The legal protection of trade secrets in China
By Jody Lu (China IP)
Updated: 2012-03-12

According to statistics by the Shanghai Higher People's Court, less than 2% out of all intellectual property cases in the past three years were about trade secrets, of which 30% reached conclusions, and the rest ended up in withdrawal or settlements. In less than half of those 30% concluded, infringements of trade secrets were found. The status quo is, as China IP learnt, that this is not exceptional elsewhere in the country, trade secret litigation also faces some difficulties such as instigation, hard trials, and low success ratios. Meanwhile, few enterprises, when facing trade secret infringements, are willing to go to court. The judicial solutions are a far cry from the reality of trade secret infringements.

The statutory uncertainty

China has no specific statutory law for the protection of trade secrets at present. Provisions related to trade secret protection in China can be found in many laws, including Trademark Law, Law against Unfair Competition, General Principle of Civil Law, Patent Law, Copyright Law, Criminal Law, Contract Law, Labor Law and other laws. "Lacking a unified law, there are many improvements to be made in China's current legal system of trade secret protection," said Zuo Yan'an, Delegate of China's National People's Congress.

The Supreme People's Court promulgated Interpretation of the Supreme People's Court on Some Issues Concerning the Application of Law in the Trial of Civil Cases Involving Unfair Competition ("Interpretation") in 2007, which is conducive to trade secret protection. However, provisions in the Interpretation are too general to be followed by courts, public security organs, administration for industry and commerce at all levels and lawyers in practice. Cases involving trade secrets are different from cases mainly dealing with patent and trademark infringements in that courts must ascertain whether the information submitted by the proprietor falls into the scope of a trade secret. There are stringent standards for such ascertainment both at home and abroad. According to the Law against Unfair Competition, trade secret refers to any technology information or business operation information which is unknown to the public, can bring about economic benefits to the proprietor and has practical utility, and upon which the proprietor has adopted secret-keeping measures. Therefore, secrecy, economic value and secret-keeping measures are required at the same time in the same case.

The key is usually the secrecy. According to the insiders, people may have different understandings of "the public" in the constitutive requirements of "unknown to the public" because the concept is too broad in meaning. "It is a worldwide problem and no country could find a good solution. The theoretical standard has been made, saying unknown to the public.' However, we don't know how many people should know or have known the confidential information. And there will never be an exact answer," commented Huang Wushuang, the Associate Dean of Intellectual Law School of East China University of Political Science and Law. "Western countries have accumulated mature experience in judicial practice in this regard, whereas China still has a long way to go."

Another method of demonstrating the existence of trade secrets is that the proprietor has adopted secret-keeping measures. Wu Pengbin, lawyer at Shanghai DeBund Law Firm, commented, "Most plaintiffs were defeated in cases involving trade secrets. One major reason is that many right holders failed to adopt reasonable secret-keeping measures. Many plaintiffs can not even explain clearly what his trade secrets are. Even trade secrets themselves cannot be ascertained by the court under such circumstances, not to mention infringement. The proprietor must treat his information as trade secrets and have adopted measures that are active and reasonable enough to protect them. Otherwise, there shall be no legal protection." China IP learned from Wei Li, Deputy Director of Antimonopoly and Anti-unfair Competition Enforcement Bureau of State Administration for Industry & Commerce (SAIC), that many enterprises in China still lack awareness of protecting their trade secrets, and know nothing about how to adopt secret-keeping measures. "According to our survey a few years ago, more than 50% of China's enterprises had no such awareness and didn't take any secret-keeping measure when they reported infringements upon their trade secrets."

However, a judge at Shanghai Higher People's Court told China IP that "The court may not ascertain the existence of trade secrets even if the three elements are satisfied at the same time in the same case or vice versa. The reason is that experience does not always match logic and that actual situations are more complicated than the simple provisions of the three elements. In fact, the ascertainment of trade secrets often depends on factors other than the three elements in different cases." In practice, when identifying trade secrets and relevant protection measures, the court shall also take into consideration many factors outside the case. "The protection of private property is of the same importance as that of competition order in the legislation of trade secrets protection. The court shall consider the maintenance of competition order in addition to the protection of private property." The balance of judicial judgment usually leads to a slight consideration of the workers in practice, which has inevitably had some adverse influence on enterprises' efforts to seek judicial remedies for trade secret infringements.

Confusions on the standards of proof

There have long been controversies on the distribution of burden of proof in the circle of legal research and practice. According to the basic principle of China's Civil Procedure Law of "he who is affirming must prove," the plaintiff shall bear the burden of proof in cases involving trade secrets. However, some people insist that the burden of proving whether the technical information involved in the case are trade secrets should be assigned to the defendant because the defendant is the party reported as having made active infringements and may have a different opinion on this issue from that of the plaintiff. Others hold that the burden of proof should be born by the plaintiff at first and then shifted to the defendant, so both parties can make an argument on this point. Obviously, it is borrowed from the experience of European and American countries.

Huang Wushuang believes that the plaintiff has an undue burden of proof in cases involving trade secrets. "There has been no consensus among judges on the distribution of burden of proof at present and one thousand judges have one thousand understandings. This, as a consequence, has led to the difficulties in collecting evidences. Thus, the plaintiff might inevitably lose the case if there are disagreements on the distribution and he might bear the burden of proof alone without differentiation."

