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RECENT POLITICAL AND LEGAL EFFORTS TO REFORM TRADE SECRET LAW IN CHINA

by ANDREW SCOTT

                                                                                                 August 4, 2014   I. INTRODUCTION II. A TALE OF TWO COUNTRIES: THE DIFFERENT SOURCES OF TRADE SECRET LAW BETWEEN THE UNITED STATES AND CHINA A. Background: Defining and Protecting Trade Secrets in the U.S. and China B. The Use of Case Law C. Using Trade Secret Cases 1. Using  the  Interpretations   2. Using Guiding Cases: A Step Toward Precedent 3. Using Typical  (Model)  Cases   III. LEGAL AND POLITICAL REFORM IN CHINA: DISTILLING PRINCIPLES AND PREDICTING TRENDS BY EVALUATING RECENTLY RELEASED GUIDING AND MODEL CASES

A. New Preliminary Injunction Law Applied in Favor of American Company

Claiming Trade Secret Infringement Against Former Employee 1. Introducing Civil Procedure Law 100

2. Applying Civil Procedure Law100 in the Context of a Trade Secret Infringement Claim by Eli Lilly, an American Company 3. Comments: A Positive Outlook for Foreign Investors’ TSRs B. Summaries of Recent Typical (Model) IPR Cases Released 1. Shifting the Burden of Proof in an Intellectual Property Case 2. Promise for Claims of Willful Infringement 3. Employee Mobility and Foreign Companies Find Protection Through Evidentiary Measure in Trade Secret Case 4. Criminal Trade Secret Case Produces Largest Penalty in Chinese History Upholds Policy of Non-Disclosure Duty of Former Employees IV. BEST PRACTICES MOVING FORWARD: FACTORS TO CONSIDER IN PROTECTING TSRS WHEN DOING BUSINESS IN CHINA A. Employee Mobility in China: Past and Present Practices and Policies 1. China’s Views of Employee Mobility in Light of Trade Secrets

 

 

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2. Protecting Trade Secrets Before Litigation 3. Protecting Trade Secrets During Litigation B. Risk Planning for the Future Business in China: 1. Private Enforcement 2. Judicial Enforcement: Administrative, Civil, or Criminal a. Administrative Enforcement b. Civil Enforcement c. Criminal Enforcement C. Consult a Professional V. CONCLUSION  

 

 

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I. INTRODUCTION

With good reason, U.S. companies doing business in China have long complained

about the inadequate protection accorded to trade secret rights (“TSRs”).1 Anyone who

has ever applied to a Chinese administrative, civil, or criminal court either to preserve

evidence or to stop infringement of a trade secret prior to trial knows how frustrating and

futile the process can be: (1) civil claims often take up to a year to be decided, (2) huge

losses may occur before trial because of difficulty in getting a preliminary injunction

before trial,2 (3) administrative agencies often shirk enforcement mandates, (4) criminal

courts rarely punish trade secret infringers,3 and (5) local judiciaries frequently dismiss

infringement claims, carrying out government’s interest in generating revenue and

acquiring innovation at the expense of a right holder’ interest in stamping out

infringement.4 In light of the foregoing concerns, it is no surprise China’s poor record for

protecting trade secrets consistently ranks among the top concerns that foreign companies

have about doing business in China.5

                                                                                                               1 Richard Grams, China Must Double-Down on Trade Secret Protection, LAW360.COM (Nov. 21, 2013, 8:18 PM), http://www.law360.com/articles/489559/china-must-double-down-on-trade-secret-protection. 2 Id. 3 Matthew A. Marucci, Navigating Unfamiliar Terrain: Reconciling Conflicting Impressions of China’s Intellectual Property Regime in an Effort to Aid Foreign Right Holders, 23 FORDHAM INTELL. PROP. MEDIA & ENT. L.J. 1395, 1435 (2013), citing Mark Cohen, Why the Proposed Amendments to the Patent Law Matter . . . And Maybe Not Just For Patents, (Sept. 6, 2012), http://chinaipr.com/2012/09/06/why-the-proposed-amendments-to-the-patent-law-really-matter-and-maybe-not-just-for-patents. 4 Matthew A. Marucci, Navigating Unfamiliar Terrain: Reconciling Conflicting Impressions of China’s Intellectual Property Regime in an Effort to Aid Foreign Right Holders, 23 FORDHAM INTELL. PROP. MEDIA & ENT. L.J. 1395, 1435 (2013). 5 Richard Grams, China Must Double-Down on Trade Secret Protection, LAW360.COM (Nov. 21, 2013, 8:18 PM), http://www.law360.com/articles/489559/china-must-double-down-on-trade-secret-protection.

 

 

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The U.S. has urged China to reform its trade secret practice.6 China’s slow

response; however, has continued to strain the two countries’ relations.7 One of the

obstacles facing trade secret reform is the nature of China’s legal system. China’s courts

adhere to civil law; not common law. As a result, courts do not adhere to precedent in

deciding cases. Another obstacle is the protectionist values that many local courts invoke

in deciding cases,8 Finally, the problems that arise from these obstacles are exacerbated

by the courts’ lack of transparency in that they rarely publish opinions.9

Today, however, there are signs that legal reform is underway in China through

the leadership of President Xi Jingping. Although its reform efforts have been sluggish

to bring the level of protection for TSRs to that afforded to other intellectual property

rights (“IPRs”) in China, the country’s recent efforts reflect a desire to reform their

intellectual property regime, including trade secret law:10

o November 2013: At the third plenum of the 19th Chinese Communist Party Congress, President Xi proposed collaborating with the U.S. to reform China’s trade policies, including creating fair competition for foreign and domestic companies.11

                                                                                                               6 Mark Cohen, US-China Business Council Recommendations for Trade Secret Protection, (Oct. 4, 2013), http://chinaipr.com/2013/10/04/us-china-business-council-recommendations-for-trade-secret-protection. 7 Fareed Zakaria GPS (CNN television broadcast Jan. 19, 2014) (noting that Chinese cyber terrorism has targeted American telecommunication systems, stealing secrets from governments or private companies, becoming the single-most worrisome threats to the United States) (transcript available at http://transcripts.cnn.com/TRANSCRIPTS/1401/19/fzgps.01). 8 Additionally, China has neither a federal nor state court system, they have one system of courts that is different from any country, having four levels of courts: the basic court, intermediate court, high court, and the supreme court. See Kong Xiangiun, Chief Justice, Intellectual Property Tribunal of the Supreme People’s Court of China, Address at the University of Washington School of Law’s Lecture on Intellectual Property Enforcement in China (February 4, 2011) (transcript available at http://www.law.washington.edu/multimedia/2011/JudgeKong/Transcript.aspx). 9 Robert Zoellick, The Aim Of Xi’s Reforms Is To Preserve Party Control, FINANCIAL TIMES, June 12, 2014, available at http://www.ft.com/intl/cms/s/0/ee06f38c-efce-11e3-9b4c-00144feabdc0.html#axzz39SJP9EYB. 10 Marucci, supra note 3, at 1436. 11 President Xi discussed goals and reforms that signaled a positive momentum for reforms that may benefit foreign companies in the longer term including having a unified investment regime. See Third Plenum Decision Expands Reform Objectives; Follow-up Measures Needed to Determine Impact on Commercial

 

 

