This report summarizes China’s legal regime for enforcing trade secret protection and the civil remedies provided for trade secret owners to combat misappropriation. Trade secrets were first addressed by the Civil Procedure Law enacted in 1991, which briefly mentioned the protection of trade secrets in civil proceedings.
The primary trade secret regulations are provided by the 1993 Law on Anti-Unfair Competition (Anti-Unfair Competition Law). Under the Law, misappropriation of trade secrets may be punished by administrative penalties. The Law also provides for compensatory damages as civil remedies to the trade secret owners.
Later, when the Criminal Law was revised in 1997, misappropriation of trade secrets was written into the new Law as a crime. Persons who commit such an offense may be subject to imprisonment for up to seven years. In terms of civil law, although trade secrets are not addressed by the General Principles of the Civil Law, the protection of trade secrets and remedies for the owner may be found in individual civil and commercial laws, including the Contract Law, Labor Law, Labor Contract Law, and Company Law.
II. Criminal Law
A misappropriation of trade secrets that causes serious losses to the owner may constitute a crime under the Criminal Law. According to article 219 of the Criminal Law, whoever commits any of the prescribed acts and thus causes “serious losses” to a trade secret owner will be punished by a fine, or a fine and up to three years’ imprisonment or criminal detention. When the losses are “exceptionally serious,” the violator will be sentenced to imprisonment of three to seven years and a fine. The prescribed acts include any of the following:
(1) Acquiring a trade secret of another by theft, inducement, duress, or other illegal means;
(2) Disclosing, using, or allowing others to use a trade secret of another acquired by the above illegal means;
(3) Disclosing, using, or allowing others to use a trade secret in breach of an agreement or a confidentiality obligation imposed by a legal owner; or
(4) Acquiring, using, or disclosing a trade secret by a third party, when he knew or should have known that the trade secret has been misappropriated in any of the aforementioned ways.
The Supreme People’s Court has issued a judicial interpretation that sets forth the specific thresholds for determining whether losses are “serious” or “exceptionally serious.” According to the interpretation, losses over 500,000 yuan (about US$80,000) are “serious losses,” while losses over 2,500,000 yuan are “exceptionally serious losses.”
Criminal prosecution is “always” considered by lawyers practicing in China as an enforcement option when the trade secret owner has suffered great losses, “because police in China have the power to seize any relevant evidence, which can also be used in administrative or civil litigation.”
III. Anti-Unfair Competition Law
The Anti-Unfair Competition Law is the primary statute in the current Chinese legal system providing protection for trade secrets. The Law defines those trade secrets that deserve legal protection, the acts that may be deemed as misappropriation of trade secrets, and the legal liabilities for misappropriation including administrative penalties and civil liabilities.
In 2007, the Supreme People’s Court issued a judicial interpretation on the application of the Anti-Unfair Competition Law (Judicial Interpretation), which provides for more detailed rules regarding trade secret protection under the Anti-Unfair Competition Law.
A. Definition of Trade SecretsAccording to article 10 of the Anti-Unfair Competition Law, “trade secrets” are defined as technical or business operation information that
- is unknown to the public,
- can bring economic benefits to the owner,
- has practical utility, and
- for which the trade secret owner has adopted measures to maintain its confidentiality.
The Judicial Interpretation provides definitions of the terms “unknown to the public,” “can bring economic benefits to the owner and has practical utility,” and “confidentiality measures” under article 10 of the Anti-Unfair Competition Law. The Interpretation specifically allows acquiring trade secrets through “independent creation” and reverse engineering, which are not deemed a misappropriation of trade secrets under the Anti-Unfair Competition Law. The Interpretation also provides a definition of “customer lists.”
B. Misappropriation of Trade Secrets
Under the Anti-Unfair Competition Law “misappropriation of trade secrets” includes
- acquiring the trade secret of another by theft, inducement, duress, or other illegal means;
- disclosing, using, or allowing others to use the trade secret of another acquired by the above illegal means; or
- disclosing, using, or allowing others to use a trade secret in breach of an agreement or a confidentiality obligation imposed by a legal owner.
According to the Judicial Interpretation, a plaintiff who claims that a defendant has misappropriated its trade secret bears the burden of proving that its trade secret meets the statutory requirements, that what the defendant uses is similar or substantially similar to its trade secret, and that the defendant has used illegal means.
