On 23 April 2019 the 10th Session of the Standing Committee of the 13th National People’s Congress passed and published revisions to the Anti-unfair Competition Law (AUCL), which came into effect immediately. This is only the second time that the AUCL has been revised since its enactment in 1993. Unlike the previous revision, which dealt with a variety of issues, the current amendment specifically addresses trade secret infringement, which has become increasingly important as trade secrets are regarded as one of the core competitive advantages in today’s business world. This article discusses the main amendments to the AUCL and their implications for business executives, law practitioners and academics.
Background
Unlike the protection for patents, trademarks and copyright, there is no specialised law in China dedicated to the protection of trade secrets – despite them being viewed as potentially more valuable than patents or trademarks. In China, protection for trade secrets is provided in the AUCL, labour law, contract law and criminal law, with the AUCL setting forth the substantive provisions which form the basis and guidance for the other specialised laws. Some statistics indicate that, of the intellectual property generated from a company’s R&D efforts, approximately only 10% is patentable and even less is successfully patented, with the vast remainder constituting potential trade secrets. However, civil or criminal suits for trade secret infringement have been far outnumbered by patent and trademark cases in China. The reasons behind this discrepancy include:
- a limited scope of trade secret infringers;
- insufficient compensation for rights holders; and
- an excessive burden of proof for plaintiffs.
In response, the new revision deals with each of these issues, as discussed below.
The widening scope of infringers
A new paragraph has been inserted into Article 9 of the AUCL, widening the definition of ‘infringer’. It provides that “individuals, legal persons and non-legal person organisations other than business operators, who committed illicit acts as specified in the preceding paragraph, shall be deemed to have infringed trade secrets”.
Previously, the AUCL had been interpreted as dealing only with competition between business operators. As a result, whether employees could be held liable under the AUCL or whether they were general tortfeasors under the Tort Law has been a controversial issue. As trade secrets are often disclosed by a business operator’s employees (especially ex-employees), calls for catching employees under the AUCL have risen. It is thus a welcome amendment that the law now explicitly states that employees and ex-employees are punishable as infringers under the AUCL by the same sanctions.
Increasing sanctions for infringement
In response to the Chinese leadership’s call for establishing a punitive mechanism to make IP offenders pay a heavy price, punitive damages are now authorised under the AUCL for the first time. Article 17 now provides that “a business operator who maliciously infringed trade secrets in a severe manner can be assessed damages one to five times those determined by the aforesaid method”. The ‘aforesaid method’ refers to actual damages sustained by the rights holder or illicit gains obtained by the infringer.
It should be noted that this is also the first time that punitive damages as high as five times have been introduced into Chinese law. Previously, the Trademark Law permitted only treble damages (which has also been raised to five times in the Trademark Law’s parallel amendment on 23 April 2019). It can thus be reasonably envisioned that when the Patent Law is amended later in 2019, five times damages will also be allowable.
Aside from punitive damages for malicious conduct, the revised AUCL increases the statutory maximum compensation in instances of unascertainable damages and administrative penalties from Rmb3 million to Rmb5 million (approximately $450,000 to $750,000). Together with the punitive compensation system, the increased sanctions will:
- create sufficient incentives for rights holders to enforce their rights in the courts and before the government; and
- encourage potential infringers to think twice before engaging in illegal conduct
- Alleviating burden of proof for plaintiffs
The third welcome amendment is the alleviated burden of proof for civil plaintiffs in the courts. Previously, trade secret rights holders had to make a preliminary showing that the alleged infringer had access or exposure to the trade secret and that the information used by the infringer was substantively the same as the trade secret, before shifting the burden to the defendant to prove that the information at issue was not a trade secret or that it did not engage in infringement conduct.(1) As most trade secret infringements are committed stealthily as offenders strive to keep their stolen information secret, these evidentiary requirements create an almost insurmountable hurdle for the plaintiff to overcome.
A new provision has been added to Article 32 of the AUCL, which provides that:
in trade secret civil litigation, if the right owner has adduced preliminary evidence showing that it has taken confidentiality measures for the trade secret and reasonably demonstrating that the trade secret has been infringed, then the alleged infringer shall prove that the trade secret claimed by the right owner is not a trade secret within the meaning of this Law.
Article 32 further provides that:
if the right owner adduces preliminary evidence reasonably demonstrating that the trade secret has been infringed and provides one kind of the following evidence, then the alleged infringer shall prove that it did not commit an infringing act: (1) evidence demonstrating that the alleged infringer has a channel or opportunity to acquire the trade secret and the information used by the alleged infringer is substantively the same as the trade secret; (2) evidence demonstrating that the trade secret has been disclosed or used, or is at risk of being disclosed or used; (3) other evidence demonstrating that the trade secret has been infringed by the alleged infringer.
Therefore, apart from proving the infringer’s exposure to the trade secret and substantive similarity, the plaintiff can now pass the buck to the defendant after demonstrating that the trade secret has been disclosed or used (or is at risk of being disclosed or used), which substantially alleviates the burden on the plaintiff. Further, after making the preliminary showing, the plaintiff may apply to the court to exercise its power in evidence collection and preservation under Article 64 of the Civil Procedure Law.