Steve McDaniel, JD, PhD, Contributing Editor09.23.14
Chinese art and cultural beliefs have been dominated by dragons for thousands of years. The Han Dynasty scholar Wang Fu, sometime between 206 B.C. and A.D. 220, described precisely the complex characteristics of a Chinese Dragon:
• Camel head
• Demon eyes
• Cow ears
• Stag antlers
• Snake neck
• Clam belly
• Tiger feet
• Eagle claws
• 117 carp scales around the body, most benign but some malevolent.
This composite creature (let’s call it “Lucky”) might also be an apt description of another Chinese body – namely, its body of trade secret protection laws and regulations, which are just now evolving to resemble laws that would be recognizable in a Western court of law (to the credit of the Chinese lawmakers and regulators). The bottom line is this, don’t count on Lucky. One should not challenge a dragon without being armed with considerable fore knowledge . . . likewise, you would be ill-advised to get mixed up in a trade secret battle within the Land of the Dragon without tons of local intel and help.
With that stern and heartfelt forewarning, if you get your trade secrets ripped off in China, you can chose to pursue justice through governmental civil, administrative, or criminal (e.g., a Public Security Bureau) agencies.
The civil and administrative routes both have similar standards of admissible/persuasive evidence. However, because of the relatively small number of trade secret cases in China, local courts and officials are often unfamiliar with the concepts and procedures governing such cases. If you make a request for investigation to a Chinese agency, you will need to provide a thorough pile of evidence and be prepared to educate the officials involved about your trade secret. To bolster your position (i.e., to avoid having the AIC, a Civil Court, Criminal Court, etc. look at you like you are crazy), the VERY BEST approach would be to describe the trade secret in detail in a written licensing agreement to a Chinese-based business entity with whom you are in an established business. This will greatly aid in establishing the existence and your ownership of the trade secret. Frankly, this is just about the ONLY approach you should take with “Lucky.”
For the remainder of this article, we will assume you have taken this prudent step.
Unfortunately civil cases often begin with time consuming expert review panels determining what, if any, materials qualify as a trade secret. In criminal cases, you generally have to provide the police the documentarily based evidence of trade secret ownership and theft on a silver platter before they will take action. And then, often a state controlled research institute may evaluate whether the defendant and the plaintiff’s products are similar enough to indicate theft and use of a trade secret. Because of these tough standards, of the various intellectual property related cases filed in China in 2012, about 1 percent were for trade secret violations, with 1,123 being civil versus. 43 criminal cases.
Where will you find the descriptions of Lucky (and which carp scales are benign/malevolent)? In China, there is no counterpart to the consolidated body of trade secret laws such as the Uniform Trade Secrets Act. The current legal framework for trade secret protection in China is dominated by the 1993’s Anti-Unfair Competition Law, which defines trade secrets as “technical and business information that is unknown to the public, which can bring economic value to the rights holder that has applicability, and for which the rights holder take measures to protect their confidentiality.” Obtaining, disclosing or using a misappropriated trade secret by third party is also covered by this statute when the thief knows or should have known that the trade secret was misappropriated. Trade secrets in China held to fall in this definition include techniques and processes for management, sales (e.g., customer lists), manufacturing, and product designs/blueprints/formulas. Other documents that cover trade secret protection include the State Administration of Industry and Commerce’s Provisions Regarding the Prohibition of Trade Secret Infringement for administrative procedures, as well as business related statutes regarding contract and labor laws (e.g., confidentially agreements, employment agreements, etc.).
In 2007, the Interpretation on Certain Issues Related to the Application of Law in Trials of Civil Case Involving Unfair Competition published by the Supreme People’s Court clarified that the plaintiff in a civil case needs to produce clear evidence on how and when the trade secret was misappropriated. This is much, much harder than the procedures that allow misappropriation to be found by reasonable inference from the evidence in Western courts.
There are practical and procedural limits to a plaintiff’s ability to submit evidence provided by a private investigator or by witness testimony, and that proof is not given as strong weight as in Western courts. Documentation, documentation, documentation . . . let me say that again . . . DOCUMENTATION is the only way to sway the court. China’s civil courts lack a discovery process (you won’t be given an automatic opportunity to question the defendant about a suspected misappropriation as you would in a Western court) so you should seek to have the court issue a document preservation order to legally obtain and maintain materials (i.e., you will want to prevent a misappropriator from making Chinese lanterns out of them and setting them on fire). You will need to know ahead of time what specific (the more specific, the better) documents you are trying to protect to advise the court.