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o December 2013: At the 24th annual China-U.S. Joint Commission on Commerce and Trade (“JCCT”),12 China collaborated with the U.S. in taking steps to strengthen and improve trade secret protection and enforcement by doing the following:

! Improve trade secret reform within China’s legal systems, ! Strengthen criminal law enforcement of IPRs, ! Strengthen TSRs for foreign investors, and ! Welcome U.S. suggestions13

o April, 2014: The Chinese General Office of the State Council printed and

issued a document hoping to, in part, optimize the Chinese market by establishing protections for businesses with trade secrets by doing the following:

! Cracking down on criminal infringement of IPRs; ! Creating reforms in pilot programs for IPRs tribunals; ! Establishing a black list of companies violating IPRs; ! Negotiating with developed countries on IPR issues ! Publicizing cases of trade secret infringement; ! Reinforcing trade secret protection; and ! Strengthening protection of intellectual property rights14

o June, 2014: The State Administration of Industry and Commerce

(“SAIC”) invited criticism and suggestions from the public to make amendments to a draft of rules15 that could effect holders of TSRs16

                                                                                                                                                                                                                                                                                                                                         Issues, U.S.-CHINA BUS. COUNCIL, https://www.uschina.org/third-plenum-decision-expands-reform-objectives-follow-measures-needed-determine-impact-commercial (last visited Aug. 4, 2014). 12 The JCCT is a forum of or high-level dialogue between officials of the U.S. and China who discuss bilateral trade issues. In 2004, Vice Premier Wu Yi committed to the Joint commission to reduce IPR infringements significantly through China in light of what the U.S. continues to assert as “rampant counterfeit and piracy problems that plague China’s domestic market, and China’s having become a leading exporter of counterfeit and pirated goods to the world.” See Henry Beck & Xichun (Catherine) Pan, Licensing and Technology Transfer to China: A Roadmap, in LICENSING BEST PRACTICES, STRATEGIC, TERRITORIAL, AND TECHNOLOGY ISSUES 12, (Robert Goldschider & Alan H. Gordon eds., 2006). 13 Fact Sheet from the 24th U.S.-China Joint Comm’n on Commerce and Trade (Dec. 20, 2013, 11:22AM), http://edit2.my.commerce.gov/news/fact-sheets/2013/12/20/fact-sheet-24th-us-–china-joint-commission-commerce-and-trade-fact-sheet. 14 Press Release, Ministry of Commerce of the People’s Republic of China, The General Office of State Council’s Issuing and Printing of the National Work Planning and Cracking down on IPR Infringement and Counterfeit and Shoddy Goods (Apr. 17, 2014, 3:39PM), http://english.mofcom.gov.cn/article/zt_cv/lanmua/201404/20140400553497.shtml. 15 The SAIC invited criticism for its draft of the Industrial and Commercial Administrative Authorities Prohibit the Abuse of Intellectual Property Rights to Eliminate or Restrict Competition Regulations (Jun. 10, 2014), http://www.saic.gov.cn/ywdt/gsyw/zjyw/xxb/201406/t20140611_145883.html. 16 Ryan Ong, U.S.-China Bus. Council, SAIC Draft Rules Create Competition, IPR Challenges for Companies, http://www.uschina.org/saic-draft-rules-create-competition-ipr-challenges-companies (last visited, Aug. 4, 2014) (recognizing shortcomings, of the SAIC’s draft, suggesting revisions to the SAIC,

 

 

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o July 2014: In Beijing, President Xi assured U.S. economic officials that China recognized enforcing trade secrets is essential to maintain fair competition and development of an innovative economy, so China committed to the following:

! Vigorously investigate and prosecute trade secret theft; ! Publish civil and criminal judgments; and ! Protect confidential business information, including

trade secrets.17

While the foregoing are examples of efforts made toward political reform that promote

foreign nations to do business in the country, these efforts might be having a positive

effect on China’s legal system, too, particularly with the judiciary. For example, Chinese

courts have been deciding cases that are emphasizing foreign-country-friend legal values:

higher civil damages, combining civil, administrative and criminal cases in lower courts,

improvements in civil procedure, burden of proof reversals for patent protection, and an

enhanced focus for trade secrets.18

Are these recent decisions a bellwether to a more enlightened and transparent

judiciary or a flash in the pan? Accordingly, this paper aims to evaluate this question by

doing the following: (1) analyze China’s current and changing legal framework in light of

trade secret reform; (2) distill from recent trade secret model cases important changes,

values, trends in the trade secret law; and (3) to suggest practices that might be useful to

U.S. companies looking to do business in China in light of issues concerning both

employee mobility and protectionist courts.

                                                                                                                                                                                                                                                                                                                                         and seeking improvements to provisions affecting the requirements of essential facilities, IP and standards, and IP-related trading practices like bundling and tying). 17 Press Release, U.S. Treasury Dept. Office of Pub. Affairs, Sixth Meeting of the U.S.-China Strategic and Economic Dialogue Joint U.S-China Economic Fact Sheet (Jul. 11, 2014), available at http://www.treasury.gov/press-center/press-releases/Pages/jl2563.aspx. 18 Mark Cohen, IPR Model Cases: Part of the Long Journey Towards IPR Case Law with “Chinese Characteristics”?, (Nov. 11, 2013), http://chinaipr.com/2013/11/10/ipr-model-cases-part-of-the-long-journey-towards-ipr-case-law-with-chinese-characteristics.

 

 

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II. A TALE OF TWO COUNTRIES: THE DIFFERENT SOURCES OF TRADE SECRET LAW BETWEEN THE UNITED STATES AND CHINA

A. Defining and Protecting Trade Secrets

In the United States, the protection and the framework of TSRs have been

recognized and developed for more than a century. Fourty-eight of the fifty19 states

generally provide protection for trade secrets by means of, at least, the Uniform Trade

Secrets Act (“UTSA”), which usually provides that a trade secret has the following

elements:

(1) Comprised of information, including a formula, pattern, compilation, program device, method, technique, or process;

(2) Derives independent economic value, actual or potential, from not being generally known to the public or to others who can obtain economic value from its disclosure or use; and

(3) Ds the subject of efforts that are reasonable under the circumstances to maintain its secrecy.20

In comparison to the well-developed legal framework and rich jurisprudence for trade

secret law in not only the U.S. but also the developed nations in the international

community, China’s basic framework is playing par for the course; however, the

country’s trade secret jurisprudence is fighting its way out of a sand trap. Like the

UTSA, or a slight variation thereof, provides the framework for trade secret protection in

the U.S., the Anti-Unfair Competition Law (“AUCL”) provide the framework in China to

protect one’s trade secret:21

                                                                                                               19 New York, and Massachusetts’ legislature have not adopted the UTSA. 20 See Cal. Civ. Code § 3426.1(d) (West 2005). Without significant change, California has adopted the UTSA. 21 Notice both the UTSA and UACL have requirements of (1) information, (2) economic value, and (3) reasonable efforts or measures taken to maintain secrecy; however, some scholars find that a trade secret may be comprised of either three or four elements; See also SHAN HAILING, THE PROTECTION OF TRADE

 

 

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(1) Comprised of technical and business information that is unknown to the public,

(2) Has economic value and practical utility, and (3) Has an owner who has undertaken measures to maintain its

confidentiality. 22

China, however, allows both its national agencies and local standing committees in

different provinces to supplement the AUCL. In this respect, China’s trade secret

framework is unlike the U.S. in that China has a myriad23 of trade secret laws, for

example:

