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Many U.S. lawyers are surprised when I tell them that China has legal protection for trade secrets.  Although China’s trade secret protections are scattered across several statutes, the most important is the Anti-Unfair Competition Law (AUCL). Article 10 of the AUCL defines a trade secret as technical and business information unknown to the public which has economic value and practical utility and for which the trade secret owner has taken measures to protect its confidentiality. Article 10 of the AUCL prohibits three forms of misappropriation:

  • The acquisition of a trade secret by theft, inducement, duress or other illegal means;
  • The disclosure or use of a trade secret acquired by the above-described illegal means; and
  • The disclosure or use of a trade secret in breach of an agreement or confidentiality obligation imposed by the trade secret owner.

As in the U.S., reverse engineering does not constitute misappropriation. And, as in the U.S., the failure of a trade secret owner to take reasonable steps to protect the confidentiality of its trade secret deprives it of trade secret status.

In addition to the AUCL, Article 43 of China’s Contract Law prohibits parties to a contract from disclosing or exploiting a trade secret obtained during the contract negotiations, even if the contract is not ultimately executed. Similarly, Article 149 of China’s Company Law prohibits directors and senior managers of a company from making unauthorized disclosure of their company’s trade secrets. Finally, under China’s Labor Law, an employer is expressly authorized to impose confidentiality obligations on employees who will be exposed to trade secrets during their employment.

Victims of trade secret misappropriation have three options for the enforcement of the foregoing laws. A trade secret owner can file a civil lawsuit, a recourse that U.S. companies have increasingly turned to for relief. A trade secret owner can also pursue administrative action through the Administration for Industry and Commerce (AIC), but the AIC can only accord limited relief, such as ordering the return of tangible trade secrets (e.g., blueprints) or seizing and destroying goods manufactured using misappropriated trade secrets. A trade secret owner can also seek criminal action in cases involving significant losses caused by misappropriation.

Although on paper, China appears to offer robust protection for trade secrets, there are practical difficulties in obtaining relief.  In civil and administrative cases, trade secret owners face significant proof challenges. First, there is limited U.S.-style discovery available for building a misappropriation case. Second, there is a strong preference for documentary, as opposed to testimonial, evidence. Finally, there is general lack of experience in the Chinese judicial and administrative systems with trade secret cases, although this is gradually changing in the larger cities.