What can you get done to “fix” the problem if you win? In an AIC branch, if there is a finding that trade secret misappropriation occurred as a violation of anticompetitive laws, then they can force return of the trade secret materials, destroy goods produced using the stolen trade secret, and issue fines – the government, not you, gets the money – up to about $32,500 (¥200,000) at current exchange rates. The advantage of the AIC is they can conduct raids and issue penalties within minutes if given sufficient evidence – though that standard is high for trade secret cases.
In Civil Court, you can get permanent injunctions as well as damages. Damages may be in the form of a reasonably royalty, profits from the infringer or your lost profits much like in Western courts. Because of the ability to get a permanent injunction, many companies seek regress in Civil Court rather than an AIC. However, in Civil Court it may take a year for the case to reach conclusion, giving plenty of time for serious damage to your business to occur. Fortunately, the Civil Procedure Law was revised in 2012 to allow preliminary injunctions if a party’s conduct could cause irreparable damage or make judgment more difficult.
This has been applied by the Shanghai First Intermediate People’s Court in the past couple of years in two trade secret cases, opening the prospect of more widespread application. In the more recent case, the chief judge stated that five factors were used to issue the injunction: the potential threat of irreparable damage or injury to the petitioner, whether or not the claim was totally frivolous, the urgency of the petition, a balancing of potential costs/harms of each party, and the public interest. But, have all your evidentiary ducks in a row if you want to have a crack at getting a preliminary injunction issued should the process become widespread. In the meantime, seriously consider doing business in the Shanghai First Intermediate Court’s jurisdiction.
If you suffer big financial losses at the hands of the misappropriator, the Public Security Bureaus (the cops) are responsible for investigating whether or not the offender may be liable for criminal penalties. Public Security Bureaus are focused on violent crimes and (sometimes) product safety issues. They have little interest in economic crimes in which the Bureau does not have an economic interest (police departments making money from speed traps and forfeiture seizures have an economic interest in such crimes). The Public Security Bureau has the ability to seize evidence, conduct searches, and order defendants to release information, unlike the civil agencies. The results are admissible in administrative or civil proceedings – a potentially hard-nosed substitute for the discovery process in US courts.
At the “serious” loss level of about $81,000 (¥500,000) or more when the defendant is an individual defendant or $244,000 (¥1,500,000) when the defendant is a business, the losing defendant can face 3 years in prison and fines. “Exceptionally serious” losses of about $406,000 (¥2,500,000) or $1,219,000 (¥7,500,000), for an individual or business defendant, respectively, can put them away between 3 to 7 years. Of note, a way to invoke the criminal statute for trade secret misappropriation is “Disclosing, using, or allowing others to use a trade secret in breach of an agreement or a confidentiality obligation imposed by a legal owner.” This same language is also used in the Anti-Unfair Competition Law that is used in administrative and civil proceedings. The Supreme People’s Court also lists “Entered into a confidentiality agreement” as a satisfactory measure to demonstrate that the misappropriated information was being protected as a trade secret. So, be sure to have confidentiality agreements for everyone in your Chinese operations. The threat of pursuing a criminal case has some deterrent value to be considered when doing business, as who wants to do time in a Chinese prison, so mention it in these agreements.
Additional law suits may be filed for trade secret misappropriation during contact negotiation, during use under a licensing agreement, an employee violating a labor contract’s confidentiality agreement, as well as directors or managers harming the company by disclosing secrets under Company Law. A breach of an applicable confidentially clause in an employment contract may also be brought before a labor arbitration commission, keeping in mind that these agencies tend to favor employees over employers.
Ok, given the limitations of the options above, how do you prepare ahead of a trade secret misappropriation event to win in court – or more importantly, intimidate possible bad actors from starting the ball rolling. Document everything. In detail. Not just a paper trail . . . you want a paper road, a paper Autobahn! The information is your trade secret. Document this. The education employees got on maintaining a trade secret is critical. Document this. You have policies that are implemented to protect your trade secrets. Document this. What employee had access to a trade secret? Document this.
You will need this stack of paper to show reasonable efforts were taken to protect your trade secret, to prove misappropriation, and hopefully identify when and who was involved. With this information in hand, one or more of the agencies described above can be more easily persuaded to commit limited resources to investigate your case (i.e., take you evidence seriously since most of the investigation is done by you). Only about 20% of civil court plaintiffs win – so come loaded for bear. Also, you may seek to build positive relationships with your local AIC and public security bureau beforehand through local experts familiar with the authorities so they will be more conducive to listen to your complaint if the need arises.
