[Focus On PIAC] Tips of Intellectual Property Protection in China(I)

The U.S.-China Business Council recently released its China Business Environment Survey. Of those U.S. companies surveyed, 95% indicated they are either somewhat or very concerned about IPR enforcement in China. Despite that concern, over half indicated that they had seen some improvements in IPR protection in the past year. While other areas of intellectual property rights have historically garnered more attention, U.S. companies are increasingly concerned about trade secrets protection in China. The rising level of concern over trade secrets reflects longstanding concerns about companies’ ability to use the Chinese legal system to protect and enforce trade secrets. Further, with the enactment of the third amendment to the Chinese Patent Law and the related Implementing Regulations, inventor remuneration in China is no longer a negligible issue for multinational companies (MNCs) who have R&D activities in China. Developing and implementing an inventor remuneration policy is on the agenda of most MNCs in China. This article discusses best practices to prevent trade secret theft and prompt the inventor remuneration policy in China.

I. Protection of Trade Secrets in China

While China has a comprehensive set of laws, regulations, and judicial interpretations designed to protect the rights of trade secret owners, the enforcement of trade secrets has not been straightforward. This is primarily because China does not have U.S.-style discovery in litigation and the evidentiary burden for a plaintiff to bring a claim of trade secret misappropriation in Chinese courts is high. Notwithstanding the difficulties, there have been numerous cases of successful enforcement, both civil and criminal. Experience shows that it is possible to protect and enforce trade secrets in China, but the devil is in the details.

To prevail in a trade secret misappropriation action in China, a trade secret owner must prove that: (1) the asserted trade secret is not publicly known; (2) the asserted trade secret has economic benefits and practical utility; (3) the trade secret owner has taken measures to protect the confidential nature of the asserted trade secret; and (4) a wrongdoer or third party has misappropriated the asserted trade secret. Chinese courts prefer evidence in its original form. In practice, documentary evidence is almost the only form of evidence that carries significant weight in Chinese courts.

Although trade secrets can be protected by means similar to those used in the U.S., such as a confidentiality agreement, the mere existence of a confidentiality agreement may not be sufficient. In addition to a confidentiality agreement, it is advisable to have recipients of confidential information sign an acknowledgement before they receive that confidential information.

Because one of the key elements for a protectable trade secret is that the trade secret owner has taken measures to keep the trade secret confidential, it is important to establish and enforce a company-wide confidentiality policy.

1. Establish your confidentiality policy

If a company has trade secrets of any value, it is essential to establish a trade secret audit program and implement a robust policy to maintain the confidentiality of its trade secrets. The necessary steps of any effective confidentiality policy should include at least the following:

• identifying what information the company deems confidential and how its employees should handle that information;

• Clearly spelling out the consequences of any unauthorized or improper use or disclosure of confidential information; and

• Clearly stating that improper use or disclosure constitutes grounds for termination or even criminal prosecution.

2. Policy enforcement

The following are the recommended practices on enforcing company confidentiality policies and protecting the company’s trade secrets.

Have all key personnel who have knowledge of trade secrets sign confidentiality agreements. In addition, the company should have a formal policy regarding the ownership of any intellectual property created by the employee during his or her employment, such as assigning all IP rights including trade secrets to the company.

• Conduct regular training on the company’s confidentiality policy.

• Verify that all employees have received a copy of the confidentiality policy in their employee handbook and have signed a statement acknowledging that they have read, understood and will comply with the policy as a condition of their employment.

• Keep confidential information in restricted areas and in clearly marked binders and storage media. Those items should be marked as Classified, Restricted, Confidential, Do Not Disclose, Do Not Copy Property of [company name], or some other reasonably appropriate method particular to the company’s business.

• Implement the following measures:

(i) Restrict access to confidential information and disclose it only on a need-to-know basis;

(ii) Adopt a locking system on the confidential information, such as a check-in and check-out system;

(iii) Put passwords on confidential information.

• Impose confidentiality requirements on visitors to the company’s factories and premises.

• To the extent possible, have all employees sign a written acknowledgement before receiving any company information. If not, a subsequent written acknowledgement must be obtained. For a consultant, subcontractor, or any other third party, obtains a written acknowledgement in advance.

• Conduct exit interviews of departing employees to ensure that they are not taking any information that the company would not want to disclose to a competitor with them to their new jobs. This also serves to remind all key employees that their obligation not to disclose trade secrets extends beyond their employment with the company. Also have departing employees provide written acknowledgment that they had access to certain confidential information and attach a list of that information. It is advisable to have departing employees return all electronic storage devices, such as USB drives, when employment terminates.

• Since one of the most common avenues for loss of trade secret is disclosure through electronic means, electronic access for departing employees should be either blocked immediately before termination or closely monitored in accordance with company computer policies. It is also advisable for the company to have computer policies in place that permit monitoring of electronic transmissions (such as regular imaging of an employee’s CPU) in a way that would alert the company if confidential files were being transmitted outside the company without the company’s consent.

• To the extent possible, keep the key computers storing confidential information off any network.

• To the extent possible, limit unauthorized downloading and installation of software that is not work-related.

• To the extent possible, but without invading personal privacy, monitor employee web surfing and email communication both in and out of the company computers.

• Ask contractors and employees to enter into non-competition agreements with your business after they leave.

• Obtain reference and background checks on all managers, key employees and persons who will have regular access to any confidential information.

• Build and maintain good relationships with the local police and Chinese government agencies, such as the State Administration for Industry and Commerce.

Although these measures may not completely protect trade secrets from unwanted disclosure, they may substantially reduce the risk of misappropriation. Moreover, these are necessary steps to prove that the trade secret owner has taken adequate measures to protect the confidentiality of the trade secret, which is essential in any enforcement action against misappropriation in China.

When it comes to trade secrets, prevention is the best cure. But don’t be shy of taking enforcement action in China if misappropriation has occurred. Chinese courts are improving. MNCs can now get meaningful remedies from Chinese courts.

Helen Cheng (Partner in the Shanghai office of Zhong Lun Law Firm)