Protecting Trade Secrets, Confidential
Information and NDAs in China Maintaining Confidential Information, Preventing Infringement, and Enforcing Trade Secret Rights
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TUESDAY, JULY 22, 2014
Presenting a live 90-minute webinar with interactive Q&A
May Tai, Partner, Herbert Smith Freehills, Beijing, China
Brenda Horrigan, Partner, Herbert Smith Freehills, Shanghai, China
Damien McDonald, Registered Foreign Lawyer, Fangda Partners
(in Association with Peter Yuen & Associates), Hong Kong, China
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FOR LIVE EVENT ONLY
July 2014
May Tai, Partner, [email protected]
Brenda Horrigan. Partner, [email protected]
Damien McDonald, Foreign Registered Lawyer, [email protected]
TRADE SECRETS IN CHINA - ENFORCEMENT
6
Statutory
• PRC Criminal Law
• PRC Anti-unfair Competition Law
• Interim Regulations on the Protection of Trade Secrets in Central
Enterprises issued by the State-owned Assets Supervision and
Administration Commission (“SASAC Regulations”)
Contractual
• PRC Contract law
• PRC Labor Contract law
TRADE SECRETS
7
Definition
• The PRC trade secrets law is limited to confidential technical or operational information.
• Art 219 Criminal Law / Art 10 Anti-unfair Competition Law:
“Technical information and operational information that are unknown to the public, which can bring economic benefits to their owner, are functional, and are kept as secrets by their owners.”
• SASAC Regulations for protection of trade secrets contains the above definition and further “examples” which makes potentially broadens the scope of secrets
TRADE SECRETS
8
SASAC Regulations
• The Regulations effectively require SOEs to classify all non public information as a trade secret
• The SASAC Regulations apply to all 125 “centrally administered” SOEs (includes CNOOC, CNPC, SINOPEC etc.)
• Trade Secrets are graded according to their economic harm to the SOE (core trade secrets and ordinary trade secrets). This may have some evidential value in any criminal prosecution
• The Regulations require a Confidentiality Agreement where the dealing with a counterparty involves:
“consultation, negotiation, technical assessment, technology consulting,
cooperative development, technology transfer, joint ventures, external audit
and due diligence relating to trade secrets (Art 21)”
TRADE SECRETS
9
• Criminal prosecution under PRC Criminal Law
• Civil prosecution under PRC Anti-unfair Competition Law / Contract law
• Administrative protection
• Commercial Arbitration under Contract
• Arbitration under PRC Labor Contract law
TRADE SECRET ENFORCEMENT
10
Offences
(under Art 219 of the Criminal Law and Art 10 of the Unfair Competition Law)
Acquiring trade secrets through theft, lure by promise of gain, threat, or
other improper means
Disclosing, using, or allowing others to use trade secrets which are
acquired through the above acts
Disclosing, using, or allowing others to use, in breach of the agreement
with the rightful owner
Infringer is aware or ought to be award that it has acquired or disclosed
trade secrets.
TRADE SECRETS OFFENCES
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• Causing “significant losses”
• Sanction
– If causing losses of RMB500,000 or more: up to 3 years imprisonment and/or a
fine
– If causing losses of RMB2,500,000 or more: 3-7 years imprisonment and a fine
(Art 7 of the Interpretation Issued by the SPC and SPP on Several Issues in the
Application of Law in Handling Intellectual Property Infringement Cases)
CRIMINAL PROSECUTION
12
• Anti-unfair Competition Law, Art 10 / Confidentiality Agreement
• Case brought to intermediate court
• Sanction
– Fine between RMB10,000 to RMB200,000 (Anti-Unfair Competition Law, Art
25)
– Compensation – Art 20 provides:
• (1) losses
• (2) if losses difficult to calculate then “profits that the damaging party has
obtained during the period of infringement”
• Remedies
– Injunction
– Damages (Contract Law, Art 112)
CIVIL PROSECUTION
13
– Administrative protection by Administration for Industry and Commerce
(AIC)
• Pre-action measure
• Investigation
• Injunction – order return or destruction of trade secret
• Review/administrative action
– SAIC regulation of “Certain Provisions on Prohibition of Infringement of
Trade Secrets" gives the AIC powers to investigate and penalise.
