Trade secret laws and regulations in China

China has not legislated a unified law specifically directed to trade secret protection. 
So far in China, the laws related to trade secret protection scatter across: 

• the Anti-Unfair Competition Law (revised in 2019); 
• Civil Code (effective in 2021)Civil Procedure Law (revised in 2017);
• Labour Law (revised in 2018); and 
• Criminal Law (revised in 2015).

Yes.

Other exemplary applicable regulations and guidance relating to trade secrets protections include:

• Certain Regulations of the State Administration for Industry and Commerce on Prohibiting Infringement of Commercial Secrets (effective in 1998);
• Interpretation of the Supreme People's Court on Some Matters about the Application of Law in the Trial of Civil Cases Involving Unfair Competition (effective in 2007);
• Circular on Printing and Distributing the Tentative Provisions on the Protection of Central Enterprise Trade Secrets (effective in 2010);
• Opinions of the Supreme People's Court on Comprehensively Strengthening the Judicial Protection of Intellectual Property Rights (effective in 2020);
• Provisions of the Supreme People's Court on Several Issues concerning the Application of Law in the Trial of Civil Cases of Trade Secret Infringement (effective in 2020).

According to the Anti-Unfair Competition Law: trade secrets refer to any technical information, operational information or commercial information, which is not known to the public and has commercial value, and for which its infringer adopted measures to ensure its confidentiality.

No.

Anti-Unfair Competition Law did not specify what kind of measures should be adopted to show that the company has made sufficient efforts to ensure the confidentiality.  

However, it is worth noting that Article 6 of Provisions of the Supreme People's Court on Several Issues concerning the Application of Law in the Trial of Civil Cases of Trade Secret Infringement provides that:

 “A people's court shall identify that a right holder has taken appropriate confidentiality measures under any of the following circumstances if it is sufficient to prevent the leakage of trade secrets under normal conditions:

• it executes a non-disclosure agreement or stipulates the obligation of confidentiality in a contract;
• through articles of association, training, rules and regulations, written notification, etc., it puts forward confidentiality requirements on those who can access and acquire trade secrets, including its employees, former employees, suppliers, customers and visitors;
• it restricts visitors' access to, or conducts differentiated management of secret-involved factory buildings, workshops and other production and business premises;
• it differentiates and manages trade secrets and the carriers thereof by means of marking, classifying, isolating, encrypting, and sealing them, and by limiting the scope of personnel that can access or acquire them;
• it takes measures to prohibit or restrict the use of, access to, storage in or reproduction from computer devices, electronic devices, network devices, storage devices, software, etc. that can access or acquire trade secrets;
• it requires departing employees to register, return, remove or destroy trade secrets and the carriers thereof accessed or acquired by them, and continue to assume the obligation of confidentiality; or
• it takes other reasonable confidentiality measures.”

Yes.

There can be various consequences depending on the governing law. For example:

Article 21 of the Anti-Unfair Competition Law stipulates that:
“[w]here a business operator or any other natural person, legal person or unincorporated organisation infringes any trade secret in violation of Article 9 herein, the supervision and inspection authority shall order it to cease the illegal act, confiscated the illegal gains and impose on it a fine of between CNY100, 000 and CNY1 million; where the circumstance is serious, the fine shall be between CNY500, 000 and CNY5 million.”

Therefore, under the Anti-Unfair Competition Law, transfer or licensing of trade secrets by a party who is not the trade secrets owner will be punishable for an injunction, confiscation of illegal gains, and a fine of up to 5 million RMB. 

Yes.

For example, Article 9 of the Anti-Unfair Competition Law stipulates that trademark infringement actions includes:
“. . .

