China (PRC)

By Yao Rao

yao-raoRecently, we, HHP Attorneys-at-Law, handled a trade secret infringement case that former employees of a multinational company (the Client) stole the drawings including the Client’s core trade secrets and disclosed worldwide, therefore, the Client took legal measures to protect its rights in many countries including China, America, Singapore and Japan. In the course of handling the case, we observe closely the improvement of the intellectual property right protection in legislation and enforcement in China.

Background and result of the case

In China, a former employee of the Client stole and provided such drawings to a local company and introduced another employee then, to be a technical consultant of the local company so as to produce and sell products by using such drawings, and to take the Client’s customers by offering lower prices. The Client engaged us to handle the trade secrets infringement to cease the infringement conduct and stop the former employees from working for the Chinese competitor.

The case was first brought to the court where the Chinese competitor is located, and then transferred to and finally settled by a special intellectual property tribunal of that province (the “IP Tribunal”). Reviewing the entire process of the case, we confronted a lot of difficulties in both procedural and substantial legal issues at the local court. The local court appeared to have limited experience in dealing foreign-related cases and therefore was not familiar with the procedural matters. For example, when we applied an injunction against the former employee’s exit from China, the local court took a very long time to review the application. Thus, it costed us huge effort on successfully having the local court to issue the injunction. 

The turning point came when the local court, according to a new policy issued by the Supreme People’s Court, transferred the case to the IP Tribunal of that province, which was set up to only handle complicated intellectual property cases. After the transfer, the case experienced two hearings in the IP Tribunal and completed all the legal proceedings including the evidence exchange, court fact investigation and court debate in a very efficient way. 

The case was finally settled by mediation under the IP Tribunal, under which the Client successfully ceased its former employee and the Chinese competitor working with him from disclosing and using its trade secrets, and obtained compensation for damages from the Chinese competitor. And thus, the lawsuit in China becomes the only case where the monetary compensation was obtained among the legal actions filed by the Client worldwide. 

Observing the progress of IPR protection in China

The State Council and the Supreme People’s Court of China have successively promulgated a series of suggestions and notices for the protection of intellectual property rights and improvement of commercial environment since 2015. The series of documents indicate obviously that the principle and the resolution of China to strengthen the protection of intellectual property rights, crack down trade secrets infringement and maintain foreign enterprise’s investment and commercial operation environment; as well as the requirement to solve the problems as to “high burden of proof” and “low compensation” in trades secret infringement cases in the judicial perspective.

During the lawsuit of this case, the Anti-Unfair Competition Law of China (the AUCL) has been revised twice. By comparing with the revised provision, HHP observes the following progress of trade secrets protection in China:

1. Constantly widened the qualifications of trade secrets, added the circumstances of trade secrets infringement, and expanded the scope of trade secrets protection.

The AUCL of 1993 described the qualifying factors of trade secrets as “any technical information and business operation information which are unknown to the public, can bring economic benefits to the right owner, has practical utility and is subject to the confidentiality measures made by the right owner”. The requirement of “economic benefits to the right owner” and “practical utility” has been deleted in the revision in 2017 and replaced by having “commercial value”. 

The AUCL of 2019 further expanded the scope of trade secrets definition from “technical information and business operational information” to “technical information, business operational information and other commercial information”.

It is obvious that, by modifying the definition of trade secrets, the scope of trade secrets is further expanded. On the other hand, the scope of entities liable for trade secrets infringement is also expanded.

In the AUCL of 1993 and 2017, the entities liable for trade secrets infringement are limited to business operators, while in the revised version of 2019, natural persons, legal persons and other organizations are included into the scope of the entities liable for trade secrets infringement. 

In addition, the circumstances of trade secrets infringement are increased as well, which include obtaining trade secrets from the right owner by electronic intrusion, abetting, luring and assisting others to violate the confidential obligations or the right owner’s confidential requirement to obtain, disclose, use or allow others to use the right owner’s trade secrets.

