Has China Finally Embraced Robust Trade Secret Protection?

June 14, 2020

IP Watchdog

It happened to Japan in the 1950s. Then it happened to Taiwan, and then Korea. Rapidly-developing countries started out relying on copying foreign technologies to drive their economies. But as growth increased and investments in education led the way to domestic innovation, each country found that a framework of strong intellectual property (IP) laws was necessary to sustain economic expansion.

For many years, the relationship between China and the United States (as well as other Western countries) around IP has felt like pulling uphill on a very heavy wagon, as we tried to convince, cajole and threaten, often demanding reforms as part of trade negotiations. The relationship with China was further weighed down by the perception that the government was itself involved in misappropriation and that in general it was a proponent of weak IP protection. This past January, in the midst of a tariff war, China signed the “Phase One Agreement” that promised certain improvements in its trade secret regime in return for the United States dialing back some of the trade pressure.

A Creative and Sophisticated Interpretation

Given this history of adversarial trade negotiations, it came as something of a surprise when on June 9 China’s Supreme People’s Court (“SPC”) issued an extensive draft “Judicial Interpretation” (“JI”) of the country’s civil trade secret laws. (It released two other JIs at the same time, related to internet IP and e-commerce platforms.) JIs are quasi-legislative enactments of the SPC that can have the force of law. In a number of areas, the new trade secret pronouncement not only went beyond what had been promised in Phase One, but included some provisions that seem more creative and sophisticated than the analysis we might find in many U.S. court decisions.

Until a more formal translation is available, the best resource for understanding this new development is the China IPR blog by Mark Cohen of Berkeley Law, who for years was the USPTO’s senior counsel for China and who speaks and reads Mandarin. See his post on the JI here.

Does this mean that China, like other Asian countries before it, has finally turned a corner and is now strengthening its IP system to meet its own interests, rather than being pressured to do so? Is it now pushing where we in the past have been pulling? Perhaps. But a couple of caveats are in order before we take a look at the most remarkable provisions of this JI. First, it was published as a draft for comment (the period ends July 27), so it’s likely there will be changes. Second, we are working from a preliminary translation of the JI. Third, the Supreme People’s Court doesn’t have direct control over administrative or criminal procedures where some trade secret cases are resolved. However, the recent consolidation of all technology-based IP disputes into the IP specialty court makes it likely that the SPC’s interpretation will not only be considered authoritative but may also influence the administrative and criminal trade secret enforcement agencies.

Here are the aspects of the trade secrets JI that (after consultation with Professor Cohen) I think are most interesting.

Identification of secrets (Article 1). The trade secret owner has to “clarify the specific content” of the claimed trade secret in the first level court, which may dismiss all or a portion of a claim that is not clear. The defendant can ask for greater specificity,and the court may resolve the issue by taking evidence subject to cross-examination. On appeal (where the case is essentially re-tried) the plaintiff can amend its specification. This tracks the general approach in the U.S. to force an early identification but allow refinement as the case proceeds.

Combination secrets (Article 2). Under U.S. law a trade secret may consist of a unique combination of elements each of which may be generally known. The JI similarly provides that a claim will qualify if “the information known to the public is collated and improved.”

Value from secrecy (Article 3). The U.S. rule, exemplified by the DTSA (18 U.S.C. § 1839(3)(B)), requires that a trade secret “derive independent economic value, actual or potential” from not being generally known. The JI speaks in similar terms that the plaintiff has to show “real or potential market value” that “can bring about a competitive advantage.”

Reasonable efforts (Articles 6 and 7). The SPC’s treatment of this universal requirement that the plaintiff demonstrate reasonable efforts to maintain secrecy is especially remarkable for the way that the court’s expression aligns with the practical security concerns of any information-based business. While most U.S. courts address this issue with a shallow recitation of typical practices such as NDAs, passwords, marking etc. (which the SPC also does in Article 7), in Article 6 of the JI it suggests a number of “factors” that should be considered by trial courts in making a judgment about the issue. Among these are the nature of the business and the “degree of matching of confidentiality measures with trade secrets.” In other words, while it gives a nod to the “checklist” of efforts, the JI introduces proportionality into the calculus, by pointing out the utility of tying particular measures to particular risks to particular secrets.