1. obtaining an infringer's trade secrets by theft, bribery, intimidation, electronic intrusion or other improper means;
2. disclosing, using, or allowing others to use an infringer's trade secrets obtained by the means mentioned in the preceding paragraph; or
3. disclosing, using or allowing others to use an infringer's trade secrets in violation of confidentiality obligations or the infringer's requirements on keeping such trade secrets confidential.
4. obtaining, disclosing, using or allowing any other party to use an infringer's trade secrets by instigating, tempting or helping any other party to violate the confidentiality obligations or the infringer's requirements on keeping such trade secrets confidential.

Other natural persons, legal persons and unincorporated organisations other than the business operators who commit the illegal acts listed in the preceding paragraph shall be deemed as infringement of trade secrets.

Where a third party knows or should have known of the fact that an employee or former employee of the right owner of trade secrets or any other entity or individual conducts any of the illegal acts specified in the first paragraph of this article, but still accepts, publishes, uses or allows any other party to use such secrets, such practice shall be deemed as infringement of trade secrets.
. . .”

The evidence needed for initiating an investigation of trade secret infringement is accessible to the trade secret owner. There is evidence directed to (1) prove the existence of trade secrets; and (2) prove the infringer has access to the trade secrets and the information used by the alleged infringer is substantially identical to such trade secrets.

Article 32 of the Anti-Unfair Competition Law stipulates that: 

“During civil trials of infringement cases of trade secrets, where the preliminary evidence provided by an obligee of trade secrets can prove that it has taken measures to keep the confidentiality of its trade secrets and can reasonably indicate that such trade secrets have been infringed, the alleged infringer shall prove that the trade secrets claimed by the obligee do not fall within the scope of trade secrets as provided in this Law.

Where the obligee of trade secrets provides preliminary evidence that can reasonably indicate that the trade secrets have been infringed and provides one of the following pieces of evidence, the alleged infringer shall prove that there is no infringement of any trade secret:

1. evidence showing that the alleged infringer has access to or opportunities to obtain such trade secrets and the information used by the alleged infringer is substantially identical to such trade secrets;
2. evidence showing that such trade secrets have been or have the possibility of being published or used by the alleged infringer;
3. other evidence showing that such trade secrets have been infringed by the alleged infringer.”

After passing the hurdle of providing preliminary evidence, Article 13 provides that: 
“The supervision and inspection authorities may adopt any of the following measures to investigate suspected unfair competition conduct,

1. accessing the business premises involved in a suspected unfair competition act for inspection;
2. questioning the business operator under investigation, any interested party, or any other related entity or individual, and requiring them to explain relevant situations or provide other materials in relation to the investigated act;
3. inquiring into and copying the contracts and agreements, account books, vouchers, documents, records, business correspondence and other materials related to a suspected unfair competition act;
4. sealing up and/or detaining the property involved in a suspected unfair competition act; and
5. inquiring into the bank account of a business operator that is suspected of an unfair competition act.
   . . .” 

Regarding interim measures, Article 100 of the Civil Procedure Law provides injunctive relief to parties in general commercial disputes. When applying for an injunction, the applicant must convince the court that the injunction is necessary such as the judgment will be difficult to enforce or the applicant may suffer damages, and the applicant must provide a security (usually cash). 

Regarding final measures and remedies, Article 17 of the Anti-Unfair Competition Law provides that: 

“. . . 
Where a business operator violates the provisions stipulated in Article 6 or Article 9 herein, and it is truly difficult to determine the actual losses suffered by the obligee as a result of the infringement or the benefits obtained by the infringer from the infringement, the people's court shall award the obligee less than CNY5 million in damages, depending on the seriousness of the infringement.”

Article 21 provides that: 

“Where a business operator or any other natural person, legal person or unincorporated organisation infringes any trade secret in violation of Article 9 herein, the supervision and inspection authority shall order it to cease the illegal act, confiscated the illegal gains and impose on it a fine of between CNY 100,000 and CNY 1 million; where the circumstance is serious, the fine shall be between CNY 500,000 and CNY 5 million.”