2. Raised the compensation standards of trade secrets infringement and provided punitive compensation to further strengthen the trade secrets protection.

The revised AUCL of 2017 explicitly provided that, as for trade secrets infringement, when the actual losses caused by trade secrets infringement and the benefits obtained by the infringer are difficult to confirm, the courts decide the compensation up to RMB 3 million according to the conditions of infringement conducts, which fills the gap in the AUCL of 1993.

In the revised AUCL of 2019, the maximum amount of compensation is further increased from RMB 3 million to RMB 5 million. Moreover, it additionally provides that when the business operator infringes trade secrets maliciously and the circumstance of which is serious, the amount of the compensation may be determined from double and up to quintuple, as the right owner’s actual losses or the infringer’s benefits, which is first time in Chinese laws to stipulate the punitive compensation for the malicious infringement on trade secrets. Besides, the strength of the administrative punishment for infringement on trade secrets is also gradually escalated. 

From the above changes, apart from the expansion of the scope of trade secrets protection, the strength of punishing infringement on trade secrets in China is gradually enhanced as well. 

3. Further lowered the right owner’s burden of proof in trade secrets infringement case.

In trade secrets infringement cases, since the evidence of infringement is difficult to obtain and the technical secrets is, more often than not, very technical, the “difficulties in proving”, especially to prove the trade secrets meet the statutory qualifying factors is always a hard part in lawsuits. 

The revised AUCL of 2019 re-allocates the burden of proof between the right owner and the alleged infringer. The right owner of the trade secrets only needs to provide primary evidence to prove that it has taken the confidential measure and give reason for alleging the trade secrets infringement; while the alleged infringer shall prove that the trade secrets claimed by the right owner are not the trade secrets as provided in the laws and it has not committed infringement, which increases the alleged infringer’s burden of proof and benefits the right owner. Such tendency of relieving the right owner’s burden of proof is also reflected in this case. 

4. Established the intellectual property tribunals.

Since November 3, 2014, the Provisions of the Supreme People’s Court on the Jurisdiction of the Intellectual Property Courts of Beijing, Shanghai and Guangzhou over Cases took effect.

Since January of 2017, the Supreme Court officially replied that 20 IP tribunals were established in 17 provinces: Nanjing, Suzhou, Wuhan, Chengdu, Hangzhou, Ningbo, Hefei, Fuzhou, Jinan, Qingdao, Shenzhen, Tianjin, Zhengzhou, Changsha, Xi’an, Nanchang, Lanzhou, Changchun, Urumqi, and Haikou.

On January 1, 2019, the IP tribunal of the Supreme Court was officially established, mainly hearing the nationwide second instance of civil and administrative intellectual property cases with strong technical expertise such as patents and other technology related cases.

The above progress of the establishment of the intellectual property court/ tribunal indicates that China is positively promoting the reform of the judicial system and mechanism for the protection of intellectual property rights, pushing ahead with further improvement of judicial protection regime and adjudication capacities of intellectual property rights. Since intellectual property cases are of high technicality, the judges from local courts or ordinary intermediate courts generally do not have relevant knowledge. Establishing specialized intellectual property court/tribunal and building high-quality and professionalized teams of judges promotes the unification of adjudication criteria and improve the quality of adjudication. 

This case has been respectively heard by the court where the defendant is located and the special IP Tribunal. With respect to the communication with the judges and the hearings, comparing with the local court, we find that the IP Tribunal is more professional and experienced on the trial of foreign-related intellectual property infringement cases, able to communicate with the parties efficiently on the issues in the procedure, and able to conclude the focus of the case promptly and expedite the progress of the case. 

Our experience in this case indicates that China has already taken measures which systematically improve the legal protection of intellectual property rights. The scope and strength of IP rights protection have been further increased in the aspect of legislation and enforcement, which provides a more efficient, convenient and professional legal environment for protecting the legitimate IP rights of both domestic and foreign parties.

 

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