• State laws, which include the national laws for Labor,24 Criminal,25 Contract,26 Company,27 and Labor Contract;28

• Administrative laws and regulations of the State Council, which include Several Provisions on Prohibiting Infringements upon Trade Secrets;29

• Local regulations, [good information here form a particular province that implemented protections that changed the game].30

                                                                                                                                                                                                                                                                                                                                         SECRETS IN CHINA 47 n.2 (2d. ed. 2012), noting that, generally, most people consider a trade secret to have to have three or four elements. 22 J. BENJAMIN BAI & GUOPING DA, STRATEGIES FOR TRADE SECRET PROTECTION IN CHINA, 9 NW. J. OF TECH. & INTELL. PROP. 351, 33, construing [Anti-Unfair Competition Law of the P.R.C.] promulgated by the Standing Comm. Nat'l People's Cong., Sept. 2, 1993, effective Sept. 2, 1993), art. 10 (China). 23 The Protection of Trade Secrets in China, page 28, noting there are more than 400 laws and regulations containing provisions of the protection of trade secrets (including technological secrets were promulgated and implemented in China from 1985 to 2012, all of which constitute the source of law for current trade secret protection in China. 24 Zhong Hua Ren Min Gong He Guo Lao Dong Fa [Labor Law of the P.R.C.] (promulgated by the Standing Comm. Nat'l People's Cong., July 5, 1994, effective Jan. 1, 1995), art. 22 (China). 25 Zhong Hua Ren Min Gong He Guo Xing Fa [Criminal Law of the P.R.C.] (promulgated by the Nat'l People's Cong., Mar, 14, 1997, effective Oct. 1, 1997), art. 219 (China). 26 Zhong Hua Ren Min Gong He Guo He Tong Fa [Contract Law of the P.R.C.] (promulgated by the Nat'l People's Cong., Mar. 15, 1999, effective Oct. 1,1999), art. 306 (China). 27 Zhong Hua Ren Min Gong He Guo Gong Si Fa [Company Law of the P.R.C.] (promulgated by the Standing Comm. Nat'l People's Cong., Oct. 27, 2005, effective Jan. 1, 2006), art. 149(7) (China). 28 Zhong Hua Ren Min Gong He Guo Lao Dong He Tong Fa [Labor Contract Law of the P.R.C.] (promulgated by the Standing Comm. Nat'l People's Cong., Jun. 29, 2007, effective Jan. 1, 2008), art. 23 (China). 29 See Guo Jia Gong Shang Xing Zheng Guan Li Ju Guan Yu Jin Zhi Qin Fan Shang Ye Mi Mi Xing Wei De Ruo Gan Gui Ding [Several Provisions on Prohibiting Infringements upon Trade Secrets] (promulgated by the State Admin. for Indus. and Commerce of the P.R.C, 1998), art. 9 (China); See also, http:// beijing.usembassychina.org.cn/ipr_tsuc.html. 30 SHAN HAILING, THE PROTECTION OF TRADE SECRETS IN CHINA 45 (2d. ed. 2012), explaining that local laws and regulations have come into force containing specific provisions regarding various matters relating

 

 

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Clearly, there is not a consensus in China as to what constitutes a trade secret because,

depending on the context, a trade secret is defined differently. Despite the potential

confusion as to what a trade secret is in China, only practice can enhance the impact of

trade secret law and promote its development.31

B. The Use of Case Law

Chinese courts neither use nor cite cases in issuing their decisions.32

Without the use of precedent, an attorney perusing a trade secret infringement claim may

struggle in building and sustaining a case because the system both lacks predictability

and creates challenges. But, there may be hope for using case law in China. Recently,

the country has been trying to circumvent the limits of the their civil system by releasing

different groups of cases with varying instructions on their use.

1. Using the Interpretations

In 2007, the Supreme People’s Court (“SPC”) promulgated Interpretations of the

Supreme People’s Court on Some Issues Concerning the Application of Law in Trial of

Civil Cases Involving Anti-unfair Competition (the “Interpretations).33 This law’s aims

are both to help clarify intellectual property litigation related to unfair competition and to

strengthen such IPR infringement claims, including TSRs.34 The Interpretations reflect

important cases that clarify key trade secret elements--(1) unknown to the public, (2)

economic benefits, and (3) practical utility--and provide guidance in the deciding of trade

                                                                                                                                                                                                                                                                                                                                         to trade secrets, for example: elements and scope of trade secrets; administrative, civil, and criminal penalties for acts of infringement upon trade secrets; burden of proof; duty of non-competition; and the obligation of confidentiality of skilled workers of enterprises and institutions. 31 See Id. at 63. 32 It is important to note that Chinese courts are not to cite to cases. See Cohen, supra note 18. 33 See Bai & Da, supra note 22, at 83. 34 See Cohen, supra note 18.

 

 

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secret cases. Also, the Interpretations show how to handle misappropriation claims in

China, and they are to be used by the lower courts to distill from the cases important

principles.35 In creating the Interpretations, the SPC has made useful an understanding of

how to recognize and to address other issues, such as defenses to misappropriation,

customer lists as trade secrets, burden of proof, damages determination, and injunctions

in trade secrets misappropriation cases.36

2. Using Guiding Cases: A Step Toward

Guiding Cases (“GCs”) are selected by the SPC’.37 GCs bring to focus new

problems and new situations emerging in practice, helping contribute to correctly

applying law to create more consistent jurisprudence38 through having all court levels in

China refer to them.39 According to Professor Mei Gechlik, GCs have the following

characteristics:

The[y are the] only set of cases explicitly identified by China’s Supreme

People’s Court that courts in the country “should refer to” in handling similar cases. It's an attempt to foster a more fair, open, but clearly and consistently regulated environment.40 Nobody is certain what the SPC is looking for when it selects a GC. Each GC is

approximately three-page summary of a previously decided case. The summary is

                                                                                                               35 Richard Grams, China, in INTERNATIONAL LICENSING CHI/57 (2013) (discussing how the GCs are actually selected by the SPC’s adjudication committee) 36 See Bai & Da, supra note 22, at 91. 37 WHY GUIDING CASES MATTER, STANFORD L. SCH., https://cgc.law.stanford.edu/why-guiding-cases-matter/ (last visited Aug. 4, 2014). 38 See id. 39 https://cgc.law.stanford.edu/about-the-cgcp/ If they are not followed, their could be serious repercussions. These cases carry far more weight than the phrase “should refer to” would otherwise suggest 40 E-mail from Mei Gechlik, Founder and Director, China Guiding Cases Project at Stanford Law School, to author (July, 30, 2014, 13:08 PST) (on file with author).

 

 

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comprised of six sections, usually including only the key facts, rules, and analysis.

While none of the GCs have included a previously decided trade secret case, there have

been two that each dealt with an infringement claim under the AUCL.

41

A GC that dealt with trade secret infringement would help unify the courts in how they

should deal with similar problems.42 Will the next release include a GC covering trade

secret law?