According to Article 101 of the Civil Procedural Law, where the applicant fails to institute lawsuit or apply for arbitration in accordance with the law within 30 days after the people's court adopts preservation measures, the people's court shall revoke the preservation order.

No.

No matter the injunction is granted by a court or not, the damages or financial compensation will be awarded by the court when there is an infringement of trade secrets. 

In general, court hearings involving trademark secret disputes are inter parte hearings. However, if one party does not appear before the court and cannot provide reasonable cause for its absence, the interim and final measures will be issued in a default judgment. 

According to Article 17 of the Anti-Unfair Competition Law:

 “. . .
[t]he amount of compensation for damage caused by any unfair competition act to a business operator shall be determined depending on the actual losses suffered by such operator as a result of the infringement; where it is truly difficult to work out the actual losses, such amount shall be determined in accordance with the benefits obtained by the infringer from the infringement. Where a business operator is maliciously engaged in the infringement of trade secrets, if the circumstance is serious, the amount of compensation may be determined between one time to five times the amount determined according to the above method. The amount of compensation shall also include the reasonable expenses paid by the damaged business operator to stop the infringement.

Where a business operator violates the provisions stipulated in Article 6 or Article 9 herein, and it is truly difficult to determine the actual losses suffered by the obligee as a result of the infringement or the benefits obtained by the infringer from the infringement, the people's court shall award the obligee less than CNY 5 million in damages, depending on the seriousness of the infringement.”

Three years for civil litigation. The statute of limitation shall not apply to a claim for ceasing infringements.

The statute of limitation is calculated from the date when a right holder knows or should have known that his or her rights have been infringed and who the infringer is. 

Article 194 of the Civil Code provides that: 

“[a] limitation of action shall be suspended during the last six months of the limitation if the right of claim cannot be exercised because of the following obstacles:

1. Force majeure;

. . . 

5. Other obstacles that result in the failure of the right holder to exercise the right of claim.

The statute of limitation shall expire after six months from the date when the obstacles causing the suspension are eliminated.”

Article 195 of the Civil Code provides that:

“[a] statute of limitation shall be interrupted under any of the following circumstances, and shall recommence from the time when the interruption or the relevant procedure is terminated:

1. Where the right holder claims for the fulfillment of obligations against the infringer;
2. Where the infringer agrees to fulfill the obligations;
3. Where the right holder files a lawsuit or applies for arbitration; or
4. Other circumstances which have the same effect as filing a lawsuit or applying for arbitration arise.”

Yes.

Article 15 of the Anti-Unfair Competition Law provides that the supervision and inspection authorities and their staff members shall keep confidential any trade secrets known to them during the investigations.

The exceptions can be invoked by government organs when there is a conflict between government information protection and public interest. 

According to Article 15 of Regulations of the People's Republic of China on the Disclosure of Government Information (revised in 2019), 

“[a]n administrative organ shall not disclose government information that involves trade secrets or personal privacy and whose disclosure will damage the legitimate rights and interests of third parties. However, if a third party agrees to the disclosure or the administrative organ believes that the non-disclosure will have a significant impact on public interests, the government information shall be disclosed.”

According to Article 32,

“[w]here the government information to be disclosed upon request will damage the legitimate rights and interests of a third party, the administrative organ concerned shall solicit the opinions of the third party in writing. The third party shall give opinions within 15 working days of receipt of the request for opinions. If the third party fails to give opinions within the time limit, the administrative organ concerned shall decide whether to disclose the information in accordance with the Regulations. If the third party does not agree to the disclosure and has reasonable grounds, the administrative organ concerned shall not disclose the information. If the administrative organ concerned believes that non-disclosure may have a significant impact on public interests, it may decide to disclose it and inform the third party in writing of the content of the government information to be disclosed and reasons for the disclosure.”

Exceptions can also be invoked when a company seeks to go to public pursuant to Chapter 5 of the Securities Law of the People's Republic of China (revised in 2019).

Yes. 