– Sanction (penalty but not damages)
• Fine between RMB10,000 to RMB200,000 (Certain Regulations on
Prohibiting Infringement of Commercial Secrets issued by the State
Administration of Industry and Commerce, Art 7)
ADMINISTRATIVE PROTECTION
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Elements to be proved
• unknown to the public
• technical and operational information
• functionality
• secret keeping measures
• rightful owner
Possible defences
• Information is available to the public
• No secret keeping measures in place
• Unclear scope of what is a trade secrets
• Reverse engineering
ENFORCEMENT OF TRADE SECRETS IN COURT
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Evidentiary issues and burden of proof
• Claimant establishes prima facie evidence, then the burden of prove shifts to
the defendant
• No discovery and evidence has to be notarised and legalised
Injunctive relief
• Injunctive relief as a final remedy - Opinion of the Supreme People's Court on
Some Issues Concerning the Application of Law in the Trial of Civil Cases
Involving Unfair Competition
• injunctive relief as an interim remedy - now available by virtue of the new PRC
Civil Procedure Law that came into force in January 2013
ENFORCEMENT OF TRADE SECRETS IN COURT
16
Commercial arbitration under a contractual arbitration agreement
•Contractual protection of trade secret should include”:
– Define what is the trade secret
– Set out the obligation of non-disclosure
•Interim injunctive relief could be ordered by the court in aid of arbitration
Arbitration under PRC Labor Contract Law
•Article 23: Employer and employee may provide for the protection of the
confidentiality of the employer's trade secrets and intellectual property in the
employment contract
•Post employment, employer should consider paying employer to maintain
confidentiality and non-competition for a reasonable term (i.e. 2 years)
•Remedies
– Injunction
– Damages
•Venue is favorable to employees
ENFORCEMENT IN OTHER VENUES
17
Mitigate risks of breaching PRC trade secret laws by:
•Identifying and documenting the areas of cooperation between client and
counterparty or reasons why sensitive information will be disseminated (so long
as it is legitimate, risk of prosecution will be reduced).
•Entering into a Confidentiality Agreement where appropriate (narrow definition
of Confidential Information)
•Considering obtaining representations and warranties
•Keeping a detailed record of any documents handed over to you
•Preparing an information/document handling protocol including what are the
proper and improper means of obtaining information (the “dos and don’ts”)
RECOMMENDATIONS
18
Drafting an NDA
•Contractual formalities
•Identify what type of information you are dealing with:
– Is it in the public domain?
– Does it relate to your counterparty’s business in a technical or
commercial sense?
– Is it functional?
– Have any secret-keeping measures been applied to it?
RECOMMENDATIONS
19
Confidentiality measures
– Enter into a confidentiality agreement with the counterparty before taking
custody of documents
– Treat the information as you would your own confidential information
• Apply security measures
• Limit access
• Ensure appropriate storage
Relations with authorities
•Define State secrets
RECOMMENDATIONS
20
In-House Program for Protecting Trade Secrets
•Organization
• Legal Department
• Human Resources Department
• Corporate Managers
• Business Unit directors
•Recognition and maintenance of IP assets
•Purchase and suppliers
• Standard supplier agreement
• Standard confidentiality agreement
• Supplier audit checklist and termination list
RECOMMENDATIONS
21
In-House Program for Protecting Trade Secrets (Continued)
•Sales and customer service
•Engineering workshop
•Human Resources
• Employee non-compete agreement
• Employee confidentiality agreement
• Employment agreement
•IP protection in the physical environment
•Risk assessment of company’s operations
RECOMMENDATIONS
STATE SECRETS IN CHINA
23
Overview of law – the key statutes
• PRC Law on Protection of State Secrets (“State Secrets Law”)
• PRC Criminal Law
STATE SECRETS
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Definition
• Matters that “vitally relate to national security and interests, determined according to
legal procedures and accessible by a limited group of people within a given period of
time” (Art 2 State Secret Law)
• A broad definition: “The following matters involving State security and national
interests shall be determined as State secrets if the divulgence of such matters is
likely to damage State security and national interests in the fields such as politics,
economy, national defence, foreign affairs, etc.”(Art 9 State Secret Law)
① secrets concerning major State affairs decisions making;
② secrets concerning national defence and military force;
③ secrets concerning diplomatic activities and activities related to foreign affairs;
④ secrets concerning national economic and social development;
⑤ secrets concerning science and technology;
⑥ secrets concerning state security and combating crimes; and
⑦ others
STATE SECRETS
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Article 282 Criminal Law
• Offence A – unlawfully obtaining State secrets
• Elements of offence
Applies to Chinese and non-Chinese citizens who:
– intentionally
– steal, spy or buy
– State secrets
• Penalties
– imprisonment of not more than 3 years, criminal detention or public surveillance
– imprisonment of not less than 3 years but no more than 7 years(serious)
OFFENCES
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Article 111 Criminal law
•Elements of offence
Applies to Chinese and non-Chinese citizens who:
–intentionally
–steal, spy, buy or unlawfully supply