3. Using Typical (Model) Cases

While GCs are relatively new, Professor Gechik notes that the term "guiding

cases" is not new.43 Before GCs, there were a limited group of published cases referred

                                                                                                               41 GUIDING CASES ANALYTICS, STANFORD L. SCH., http://cgc.law.stanford.edu/guiding-cases-analytics/ (last visited Aug. 4, 2014), construing the Guiding Cases data. 42 https://cgc.law.stanford.edu/about-the-cgcp/; but see XIA Jinwen, Vice President of Nanjing Normal University, https://cgc.law.stanford.edu/why-guiding-cases-matter/ (it is important to guide judges’ ideology and practice, to actively train and regulate judges’ habits when looking up cases, to ensure that a good habit of strictly observing the guiding cases when trying cases will be nurtured, and to strengthen the function of judicial decisions in predicting and regulating society’s. behavior). 43 See Gechlik, supra note 41.

2011   2012   2013   2014  (Through  June)  

4  8   9  

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Number  of  Guiding  Cases  Non-­‐Anti-­‐Unfair  Competition  Law   Anti-­‐Unfair  Competition  Law  

 

 

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to as guiding cases, which are now known as either model or typical cases, causing many

parties confusion.44

While many of these published cases are of great interest in their own rights, there

also remains a broader question: In light of model cases being unable to be cited by the

courts, of what is the significance is courts publishing these cases?45 Are the cases

released with summaries present all of the facts of the case, or are the facts selected to

make the point clearer in light of China’s current needs, believing such adherence

improve society? On October 22, 2013, the Supreme People’s Court of Civil Intellectual

Property Tribunal (“SPCCIPT”) released eight model cases, including three trade secret

cases.46 Some academics think that this is an effort to create more transparency; others

might consider this as an effort of the Chinese to guide foreign companies on what rules

and valued principles to keep in mind when trying to do business; essentially, a stronger

adherence to Chinese case law.47

III. LEGAL AND POLITICAL REFORM IN CHINA: DISTILLING PRINCIPLES AND PREDICTING TRENDS IN INTELLECTUAL PROPERTY AND TRADE SECRET LAWS BY EVALUATING RECENTLY EFFECTIVE LAWS AND PUBLISHED CASES A. New Preliminary Injunction Law Applied in Favor of American Company

Claiming Trade Secret Infringement Against Former Employee 1. Introducing Civil Procedure Law 100

                                                                                                               44 Id. 45 See Cohen, supra note 18; See See Susan Finder, A Model Copyright Infringement Case-“A Bite of China,” (Jun. 26, 2014), http://supremepeoplescourtmonitor.com/2014/06/26/a-model-copyright-infringement-case-a-bite-of-china (believing believe that Chinese courts are publishing more model cases as an important supplement to legislation, judicial interpretations and guiding cases). 46 Id. 47 Id. On the other hand, Some believe that Chinese courts are publishing more model cases as an important supplement to legislation, judicial interpretations and guiding cases. See Susan Finder, A Model Copyright Infringement Case-“A Bite of China,” (Jun. 26, 2014), http://supremepeoplescourtmonitor.com/2014/06/26/a-model-copyright-infringement-case-a-bite-of-china.

 

 

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Before January 1, 2013, it was uncertain whether or not the Chinese Civil

Procedure Law would provide preliminary injunctions for trade secrets infringement48--

nowhere in China had a preliminary injunction to stop such infringement had ever been

ordered.49 The reason for such uncertainty might be attributable to several factors.

In comparison with the laws for patents, trademarks, and copyrights, trade secret law

lacked a strong legal basis for such a remedy.50 Also, Chinese rules of evidence--e.g.,

burden of proff--, it very difficult for plaintiffs to prove trade secret infringement--fewer

than 20 percent succeed; this undermines applications for preliminary injunctions because

courts in China tend to grant these only where there is a strong likelihood of prevailing at

trial.51 Consequently, seeking a preliminary injunction to prevent or to stop trade secret

infringement, a plaintiff would have to invoke two steps. First, the plaintiff would have

to prove the following:

(1) The recovery of alimony, maintenance, or education expenses, pension for the disabled or for the family of a decedent or medical expenses;

(2) The recovery of wages for labor; and (3) The existence of circumstances that require certain

measures of advance execution on the basis of urgency.52

In construing “urgent circumstances,” some courts found the circumstances necessary to

protect TSRs from infringement.53 As for the second step, the motioning party would

have to provide the following:

                                                                                                               48 See Grams, supra note 1. 49 China’s First Ban on Commercial Secrets Acts Perform in Shanghai, CHINA YOUTH DAILY (Aug. 7, 2013), http://www.chinanews.com/gn/2013/08-07/5132953.shtml [hereinafter First Ban] (last visited Aug. 4, 2014) (quoting Tutor Hwang, Associate Dean and Professor at East China University of Politics and Intellectual Property). 50 See Id. 51 See Grams, supra note 1. 52 See Zhong Hua Ren Min Gong He Guo Min Shi Su Song Fa [Civil Procedure Law of the P.R.C.] (Promulgated by the Standing Comm. Nat'l People's Cong., Aug 22, 2012, effective Jan. 1, 2013), art. 100 (China).

 

 

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(1) A clear and definite set or rights and obligations between the parties have been established;

(2) An urgent need for imposing the rights; (3) A showing that the party against whom a petition is brought

must be capable of fulfilling the obligations;54 and (4) The petitioner may have to provide security for the

preliminary injunction, failing to do so could have resulted in the denial of such an injunction.55

On Jan 1, 2013, however, the foregoing Civil Procedure Law was revised,

resulting in the broadening of the scope for obtaining injunctive relief for all civil

remedies. As a result, the law brought preliminary protection for trade secrets to the level

afforded to Patents,56 Trademarks,57 and Copyright.58 Accordingly, the revised law--

Civil Procedure Law Articles 100 (“CPL 100”)--provides the following:

In the cases where the execution of a judgment may become Impossible or difficult or otherwise harmful to the parties concerned because of the acts of one party or for other reasons, the people's court may, at the application of the other party, make a ruling to preserve the assets of the other party or order the other party to perform certain acts or to prohibit the other party from committing certain acts; where no application is filed by either party, the people’s court may also rule to take preservation measures when it deems necessary . . ..

In adopting property preservation measures, the people's court may order the applicant to provide security; if the applicant fails to provide security, his application shall be rejected . . .

In case of emergency, the people's court shall make a ruling within 48 hours after receiving the application. Where the people’s court rules to take preservative measures, the ruling shall be enforced immediately.

                                                                                                                                                                                                                                                                                                                                         53 See HAILING, Supra, note 30, at 84. 54 Id. at n. 12; cf. See CHINA NEWS, http://www.chinanews.com, quoting legal scholar, Huang Wu, who said that since the commencement of CPL 100, to his knowledge, there have been no instances of prohibiting conduct to prevent trade secret infringement. 55 See HAILING, Supra, note 53. 56 See Grams, supra note 35, at CHI/53, construing China’s Patent Law. 57 Id. at CHI/57, construing China’s Trademark Law. 58 Id. at CHI/49, construing China’s Copyright Law.; See also Grams, supra note 51, suggesting that the courts did not honor trade secrets because of the lack of a uniform law protecting them like patents, copyright, and trademarks.

 

 

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The differences between the original law and the revised law are significant.

