Trade Secrets Law in China
Trade secrets are crucial assets for businesses, encompassing confidential business information, such as formulas, processes, patterns, customer lists, and financial data, that provide competitive advantages in the market. China, as one of the world’s leading economies, has developed a robust legal framework to protect trade secrets, largely influenced by both domestic legislation and international agreements like the World Trade Organization (WTO) and TRIPS (Trade-Related Aspects of Intellectual Property Rights).
Legal Framework for Trade Secrets Protection in China
The Anti-Unfair Competition Law (AUCL) (2019 Amendment)
The main piece of legislation that governs trade secrets in China is the Anti-Unfair Competition Law (AUCL), which was first enacted in 1993 and most recently amended in 2019.
Article 9 of the AUCL specifically addresses the protection of trade secrets. It prohibits the acquisition, use, or disclosure of trade secrets without the consent of the rightful owner, unless the acquisition or disclosure is lawful.
Definition of Trade Secrets: Under Article 9, a trade secret is defined as information that is not known to the public, has commercial value, and is protected by its owner through reasonable measures.
Infringement of Trade Secrets: The law prohibits the misappropriation of trade secrets by means such as industrial espionage, breach of contract, or improper disclosure by employees or former employees.
Scope of Protection: Protection is given to technical information, business information, and marketing strategies, provided these are kept confidential and not publicly available.
The Civil Code of the People’s Republic of China (PRC) (2021)
With the enactment of the Civil Code in 2021, there are broader provisions regarding the protection of intangible assets, including trade secrets. The General Principles of Civil Law offer protection to business interests such as confidential information, which has been expanded to cover more complex issues such as contractual breaches and infringement of intellectual property rights.
Criminal Law (2009, amended 2017)
In addition to civil remedies under the AUCL, the Criminal Law of the People’s Republic of China provides criminal penalties for the misappropriation of trade secrets. Article 219 of the Criminal Law imposes criminal sanctions on individuals who steal or disclose another person’s trade secrets for personal gain or competitive advantage.
The Judicial Interpretation of the Supreme People’s Court (SPC)
In 2017, the Supreme People's Court (SPC) issued detailed judicial interpretations on handling trade secrets cases, emphasizing that reasonable protection measures must be demonstrated by the plaintiff. The SPC clarified standards for determining the value of a trade secret and how trade secrets are to be treated in the context of litigation.
Key Elements of Trade Secrets Protection in China
Definition of Trade Secrets:
According to the AUCL and the Civil Code, trade secrets are defined as any technical or business information that:
Is not publicly available.
Has actual or potential economic value.
Is subject to reasonable measures by its owner to maintain secrecy.
Examples include manufacturing processes, formulas, designs, customer lists, marketing strategies, business plans, and software codes.
Obligations for Trade Secret Owners:
The owner must take reasonable measures to maintain the confidentiality of the trade secret. This could include implementing non-disclosure agreements (NDAs), restricting access to confidential data, and securing physical and digital access to sensitive information.
Misappropriation and Infringement:
Misappropriation includes stealing, disclosing, or using trade secrets without the owner's consent.
Infringement can occur through various means, such as:
Corporate espionage or hacking to gain access to confidential information.
Breach of employment contract where an employee discloses confidential information after leaving the company.
Unlawful copying or reverse engineering of trade secrets.
Damages and Remedies:
Civil remedies: Victims of trade secret misappropriation may seek injunctive relief, damages, or an accounting of profits derived from the unlawful use of their trade secrets.
Criminal sanctions: Individuals or entities who illegally acquire or use trade secrets may face criminal charges under Chinese criminal law, with penalties ranging from fines to imprisonment.
Administrative sanctions: The State Administration for Industry and Commerce (SAIC) has the power to impose fines and other administrative measures on infringers.
Notable Case Law on Trade Secrets in China
Although there is still some development needed in terms of case law and judicial consistency, Chinese courts have handled several high-profile trade secret disputes in recent years. Below are some notable cases that highlight the application of trade secrets law in China:
BASF v. Wang Yong (2014)
Facts: This case involved a former employee of BASF, a global chemical company, who was accused of misappropriating trade secrets by downloading confidential company data before resigning and attempting to join a competitor.
Ruling: The court ruled in favor of BASF, holding that the employee’s actions amounted to misappropriation of trade secrets. The employee was ordered to pay damages for the unlawful use of the trade secrets.
Significance: This case marked an important step in enforcing employee confidentiality obligations and highlighted the importance of internal measures to safeguard trade secrets, including employee agreements and access control systems.
Zhejiang Sunchine Import and Export Co., Ltd. v. Jinlin Machinery Co., Ltd. (2017)
Facts: The dispute involved allegations of the defendant using confidential product designs and technical information without permission after an unsuccessful business negotiation with the plaintiff. The plaintiff argued that its designs were confidential trade secrets, and their use by the defendant was unlawful.
Ruling: The court ruled in favor of the plaintiff, emphasizing that the technical drawings and business strategies shared during the negotiation were indeed trade secrets. The defendant was ordered to cease using the plaintiff’s designs and pay damages.
Significance: This case reinforced the notion that pre-contractual information shared in business negotiations can be protected as trade secrets, even before formal agreements are made.
Guangdong VTech Electronics v. Shenzhen Dong Fang Technology Co. (2015)
Facts: VTech, a global manufacturer of consumer electronics, sued Shenzhen Dong Fang for misappropriating its trade secrets related to software used in electronic toys. The defendant was accused of using VTech’s proprietary software to develop a competing product.
Ruling: The court found that the software in question was a trade secret and ordered Shenzhen Dong Fang to cease production of the infringing toys and pay damages to VTech.
Significance: This case emphasized the protection of software and technical innovations as trade secrets in China, particularly in highly competitive industries.
Chinese Court Ruling on Employee’s Duty of Confidentiality (2018)
Facts: In a high-profile case involving an employee who took company files upon resignation and disclosed them to a competitor, the court ruled that the employee’s actions violated both the employment contract and the company’s trade secrets protection policy.
Ruling: The court found the employee guilty of misappropriating trade secrets and awarded significant damages to the employer.
Significance: This case reinforced the obligation of employees to maintain confidentiality even after leaving a company and the necessity for companies to implement clear and enforceable trade secrets protection policies.
Key Challenges in Trade Secret Protection in China
Enforcement Issues: Despite legal provisions, trade secret enforcement remains inconsistent across China. Courts often struggle with burden of proof, particularly in cases involving digital or software-related trade secrets.
International Trade Secret Theft: With China's growing role in international trade, there have been concerns regarding the misappropriation of foreign trade secrets. Companies have raised issues regarding the transparency and fairness of the Chinese legal system in handling foreign trade secret disputes.
Employee Mobility: China’s legal framework continues to evolve regarding the balance between protecting trade secrets and allowing employee mobility. Some cases suggest that employees might be unfairly restricted from taking on new roles in the same industry, leading to challenges in upholding non-compete clauses.
Conclusion
Trade secrets are a crucial element of intellectual property in China, and the country has established a legal framework to protect such secrets. The Anti-Unfair Competition Law (AUCL), the Civil Code, and criminal law provide substantial protection for trade secrets, with remedies including damages, injunctive relief, and criminal sanctions. However, as China's economy and legal landscape continue to evolve, the enforcement of trade secret laws and the handling of cross-border disputes remain areas requiring improvement. The aforementioned case law illustrates the increasing awareness and legal action being taken against trade secret theft and highlights China’s role in the global trade secrets regime.
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