Navigating the minefield of trade secrets protection in China.

• Author: Chow, Daniel C.K.

Abstract

Many Multinational Companies (MNCs) now consider trade secrets to be the most important intellectual property right in China, ahead of patents, trademarks, and copyrights. While trade secrets have become more valuable than ever as a business asset in China, many MNCs also find that the protection of trade secrets in China is full of pitfalls and traps. Unlike in the case of patents, trademarks, and copyrights, China has no unified law governing trade secrets, but has disjointed provisions scattered throughout various laws. The pitfalls are also created by a high evidentiary burden in proving a theft of a trade secret that many MNCs find difficult to meet. China places an emphasis on documentary proof of the theft of the trade secret, which can be difficult to obtain. A comparison of the enforcement of trademarks in China with the enforcement of trade secrets illustrates how much more difficult it is to enforce trade secrets. In addition, MNCs that attempt to enforce their trade secrets can find themselves caught in risky and dangerous entanglements with Chinese enforcement authorities. These enforcement authorities often demand illegal payments as a price of enforcement. While these enforcement problems admit of no easy solutions given the realities of China's current trade secrets legal regime, many of these problems can be avoided altogether if MNCs implemented some simple advanced planning and preventative measures. MNCs should invest in these preventative measures that, if carefully implemented, can avoid the traps in China's murky enforcement regime while at the same time protect valuable confidential and propriety information of the company.

Table of Contents I. Introduction II. Technology Transfer and Trade Secrets in China A. Technology Transfer in China B. Technology Transfer and Protection of Trade Secrets III. China's Legal Framework for Protecting Trade Secrets A. Existing Laws Applicable to Trade Secrets B. Enforcement Authorities C. High Evidentiary Burden and Traps in the Enforcement Process 1. Enforcement of Trademarks and Trade Secrets 2. Legal Risks in Enforcing Trade Secrets IV. Preventative Measures A. Licensing and Confidentiality Agreement B. Non-Competition Agreements C. Use of Preventative Measures to Protect Trade Secrets V. Conclusion I. Introduction

Many multinational companies (MNCs) doing business in the People's Republic of China (China) find protecting trade secrets, the commercially valuable technical and business information MNCs protect through confidentiality measures, to be a growing problem. (1) For the first time, in a recent survey of MNCs doing business in China the majority of respondents selected trade secrets as the intellectual property right of most concern, ranking trade secrets ahead of trademarks, patents, and copyrights. (2) The recent concern with trade secrets is highlighted by a number of high profile cases. In a notorious case, General Motors (GM) discovered that Chery, a Chinese state-owned automaker, was marketing the QQ subcompact car, a nearly identical copy of GM's Chevrolet Spark. Chery, however, was selling the QQ at one-third of the price. (3) GM claimed that the two cars were built based on proprietary mathematical data and formulas that were stolen from GM. (4) GM brought a lawsuit against Chery in China but the two parties eventually settled the case. (5) Since the settlement, Chery has announced its plans to export cars to the United States, and it is unclear how much of an advantage Chery was able to gain through obtaining access to GM's proprietary information. (6) In a 2013 case, a former employee of the Chinese multinational pharmaceutical company Eli Lilly downloaded copies of confidential documents from Lilly's computer server with the probable intention of making them available to Lilly's competitors in China. (7) E.I. du Pont, Corning, and American Superconductor, all U.S.-based MNCs, have recently brought cases of trade secret theft in China. (8)

Theft of trade secrets in China is considered to be a widespread and common problem. (9) The Chinese government recently acknowledged the importance of trade secrets; this acknowledgement reflects China's own concern that a lax environment that results in industrial espionage is detrimental to China's own long-term interests. (10) On December 20, 2013, the U.S.-China Joint Commission on Commerce and Trade, a high-level government forum for dialogue on trade issues between the United States and China, announced that trade secret protection and enforcement and legislative reform would be a top priority for the Chinese government in 2014. (11)

The recent attention to trade secrets is fueled by not only the growing importance of trade secrets as business assets for all MNCs doing business in China but also by the growing frustration of MNCs faced with the many difficulties of protecting trade secrets. (12) Enforcement of all intellectual property rights in China has long been a concern for MNCs, but trade secrets pose a special and unique set of issues for MNCs in China for at least three reasons.