First, by no longer having to prove the element of “urgent circumstances;” rather, the

motioning party having to prove the element of “the execution of the judgment may

become . . . harmful to the parties,” there exists a more practice-friendly platform to plead

for immediate action in order to avoid a real and irreparable harm due to the infringement

of his or her trade secret.59 Also, the provision suggests the court will balance the

interests of the parties because “harmful” inherently suggests that a determination of what

is harmful must be made by weighing the interests of both the parties the public.60

Additionally, the new law added a property preservation provision. Such a

provision perhaps reflect a trend that there is a need for protective measures to either curb

bad behavior associated with spoliation of the property or prevent a defendant from

disclosing or using the property that could prove harmful, especially in light of dealing

with a trade secret.61

2. Applying Civil Procedure Law100 in the Context of a Trade Secret Infringement Claim by Eli Lilly, an American Company

In issuing Eli Lilly v. Huang Mei (“Eli Lilly”) on August 2, 2013,62 the Shanghai

No. 1 Intermediate Court made a landmark63 decision: becoming the first64 Chinese court

to not only apply the revised civil procedure law but also issue a preliminary injunction in

protecting an American company’s trade secret. The injunction’s scope prohibited the

                                                                                                               59 See Grams, supra note 51. 60 See CHINA NEWS, http://www.chinanews.com. 61 Id. 62 Eli Lilly included the U.S. pharmaceutical corporation and its Chinese subsidiary, and Case is not fully available to the public because the case contains confidential information 63 See CHINA NEWS, http://www.chinanews.com. 64 Id.

 

 

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defendant from disclosing, using, or allowing others to use any trade secrets contained in

the twenty-one confidential documents that the defendant had allegedly downloaded

without permission from the plaintiff’s server.65 As for the circumstances that gave rise

to the court’s decision, they are summarized below.

In 2011, Eli Lilly, an American company, was the world’s tenth largest

pharmaceutical company, having been existence for over 130 years.66 Like many

American companies that seek to enter the Chinese market successfully, Eli Lilly created

a subsidiary company in China--Eli Lilly China R & D--that was intended to be both a

collaborative R & D network with the Chinese and an important pharmaceutical hub for

its American parent companies to enter the Chinese market.67

On May 3, 2012, Eli Lilly and its subsidiary hired Huang and signed him to a

three-year contract to work at the subsidiary as a researcher and chemist.68 The contract

included a confidentiality agreement that provided Huang could not disclose any

confidential and proprietary information--e.g., sales and marketing strategies69--he

obtained in the course of employment belonging to Eli Lilly to any individual or

organization.70

On January 19, 2013, Eli Lilly alleged Huang downloaded twenty-one

confidential documents from Eli Lilly’s server without authorization.71 Between January

                                                                                                               65 See Grams, supra note 60. 66 See CHINA NEWS, http://www.chinanews.com. 67 Id. 68 Principal Scientist I, Chemistry (Chemistry, Senior Researcher I ) 69 See Grams, supra note 66. 70 Id. 71 Id.; See also Christine Yiu &Yijun Ge, Eli Lilly v. Huang: Shanghai Court Issues Interlocutory Injunction Against Breach of Trade Secret, BIRD & BIRD (Aug. 21, 2013) http://www.twobirds.com/en/news/articles/2013/china/eli-lilly-v-huang-shanghai-court-issues-interlocutory-injunction-against-breach-of-trade-secret (last visited Aug. 4, 2014).

 

 

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19, 2013 and February 2, 2013, 72 reports indicated that Eli Lilly issued a suspension

notice to Huang, Eli Lilly issued a notification letter to terminate Huang’s employment,

effective immediately,73 Huang submitted his letter of resignation.74 Shortly after

Huang’s resignation from the company, Eli Lilly sent its personnel to Huang’s house,

requiring him to either delete or return the trade secrets; however, Huang, refused to

cooperate.75

On July 2, 2013, Eli Lilly claimed that Huang misappropriated twenty-one

company trade secret documents.76 Accordingly, Eli Lilly filed suit under the AUCL,

seeking damages in the amount of $3.2 million as well as an injunction against further

dissemination of the documents.77 In Eli Lilly’s request, the company asked the court to

prevent Huang from doing the following: Most importantly, Eli Lilly applied for a

preliminary injunction to prevent Huang from doing with the trade secrets before trial78

the following: (1) copying, (2), disclosing, or (3) permiting others to use.79

In construing CPL 100 in light of a threatened trade secret misappropriation, the

court evaluated (1) the irreparable harm to the plaintiffs’ legitimate interests if there were

                                                                                                               72 Some reports indicate January 27; See Grams, supra note 66; see also Christine Yiu &Yijun Ge, Eli Lilly v. Huang: Shanghai Court Issues Interlocutory Injunction Against Breach of Trade Secret, BIRD & BIRD (Aug. 21, 2013) http://www.twobirds.com/en/news/articles/2013/china/eli-lilly-v-huang-shanghai-court-issues-interlocutory-injunction-against-breach-of-trade-secret (last visited Aug. 4, 2014). 73 See CHINA NEWS, http://www.chinanews.com. 74 Id. 75 Id. 76 See Christine Yiu &Yijun Ge, Eli Lilly v. Huang: Shanghai Court Issues Interlocutory Injunction Against Breach of Trade Secret, BIRD & BIRD (Aug. 21, 2013) http://www.twobirds.com/en/news/articles/2013/china/eli-lilly-v-huang-shanghai-court-issues-interlocutory-injunction-against-breach-of-trade-secret (last visited Aug. 4, 2014). 77 See Grams, supra note 71. 78 Id. 79 See CHINA NEWS, http://www.chinanews.com, reporting Eli Lilly asked the court to the to compensate any ancillary costs associated with Huang’s acts, including attorney's fees paid by the infringement, notary fees, investigation fees, translation fees and other reasonable expenses totaling 20 million yuan. In granting the request, the court required Eli Lilly to provide a security deposit, like a bond, the preservation of the application and provide a security deposit of $ 100,000.

 

 

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no injunction and (2) the consideration of any public interest factors.80 In arguing in

favor of suffering an irreparable harm, Eli Lilly argued that Huang’s breach’s of his

employment agreement put the company’s trade secrets in imminent danger of being

leaked,81 which would cause irreparable harm because much of the company’s core

competitiveness comes from what was in its trade secrets, and disclosure would lead to

serious consequences,82 ranging from the research and development costs or giving

competing companies a serious advantage while causing an irreparable economic loss

and devastating blow to the enterprise.83

3. Comments: A Positive Outlook for Foreign Investors’ TSRs

The outcome in Eli Lilly reflects well on China’s attitude toward TSRs and

foreign investors. In the context of protecting TSRs in the court, the court in Eli Lilly did

a lot to help trade secret law. Through construing CPL 100 to require Eli Lilly to show

it suffered an irreparable harm, the court did the following:

• Demonstrated strong judicial maneuverability, 84 • Construed CPL 100 to require an irreparable harm, • Found an irreparable cannot be satisfied by damages. 85

Eli Lilly succeeded in getting its injunction because it was able to persuade the court that

                                                                                                               80 Id. In the U.S., certain jurisdictions may provide injunctions for threatened misappropriation because those jurisdictions recognize such a tort. See Del Monte v. Dole, 148 F. Supp. 2d 1326 (S.D. Fl. 2001) (refusing to prohibit an employee from going to work for a competitor, because the record failed to show he had taken confidential information when leaving his prior employment and he claimed he could not remember the confidential information with precision); however, it is unclear what evidence is necessary to prove this tort in China. Chris Neumeyer, Trade Secrets and Employee Mobility, (Oct. 9, 2013, 10:26am), /2013/10/09/trade-secrets-and-employee-mobility-in-the-u-s-and-asia/id=45666. 81 Id., reporting that the court described the circumstances of an irreparable harm. 82 Id. 83 Id. 84 Id. 85 See Grams, supra note 79.

