New options for enforcing trade secrets in China

Effective immediately, the 10th Session of the Standing Committee of the 13th National People’s Congress (NPC) amended the Anti-unfair Competition Law on trade secret protection on 23 April 2019. Although China is still expected to enact a standalone statute on trade secret protection, the improvements brought about by the new amendments are encouraging.

Expanding the definition of ‘trade secrets’

The session has expanded the definition of ‘trade secrets’ from “technical and business information” to “commercial information such as technical and business information”. Trade secrets worthy of legal protection are no longer limited to technical information (eg, know-how related to manufacturing processes or formulas) and business information (eg, customer lists). Other business information (eg, stock option plans) have high commercial value to companies and should also be protected. While it does not list the specifics, the amendment leaves room for courts and administrative authorities to expand the coverage of trade secrets.

Expanding the scope of infringement

The amendment covers other acts of trade secret infringement, which include:

• acquiring a trade secret through theft, bribery, fraud, coercion or other illegal means;
• disclosing, using or allowing others to use the trade secret acquired; and
• disclosing, using or allowing others to use the trade secret under a parties’ control in violation of the agreements that this party is subject to or in violation of requirements of trade secret protection imposed by the rights holder.

In addition, the law holds a third party liable for acquiring, disclosing, using or allowing others to use rights holders’ trade secrets when it knows (or should have known) that the rights holder’s employees or ex-employees or other entities or individuals have committed illegal acts that infringe trade secrets.

The amendment expands the scope of what constitutes infringement in three ways. First, it counts obtaining trade secrets through electronic intrusion as infringement. Second, it clarifies the agreements that may be violated by infringers with a duty of confidentiality. Third, China now recognises secondary infringement, including inducement and contributory acts, in the context of breaching the duty of confidentiality or other requirements. All this expands the scope of what counts as trade secret theft.

Expanding the definition of infringers

To a large extent the current law limits liability for trade secret theft to competitors: an individual or entity could thus claim to be a third party and escape liability. However, the new amendment has closed this loophole. Now, third parties can be held liable if they know (or should have known) that the rights holder’s employees or ex-employees or other entities or individuals have infringed a trade secret.

Damages and administrative penalties

The amendments introduce the concept of wilful infringement into trade secret protection and impose punitive damages of up to five times the rights holder’s actual loss or the infringer’s illegal profits.

The cap of statutory damages has been raised from Rmb3 million ($430,000) to Rmb5 million ($725,000), while the administrative fine has been raised to Rmb1 million ($150,000) for normal infringement and up to Rmb5 million in serious cases. The fact that the statutory cap for compensation and administrative fines was raised in the previous amendment demonstrates that the authorities are taking a firm stance on trade secret protection.

Burden of proof shifted

The most promising change is a new rule that shifts the burden of proof for trade secret litigation. First, with regard to the proof of a trade secret, the amendments allow a trade secret owner to present prima facie evidence that confidential measures have been taken to protect the asserted trade secret and establish that it has been infringed. Then the accused infringer must prove that the trade secret claimed by the rights holder does not fall within the scope of the trade secret. The amendment no longer requires the plaintiff to take extra efforts to prove commercial value and secrecy, which are among the legal tests of what counts as a trade secret under the current law. The defendant must provide evidence to rebut. Second, with regard to proof of infringement, the trade secret owner must provide prima facie evidence that the asserted trade secret has been infringed and prove one of the following:

• That the alleged infringer had access or opportunity to obtain the trade secret and that the information used by it was substantially the same as the asserted trade secret.
• That the trade secret has been disclosed, used or there is a risk of it being disclosed or used by the infringer.
• That there is other evidence to prove that trade secrets have been infringed by the alleged infringer.

Following this, the defendant must prove that it did not infringe any trade secret.

We believe that the amendment will substantially alleviate the burden of proof for plaintiffs. In addition, it introduces far more incentives for plaintiffs to seek aggressive measures such as preliminary injunctions or partial judgments in court.