New Rules on Protection of Trade Secrets

On 23 April 2019, the Standing Committee of China’s People’s Congress passed an amendment to the Anti-Unfair Competition Law (“AUCL“), effective immediately, signifying China’s aim to further strengthen the protection of trade secrets. The AUCL is the main law in China providing for trade secret protection as China currently does not have a specific trade secret law.

In close relation to the AUCL, the new Foreign Investment Law (“FIL”), promulgated on 15 March 2019, also provides for increased protection of trade secrets, requiring authorities to keep confidential any trade secrets of foreign investors and foreign-invested enterprises that they learn during the performance of their duties and sets out punishments for unauthorized and unlawful disclosures. The changes in these laws evidence a further step towards providing stronger trade secret protection for foreign investors doing business in China.

The amendment to the AUCL includes seven major changes to its trade secret provisions:

1. Amendment to the Definition of Trade Secrets

The previous version of the AUCL limited the definition of trade secrets to technological and business operational information which is not known to the public and has commercial value. However, under the new amendment all types of commercial information may be regarded as trade secrets, giving companies more flexibility to implement measures to protect valuable information related to their business.

2. Electronic Intrusion is Considered as a Method of Trade Secret Infringement

As technology improves, stealing trade secrets through hacking becomes more and more common. Under the new amendment, hacking, or other forms of improperly obtaining trade secrets through electronic intrusion, are methods included in the list of actions the AUCL considers as infringement of trade secrets.

3. Violation of Confidentiality Obligations Could Also be Regarded as a Violation of Trade Secrets

The violation of trade secrets is no longer limited to the existence of a non-disclosure agreement. In practice, some companies may not have these agreements, nor do they specify the details of confidential information in agreements with their employees or senior management. The new amendment to the AUCL changes “violation of an agreement” to “violation of confidentiality obligations” (statutory confidentiality obligations are stipulated in Chinese law, specifically in the Company Law and the Contract Law), thereby expanding the range of potential infringing subjects and helping companies to better protect their legal rights regarding confidential information in the absence of a non-disclosure agreement.

4. Those Abetting, Seducing or Assisting Others in Trade Secret Infringement Could be Regarded as Joint Infringers

The amendment also expands its characterization of infringement. Legislators have found it to be quite common for competitors to abet, seduce or assist employees of other business operators to engage in trade secret infringement. While such competitors do not directly commit the infringement themselves, their behavior may now be regarded as such.

5. Expansion of the Scope of Infringers to Include All Individuals and Entities

Prior to the new amendment, only “business operators” could be regarded as infringers. The amendment expands the scope of those who could be considered infringers to include all individuals and entities who steal or leak trade secrets from the company. Therefore, employees and former employees who are not, strictly speaking, business operators are now considered potentially liable under the new amendment. This is a significant change since a lot of trade secret infringement in China is committed by employees and former employees.

6. More Serious Punishments

There are three major modifications to the provisions concerning the liability of those in violation of this law.

First, the act of “maliciously” committing trade secret infringement is now punishable with one to five times the amount of damages, with the degree of “maliciousness” determined by the claimant’s direct evidence. Although the amendment does not define “malicious infringement,” in practice, a claimant’s continuous submission of Letters of Demand to the infringers could be considered evidence to prove the maliciousness of the infringer. Second, the statutory damage for trade secret infringement has been raised from RMB 3 million to RMB 5 million. And third, the new amendment includes as a punishment the confiscation of illegal income gained from the trade secret infringement. The maximum fine has also been raised from RMB 500,000 to RMB 1 million under normal circumstances, and from RMB 3 million to RMB 5 million under serious circumstances.

These modifications aim to encourage owners of trade secrets to take action to safeguard their legal rights. Previously, owners of trade secrets were put in a precarious situation where the amount of damages they could legally claim against an infringer was less than the amount of money they would need to spend on legal fees. However, under the new amendment a higher amount of damages can be claimed and other punishments have been introduced to serve as an extra deterrent against infringers.

7. Reducing Burden of Proof Difficulties for Owners of Trade Secrets

The previous version of the AUCL set difficult standards for owners of trade secrets to protect their rights. Foreign investors who brought trade secrets into their business in China faced high burdens of proof, and often lacked the evidence to show that their trade secrets were indeed trade secrets, or whether another party had committed an infringement against their company.

The new amendment now requires that the owner provide prima facie evidence to prove that it has adopted confidentiality measures and to “reasonably indicate” that its trade secrets have been misappropriated. The alleged infringer will then be required to prove that the trade secrets do not meet the definition of trade secrets under the AUCL.

The burden of proof also shifts to the alleged infringer if the owner of the trade secrets can show (prima facie) that the trade secrets have been infringed upon. The owner can evidence this by demonstrating that the alleged infringer has ways to obtain the trade secrets; that the information used by the alleged infringer is substantially similar to the trade secrets; or that the trade secrets have been disclosed, used or have the possibility of being disclosed or used.

The reduction in the burden of proof for owners of trade secrets is an important change with regard to the protection of trade secrets in China. Not only does it serve to deter potential infringers, but it provides a greater ease to owners in enforcing their legal rights.

Concluding Remarks

The new amendment to the AUCL in conjunction with the new FIL is an active step by the Chinese government to provide stronger trade secret protection for foreign investors doing business in China, which in turn creates a better business environment. Foreign companies will be able to expand their business in China with peace of mind that their trade secrets and confidential information will receive the proper protection in the Chinese legal system.