–State secrets or intelligence
–for an organ, organization or individual outside the territory of China
Even if not marked confidential or classified, still potential liability if defendant knew or
ought to have known that it was secret (Art 5 SPC Interpretation)
•Penalties
–imprisonment of not less than 5 years but not more than 10 years
–imprisonment of not less than 10 years or life imprisonment (especially serious)
–imprisonment of not more than 5 years or criminal detention, public surveillance or
deprivation of political rights (minor offence)
–death and confiscation of property (Art 113 Criminal Law)
OFFENCES
27
Article 282 Criminal law
• Offence B – unlawfully holding State secrets & refusing to explain sources/purposes
• Elements of offence
Applies to Chinese and non-Chinese citizens
–intentionally
–unlawfully hold documents, material or other objects with State secrets
–and refuse to explain sources and purposes for which the information is held
• Penalties
–Imprisonment of not more than three years, criminal detention or public surveillance
OFFENCES
28
Article 398 Criminal Law
• Offence C – intentionally or negligently divulging State secrets in breach of State
Secrets Law
• Elements of offence
Applies to Chinese and non-Chinese citizens (public servant or other persons)
– intentionally or negligently
– divulging State secrets in breach of State Secrets Law
• Penalties
• Imprisonment of not more than 7 years
OFFENCES
29
Article 48 State Secrets Law
•Contains the following prohibitions relating to state secrets:
– illegally acquiring or holding
– purchasing, selling, transferring or destroying
– transmitting
– sending out of territory
– illegally reproducing, recording or storing
– referring to in private contact or correspondence
– transmitting on internet
– connecting secret-related computer to internet
– exchanging message without safeguard measures
– storing or processing state secret by using a non secret related computer
– uninstalling or modifying the safety technique program
– presenting, selling, abandoning or using any secret-related computer
OFFENCES
30
Due diligence
•M&A and investment transactions involving Chinese government or SOEs
•Identify the counterparty
•Have strict confidentiality regime in place
•Don’t remove State secrets from China
POTENTIAL RISKS: WHERE DO STATE SECRETS ISSUES ARISE?
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Investigations
•Document reviews for internal investigations e.g. under US Foreign Corrupt Practices
Act
•If documents are marked as “confidential”, “classified”, or “most confidential”
– don’t review, copy, remove or discuss
– markings are not determinative if a person knows or ought to have known that the
information was a State Secret (Art 5 SPC Interpretation)
•When considering whether to send documents to the US or anywhere else outside
China for review:
– seek legal advice
– Consider engaging a PRC qualified lawyer to “clear” documents from a state
secret perspective before transfer outside the PRC
POTENTIAL RISKS: WHERE DO STATE SECRETS ISSUES ARISE?
32
Beijing Municipal People’s Procuratorate Branch No.1 v Xue Feng and , Li Yongbo,
Chen Mengjin and Li Dongxu (2009)
• US Geologist (Chinese descent) sentenced to 8 years for breach of State Secrets laws in July
2010. (Appeal was rejected in February 2011)
• Conduct related to the gathering of geographic data from SOEs, including information relating to
exploration activities and a database containing location of 30,000 exploratory wells. All
information obtained through unofficial channels (former classmates).
• Court found Xue Feng (US citizen) had contrary to Art 111 of the PRC Criminal Law unlawfully
obtained State secrets and taken “intelligence” out of the PRC
•Issues with the definition of “intelligence” under PRC Law and retrospective classification
•Public domain – Some of the information was available outside China on the internet
EXAMPLES OF RECENT CASES
33
Beijing No.1 Intermediate People’s Court V Jiang Xinsheng (2010)
•This case involved charges against Jiang Xinsheng, the former manager of China National Technical
Import and Export Corp and the deputy head of the preparatory group of the State Nuclear Power
Technology Corp
•Jiang Xinsheng provided materials and internal information regarding the tender and bidding of
China’s third generation nuclear power project to Wang Jianxiong who was resident outside of China
•Jiang provided Wang with State secrets in relation to the tender and bidding of the third generation
nuclear power project in return for commission
•The Court held that Jiang Xinsheng committed the crime of providing State secrets and intelligence to
a foreign organisation or person. He was sentenced to 20 years imprisonment
EXAMPLES OF RECENT CASES
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Dos:
•Always establish the identity of the Chinese party
•Ask for assurances prior to information exchanges
•Be aware of the precautionary measures Chinese SOEs are required to take to protect
commercial secrets
•Consider having a PRC lawyer review documents before they are transferred outside
the PRC
SUMMARY OF THE “DOS AND DON’TS”
35
Don’ts:
• If it is marked “Most confidential” (绝密), “Classified” (机密) or “Confidential” (秘密)
– do not review the contents of the document
– do not copy or remove the document
– do not discuss anything that you consider confidential
•Don’t remove potentially State secrets overseas prior to legal advice
•Don’t assume that information is not confidential/classified merely because it is not
marked as so
•NEVER obtain State/SOE related confidential information from unofficial sources
SUMMARY OF THE “DOS AND DON’TS”
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