 

 

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if the alleged trade secrets contained in the downloaded documents were used or

disclosed to others, Lilly would suffer significant harm that was not capable of being

remedied by damages alone.86 The court’s willingness to create an irreparable harm

standard may reflect a paradigm shift from the traditional reluctance of Chinese courts to

grant preliminary injunctions.87

It might be too early to tell whether what the intermediate court in Shanghai did

with respect to requiring parties to prove that that they suffered an irreparable harm will

be followed by more jurisdictions.88 It, however, seems that the CPL 100 has been

construed to codify provisions for interim measures to protect trade secrets that have been

available under the PRC Patent Law, Trademark Law and Copyright Law.89 But, despite

this optimism that should come to foreign investors surrounding the ruling in Eli Lilly,

there might be reason to temper excitement. Is Eli Lilly an isolated decision? Will a new

judicial interpretation on preliminary injunctions be issued sometime in 2014? Does Eli

Lilly represent a precedent for holders of TSRs who have IP rights at stake?

B. Recent Model IPR Cases Released

1. Shifting the Burden of Proof in an Intellectual Property Case

Under the AUCL, a party seeking to claim trade secret infringement has the

burden of proof on the following issues:

(1) The trade secret meets the statutory requirements, (2) The defendant’s uses is similar or substantially similar, and

                                                                                                               86 Id. 87 Id. 88Due to the nature of the case, much of this decision was not published because of the danger of exposing the trade secrets, so many facts are missing. 89 See Yiu & Ge, supra note 77.

 

 

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(3) The defendant has used illegal means.90

In deciding Zhuhai Geli Electrical Co., Ltd v Guangdong Meidi Refrigeration

Equipment Co., Ltd,91 the Guandong High People’s Court shifted the burden of proof to

the defendant Meidi before the court held three types of defendant’s products to be

infringing.92 As to the circumstances that gave rise to the case, both parties are renowned

Chinese electrical appliance enterprises.93 Plaintiff Geli claimed that the technological

solutions applied in four types of Meidi air conditioners infringed its invention patent.94

There was no dispute that one of the four types of air condition infringed Geli’s IP

right.95 The defendant failed to distinguish the remaining productions with the infringing

one.96

2. Promise for Claims of Willful Infringement

The law in China generally provides that one is limited in his or her recovery

when the benefits derived from a trademark infringement are speculative. In BMW v.

Guangzhou Shiji Baochi Apparels Ltd., however, the Beijing High People’s Court upheld

an award of nearly $325,00097 in damages through weighing the following factors:

(1) The infringer’s bad faith, (2) The length and benefit of the infringement, (3) The victim’s renowned reputation, and (4) The victim’s efforts to eliminate the negative effect of the

infringement.98

                                                                                                               90 See AUCL, supra note 52, at art. 14. 91 See Cohen, supra note 18 92 Id. 93 Id. 94 Id. 95 Id. 96 Id. 97In Chinese currency, the judgment was for nearly 2,000,000 RMB 98 See Cohen, supra note 97.

 

 

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Moreover, the court punished the defendant with a little more than $16,0000 in

civil sanctions,99 signaling that the SAIC for a nation-wide investigation of

infringement.100

3. Employee Mobility and Foreign Companies Find Protection Through Evidentiary Measure in Trade Secret Case

In Ash Ashland Licensing and Intellectual Property LLC v. Beiging Ruishibang

Fine Chemistry Technology Co., Ltd. and Wei Xingguang, the Suzhou Intermediate

People’s Court reversed the burden of proof with respect to producing evidence.101

Typically in China, the litigating parties are responsible to produce their own evidence in

bringing their claims; however, the court required that the defendants produce evidence

in order to meet the plaintiffs’ claims.102 In finding for the plaintiffs, the Chinese court

helped a U.S. Company, and its’ Chinese licensee, who was granted a license of a

patented manufacturing process/method that produces a certain industrial chemical that

has a specific customer group and is impossible to obtain from the open market, the court

did not let a former employee of the Chinese licensee from stealing the process and using

it at a new company.103 Consequently, a court-sponsored mediation facilitated

settlements for both the U.S. company and the Chinese license in the amounts of roughly

$2,427,200 and $1,132,700, respectively.104 This willful infringement doctrine, however,

                                                                                                               99 The judgment was for 100,000 RMB, see http://chinaipr.com/2013/11/10/ipr-model-cases-part-of-the-long-journey-towards-ipr-case-law-with-chinese-characteristics/ 100 See Cohen, supra note 99. 101 Id. 102 Id. 103 Id. 104 The judgments were $15,000,000 and $7,000,000 respectively. See Id.

 

 

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has still yet to be adopted.105

4. Criminal Trade Secret Case Produces Largest Penalty in Chinese History Upholds Policy of Non-Disclosure Duty of Former Employees

In Jiangxi Yibai Electronic Technology Co., Ltd., the Zhuai Intermediate People’s

Court not only sentenced four individual defendants to jail but also ordered them to pay a

$5,987,200 penalty, making this the largest business information trade secret criminal

case in China’s history.106 Should this decision be seen as a harbinger of harsher

punishments in this area?107 The court found that the defendants--four former employees

of Saina Technology Co., Ltd.--misappropriated information from their former employer

under the theory of their duty of non-disclosure--Saina Technology., Ltd.108 Upon

acquiring this information, the four defendants established a manufacturing company

called Yibai, along with several sales companies, capitalizing on the sales channels and

operational information created by Saina Technology.109

IV. BEST PRACTICES MOVING FORWARD: FACTORS TO CONSIDER IN PROTECTING TSRS WHEN DOING BUSINESS IN CHINA A. Employee Mobility in China: Past and Present Practices and Policies

1. China’s Views of Employee Mobility in Light of Trade Secrets

The policies that give rise to protecting trade secrets in the U.S. are similar to the

                                                                                                               105 See Bai & Da, supra note 36, at 56. Also, some U.S. courts adopt the doctrine of inevitable disclosure, which allows for an injunction against competition, even in the absence of actual trade secret misappropriation, based on the presumption that the employee's new duties cannot be performed without disclosure of the old employer's trade secret. See PepsiCo., Inc. v. Redmond, 54 F.3d 1262 (7th Cir. 1995). 106 See Cohen, supra note 104, noting the judgment was 37,000,000 RMB 107 See Justice Kong Xiangiun, supra note 8, discussing that his court has been increasing willing to use increase significant amounts of damage as a tool to enforce IP rights. 108 Cohen, supra note 107. 109 Id.

 

 

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policies protecting trade secrets in China. In the context of employee mobility issues, trade

secret law in both countries arises from the following policies:

• To protect property, and • To protect confidential relationships.110

In light of employee mobility issues, China’s culture has roots in protecting the

confidential information the master shared with his or her apprentice. The system of

preserving such information basically self-regulated; the apprentice acquired skills to be

used elsewhere, but he usually did not leave his master.111 In trying to balance the values

embodied in the system that protected confidentiality, courts did, and do, weigh the

values in protecting this relationship, and what information the employee learned from it,

against the interests of an employees leaving with that information.

