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Examining legal protection of trade secrets

ZHANG CHENYANG | 2023-01-05 | Hits:
Chinese Social Sciences Today

A counselee seeks legal advice from two workers at a trade secret protection center in Changzhou, Jiangsu in Sep, 2021. Photo: CFP

In the 20th National Congress of the Communist Party of China, General Secretary Xi said: “We will deepen structural scientific and technological reform and reform of the system for appraisal of scientific and technological advances. We will increase investment in science and technology through diverse channels and strengthen legal protection of intellectual property rights, in order to establish a foundational system for all-around innovation.” Hence, it is meaningful to enhance China’s legal guarantee for intellectual property through legislation.

Paragraph 2 of Article 123 of the Civil Code of the People’s Republic of China states: “The persons of the civil law enjoy intellectual property rights in accordance with law. Intellectual property rights are the exclusive rights enjoyed by the right holders in accordance with law over the following subject matters: (1) works; (2) inventions, new utility models, or designs; (3) trademarks; (4) geographical indications; (5) trade secrets; (6) layout designs of integrated circuits; (7) new plant varieties; and (8) the other subject matters as provided by law.” The Civil Code unified regulation on whether or not trade secrets fall into the category of exclusive rights.

On this matter, the European Parliament and the Council passed the Directives on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use and disclosure (hereinafter referred to as “the Directives”) on June 8, 2016. The Directives defined trade secrets and the practices of misappropriating trade secrets. It also stipulated protection over reverse engineering lawfully acquired products. The European Union required member states to formulate and enact necessary laws and administrative laws and regulations before June 9, 2018.

In recent years, China has made significant progress in protection of trade secrets. Nevertheless, legislation in this arena remains scattered. This calls for the establishment of a specialized law to protect trade secrets, representing a new development trend for future legislation.

Criteria for constituent elements

According to the Anti-Unfair Competition Law of China (Revised in 2019), “Commercial secrets refer to any technical information, operational information, or commercial information which is not known to the public and has commercial value, and for which its obligee has adopted measures to ensure its confidentiality.”

The Provisions of the Supreme People’s Court on Several Issues Concerning the Application of Law in the Trial of Civil Cases Involving Infringements upon Trade Secrets (Interpretation No. 7 [2020] of the Supreme People’s Court hereafter referred to as “the Provisions”) itemized the subject matters that are defined as trade secrets in the Anti-Unfair Competition Law. From a legislative perspective, the constituent elements of a trade secret include secrecy (not known by the public), value (able to generate economic profits or a competitive edge for the right holder), and confidentiality (also referred to as “manageability”; that the right holder has taken reasonable confidentiality measures to keep the secret confidential). Any information which complies with these three characteristics can be protected as trade secrets.

Article 2 of the Directives codifies that a trade secret means information which meets all of the following requirements: “(a) it is secret in the sense that it is not, as a body or in the precise configuration and assembly of its components, generally known among or readily accessible to persons within the circles that normally deal with the kind of information in question; (b) it has commercial value because it is secret; (c) it has been subject to reasonable steps under the circumstances, by the person lawfully in control of the information, to keep it secret.” As China gradually expands its scope of protection for trade secrets, while specifying relevant regulations, it is heading in the same direction as the EU in regards to legal provisions on protecting trade secrets.

However, in legal proceedings, trade secrets are sometimes defined differently in courtrooms than in theory. Article 6 of the Provisions specified situations where “the right holder has taken corresponding confidentiality measures.” This shows that judiciary interpretation has only generally described confidential measures. In legal proceedings, the court may make a judgment through inquiry into the confidentiality measures the plaintiff claims to have taken, and measure these against the ones listed in the judiciary interpretation. Consequently, when the measures taken by the plaintiff are not covered by judiciary interpretation, it may be difficult to identify the measures. In other cases, some courts may directly identify the confidentiality duty regulated in other laws as confidentiality measures.

Grounds of defense

Since the court of equity’s “Unclear Hand” doctrine has been applied in the intellectual property field, the defendant can defend him/herself based on this doctrine. When the defendant commits unfair practices or wrongful conduct, the court can exempt him/her from legal obligation. Although the owner of the trade secret cannot exercise the right exclusively, the defendant can still refer to grounds of defense to avoid liability.

The concept of “grounds of defense” has not directly appeared in China’s laws and judiciary interpretations. The Provisions itemized the situations the court does not consider to be violations of trade secrets, including when the information in dispute does not constitute a trade secret; the information is different from the right owner’s trade secret; the defendant and related people did not have access to the trade secret; the defendants and related people accessed the trade secret through legal ways.

