Trade Secrets

Posted April 29, 2010 by Bierce & Kenerson, P.C. · Print This Post

Chinese Criminal Law, Article 219, imposes criminal liability for improper conduct relating to “commercial secrets.” The Criminal Law has only a vague definition of “commercial secrets.” Conduct is criminally improper if one:

o   Obtains a commercial secret by stealing, luring, coercion, bribery or other improper means,
o   Uses or allows another to use a commercial secret obtained by such improper means,
o Discloses commercial secrets in violation of a non-disclosure agreement (“NDA”) or against the request of the rightful holder of the commercial secret, or
o   Obtains, uses or discloses a commercial secret that one should have known (or actually knew) was improperly obtained.

On March 25, 2010, the State-owned Assets Supervision and Administration Commission (“SASAC”) adopted regulations on commercial secrets applicable to approximately 120 state-owned enterprises (“SOE’s”). SOE’s dominate many sectors of the Chinese economy, including iron and steel, which are politically sensitive. Foreign companies and non-SOE’s should thus regard “commercial secrets” of SOE’s as if they were “state secrets” impacting “national security.” The regulations were announced on April 26, 2010, shortly after the convictions of certain Rio Tinto employees of bribery and theft of commercial secrets.

Under the SASAC regulations, “commercial secrets” cover management methods and business models and include:

”management information like strategic plans, management methods, business models, reform and stock market listing, M&A and restructuring, property transactions, financial information, investment decisions and financing, production plans, purchase and sale, resource reserves, client information, bidding information and technical information like designs, programs, product specifications, production techniques, production methods, and technical know-how etc.”

The SASAC regulations require SOE’s to separate “core commercial secrets” (that can last forever) from “standard commercial secrets” (that have a limited useful life as secrets). Under the regulations, SOE’s must set a sunset period for expiration of any claim to “commercial secret” status of “standard commercial secrets.”

As of late March 2010, China’s legislature was reviewing proposed amendments to the Law on Guarding State Secrets that would impose direct obligations on telecommunications carriers and Internet hosting providers. Reuters referred to the China Daily (on April 27, 2010), as stating that, under the draft, “a State secret is defined as information concerning national security and interests that, if released, would harm the country’s security and interests.”

The Chinese legal system adopts a unique approach to protection and enforcement of rights in “commercial secrets” and “state secrets”:

o The State expressly demands that all commercial secrets be disclosable to the State from telecommunications carriers and Internet hosting providers. (While this may occur in other countries including the United States, the U.S. procedure includes judicial review.)
o Enforcement is done through the criminal process.
o Company management can be vicariously liable for the criminal acts of employees.
o “Commercial secrets” of SOE’s can be deemed to be “state secrets,” and thus protected by national security interests and breach may result in potentially severe criminal prosecution, particularly if the “commercial secrets” were obtained by bribery.

This approach suggests that caution is still required before a foreign company considers establishment and operation of captive service centers and outsourcing of business processes and knowledge processes in China, particularly involving the use of any company-confidential information that supports competitive advantage. It also suggests that private Chinese enterprises should adopt the same geographical diversification model that the Indian BPO providers have adopted to avoid dependency on one legal regime that remains “sui generis”.

Trade Secrets

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