Early disputes consisted of either (a) employees disclosing or using an employer’s

trade secrets or (b) third party employers inducing their employees to disclose the trade

secrets that he or she acquired from his or her former employer.112 In finding for the

employers, Chinese courts would protect an employer’s trade secret through restricting

his or her former employee’s mobility. Often, courts’ decisions to enforce employee

mobility restrictions arose from an interest in punishing the behavior of a departing

employee rather than protecting the value of the trade secrets he or she took; the courts

would often either uphold express employment contracts, contract principles, and

confidentiality agreements or create implied contracts between an employer and an

employee.113

Today, the tides have turned. China has been experiencing intense economic

                                                                                                               110 See HAILING, Supra, note 106, at 55. 111 Id. 112 Id. at 73 113 Id.

 

 

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growth, which is a likely result from a more competitive labor market that values,

education, achievement and innovation. Such values are rooted in a political and a legal

system that, generally, seem to value innovation and employee mobility over protecting

an employer’s trade secret. Consequently, while Eli Lilly provides confidence to trade

secret holders in enforcing their rights in China, it is important not to lose focus both

before the infringement happens and after an interlocutory injunction order is obtained.114

2. Protecting Trade Secrets Before Litigation

Adopting measures to protect and to maintain a trade secret’s confidentiality can

be a challenge,115 so U.S. companies must consider potential risks of trade secret

infringement before doing business in China.116 For example, some experts have

suggested the following:

• Choosing the correct business partner or employee; Compartmentalizing work processes to minimize employees’ access to unauthorized information;

• Increasing their facilities’ security and access; • Innovating quick enough to have the next generation of

technology ready for the market before their competitors--a philosophy for those who believe that misappropriation is inevitable; and

• Maintaining computer servers outside China.117

U.S. companies should be aware of the potential persons and entities that may

misappropriate trade secrets:

• Employees,

                                                                                                               114 See Yiu & Ge, supra note 90. 115 LEI MEI, CONDUCTING BUSINESS IN CHINA--AN INTELLECTUAL PROPERTY PERSPECTIVE, 108 (2012). 116 Id. at 110. 117 Id. at 108, citing CITING U.S. INT’L TRADE COMM’N, CHINA: INTELLECTUAL PROPERTY INFRINGEMENT, INDIGENOUS INNOVATION POLICIES, AND FRAMEWORKS FOR MEASURING THE EFFECTS ON THE U.S. ECONOMY, Investigation No. 332-514, USITC Publication 4199, 4-10 (Nov. 2010).

 

 

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• Joint venture partners, • Computer hackers, and • Regulatory agencies.118

In particular, misappropriation by joint venture may be the biggest risk for U.S.

companies doing business in China, having to compete with current or former Chinese

partners from a joint venture.119 Look for minority and partial owners involved with a

joint venture partner, a foreign company may have many hesitations, including the

leaking of information.

On the other hand, there are positives in Chinese partners. Chinese partners often

provide market and regulatory access for U.S. companies, helpinh U.S. companies

achieve higher profits in China, which is another way to extract trade secret value.120

Losing trade secrets could eventually gain market shares and boost sales in China through

a partnership with a Chinese joint venture with a local business. In exchange for losing

such secrets, a foreign company might be better able to navigate the complex cultural and

political environment, eventually resulting in better market access; a U.S. investor must

be aware of the higher frequency of leaks even with government regulatory agencies

when the investors submit the project for agency approval. 121

3. Protecting Trade Secrets During Litigation After the injunction, continual monitoring on the part of the employer remains

vital to prevent any new or further disclosure by the ex-employee.122 Non-compliance

with court orders has always been a problematic area in the Chinese legal system, as a

                                                                                                               118 Id. 119 Id., explaining how some foreign company victims of trade secret infringement can find long-term benefits from being introduced to the Chinese market, gaining a larger share of the market. 120 Id., discussing Google’s trade secret cases in China. 121 See Yiu & Ge, supra note 115. 122 Id.

 

 

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breach of court order is rarely punished with heavy fine or imprisonment unless the

breach is shown to be repeating and serious.123 Remember, a disgruntled ex-employee

may not act sensibly, and judges may be sympathetic to a person who has recently lost

his job.

B. Risk Planning for the Future Business in China

1. Private Enforcement

In wanting to protect a trade secret that might be transferred into to China,

someone may choose to protect his or her trade secret through private enforcement--e.g.,

a license--measures. The following are examples of private enforcement measures:

• Choosing an appropriate business model: Is it better to create a wholly owned subsidiary in China?

• Choosing an appropriate choice of law, arbitration, dispute resolution clause: Is it better to choose Chinese law?124

• Choosing the appropriate level of technology to provide to the licensee: Is it better to transfer fewer or more rights to the know-how or technology in question?125

The foregoing tips could provide greater control over the personnel in possession of the

transferred technology, enabling the licensor to insist on the kinds of security and access

procedures that are familiar in developed economies.126 Also, how should one choose the

type of law that governs a contract that involves a trade secret? One must consider that

Chinese law permits the parties to a contract to select the governing law if there are the

following:

                                                                                                               123 Id. 124  Mark  Cohen,  Choice  of  Law  in  IP  Contracts  With  China:      A  Sleeper  Issue?,  (Jun.  6,  2014),  http://chinaipr.com/2014/06/19/choice-­‐of-­‐law-­‐in-­‐ip-­‐contracts-­‐with-­‐china-­‐a-­‐sleeper-­‐issue.  125 See Henry Beck & Xichun (Catherine) Pan, Licensing and Technology Transfer to China: A Roadmap, in LICENSING BEST PRACTICES, STRATEGIC, TERRITORIAL, AND TECHNOLOGY ISSUES 86, (Robert Goldschider & Alan H. Gordon eds., 2006). 126 Id. at 12.

 

 

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(1) At least one contracting party is a foreign party, and (2) The legal relationship was created in a foreign country or

the subject matter of the contract is located in a foreign country.127

Even with choosing the right choice of law, what about the jurisdiction? For instance,

Eli Lilly was decided in Shanghai. Will a different jurisdiction be as willing or

competent to execute the country’s second preliminary injunction (the graph below may

give insight as to jurisdictional insights) ?

Finally, one should consider how much of the trade secret or the know-how to

share in a business deal. It might be worth considering sharing the entire trade secret or

more of the know-how with a Chinese business partner, recognizing that trade secret

infringement can occur sooner than later.128 Practically, the Chinese would likely be

more interested in buying know-how or a trade secret than, for example, a patent in a

technology transfer agreement because the know-how or the trade secret technology of

the transfer may be preserved even when the patent is found to be invalid.129

2: Judicial Enforcement: Administrative, Civil, or Criminal

China has available to holders of all intellectual property rights, including TSRs,

two avenues of recourse: (1) an administrative courts and (2) judicial courts.

a. Administrative Enforcement

A holder of a TSR may file a complaint of infringement with a designated

administrative agency. Claims for trade secret infringements are within the purview of

                                                                                                               127 Ina license or technology agreement, if both parties are PRC entities (such as in an agreement between a wholly owned Chinese subsidiary of a U.S. company and another Chinese entity,), Chinese law will govern the agreement, unless the agreement was negotiated in a foreign country. See Id. at 12. 128See Mei, supra note 116, at 145 129 Id.

