China Anti-Unfair Competition Law; to protect against Trade Secret Infringement

The Anjie Law Firm in China originally published this article which has great legal insights into the implementation of a new law in China. This law will protect foreign enterprises operating in China as well as local Chinese businesses against “Trade Secret” infringement.  

On April 23 the 10th Session of the Standing Committee of the 13th National People’s Congress of China passed and published revisions to the Anti-Unfair Competition Law (the “AUCL”), which came into effect immediately.

This is only the second time the AUCL were revised since its enactment in 1993, and unlike the last revision which dealt with a variety of issues, the current amendment specifically addresses trade secret infringement which has become increasingly important as a trade secret is regarded as one of the core competitive advantages in today’s business world.

Background

Unlike the protection for patents, trademarks, and copyright, there is currently no specialized law in China dedicated to the protection of trade secrets, although it has traditionally been regarded as one type of intellectual property and potentially more valuable than patents or trademarks.

In China protection for trade secrets is provided in the AUCL, labor law, contract law, and the criminal law, with the AUCL setting forth the substantive provisions which form the basis and guidance for the other specialized laws. Some statistics indicate that, of the intellectual property generated from a company’s R&D effort, probably only 10% is patentable and even less successfully patented, with the vast remainder constituting a potential trade secret.

However, civil or criminal suits for trade secret infringement have been far outnumbered by patent and trademark cases in China. The reasons behind include the limited scope of infringers, insufficient compensation for right owners, and excessive burden of proof for plaintiffs. In response, the current revision deals with these issues one by one as explained below.

Enlarged Scope of Infringers

A new paragraph is inserted into Article 9 of the AUCL, which provides that “individuals, legal persons and non-legal person organizations other than business operators, who committed illicit acts as specified in the preceding paragraph, shall be deemed to have infringed trade secrets.”

Previously, the AUCL has been interpreted as dealing with competition between business operators. As a result, whether employees could be held liable under the AUCL or whether they were general tortfeasors under the Tort Law, has been a controversial issue.

As trade secrets are often disclosed by a business operator’s employees, especially ex-employees, calls for catching employees under the AUCL have been on the rise. It is thus a welcome amendment that the law now explicitly states that employees and ex-employees are punishable under the AUCL by the same sanctions as explained in the next section.

Increased Sanctions for Infringement

In response to Chinese top leadership’s call for putting in place a punitive mechanism to make IP offenders pay a heavy price, punitive damages are for the first time authorized under the AUCL.

Article 17 now provides that “a business operator who maliciously infringed trade secrets in a severe manner can be assessed damages one to five times those determined by the aforesaid method.” (“The aforesaid method” refers to actual damages sustained by the right owner or illicit gains obtained by the infringer.)

It should be noted that this is also the first time that as high as five times punitive damages are introduced into Chinese law. Previously, only the Trademark Law permitted treble damages (which have also been raised to five times in the Trademark Law’s parallel amendment on April 23). It can be reasonably envisioned that when the Patent Law is amended later this year (a high probability event in our view), five times damages will also be allowable.

Aside from punitive damages for malicious conduct, the revised AUCL increases the statutory maximum compensation in instances of unascertainable damages and administrative penalties from RMB 3 million to 5 million (approx. USD 450,000 to 750,000). Together with the punitive compensation system, the increased sanctions will create sufficient incentives for right owners to enforce their rights in the court and before the government, and potential infringers will think twice before engaging in illegal conduct.

Alleviated Burden of Proof for Plaintiffs

The third welcome amendment and even more significant for civil plaintiffs is their alleviated burden of proof in the court.

Previously, trade secret right owners must make a preliminary showing that the alleged infringer had access or exposure to the trade secret and that the information used by the infringer is substantively the same as the trade secret, before shifting the burden to the defendant to prove that the information at issue is “not a trade secret” or that it did not engage in infringement conduct (see Article 14 of the Interpretation of the Supreme People’s Court on Certain Issues in the Application of Law in Un-fair Competition Cases).

Because most trade secret infringements are committed by stealth and the offenders spare no effort in keeping their stolen information in secret, these evidentiary requirements create an almost insurmountable hurdle for the plaintiff to overcome.

Now the AUCL adds a whole new provision under Article 32 which provides that “in trade secret civil litigation, if the right owner has adduced preliminary evidence showing that it has taken confidentiality measures for the trade secret and reasonably demonstrating that the trade secret has been infringed, then the alleged infringer shall prove that the trade secret claimed by the right owner is not trade secret within the meaning of this Law.”

Article 32 further provides that “if the right owner adduces preliminary evidence reasonably demonstrating that the trade secret has been infringed and provides one kind of the following evidence, then the alleged infringer shall prove that it did not commit infringing act:

  • Evidence demonstrating that the alleged infringer has a channel or opportunity to acquire the trade secret and the information used by the alleged infringer is substantively the same as the trade secret;
  • Evidence demonstrating that the trade secret has been disclosed or used, or is at risk of being disclosed or used;
  • Other evidence demonstrating that the trade secret has been infringed by the alleged infringer.”

Therefore, apart from proving the infringer’s exposure to the trade secret and substantive similarity, the plaintiff can now pass the buck to the defendant after demonstrating that the trade secret has been disclosed or used, or even at risk of being disclosed or used, which substantially alleviates the burden on the plaintiff.

Furthermore, after making the preliminary showing, the plaintiff may apply to the court to exercise its power in evidence collection and preservation under Article 64 of the Civil Procedure Law.

Summary

It can be anticipated that the major revisions will make it easier for trade secret owners to enforce their rights in China, particularly for international companies.

With an improved IP protection environment, such as the formation of Intellectual Property Tribunal within the Supreme People’s Court, the unified jurisdiction in the Supreme People’s Court over second-instance trials of certain types of IP-related cases, and the further improved substantive legislation, China will become a more attractive battlefield for IP owners against the infringers, and continue to be one of the largest investment destinations in the world.

Recommended For You