistaken application are so severe, that most believe the remedy will not be invoked often and will be allowed only in obviously deserving cases.
Two other aspects of the DTSA deserve special comment. First, although US law has always allowed courts to issue orders against a “threatened” misappropriation, concern was raised whether this standard language might allow a federal court to stop a departing employee from taking a similar job with a competitor. This so-called “inevitable disclosure doctrine” has provoked fear – not always rational – that courts might be able to bar competitive employment merely based on how much sensitive data the employee knows. The DTSA’s solution to this mobility issue was to prohibit any order that is based only on what the person knows, requiring instead that it be based substantially on the employee’s behaviour that indicates untrustworthiness.
A second significant feature of the DTSA is its grant of immunity to employee whistleblowers reporting suspected wrongdoing. Existing law in the US is sparse and unreliable, based on a highly contextual backward look at the facts to determine whether the employee’s action may have been justified. Unsurprisingly, under these circumstances, the risks of coming forward are too great, and studies show that many who might otherwise have reported significant wrongdoing have remained silent. Of course, the employer has legitimate interests at stake as well, since the claim may turn out to be wrong, or the employee’s disclosure may be broader than necessary. The DTSA resolves this tension by providing clear immunity, but only for disclosures made in confidence to law enforcement, or as part of a court filing under seal. In this way, the information can be provided without fear of retributive litigation, while the relevant authorities can maintain the integrity of the secrets while they determine whether there is a basis to proceed.
The DTSA will improve the efficiency of, but will not revolutionise, trade secret disputes in the US. As already noted, there will be a certain class of cases brought in federal court because they involve foreign actors or witnesses spread across the country. Strictly local cases – where the chef leaves a restaurant with the secret recipes and moves down the street – will still be handled in state courts. That’s in part because the DTSA requires that the information in controversy be related to a product or service in “interstate commerce”, the minimal jurisdictional requirement for federal courts to act. And it’s in part because local cases will be brought by local lawyers who are familiar with their local courts.
Although some lawyers will want to use federal courts for trade secret cases just because they handle patent matters and are more comfortable there, that may not be the smartest tactical move. Federal judges take their cases on “single assignment”, meaning that they are in charge of all issues from beginning to end. They are therefore more likely to view the case skeptically than state court judges, who typically have a “departmental” system and are sometimes seen as waving through weak cases so that they can be taken care of by a different judge at trial. In addition, federal judges are usually more demanding of a plaintiff’s identification of its trade secrets. So we may not see a general rush toward filing in federal court.
What of the EU Trade Secrets Directive? Also driven by industry concerns over the need for harmonisation, the EU effort starts from a much lower base of harmony than has existed in US states. Indeed, the Commission’s report found a disturbing level of inconsistency among the 28 national regimes. So by establishing common definitions, some common remedies and an approach for protecting secrets during litigation, the directive represents a major step forward.
But measured by the expectations and needs of customers, there is quite a distance left to travel. For cultural and political reasons, the directive does not deal with criminal remedies and so there remains an uneven regime for enforcement in the most egregious cases of information theft. More importantly perhaps for business, there has been no progress on addressing the fundamental problem of pursuing trade secret cases in civil law systems: the lack of discovery. Say what you will about the excesses of US civil discovery in general; the trade secret plaintiff, facing losses from behaviours that only the defendants can know, is always disadvantaged at the outset of a dispute by asymmetric access to information about what happened. Without discovery to set the balance right, there will always be a significant number of legitimate cases that cannot be pursued.
Worse still may be the exceptions provided in the Directive. Unlike the DTSA, whistleblowers are free to disclose confidential information not just to government but also to media, so long as it is in the public interest. And the catchall exception for “protecting a legitimate interest” under national or EU law seems a yawning loophole that even the CJEU may not be able to constrain adequately.
The EU Trade Secrets Directive is a very good start on harmonising standards in this critical area. But for the time being, if your clients need extremely reliable civil remedies they are probably well advised to find ways to bring their cases in the US.