First, while only some MNCs have commercially valuable trademarks, patents, and copyrights in China, the majority of MNCs doing business in China either have commercially valuable trade secrets when they enter the Chinese market or develop them in quick order. (13) As a result, while some MNCs expend significant resources to protect their trademarks from counterfeiting and infringement, and others focus on enforcing their patent rights, almost every MNC has trade secrets that need protecting. (14) While this need means that every MNC needs to implement precautionary measures to protect trade secrets, (15) not all do, and many MNCs do not understand all of the pitfalls that come with enforcement of trade secrets until after theft has already occurred. (16) For the majority of MNCs doing business in China, there are two sources of trade secrets specific to their Chinese operations that need protecting. Some MNCs transfer technology to China protected as a trade secret, rather than protected as a patent or through some other form of intellectual property right. For example, an MNC might transfer an advanced chemical formula and process used in making industrial products, such as rubber resins, to its Chinese business entity as a trade secret. (17) The chemical formula and process become the basic technology (i.e. the know-how) used by the Chinese business entity to manufacture products for the Chinese market. If a competitor were able to gain access to the trade secret and use the advanced formula, the competitor could gain a business advantage that could be highly damaging to the MNC. In other cases, the MNC's Chinese business entity might develop trade secrets in the process of using the MNC's transferred technology. While trade secrets often relate to technology contained in the product sold by the MNC, the trade secrets also include confidential business information, such as logistics, financial data, customer lists, marketing strategies, advertisement camp signs, and expansion plans that are not directly related to the manufacture of the product. (18) The vast bulk of MNCs doing business in China will, over time, develop the type of information that could be harmful if leaked to a competitor. (19)

Second, trade secrets are notoriously difficult to enforce in China and present obstacles that are in some important respects even greater than hurdles in the enforcement of other intellectual property rights, such as trademarks. (20) Unlike other forms of intellectual property, such as trademarks, patents, and copyrights, which all have a uniform law, China's laws that pertain to trade secrets are scattered throughout various laws, including the Anti-Unfair Competition Law, (21) the Labor Law, (22) the Labor Contract Law, (23) the Company Law, (24) the Contract Law, (25) and the Criminal Law. (26) In addition, there does not appear to be any impetus in China for creating a unified trade secrets law in the near future, and vested political interests may prevent the creation of such a law. Moreover, an analysis of these laws indicate that, compared with other intellectual property rights, trade secrets present an especially high evidentiary burden on plaintiffs and could involve a complex procedure that could create many traps for an MNC. (27) One major hurdle is that, unlike trademarks and patents, trade secrets are not subject to a registration system in China so there is no documentary evidence, such as a registration certificate officially issued by the PRC authorities, of the ownership of the trade secret by the plaintiff. Enforcing trade secrets involving intangible knowledge, without any supporting documentary evidence, becomes a difficult, if not insurmountable, problem because Chinese government authorities have a strong preference for documentary evidence in all cases. (28) Documentary evidence is practically the only form that is given significant weight in Chinese courts; oral testimony is often regarded as of little probative value. (29) The use of documentary evidence in enforcement of intellectual property rights can be crucial because it is often difficult to obtain. Several examples, further discussed below, will illustrate this difficulty. (30) Since trade secrets and trademarks are both considered to be part of the law of unfair competition, later parts of this Article will compare the enforcement of trade secrets and trademarks in China. (31) As this Article will show, obtaining enforcement of trademark rights in China can be a straightforward process; an enforcement action can be obtained from Chinese administrative authorities in some cases immediately on application, (32) whereas obtaining enforcement of trade secrets can be a long and arduous process, full of pitfalls. Part of this explanation lies in China's strong preference for documentary evidence, which is...