Meanwhile, to avoid hindering right owner’s competitors’ from innovating, Article 14 of the Provisions made regulations on reverse engineering. It also wrote that “When the alleged infringer obtains the right holder’s business secrets by improper means, and thereafter claims that the business secrets have not been infringed on the grounds of reverse engineering, the People’s Court shall not support this defense.”

Article 3 of the EU’s Directives also made regulations on reverse engineering, as one of the situations where “the acquisition of a trade secret shall be considered lawful: independent discovery or creation; observation, study, disassembly or testing of a product or object that has been made available to the public or that is lawfully in the possession of the acquirer of the information who is free from any legally valid duty to limit the acquisition of the trade secret.”

There are generally two scenarios behind reverse engineering. The first situation is when the original manufacturer no longer produces a product, or the manufacturer no longer exists, yet consumers are still in need of the said product. Thus one or more manufacturers conduct reverse engineering to produce the product. The other scenario is when manufacturers analyze an opponent’s products to improve their own products’ performance and further enhance competitiveness.

The premise of defense, on the grounds of reverse engineering, is that the ways the defendant accessed the product as an object of study were legal. Specifically, the product already existed and could be accessed legally. If any illegal methods were used, before or during the claimed “reverse engineering,” such as stealing the product or information involved, the defendant shall not defend him/herself on the grounds of reverse engineering. Hence, future legislation on trade secret protection should make clear regulations on reverse engineering in accordance with different phases, namely, before, during, and after the conduct.

Linking criminal law, civil law

The Criminal Law of China (1997 Revision) added the “crime of infringing upon business secrets.” Article 219 stipulated that whoever causes heavy losses to the obligee of a trade secret has committed the crime of infringing upon business secrets. The article directly sees “heavy losses” as a condition for incrimination. Using “heavy losses” as the legal ground for dividing civil actions and criminal procedures has triggered debate in both academia and legal practice.

Using financial losses as the standard for incrimination may cause an “money amount-oriented” tendency. Furthermore, if the perpetrator’s violation of others’ trade secrets did not cause economic losses, but instead led to other severe results, it would not be possible to incriminate him/her based on this article.

The Amendment (XI) to the Criminal Law enacted in 2021 amended Article 219 of the Criminal Law into “Where a party commits one of the following acts of trade secret infringements, and the circumstances are serious, shall be sentenced to fixed-term imprisonment of not more than three years and/or a fine; if the circumstances are particularly serious, the offender shall be sentenced to fixed-term imprisonment of not less than three years and not more than ten years and a fine.” Here, “serious circumstances” is enough to constitute trade secret infringement. Criminal law no longer uses “heavy losses” as the standard for punishment.

By defining trade secret infringement as crime, China gradually reduced its dependency on tort in this regard. China’s civil law should build an independent judgement standard that suits the rules of criminal cases. Neither crimination nor measurement of penalty should be determined solely by the amount of money involved or the losses caused. It is also necessary to expand the scope of criminal protection for trade secrets, and coordinate civil and criminal protection, so that the two procedures can work side by side while learning from and complementing each other.

The EU believes that “The differences in the legal protection of trade secrets provided for by the Member States imply that trade secrets do not enjoy an equivalent level of protection throughout the Union, thus leading to fragmentation of the internal market in this area and a weakening of the overall deterrent effect of the relevant rules.” Thus the goal of the Directives is to facilitate the uniform application of the measures, procedures, and remedies by providing systems of cooperation and the exchange of information.

Although the EU calls for a uniform application of civic rules, member states can still formulate criminal rules suitable to their own conditions based on the features of different criminal cases. Criminal rules do not need to obey the civic rules made by the EU and can aim for higher standards of protection instead.

China’s clauses for trade secret protection are scattered amongst its Criminal Law, Anti-Unfair Competition Law, and related judiciary interpretations. To this day, no specified protection law for trade secrets has taken shape. Meanwhile, related concepts and connections between procedures still rely on judiciary interpretation. Going forward, it is advisable to work out a specified protection law for trade secrets. Lawmaking should pay special attention to the constituent elements, grounds of defense, and the link between civil law and criminal law.

Zhang Chenyang is an assistant research fellow from the Institute of European Studies at the Chinese Academy of Social Sciences.

Edited by WENG RONG