 

 

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the Fair Trade Bureau of SAIC, which (1) handles disputes arising under the AUCL--

including disputes over know-how and trade secrets--(2) investigates complaints of

intellectual property rights violations, and (3) destroys infringing goods.130

In most cases, administrative agencies cannot award damages to an injured rights-

holder, although they may impose relatively modest fines on infringers and seize

infringing goods.131 On the other hand, administrative agencies provide a quicker and

less expensive solution than judicial enforcement, their limited power to sanction

wrongdoers often causes their sanctions to be treated by infringers as just another cost of

doing business.132

b. Civil Enforcement

In choosing recourse by civil courts, there are concerns for foreign companies that

local judges may be unprepared to handle cases involving the complexities of TSRs.

There, however, exist some courts more competent than others. Judges in Beijing and

Shanghai133 are considered competent and impartial; the Haidian District Court in Beijing

is well known for its sophisticated decisions involving software, technology, and the

Internet and e-commerce.134

The GCs that have come out of particular courts could be a good indicator of the

more competent courts. For example, six guiding cases have come out of Shanghai,

which is where Eli Lilly was decided. Of the two GCs that deal with the AUCL, they

                                                                                                               130 Id. at 80. 131 Id. at 84. 132 Id. 133  Would these jurisdictions be worth considering to include in a choice of law clause?  134 See Mei, supra note 116, at 186 (2012).

 

 

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have both come out of the courts in Tianjin, suggesting the region is correctly handling

infringement issues. This region might be worthwhile enforcing a trade secret claim.

135

Judges in other regions (particularly in those regions that have not yet been swept up in

China’s economic revolution) often lack the necessary knowledge and impartiality to deal

appropriately with intellectual property disputes.

Local protectionism--the “home court advantage”--is also an issue. China is most

interested in energy or energy-related fields, consumer electronics, pharmaceuticals,

generating a lot of interest from local governments and the private sectors,136 and local

governments want projects that generate a lot of media coverage and tax revenues,

hoping to boost the political resumes of the local government officials and allow them to

navigate up the political ladder.137 On the other hand, some local laws play an important

                                                                                                               135 Guiding Cases, Supra note 44, construing data. 136 See Mei, supra note 134, at 361. 137 Id.

1   1   1   1   1   2   3   4  6   6  

2  

Number  of  Guiding  Cases  Non-­‐Anti-­‐Unfair  Competition  Law   Anti-­‐Unfair  Competition  Law  

 

 

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guiding role in the protection of trade secrets of enterprises.138 Some local rules have

expanded upon the general principles of the AUCL regarding the prohibition of acts

which infringe on trade secrets, and concretely and systematically defined technology.139

c. Criminal Enforcement

Criminal prosecution should always be considered as an enforcement option when

the trade secret owner has suffered “serious” or “exceptionally serious” losses, because

police in China have the power to seize any relevant evidence, which can also be used in

administrative or civil litigation.140 Criminal courts are reserved for particularly

egregious acts of infringement, such as large-scale commercial piracy and

counterfeiting.141 Under current law, China’s intellectual property administration

authorities may transfer such cases to the police and criminal prosecution authorities for

investigation.142 Although this is an available remedy,143 it is only rarely involved, and

its rare use remains a bone of contention between the United States and China.

Generally speaking, criminal prosecution is very effective in trade secret

misappropriation cases, but it is not always easy to get police interested in run-of-the-mill

trade secret cases.144 In the authors' experiences, the police are more interested in high

profile cases. Consequently, the authors advise that one should try to “package” the case

as “high profile” to enhance the chance of criminal prosecution. It also is important to

                                                                                                               138 Id. 139 Id. 140 See Bai & Da, supra note 136, at 364-65. 141 See Beck & Pan, supra note 125, at 11. 142 Id. 143 Id. at 36, discussing China’s involvement in the WTO. 144 See Bai & Da, supra note 147.

 

 

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build good relationships with the local community, including the local police, before any

misappropriation happens.145

C. Consult a Professional: Firms Providing Trade Secret Protection in China

• Anderson & Anderson: o Chinese Office(s): Beijing, Hong Kong, Guanggzhou, Macau, Shanghai

Pudong, and Shanghai Puxi. o Relevant Practice areas: Cross-border transactions, software infringement,

and joint venture contracts. • Asia Attorneys:

o Chinese Office(s): Taipei. o Relevant Services:

• Bird & Bird: o Chinese Office(s): Beijing and greater China. o Relevant Services: Cross-border disputes and commercial transactions.

• Baker Bots: o Chinese Office(s): Beijing and Hong Kong.

• Covington & Burling: o Chinese Offices: Beijing and Shanghai. o Relevant Services: Licensing within joint ventures. The firm claims to have

an anti-corruption team that provides 24-hour real-time support • Greenberg Traurig, LLP:

o Relevant Practice Area(s): Trade secret risk prevention. o Chinese Services Shanghai.

• Jones Day: o Chinese Office(s): Beijing, Hong Kong, and Shanghai. o Relevant Services: Also, this firm has a separate intellectual property agency

in Beijing, which is licensed to handle a wide range of non-patent intellectual matters in China.

• McDermott Will & Emery: o Chinese Office(s): Shanghai Pudong. o Relevant Services: Extensive experience in Chinese court procedure, and

research and development. • Morrison Foerster:

o Chinese Office(s): Beijing, Hong Kong, and Shanghai o Relevant Services: Litigation.

• Troutman Sanders: o Chinese Office(s): Beijing, Hong Kong, Shanghai, and greater china. o Relevant Services: The Shanghai office is bilingual and works with the Hong

Kong office to assist not only North American and European-based clients

                                                                                                               145 Id.

 

 

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with investments and operations in Asia but also Asia-based clients with their U.S. and Asian investments and operations.

• Gibson, Dunn & Crutcher: o Chinese Office(s): Beijing and Hong Kong. o Relevant services: The Hong Kong office focuses on cross-border

transaction, having the capability to handle the most substantial and challenging transactions.

• Jackson Lewis P.C.: o Relevant Practice Areas: International employment issues. o Relevant Services: Although this firm does not advise employers on matters

of foreign law, an integral part of our practice area involves relationships with leading employment lawyers around the globe with whom we can coordinate services to meet clients' needs for representation and counsel on international laws.

   

V. CONCLUSION

Overall, China’s protection of TSRs is improving, but the country is not out of the

woods yet. In Eli Lilly, a court has provided an American company the level of trade

secret protection that we take for granted at home. But, is this an anomaly? Should

foreign companies with trade secrets feel comfortable to do business only in Shanghai?

Until preliminary injunctions become the rule rather than the exception, companies with

TSRs and other intellectual property rights must rely on preventing trade secrets from

being stolen or misused in the first place, using preventive measures: for example,

contracts, protocols, and procedures.146 Also, while President Xi has been collaborating

with the U.S. to shore up trade secret protection, how realistic are the expectations of a

united front against such infringement violations when the courts are not bound by

precedent?

                                                                                                               146 The doctrine of inevitable disclosure and a no-compete agreement are not yet viable protective measures.

 

 

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China appears to be taking small steps toward providing trade secret holders with

more protection, yet the country is still miles away from having a legal framework in

place like the U.S.: a system that values precedent and anti-protectionist values. In light

of the distance, any foreign company that still intends to invest in China should still take

the time to look both ways before it crosses the street.