Article 112 of Civil Procedure Law of the People's Republic of China stipulates that:

“[w]here more than two parties to a case maliciously collaborate among themselves for the purpose of infringing the legitimate rights and interests of any other party by making use of initiating lawsuits or mediation, the people's court shall reject the claims of such parties and order a fine or detention against such parties depending on the circumstances; where the violation on the part of the parties is suspected to constitute a crime, such parties shall be subject to criminal prosecution in accordance with the law.”

A separate legal proceeding is potentially required when the violation constitutes a crime.

Reasonable confidentiality measures not only help employers avoid misuse of trade secrets, but are also an important factor in proving an infringement of trade secrets. 

In addition to any statutory protection, employers can obligate employees to confidentiality by including a confidentiality clause in the employment contract or by signing a separate confidentiality agreement with the employee. The confidentiality clause or confidentiality agreement shall contain definitions of confidential information, details regarding liability, confidentiality period, confidentiality obligations, liability for breach of contract, dispute resolution, etc. 

In addition, employers can take other confidentiality measures such as establishing bylaws and employee training to ensure that employees fulfil their obligations of confidentiality.

Yes.

Even if there is no confidentiality agreement or confidentiality clause between the employer and the employee, the employee is expected to protect the company’s trade secrets in accordance with the principle of good faith. Therefore, as long as the employer specifies the scope of trade secrets and takes confidentiality measures, employees should protect trade secrets based on their duty of good faith to the employer.

However, the implied rights of protection of trade secrets are constrained by certain limits. Trade secrets that should be protected by employees must meet the following requirements simultaneously:

• unknown to the public
• has commercial value
• the right holder has taken corresponding confidentiality protection measures

• Non-competition clause/non-competition agreement

To prevent employees from disclosing trade secrets to new employers after leaving the current employer, employers can impose a non-competition clause in the employment contract or sign a separate non-competition agreement with the employee, agreeing that the employee shall not directly or indirectly participate in competitive business for a certain period of time after leaving the company. However, please note that the non-competition restriction should only apply to senior management, senior technical personnel and other persons under a duty of confidentiality, and the duration of this non-competition restriction may not exceed two years. 

• Period of release from secrets-management

Employers can include a “period of release” clause in the employment contract, requiring the employee in possession of the trade secret to notify the employer in advance before leaving the company and wait until the release period expires before formally leaving the company. In China, such period of release should generally not exceed 6 months.

However, employers should note that some Chinese courts have held that the application of the period of release cannot hinder the termination of the employment relationship. If the employee has already given 30-days written notice to the employer, the period of release does not affect the termination of the employment relationship.

Not explicitly.

However, according to Article 16 of the Anti-Unfair Competition Law:

“[a]ny entity or individual shall have the right to report any suspected unfair competition acts to the supervision and inspection authority. The supervision and inspection authority shall promptly deal with such reports according to the law upon receipt of these reports.
The supervision and inspection authorities shall make available to the public the phone numbers, mailing addresses or email addresses for such reports and keep the identities of informants confidential. For real-name informants who present evidence for their claims, the supervision and inspection authorities shall inform them of the handling results.”

Therefore, the law encourages “whistleblowing” activities, and it is unlikely that the “whistleblower” will be punished for performing its legal right to report suspected unfair competition acts. Also, according to the law, the identities of informants are kept confidential.

Sometimes.

As a general principle, under the principle of vicarious liability, according to Article 34 of the 2009 Tort Law:

“[e]mployers shall bear tortious liability for any injury or damage caused to other people by their employees in the course of their work.

Parties that use dispatched labour shall bear tortious liability for any injury or damage caused to other people by dispatched personnel during the course of their work during the labour dispatch period; the labour dispatching party shall bear corresponding supplementary liability where it is at fault.”