“I’d rather be lucky than smart,” you hear it said in the U.S. I am not Chinese, but I never heard of that advice being given in a Chinese proverb. Not in the land of Lucky the Dragon, buddy.
• Camel head
• Demon eyes
• Cow ears
• Stag antlers
• Snake neck
• Clam belly
• Tiger feet
• Eagle claws
• 117 carp scales around the body, most benign but some malevolent.
This composite creature (let’s call it “Lucky”) might also be an apt description of another Chinese body – namely, its body of trade secret protection laws and regulations, which are just now evolving to resemble laws that would be recognizable in a Western court of law (to the credit of the Chinese lawmakers and regulators). The bottom line is this, don’t count on Lucky. One should not challenge a dragon without being armed with considerable fore knowledge . . . likewise, you would be ill-advised to get mixed up in a trade secret battle within the Land of the Dragon without tons of local intel and help.
With that stern and heartfelt forewarning, if you get your trade secrets ripped off in China, you can chose to pursue justice through governmental civil, administrative, or criminal (e.g., a Public Security Bureau) agencies.
The civil and administrative routes both have similar standards of admissible/persuasive evidence. However, because of the relatively small number of trade secret cases in China, local courts and officials are often unfamiliar with the concepts and procedures governing such cases. If you make a request for investigation to a Chinese agency, you will need to provide a thorough pile of evidence and be prepared to educate the officials involved about your trade secret. To bolster your position (i.e., to avoid having the AIC, a Civil Court, Criminal Court, etc. look at you like you are crazy), the VERY BEST approach would be to describe the trade secret in detail in a written licensing agreement to a Chinese-based business entity with whom you are in an established business. This will greatly aid in establishing the existence and your ownership of the trade secret. Frankly, this is just about the ONLY approach you should take with “Lucky.”
For the remainder of this article, we will assume you have taken this prudent step.
Unfortunately civil cases often begin with time consuming expert review panels determining what, if any, materials qualify as a trade secret. In criminal cases, you generally have to provide the police the documentarily based evidence of trade secret ownership and theft on a silver platter before they will take action. And then, often a state controlled research institute may evaluate whether the defendant and the plaintiff’s products are similar enough to indicate theft and use of a trade secret. Because of these tough standards, of the various intellectual property related cases filed in China in 2012, about 1 percent were for trade secret violations, with 1,123 being civil versus. 43 criminal cases.
Where will you find the descriptions of Lucky (and which carp scales are benign/malevolent)? In China, there is no counterpart to the consolidated body of trade secret laws such as the Uniform Trade Secrets Act. The current legal framework for trade secret protection in China is dominated by the 1993’s Anti-Unfair Competition Law, which defines trade secrets as “technical and business information that is unknown to the public, which can bring economic value to the rights holder that has applicability, and for which the rights holder take measures to protect their confidentiality.” Obtaining, disclosing or using a misappropriated trade secret by third party is also covered by this statute when the thief knows or should have known that the trade secret was misappropriated. Trade secrets in China held to fall in this definition include techniques and processes for management, sales (e.g., customer lists), manufacturing, and product designs/blueprints/formulas. Other documents that cover trade secret protection include the State Administration of Industry and Commerce’s Provisions Regarding the Prohibition of Trade Secret Infringement for administrative procedures, as well as business related statutes regarding contract and labor laws (e.g., confidentially agreements, employment agreements, etc.).
In 2007, the Interpretation on Certain Issues Related to the Application of Law in Trials of Civil Case Involving Unfair Competition published by the Supreme People’s Court clarified that the plaintiff in a civil case needs to produce clear evidence on how and when the trade secret was misappropriated. This is much, much harder than the procedures that allow misappropriation to be found by reasonable inference from the evidence in Western courts.
There are practical and procedural limits to a plaintiff’s ability to submit evidence provided by a private investigator or by witness testimony, and that proof is not given as strong weight as in Western courts. Documentation, documentation, documentation . . . let me say that again . . . DOCUMENTATION is the only way to sway the court. China’s civil courts lack a discovery process (you won’t be given an automatic opportunity to question the defendant about a suspected misappropriation as you would in a Western court) so you should seek to have the court issue a document preservation order to legally obtain and maintain materials (i.e., you will want to prevent a misappropriator from making Chinese lanterns out of them and setting them on fire). You will need to know ahead of time what specific (the more specific, the better) documents you are trying to protect to advise the court.