C. Administrative Penalties
The administrative enforcement of trade secret misappropriation is within the authority of the offices of the Administration for Industry and Commerce (AICs) above the county level. Article 17 of the Anti-Unfair Competition Law prescribes the authorities AICs may have in overseeing and investigating trade secret misappropriation cases.
After the investigation and determination of misappropriation, the AICs may order the cessation of the illegal acts and impose a fine of not less than 10,000 yuan (about US$1,600) but not more than 200,000 yuan. The AICs may further order the return of drawings, blueprints, and other materials containing the trade secrets, and the destruction of goods manufactured using the stolen trade secrets, if such goods would disclose the trade secrets to the public when made available.
D. Civil Remedies
1. Compensatory Damages
An aggrieved owner of a trade secret may seek compensatory damages under the Anti-Unfair Competition Law. According to article 20 of the Law, any business operator who violates the provisions of this Law and thus causes damage to the infringed business operators must bear the liability of compensation for the damage. When losses of the trade secret owner are difficult to determine, the court may award damages in the same amount as the profits derived from the misappropriation.
To seek compensatory damages, a trade secret owner must file a lawsuit. The government authorities imposing administrative penalties are not authorized to award compensatory damages, although the authority may act as a mediator in the negotiation upon the request of the trade secret owner.
In the past it was unusual to obtain a preliminary injunction for trade secret misappropriation in China, although when the plaintiff prevails in a trade secret misappropriation case, the court may order the cessation of the illegal acts for a period of time until the trade secret becomes known to the public, or for another period which the court believes reasonable.
A recent court order indicates that the past reluctance to issue injunctions in trade secret cases may be changing. On August 2, 2013, Shanghai No. 1 Intermediate Court granted a preliminary injunction in a trade secret misappropriation case involving an American plaintiff. This was widely reported in the domestic media as the first trade secret preliminary injunction order made in accordance with article 100 of the newly amended Civil Procedure Law.
Indeed, the order is significant because the court clearly cited to article 100, which is the article on property preservation and injunctions. Previously, it appeared to be unclear whether a preliminary injunction could be ordered in accordance with this article in trade secret cases. Injunctions may be expected to be ordered more frequently in these cases if other courts adopt similar approaches.
IV. Protection and Civil Remedies Under Other Laws
A. Contract Law
Under the Contract Law, if a party discloses or inappropriately uses a trade secret obtained while negotiating a contract and such a disclosure or use causes loss to the other party, the party is responsible for compensatory damages regardless of whether the contract was actually executed.
Protection of technological know-how is addressed in the chapter of the Contract Law regulating technology transfer. Under that chapter, the licensor and licensee of technological know-how may stipulate the scope of the use of the technological know-how in a technology licensing agreement, provided that no restriction may be imposed on technological competition and development.
The licensee of a technology transfer contract must undertake confidentiality obligations with regard to the secret parts of the technology provided by the licensor in accordance with the scope and for the time period agreed upon in the contract.
A licensee who uses a trade secret in a manner that exceeds the agreed scope or unilaterally permits a third party to use the trade secret in violation of the contract will be ordered to cease the act and will be liable for breach of contract. A party violating the agreed confidentiality obligations is also liable for breach of contract.
B. Labor Law and Labor Contract Law
The 1995 Labor Law provides that parties to a labor contract can enter into a confidentiality agreement regarding the employer’s trade secrets in a labor contract. If an employee breaches a labor contract in violating the confidentiality agreement and causes losses to the employer, the employee is liable for compensatory damages.
The 2008 Labor Contract Law also provides that employers may impose confidentiality obligations regarding the employer’s trade secrets and other intellectual property on employees in a labor contract. For an employee who bears the obligation to keep the employer’s trade secrets, the employer may stipulate competition restrictions in the labor contract or confidentiality agreement, and the payment of financial compensation to him on a monthly basis during the term of the competition restriction after the labor contract is revoked or terminated. If the employee breaches the stipulation on competition restriction, he must pay damages to the employer as agreed upon by the parties.
C. Company Law
The Company Law prohibits directors or managers of a company from illegally disclosing the company’s secrets. The Law further provides that if directors or managers violate the law, regulations, or the company’s articles of incorporation during the course of employment and cause harm to the company, they must be liable for damages.
Foreign Law Specialist
Last Updated: 02/28/2014