In addition, an employee’s former employer is likely to be a “third party” whose trade secrets have been infringed. The following behaviors of the current employer may constitute infringements of trade secrets:

• If the employer hires a specific employee of a specific competitor for the purpose of obtaining the trade secrets of this competitor, this act may constitute abetting, inducing or helping others to violate the confidentiality obligation.
• If the current employer knows or should have known that the employee has improperly obtained the trade secrets of the former employer, and allows the employee to use them or instructs other employees to use them, the current employer and the employee will be found to have committed a joint infringement of former employer’s trade secrets. 

Clauses providing obligations on the parties to keep information confidential (“Confidentiality Clauses”) and/or clauses linking the contract with non-disclosure agreements (“NDAs”) shall be included in the contract to protect trade secrets in China.  

Under Chinese law, whether the entity concerned has taken reasonable confidentiality measures to protect the information is an important factor in determining whether the information constitutes a trade secret and having Confidentiality Clauses in the contract or entering a separate NDA is deemed to be one of the confidentiality measures. Thus, it is important to include Confidentiality Clauses or clauses linking the contract with the NDAs in the contract, depending on whether the parties enter into a separate agreement on obligations to keep the relevant information confidential. 

In the Confidentiality Clauses or the NDAs, it is advisable to include provisions regulating the following aspects—the definition of confidential information; the obligations of the parties to take certain measures to protect the confidential information; liquidated damages in case there is a breach; the duration to keep the information confidential; exemption or exceptions etc.  

In addition, in any case where a party is to sign a separate NDA, it is important that the parties make it clear that they consider the contract and the NDA to be interconnected with each other. 

Not including the Confidentiality Clauses or entering the NDAs—as described in the question above, under Chinese law, one key factor to determine whether relevant information constitutes trade secrets is whether the parties have included Confidentiality Clauses in the relevant contract or signed a separate NDA to regulate the parties’ obligations to keep the information confidential. The parties may neglect to include such clauses, or sometimes even when the parties include Confidentiality Clauses, they may neglect to define the scope of confidential information or a mechanism to define what is confidential information. Moreover, during the exchange of the relevant information, it is also important for the parties to make it clear to the other party that such information is confidential and protected under Confidentiality Clauses or NDAs. 

No obligations to take measures to mitigate in case of breach – Sometimes the parties may overlook agreeing on relevant mitigation measures to contain a situation in case confidential information is disclosed. 

Enforcement issues may be one of the aspects the parties may need to look to when considering cross-border protection of trade secrets. 

If the trade secret is revealed by the other parties and the court has ordered the breaching party to compensate for the damage, if the party suffering the damage is located in a different jurisdiction, enforcement of such decision would be one of the major concerns for obtaining compensation. Thus, it is important for the parties to take into account the enforcement hurdles when drafting the dispute resolution clauses in a contract which may involve the cross-border protection of trade secrets.

Under Chinese law, a penalty clause under a commercial contract is not prohibited. Article 585 of the Civil Code provides that the parties may agree on the monetary amount of liquidated damages in case of breach of the contract by one the parties and may also agree on the calculation method of the damages arising from the breach of contract. However, it further provides that if the agreed liquidated damages are excessively higher than the damages caused, the people’s court or arbitration institution may reduce this to a proper amount according to the request of a party. Thus, companies wanting to deter suppliers or other business partners from violating the obligations to protect confidential information may consider including a penalty clause. 

In addition to contractual protection, under China’s Anti-unfair Competition Law (“AUCL”) the court may grant punitive damages if there is bad faith infringement of trade secrets. Article 17 of the AUCL provides that the amount of compensation for the parties suffering from unfair competition, shall be calculated in accordance with the actual loss suffered; if actual loss is difficult to calculate, the compensation shall be calculated in accordance with the profit of the infringer obtained through the infringement. Moreover, if the infringing party infringes the trade secret maliciously and in severe circumstances, the amount of compensation can be of 1 to 5 times the amount calculated in the aforesaid method, which shall also include the reasonable expenses paid by the party suffering the loss to stop the infringement.