Trade Secret Protection in China

• Author: Donna Suchy
• Pages: 265-297

265

CHAPTER 4

Trade Secret

Protection in China

Cristiano Rizzi, Lex Smith, and Ed Lehman

A. Introduction

In this age of globalization, the world is involved in creating a global market

economy, where the competitors are always concerned about protecting their

products (especially if patented) and their trade secrets. This short chapter is

focused on the latter; however, more discussion will follow to describe this

fascinating subject regarding the protection of intellectual property rights

(IPRs) in China because these two topics are strictly interconnected. In the

competitive global marketplace, the winners are not only those who can

introduce their new products and technologies into the stream of commerce

but also those who can properly protect both technology and trade secrets.

Because intellectual property rights protection has become a complex issue

for legislatures, judges, lawyers, and scholars, especially in China, indus-

trialized countries have joined treaties to guarantee, as much as possible,

a uniform protection of those rights for the smooth development of trade

among nations.

During the last few years China has made great strides in upgrading and

improving its systems of IPR protection, but it seems more effort is needed

to put the Chinese system more in line with international standards. This is

the reason China not only recently revised its legal framework concerning

All three authors are with Lehman, Lee & Xu in Beijing, China. This chapter was reviewed by

Sean Suiter, Suiter Swantz PC LLO.

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266 IP Protection in China

protecting IPRs but also undertook the enhancement of that framework,

working closely in particular with the European Union (EU). Regarding

intellectual property (IP) protection and enforcement of IPRs, China and

the EU have established a special and preferred channel for developing a

more clear (legal) environment in which IPRs in China should gain the

same standard of protection and consideration as found abroad.

One of the most important initiatives is the project known as IPR2,1

which is aimed at creating international standards of IPR protection in

the Chinese legislation. The IPR2 project also demonstrates China’s strong

determination to support and foster international cooperation in IP. This

project of cooperation is part of a broader national IP strategy that in addi-

tion to strengthening the enforcement system includes other important

elements such as raising the awareness of the public and education on the

importance of intellectual property in China.It is necessary to stress that

IP protection is one of the key points to further help not only local firms

but also foreign firms to compete fairly in this market, to strengthen the

relationship between China and other, more developed countries, and to

help China in better integrating itself at an international level.

Overall, many analysts say that for China to attract more investment

and move more toward a market economy, it needs to create a more con-

crete and predictable system of IPR to assure foreign companies that intel-

lectual property is fully respected. And this includes the protection of trade

secrets, which represents the heart of a business if processes or formulas are

to be used in developing it.

Recently China’s attitude toward trade secrets protection has

changed significantly: “China trade secret theft, a ‘grave problem’ ” was

the headline of a recent news article carried by MSNBC.com, CNBC

.com, XE.com, GMA News Online, newsterra.com, and many others. While

the headline is attention getting, the reality in China today is that the Chi-

nese government has realized how important it is to protect trade secrets

1. IPR2 is an EU-China cooperation initiative jointly funded under a financing agree-

ment between the European Commission of the European Union and the Ministry of Com-

merce of People’s Republic of China (PRC) for a total of EUR16.425 million (approximate

equivalent of RMB164,250,000). The EU’s contribution is EUR10.85 million, and the PRC’s

is EUR5.425 million. IPR2 has been built on the work and success of IPR1 from 1999–2004,

which promoted international standards of IPR protection in Chinese legislation. IPR2 is the

successor of that cooperation project. IPR2 aims to strengthen the enforcement of intellectual

property rights by targeting the reliability, efficiency, and accessibility of the IP protection

system in China.

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Trade Secret Protection in China 267

and other IP issues, and the legislature is now paying greater attention to it,

taking measures to enhance IP security across China.

Further discussion of this subject follows with a detailed analysis of

how Chinese legislation deals with protecting this sensitive information.

Effective protection of trade secrets is impossible without a supportive legal

system, and China has accomplished this by enhancing its legal framework

regulating IPR. As discussed in the following sections, legal standards for

protection of trade secrets are scattered in several statutes and regulations,

and this can cause confusion at first, especially if you are not familiar with

Chinese laws, but it makes sense if you keep in mind that China has devel-

oped its framework in this field in different stages.

B. Trade Secrets from an Economic Perspective

and Introductory Denition

Before discussing how China protects trade secrets, and with which instru-

ments, it is necessary to describe the importance of this information from

an economic prospective. Trade secrets are crucial for the profitability

of a business and for innovation. It is not an exaggeration to affirm that

trade secrets are at the base of innovation itself. The protection of trade

secrets is of extreme importance not only for a business itself but also for

the competitiveness of an entire nation. It is no surprise that protection of

trade secrets is a well-established concept2 (see “Concept of Trade Secret in

Roman Law”) functionally related to the impact of innovation in the evolu-

tion of the economy. Starting from the 19th century3 (see “Evolution of the

Concept of Trade Secrets in the 19th Century”), the Industrial Revolution

urged lawmakers to shape the notion of trade secrets as an asset deserving

legal protection.

Probably the peculiarity of trade secrets is that they are the most intan-

gible among intangible assets. Nevertheless, their importance in economic

terms is evident, and they deserve to be treated as real intellectual property

2. Some authors root the first legislative provision in the Roman period. See A. Arthur

Schiller, Trade Secrets and the Roman Law: The Actio Servi Corrupti, 30 C. L. R. 837

(1930). Contra Prof. A. Watson, University of Georgia Law School, Trade Secrets and Roman

Law: The Myth Exploded (1996). Scholarly Works. Paper 476.

3. See Newber y v. James, 35 Eng. Rep. 1011 (Ch. 1817); Vickery v. Welch, 36 Mass. (19

Pick.) 523 (1837).

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