The Flanders-China Chamber of Commerce, the EU-China Business Association, the China IPR SME Helpdesk and the China Chamber of Commerce / EU organized a webinar focused on “How to Protect Your Trade Secrets in China” on 13 April 2021.

Mr Peter Sczigel of the China IPR SME Helpdesk introduced the Helpdesk and the webinar’s speakers to the participants. He also introduced a few factsheets and business guides about mainland China which can be downloaded from the Helpdesk’s website. 

Ms Gwenn Sonck, Executive Director of the FCCC and EUCBA, gave a brief presentation of both organizations. She also said that the Chamber attaches much importance to IPR in China. Companies doing business with China should also have an IPR strategy in their China business plan. China has already become a leader in innovation in several areas, such as the internet industry and artificial intelligence. Speaking about innovation and speed, in Beijing, shops, restaurants and communities have signs showing the inoculation rate of the inhabitants or employees. Already 50% of the city’s population  has been vaccinated and the aim is to go to 70% – which is the threshold for herd immunity – by the end of May. This is something we can only dream of. According to the IMF, GDP growth in China will be 8.4% this year, which would be the highest in 10 years. Foreign investments in China have also increased by 6.2%. China overtook the U.S. and became the world’s top destination for FDI and will be one of the main drivers of growth this year. More business opportunities will also arise as the EU-China investment agreement will be signed, the most ambitious agreement that China has ever concluded with a third country. It will broaden market access and provide a better business environment for investors in Europe and China.

Mr Valentin de le Court, IPR Expert at the China IPR SME Helpdesk and leader of the China desk at Daldewolf, a Belgian business law firm, talked about the importance of keeping your secrets secret. It is a hot topic in China for several reasons. Trade secrets are used to protect highly valuable information. The world’s most valuable resource is no longer oil, it is data. How do you protect data? Through trade secrets confidentiality. Hardly a week goes by without reports about alleged trade secret theft by Chines individuals, state-sponsored hackers and employees. The topic of trade secrets has been included in the EU-China trade agreement, so there is also a political dimension. In the past year we have witnessed a very intense legislative dynamism when it comes to trade secrets protection in the U.S., the EU and China.  

We live in a knowledge-based, information-based, ever more digitized economy. Looking at the S&P500 of the best performing companies in the world, in 1975, intangible assets represented 17% of corporate value, rising to 90% in 2020. Intangible assets are playing a key role in today’s economy. The value of a company is determined by its capacity to innovate and to appropriate, control, exploit and monetize the results of its innovation. The law provides two important tools to manage the results of your innovation. First, intellectual property rights, including trademarks, patents, copyrights, and design rights. An IP right is an exclusive right, a monopoly that is granted. The second tool is trade secrets. They are not IP rights, so no exclusive right is granted, but they protect you against unlawful acts. 

A patent is an exclusive right granted for an invention. It enables the patent holder to exclude others from making, using, offering for sale or selling the invention without the patentee’s authorization. The invention must be new, inventive and applicable industrially. A patent is public information, available in patent registries. In return you get an exclusive right for a limited time. The main characteristic of a trade secret is that it is confidential. The protection of a trade secret is mainly factual. That will depend on the nature of the information and the way it is handled. Once it is known, it is not protected anymore and you lose the competitive advantage that you had. Trade secrets can cover a wide variety of information, not only technical, but also commercial and financial information. IP rights grant you an exclusive right, trade secrets provide protection against unlawful acts. Trade secrets and IP are complementary. Innovative EU firms use both patents and trade secrets, but they use more trade secrets than patents for protecting innovations. 

Risks related to trade secrets have increased over the years. Trade secret thefts are on the rise because there is an increased flow of information. This is due to several factors: internet and digitization, open innovation, globalization of supply chains, the mobility of workers, and hacking. The biggest risk to trade secrets is not hackers, but people close to the business, such as employees, ex-employees and business partners. The majority of trade secret cases are among people that know each other.  

How to protect your trade secrets? It requires an appropriate legal framework and an internal strategy for the management and protection of trade secrets. Over the past years there was a global awareness of the need to reinforce the protection of trade secrets, including in the U.S., the EU and China. The legal framework has improved, but most EU businesses still lack a clear internal management and protection strategy for trade secrets, which is the only way for effective protection. You need to have a trade secret action plan including five actions: audit, inventory, improvement, education, and monitoring and reacting. 

In China, the centerpiece of trade secrets protection is the Anti-Unfair Competition Law (AUCL), revised in 2017 and 2019. There is also a set of other laws and regulations that can have an impact. Several rules were adopted last year by the Supreme People’s Court (SPC). In China there is a clear political will to strengthen trade secrets protection and enforcement. Looking at article 9 of the AUCL, we see that the definition of “trade secret” has been broadened to include all commercial information, not limited to technical and business information. The scope of trade secrets misappropriation has been expanded to include hacking and indirect infringement. Who is liable for misappropriation has also been clarified. There is no limitation to “business operators” and now includes individuals, legal persons and non-legal organizations. A Supreme People’s Court interpretation was issued in September 2020, providing guidance to courts on how to treat trade secrets cases and to companies on how to protect their trade secrets. 

Trade secrets protection requires trade secrets identification. Under Chinese law a trade secret is commercial information such as technical information, business information and etc. that are not known to the public, have commercial value and for which reasonable efforts to maintain secrecy have been made by the rights holder. EU law roughly presents the same approach. It is a broad and open notion. The SPC clearly identifies typical information that may qualify as trade secrets, including technical and business operation information. Almost any kind of information can qualify as a trade secret. The second requirement is secrecy and confidentiality. The information is not widely known and not easily accessible. The ease of access to the information is the key criteria to assess whether information is confidential or not. The third requirement is to assess the commercial value of the information. It is information that has practical or potential market value because it is not known to the public and it must provide a competitive advantage because of its secrecy. The last requirement is vey important: to adopt reasonable steps to keep the information secret. Protection of trade secrets is not automatic, you need to take proactive measures. If you don’t adopt protection measures, information will not qualify as a trade secret, and you won’t be protected. You will need to convince a judge that you adopted measures to prevent what happened. Concerning the required measures there is no size fits all. The judge will not expect the same measures from a start-up as from a multinational. 

Reasonable steps to implement include contracts, training and regulations, physical barriers, access management, IT measures, HR management  and other reasonable measures of confidentiality. A non-disclosure agreement (NDA) is a good start, but is not enough. Trade secrets infringement includes obtaining trade secrets through theft, fraud, coercion, electronic intrusion or other improper means and disclosing, using, and allowing others to use illicitly acquired trade secrets. It also includes the second degree infringer. Remedies include civil enforcement and administrative / criminal enforcement. The maximum statutory damages have increased to CNY5 million or €650,000. There are specialized IP courts and an IP division at the Supreme People’s Court. The main difficulty of enforcement is evidence. The win rate in China is relatively low but difficult to asses. In an SPC judgement of February 26, 2021, the highest ever damages for a trade secrets case of CNY159 million were awarded. 

Take aways:

• • Trade secrets are widely used
• • Trade secrets enforcement is challenging in China
• • Pay special attention to employees and business partners
• • Prevention is key and pro-active management is the only way to protect your trade secrets.
• • There are positive legislative changes
• • Implement a trade secret action plan

A Q&A session concluded the webinar.