Trade secret protection in China after the U.S.-China Phase One trade deal

The U.S.-China Phase One trade deal, signed in January 2020, was viewed by many as a game-changer in causing China to upgrade its enforcement regime against trade secret misappropriation. But how much impact will the deal actually have for U.S. companies trying to prevent trade secret theft in China? As this article explains, while there will likely be an impact, it may be less consequential than anticipated.

The Phase One Agreement’s trade secret provisions

The Phase One Agreement contains a number of provisions aimed at protection of trade secrets and effective enforcement against misappropriation. Although the Agreement’s requirements are bilateral, they mainly consist of obligations by China to take certain steps to enhance its trade secret protection laws to match existing U.S. laws. These steps include enumerating acts of misappropriation to include electronic intrusions, breach of duties not to disclose information that is secret, and unauthorized disclosure or use that occurs after acquisition of a trade secret. The Agreement also calls for burden-shifting in civil proceedings so that “the burden of production of evidence or burden of proof … shifts to the accused party … where the holder of a trade secret has produced prima facie evidence … of a reasonable indication of trade secret misappropriation ….”  Additionally, the Agreement dictates that China provide for prompt and effective provisional measures to prevent the use of misappropriated trade secrets, and identify use or attempted use of claimed trade secret information as an “urgent situation” authorizing judicial authorities to grant preliminary injunctions. Finally, the Agreement requires China to broaden the scope of trade secret cases where criminal liability may ensue.

Comparison to current trade secret protection laws in China

China is a civil law country. The laws governing trade secrets are mainly provided in the Anti Unfair Competition Law, with the remaining authority provided in the Civil Law, the Criminal Law, the Labor Law and judicial interpretations issued by the Supreme People’s Court (the “SPC”). The latest amendment of the Anti-Unfair Competition Law in 2019 has already accomplished some steps required by the Agreement, such as the aforementioned expanded list of misappropriation acts and the burden-shifting rule. Similarly, for provisional remedies, a 2018 notice by the SPC provided guidance to all courts on what circumstances constitute “urgent situations” that should merit applications for preliminary injunctions; while the “urgent situations” were not expressly defined at that time to include use or attempted use of claimed trade secret information, when broadly interpreted, they would cover this situation. For these reasons, what U.S. companies now should monitor is how effectively the laws are applied to protect trade secrets.

One of the major difficulties U.S. companies face when enforcing their trade secret rights in China, is obtaining sufficient admissible evidence to prove both misappropriation and damages. This is especially true when the trade secret theft has cross-border elements, whereby the trade secrets are afterwards used in China, e.g. by third parties who are not obviously connected with the perpetrator.

According to China’s Civil Procedure Law, there are eight types of evidence, including statements, documentary evidence, physical evidence, audio-visual materials, electronic data, witness testimonies, court expert opinions and inspection records. However, in practice, documentary evidence is given almost total supremacy over the other types of evidence. This means that, in practice, witness statements and cross-examinations of witnesses carry less evidentiary weight. The prioritization of documentary evidence by China’s courts presents challenges for U.S. companies seeking to use testimony or other non-documentary evidence available in the U.S. to establish in Chinese civil proceedings that the trade secrets being used in China originated from the U.S. (likely via an ex-employee’s breach of confidentiality duties).

Moreover, Chinese law does not provide for discovery procedures. This means that the defendant is not obliged to produce unfavorable evidence at the request of the plaintiff. At the time of filing the claim, the plaintiff must, by and large, submit (documentary) evidence to prove the facts it relies upon, and it must generally locate and produce such evidence on its own. The absence of discovery, as well as the additional formal requirements for receipt of foreign evidence, can make it challenging for trade secret holders to meet their burden of proof.

When facing these challenges, U.S. trade secret holders should proactively think about how to collect necessary evidence cross-border so that they can support filing of a civil claim in China and ultimately stop further leakage or use of the trade secrets. This may involve collecting initial evidence of misappropriation from the U.S., and then using the U.S. evidence to plead in China for a court investigation order or an order to search and preserve evidence from the defendant. The trade secret holder can leverage its pleading and the investigation and preservation orders, combined with the burden-shifting rule, to prevail on its civil claim.

Apart from civil claims, U.S. IP owners may request that China’s law enforcement agencies pursue criminal liability for perpetrators in trade secret misappropriation cases. The Phase One Agreement calls for China to lower its threshold for initiating a criminal investigation of trade secret theft, including eliminating any requirement that a trade secret holder must establish actual losses as a prerequisite to such an investigation.

At present, Article 219 of the PRC Criminal Law stipulates that whoever commits illegal acts of infringing on trade secrets and thus causes “serious” or “exceptionally serious” losses shall be subject to criminal liability.  Under the Regulations on Prosecution Standards for Economic Crimes of the Supreme People’s Procutorate and the Ministry of Public Security, losses of more than 500,000 yuan can trigger a criminal investigation. However, there are different views from local enforcement agencies on whether the losses should be limited to actual losses and how a trade secret holder should prove its losses. The current prevailing view is that the losses should not include anticipated losses such as reduced market share or loss of competitiveness. Such a narrow reading of losses as a criminal enforcement threshold contributes to insufficient protection of trade secret rights. As an example, for trade secret theft cases involving production know-how, it is difficult to show actual losses when the culprit has started to use the know-how to build a plant or prepare to make products, but it has not yet sold the violative products.

If the Criminal Law is amended to eliminate the requirement of establishing actual losses, this will address a current problem and improve trade secret protection in China.

Conclusions and alternatives

The Phase One Agreement undoubtedly will enhance some aspects of civil and criminal trade secret protection laws in China.  Ultimately, however, the degree of success of these efforts may depend more on the commitment by China’s courts to reliably implement and enforce these laws.

One final note for U.S. companies to consider is that trade secret enforcement alternatives may be available in U.S. federal courts, even for acts of misappropriation in China. Specifically, the Defend Trade Secrets Act of 2016 applies to misappropriation outside the U.S. if “an act in furtherance of the offense was committed in the [U.S.].”  18 U.S.C. § 1837. Such “act[s] in furtherance of the offense,” that would enable a U.S. court to adjudicate misappropriation in China, might be as straightforward as selling or marketing imported products within the U.S. that incorporate the stolen trade secrets.

Authored by Zhen (Katie) Feng and Steve Levitan