Shifting the “burden of proof” (Article 8). As in most civil law countries, China has no discovery, and just getting into court on a trade secret claim can be very difficult. In the Phase One Agreement at Article 1.5, China promised to implement a provision that, if “prima facie” or “preliminary” evidence of the required elements is provided by the plaintiff, the burden shifts to the defendant to prove that there was no misappropriation. The JI appears to address this promise, requiring the defendant to back up any claim of independent development with evidence.

Implied confidentiality (Article 10). The confidential relationship inherent in most trade secret claims does not require a written contract, but can be inferred from “the principle of good faith,” “trading habits,” and the like. This is consistent with China’s laws on commercial contracts.

Access to secrets by an employee or former employee (Article 13). As with the reasonable efforts issue, the JI suggests multiple factors that the court may consider in determining whether an actor had access to obtain secrets. This is interesting primarily because it reflects an embrace of circumstantial evidence, implying more flexibility in the court process.

Indirect misappropriation (Articles 14 and 15). One of the perceived barriers to effective trade secret enforcement in China has been a rather rigid view of what constitutes misappropriation that seems to require something close to copying. The JI indicates that this approach may be softening. Whether what the defendant has done is “substantially the same” should be based on consideration of a number of factors, including the “degree of similarities and differences,” whether the differences would be obvious to a skilled person, and the extent of related public information. Perhaps most importantly, the court may 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. All of this points in the direction of U.S. law finding liability when a defendant’s project has been influenced or accelerated by exposure to the plaintiff’s secret information.

Head start injunction (Article 22). Under U.S. law, if following entry of an injunction the information ceases to be a trade secret (for example by publication of a patent application), a court may continue the injunction for a period of time necessary to deprive the defendant of the unfair advantage obtained by the earlier misuse. The JI appears to allow a court to do the same thing if the provisions of the injunction are “not enough to eliminate the unfair competitive advantage.”

Damage apportionment and punitive damages (Article 24). Again, the JI suggests a factor-based analysis for the court to determine the “proportion and role of the infringed technical information in the entire technical plan or the infringement of trade secrets.” Significantly, courts are directed to take into account the “infringer’s fault” in considering an award of damages that represents “a reasonable multiple of the license fee for trade secrets.”

Limited damages discovery (Article 26). In cases where the plaintiff has presented “preliminary evidence” of misappropriation, and “the books and materials [presumably accounting records] related to the infringement of trade secrets are mainly controlled by the infringer,” the court may order those materials to be produced.

Protection of trade secrets in litigation (Article 27). The JI requires that the trial court “take the necessary confidentiality measures” in connection with litigation and trial. However, it provides no specifics on exactly what kind of protective orders are recommended or even allowed.

Venue (Article 29). Signaling increased flexibility in permitting venue other than in the defendant’s domicile, the SPC now gives the plaintiff in a technology trade secret case a choice, initially where the infringement occurred or the defendant is domiciled. And if it is “difficult to determine” those places, the action may be filed at the plaintiff’s domicile.

Application of national law (Article 30). In what may be seen as a response to trade secret claims filed at the ITC involving trade secret infringement that occurred in China, the JI directs that any civil cases “involving foreign-related violations of trade secrets” will be determined in accordance with Chinese law.

An Inflection Point?

Although China has for some time now shown interest in trade secret reform, this week’s trade secret draft JI undoubtedly was motivated in part by recent trade negotiations, including the Phase One Agreement. But this most recent pronouncement seems in some respects to go beyond what was required, and in those respects also seems to reflect an imprint of U.S. practices. Nevertheless, it will be important to watch what happens as the JI is finalized in the next few months, and what its practical impact on Chinese courts and administrative agencies might be. Perhaps we are at an inflection point with China where reform and strengthening of its trade secret protection system will become self-generating and ever closer to our own, albeit with Chinese characteristics.

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