Navigating the Policy and Recent Developments of Trade Secret Practice in China

In recent years, the evolving market landscape, economic conditions, and competitive dynamics have underscored the importance of technology and trade secrets related to emerging and core technologies, as well as critical business information. These secrets have become essential for the survival and success of businesses across various sectors in China.

According to Article 9, paragraph 4, of the Anti-Unfair Competition Law of China, trade secrets are defined as technical information, business information, and other commercial information that is not publicly known, possesses commercial value, and has been subject to appropriate confidentiality measures by the rights holder. The three key elements of trade secrets are:

1. Secrecy: The information is not known to the public.

2. Value: The information has economic benefits for the rights holder, thus holding commercial value.

3. Confidentiality: The rights holder has implemented measures to maintain confidentiality.

Technical information typically includes design drawings, process flows, formulas, and technical solutions, while business information encompasses customer data, transaction patterns, business policies, and financial details.

Currently, the protection of trade secrets is primarily facilitated through three avenues: civil enforcement litigation, criminal measures, and administrative enforcement requests.

Civil Enforcement Litigation

Civil enforcement litigation serves as the most comprehensive remedy, managed by courts in the jurisdiction where the infringement occurs, where the infringement results are felt, or where the defendant resides. The threshold for initiating civil litigation is relatively low, requiring only a complaint and preliminary evidence. However, the challenge lies in evidence collection, as China follows a "burden of proof" rule, placing the onus on the plaintiff to demonstrate that their trade secrets have been infringed. This can be particularly difficult, as rights holders often struggle to obtain evidence from infringers who may actively conceal their actions. To address this, the revised Anti-Unfair Competition Law of 2019 introduced Article 32, which allows the trade secret holder to provide preliminary evidence of confidentiality measures and reasonable indications of infringement, thereby shifting the burden of proof to the accused infringer. This change significantly eases the evidentiary burden on rights holders.

The duration of civil litigation can be lengthy, typically ranging from one to two years from the filing of a lawsuit to the issuance of a first-instance judgment. If jurisdictional objections are raised, this can extend the process by an additional three to six months. Complex cases involving technical solutions may require technical appraisals, further prolonging the trial. Unlike some jurisdictions, all points in the first-instance judgment can be appealed in China, with the second-instance judgment being final and effective, usually taking about another year. As of November 1, 2023, significant and complex technical secret cases are now handled by the Supreme Court IP Tribunal, while other trade secret cases are managed by local high courts.

Regarding damages, rights holders may claim actual losses incurred due to infringement, reasonable expenses to halt the infringement, and potentially punitive damages ranging from one to five times the actual losses. The Guangzhou Intellectual Property Court has noted a positive correlation between the market value of trade secrets and the damages awarded for their infringement. However, factors such as the nature of the trade secrets, development costs, competitive advantages, and the specifics of the infringement behavior also play a crucial role in determining damages.

According to a press conference by the Beijing Intellectual Property Court on November 30, 2023, from 2021 to October 2023, there were 89 new trade secret cases, representing 0.46% of civil cases, with 86 cases concluded, also accounting for 0.47% of civil cases. The overall number of trade secret infringement cases has remained relatively low, averaging around 50 concluded cases annually. Key characteristics of these cases include:

- A high proportion of technical secret cases, which are often complex. From 2021 to October 2023, 75% of new cases involved technical secrets, making trials particularly challenging. The plaintiff's success rate is relatively low, with only 15% of concluded cases resulting in a win for the plaintiff, primarily due to difficulties in proving that the trade secrets meet legal criteria.

- A significant number of lawsuits target departing employees, with over 70% of cases filed against current or former employees.

- Procedural requests, such as evidence preservation, are common due to the covert nature of trade secret infringement.

Criminal Measures

Criminal measures provide effective remedies against such crimes, typically under the jurisdiction of local public security organs. However, a common challenge is the high threshold for case acceptance, as public security agencies often require substantial evidence before proceeding. For instance, the Zhejiang Provincial Public Security Department mandates four types of reporting materials, including evidence of the subject's identity, proof of trade secret existence, preliminary evidence of infringement, and evidence of the degree of infringement.

Once a case is established, it enters the investigation phase, where public security organs can gather evidence that rights holders may not be able to obtain, thus addressing the evidence collection challenge. In practice, rights holders often file a criminal case first, followed by a civil lawsuit, as demonstrated in the Kapo case concluded by the Supreme Court IP Tribunal in 2020. In this instance, the rights holder secured a criminal judgment recognizing the infringement before pursuing civil litigation, allowing the court to utilize evidence from the criminal case.

