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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July 2014

May Tai, Partner, may.tai@hsf.com

Brenda Horrigan. Partner, brenda.horrigan@hsf.com

Damien McDonald, Foreign Registered Lawyer, damien.mcdonald@fangdalaw.com

TRADE SECRETS IN CHINA - ENFORCEMENT

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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

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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

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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

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• 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

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• 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

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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

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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

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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

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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

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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

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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

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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

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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?

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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

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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”

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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”