What can you get done to “fix” the problem if you win? In an AIC branch, if there is a finding that trade secret misappropriation occurred as a violation of anticompetitive laws, then they can force return of the trade secret materials, destroy goods produced using the stolen trade secret, and issue fines – the government, not you, gets the money – up to about $32,500 (¥200,000) at current exchange rates. The advantage of the AIC is they can conduct raids and issue penalties within minutes if given sufficient evidence – though that standard is high for trade secret cases.
In Civil Court, you can get permanent injunctions as well as damages. Damages may be in the form of a reasonably royalty, profits from the infringer or your lost profits much like in Western courts. Because of the ability to get a permanent injunction, many companies seek regress in Civil Court rather than an AIC. However, in Civil Court it may take a year for the case to reach conclusion, giving plenty of time for serious damage to your business to occur. Fortunately, the Civil Procedure Law was revised in 2012 to allow preliminary injunctions if a party’s conduct could cause irreparable damage or make judgment more difficult.
This has been applied by the Shanghai First Intermediate People’s Court in the past couple of years in two trade secret cases, opening the prospect of more widespread application. In the more recent case, the chief judge stated that five factors were used to issue the injunction: the potential threat of irreparable damage or injury to the petitioner, whether or not the claim was totally frivolous, the urgency of the petition, a balancing of potential costs/harms of each party, and the public interest. But, have all your evidentiary ducks in a row if you want to have a crack at getting a preliminary injunction issued should the process become widespread. In the meantime, seriously consider doing business in the Shanghai First Intermediate Court’s jurisdiction.
If you suffer big financial losses at the hands of the misappropriator, the Public Security Bureaus (the cops) are responsible for investigating whether or not the offender may be liable for criminal penalties. Public Security Bureaus are focused on violent crimes and (sometimes) product safety issues. They have little interest in economic crimes in which the Bureau does not have an economic interest (police departments making money from speed traps and forfeiture seizures have an economic interest in such crimes). The Public Security Bureau has the ability to seize evidence, conduct searches, and order defendants to release information, unlike the civil agencies. The results are admissible in administrative or civil proceedings – a potentially hard-nosed substitute for the discovery process in US courts.
At the “serious” loss level of about $81,000 (¥500,000) or more when the defendant is an individual defendant or $244,000 (¥1,500,000) when the defendant is a business, the losing defendant can face 3 years in prison and fines. “Exceptionally serious” losses of about $406,000 (¥2,500,000) or $1,219,000 (¥7,500,000), for an individual or business defendant, respectively, can put them away between 3 to 7 years. Of note, a way to invoke the criminal statute for trade secret misappropriation is “Disclosing, using, or allowing others to use a trade secret in breach of an agreement or a confidentiality obligation imposed by a legal owner.” This same language is also used in the Anti-Unfair Competition Law that is used in administrative and civil proceedings. The Supreme People’s Court also lists “Entered into a confidentiality agreement” as a satisfactory measure to demonstrate that the misappropriated information was being protected as a trade secret. So, be sure to have confidentiality agreements for everyone in your Chinese operations. The threat of pursuing a criminal case has some deterrent value to be considered when doing business, as who wants to do time in a Chinese prison, so mention it in these agreements.
Additional law suits may be filed for trade secret misappropriation during contact negotiation, during use under a licensing agreement, an employee violating a labor contract’s confidentiality agreement, as well as directors or managers harming the company by disclosing secrets under Company Law. A breach of an applicable confidentially clause in an employment contract may also be brought before a labor arbitration commission, keeping in mind that these agencies tend to favor employees over employers.
Ok, given the limitations of the options above, how do you prepare ahead of a trade secret misappropriation event to win in court – or more importantly, intimidate possible bad actors from starting the ball rolling. Document everything. In detail. Not just a paper trail . . . you want a paper road, a paper Autobahn! The information is your trade secret. Document this. The education employees got on maintaining a trade secret is critical. Document this. You have policies that are implemented to protect your trade secrets. Document this. What employee had access to a trade secret? Document this.
You will need this stack of paper to show reasonable efforts were taken to protect your trade secret, to prove misappropriation, and hopefully identify when and who was involved. With this information in hand, one or more of the agencies described above can be more easily persuaded to commit limited resources to investigate your case (i.e., take you evidence seriously since most of the investigation is done by you). Only about 20% of civil court plaintiffs win – so come loaded for bear. Also, you may seek to build positive relationships with your local AIC and public security bureau beforehand through local experts familiar with the authorities so they will be more conducive to listen to your complaint if the need arises.
“I’d rather be lucky than smart,” you hear it said in the U.S. I am not Chinese, but I never heard of that advice being given in a Chinese proverb. Not in the land of Lucky the Dragon, buddy.