Some lawyers also agree with Huang, saying "they have found it relatively more difficult for an attorney to represent a plaintiff than to represent a defendant in cases involving trade secrets." So how to solve the problem? Huang Wushuang comes up with his own idea, "I wonder if it is possible to alleviate the plaintiff's burden of proof under the current circumstances. If the direct evidences were too difficult for the plaintiff to submit, can he be permitted to submit circumstantial or indirect evidence instead? We must find a good solution to the burden of proof in cases involving trade secrets."

In addition to the distribution of burden of proof, the proprietor has another obstacle in his collection of evidence. According to statistics, more than 80% of the disclosure of trade secrets and infringements can be traced back to former employees. However, it is very difficult for the proprietor to obtain evidence. Many companies lose cases due to the above reason. Some proprietors even hire private investigators to investigate and take pictures as evidences, whereas the court refuses to admit them as direct evidence in litigation because private investigation has not been legalized. As a result, their evidence is unlawful and is flatly rejected.

The problem of subjective authentication It is almost inevitable to make an authentication for every case involving trade secrets because complicated and professional techniques are involved in the process. This is especially true when it comes to determining the substantial similarity. The authentication institutions have played an important role in legal practice and some of their results are of crucial importance to the cases. They have substantially influenced the results of the trials.

However, many professionals in IP field have doubts on the conclusions of authentication institutions. Take the case of Huawei v. UTStarcom in 2005 for example, when there was a possibility that the case might be heard according to criminal law procedure, they submitted the opposite written conclusions, provided by Intellectual Property Center of Ministry of Science & Technology P.R.C and China Law Association on Science and Technology respectively.

"At present, China's legislation work cannot be said to be thoroughly considered, and there are areas waiting to be clarified. For example, what are the technical and legal bases of authentication? Attorneys are able to find inconsistencies in more than 80% of the authentication results, and some of them may even be proved to have no practical meaning as evidence, especially when the authentication is conducted upon whether the disputed techniques are already known to the public," said Huang Wushuang. "Under the current laws, an authentication is easy to be overthrown. Therefore, the legislation work on this aspect must be improved."

Disagreement on calculation of damages

Calculation of damages comes after the ascertainment of infringement upon trade secrets. In accordance with The Interpretation of the Supreme People's Court on Some Matters About the Application of Law in the Trial of Civil Cases Involving Unfair Competition, as regards determining the damages for the acts infringing on trade secrets as stipulated in Article 10 of Law of the People's Republic of China Against Unfair Competition, it may be performed with reference to the methods of determining damages for patent infringements. If any trade secret has been aware of and by the general public due to any tort, the damages shall be determined subject to the commercial value of this trade secret. The commercial value of this trade secret shall be ascertained in light of such elements as the research and development costs, the income from implementing this trade secret, possible benefits, and the time for maintaining the competitive advantage, etc.. According to Huang, "The challenge is how to prove the value of trade secrets. The first problem is to determine the quality of the secrets in dispute and the second is the losses generated by the infringement. It is very difficult for the right holder to handle the above two problems."

There are different views in the judicial circle about whether the R&D costs should be included in the losses. Some professionals are against the inclusion because since the defendant's infringement has been effectively stopped due to the intervention of the judiciary organs and their efforts, the trade secrets still belong to the right holder. Therefore, the R&D costs should not be included in the amount of loss. This viewpoint has been adopted by many judges in many cases. However, others are for the inclusion on the ground that the commercial value of the disputed trade secrets will be greatly reduced and the obligee will suffer a huge loss after the infringement because trade secret is a kind of intangible asset and could not be turned back to its original state. The R&D costs are the basic components of the caused damages and should be taken into consideration when calculating damages. Huang Wushuang is also for the inclusion. "In practice, public security organs and administrative law enforcement institutions have never thought that they should be adherent to the stipulations in the Interpretation. It will be very difficult for the right holders to seek legal protection if such thoughts had not been changed. When it comes to the test of damages, we should persuade judicial and administrative professionals to agree with the inclusion of the R&D costs in the damages. It will be a big step forward in the balance of interest in judicial procedure if we can solve this problem," said Huang Wushuang.

Insufficient punishment on infringements

A lawyer in Shanghai described a case on trade secret infringement he once represented to China IP in which his client—the plaintiff—won the case after eight years of litigation. However, just when the plaintiff decided to celebrate the victory, the infringer was going to other provinces to continue to infringe upon his trade secrets by way of using technology (contributed) as equity investment. Each time the administrative supervision on the infringer is a kind of re-education for him. However, "The infringers have become more and more sophisticated, and the proprietors are always left in a passive position because all punishment the infringer has to face are only administrative supervisions," the lawyer seemed to be very helpless. "And it will be more and more difficult to obtain evidence. This problem cannot be solved merely by administrative penalty and civil judgment without resorting to criminal prosecutions." At present, an infringement upon trade secrets would constitute a crime, if the infringer were sentenced to compensate the damage upon the infringed party for more than 50 million yuan. However, few courts will transfer such cases to public security organs for investigation. "This is definitely a critical problem. When the actual loss of a rights holder is over half a million yuan, the court should transfer the case. However, they often fail to do so. I think there may be some criminal judicial policies involved." It is perhaps the reason why proprietors in China tend to initiate criminal procedures instead of civil procedures, whereas foreign right holders prefer to seek civil remedies.

(Translated by Yuan Renhui)

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