Criminal proceedings generally have a shorter duration, with technical investigations taking about three to six months and the first-instance criminal procedure typically concluding within three months. While damages awarded in criminal cases may be lower than in civil cases, they carry a strong deterrent effect, with potential imprisonment of three to ten years and fines for the infringer.

Administrative Enforcement

Administrative enforcement requests offer the quickest means of obtaining trade secret protection. Rights holders can report infringements to the local Market Supervision and Administration Bureau, which has relatively low case acceptance requirements. Once accepted, investigators can collect evidence and request submissions from the accused infringer. A notable advantage of administrative enforcement is the Bureau's authority to preserve evidence related to the alleged infringement, particularly in cases where evidence may be lost or difficult to obtain later. The entire process typically concludes within three to five months, facilitating prompt action against infringement.

However, a limitation of administrative enforcement is that the Bureau can only mediate negotiations for damages and cannot determine the amount owed to trade secret rights holders. As a result, rights holders often pursue separate civil lawsuits to recover economic losses based on evidence gathered during administrative enforcement.

In summary, the various channels for trade secret protection can be strategically combined to maximize their effectiveness. While civil lawsuits have a low threshold for acceptance, evidence collection can be challenging. Therefore, utilizing criminal or administrative measures for evidence gathering before filing civil lawsuits may be beneficial. By leveraging multiple avenues for relief, rights holders can better mitigate losses resulting from trade secret infringement.

Influential Rulings by SPC

From 2020 to 2023, the Supreme People’s Court issued several influential rulings on trade secret cases, providing clear judicial guidance for addressing infringement.

Key issues in technical secret cases often revolve around the carrier and scope of trade secrets. A significant concern is whether the scope of the technical secret is clearly defined before filing, which can create room for debate and increase the risk of losing the case for the plaintiff. In a case involving CMP equipment, the first-instance court ruled that if a plaintiff claims drawings constitute a technical secret, they must specify which elements of the drawings qualify as such, clearly distinguishing them from publicly known information. The second-instance judgment by the Supreme People’s Court affirmed that drawings can serve as carriers of technical secrets, allowing rights holders to claim that specific technical information recorded in the drawings constitutes trade secrets.

In a trade secret case involving vanillin, the first-instance court found the defendant liable for infringing some technical secrets, awarding damages of 3 million yuan and reasonable attorney fees of 500,000 yuan. Following appeals, the second-instance judgment determined that the defendant had infringed all technical secrets involved, resulting in a revised award of 159 million yuan in economic losses, marking one of the highest damages awarded in technology secret infringement cases.

In another case from October 2023, the Supreme Court recognized that the plaintiff's losses included sunk costs and expected benefits, leading to an award of 50 million yuan to the infringer. This case highlighted the importance of demonstrating that the claimed technical information was not publicly available and that the plaintiff had sufficient evidence to support their claims.

Overall, these developments reflect the ongoing evolution of trade secret protection in China, emphasizing the need for clear definitions and robust evidence in legal proceedings.

The issue of trade secret infringement is a significant concern, particularly regarding the scope of trade secrets that remain undisclosed to the public. This includes both the entirety and partial content of such secrets. Even if certain elements of specific technical information are publicly accessible, the overall combination of that information is typically regarded as confidential. Consequently, the appellate court overturned the initial ruling.

Takeaways by Companies

Despite a rise in trade secret litigation, the success rate remains relatively low, suggesting that many businesses in China may not fully recognize the importance of safeguarding their trade secrets. To enhance protection, it is advisable for companies to focus on the following areas:

1. Enhancing Confidentiality Systems: Develop a robust internal confidentiality framework tailored to industry standards and technical needs. This should include a comprehensive confidentiality manual that clearly defines the scope and classification of trade secrets. It is essential to identify personnel who will have access to these secrets and implement measures such as coding management, tracking of authorized individuals, and proper labeling of confidential materials to mitigate the risk of leaks.

2. Reinforcing Confidentiality Measures: Conduct regular training sessions on confidentiality protocols for employees, maintaining detailed training records. It is important to include confidentiality clauses in employment contracts or to establish separate agreements. Additionally, individuals involved in significant projects should be required to sign tailored confidentiality commitment letters that address specific needs and circumstances.

3. Protecting Trade Secrets in External Interactions: Ensure that confidentiality agreements are in place with potential business partners, suppliers, and service providers who may have access to sensitive information. Clearly outline what constitutes confidential information and emphasize the obligations of confidentiality. During business negotiations, it is prudent to employ strategies such as concealing sensitive details and using coded language to prevent the unauthorized disclosure of confidential documents.

By taking these proactive steps, businesses can significantly enhance their protection of trade secrets and reduce the risk of infringement.