The Authors' Take - Uncovering Trade Secrets in China: An Empirical Study of Civil Litigation 2010–2020

Uncovering Trade Secrets in China: An Empirical Study of Civil Litigation 2010–2020

by Jyh-An Lee, Jingwen Liu, and Haifeng Huang

Trading partners of and foreign investors in China have claimed that trade-secret protection in the country is far from adequate. This intuition is rooted in China’s lack of a stand-alone trade-secret act, deficiencies in China’s civil enforcement mechanisms, the unsatisfactory win rate for plaintiffs and damages awarded, and the excessive burden-of-proof requirements imposed on trade-secret owners. Although these issues have been controversial for more than two decades, relevant debates have often lacked even the barest empirical support.

Against this backdrop, and as a byproduct of the US-China trade disputes in 2018 and 2019, China amended the Anti-Unfair Competition Law (AUCL), being the primary legislation that reflects trade secrets, in 2019 to further strengthen its trade-secret protection. The 2019 Amendment of the AUCL had, among others, substantially reformed the damages and evidence rules so as to lift the damages cap and partially reverse the burden of proof in cases concerning trade secret misappropriation. While these reforms have come under the spotlight, their actual impact has yet to be elucidated.

In this article, we investigate all published civil-litigation cases pertaining to trade-secret misappropriation in China from 2010 through 2020. Our empirical findings, which cover various aspects of trade-secret law enforcement in the country, paint a realistic picture of (1) the number and the spatio-temporal distribution of trade secret litigation, (2) the win rates of trade-secret holders and their available remedies, (3) the percentage of cases involving departing employees, and (4) foreign parties’ participation in the private enforcement of trade secrets. By presenting the empirical data with contextual analyses, this article provides a rigorous reflection of the features and patterns of private trade-secret enforcement in China during the studied period.

[This is an Authors' Take post, which provides readers with an insight into current IP scholarship, featuring preliminary comments and thoughts from authors of articles accepted for publication in forthcoming issues of the Journal of Intellectual Property Law & Practice (OUP). The full text of this contribution will be made available on Advance Access soon]

Editorial - The Trade Secrets Directive: consistency of approach required, with or without Brexit

In a clear, analytical and thought-provoking Editorial, published in our September issue, editorial board member Rachel Montagnon (Herbert Smith Freehills) discussed the changes introduced by the new Trade Secrets Directive (Directive (EU) 2016/943) from a UK perspective, evaluating the potential effects of Brexit on its implementation and arguing in favour of a consistent approach to its interpretation and application, to provide pan-European businesses with a stable and solid framework for the protection of trade secrets. Thank you, Rachel, for your very interesting and topical editorial!

The Trade Secrets Directive – consistency of approach required, with or without Brexit 

Rachel Montagnon* 

A year ago, when I agreed to write this editorial once the new Trade Secrets Directive 1 (the Directive) had entered in to force, I thought that I would be discussing a harmonisation of approach to trade secrets across the EU including the UK. Well, despite the result of the UK's Brexit referendum, harmonisation still looks likely, even if it's only at a commercial level in the UK. The Directive will affect all businesses operating across Europe; any business with employees and research and development in multiple European states, with people and product concepts moving between states in the course of employment/development, will want to apply a consistent approach to the protection of its trade secrets and know-how. This will now be made easier by virtue of the Directive. 

In fact, the UK will still be a member of the EU on the date by which the Directive must be implemented (2 years from coming into force on 5 July 2016) and so, if political will allows, the UK may even implement the Directive prior to ‘Brexit’ in any case. In any case, the minimum harmonisation required by the Directive equates to a position so similar to the current protection accorded to confidential information by the UK common law including the approach taken by the UK courts that it was always questionable whether this measure would change UK law significantly. The UK may instead find itself with no implementation but a sufficiently similar legal position that businesses can feel comfortable sharing trade secrets across borders, even if those become EU/non-EU borders in due course. Ironically perhaps, the main tenets of the UK's approach to the protection of confidential information have effectively been exported to the rest of the EU via this Directive, just at the moment that the UK has decided to leave. 

A key differentiator between the new Directive and the UK common law has been said to be in the definition of a “trade secret”. The Directive defines a trade secret as information that is secret (not generally known among or readily accessible to, persons within the circles that normally deal with this kind of information), has commercial value because it is secret, and has been subject to reasonable steps under the circumstances by the person lawfully in control of the information to keep it secret. In its assessment of whether information should be accorded protection, the UK common law considers the quality of the information and the circumstances in which it was disclosed. On closer inspection however, much of the detail of the assessments applied to confidential information under UK common law mirror those under the new Directive. If anything, UK law may be more generous in its application of the status of confidential to information being allegedly misused. 

Another aspect of the new Directive of particular note is the protection that will now be given to trade secrets that are revealed in the course of court proceedings. The lack of sufficient protection within the EU currently has meant that businesses are hesitant, at the very least, about initiating any court actions by virtue of which such revelations might be made. The Directive will ensure that the confidentiality clubs and redaction common in UK litigation will be made available EU-wide. 

The Directive introduces the concept of trade secret-"infringing goods, i.e. those whose design, characteristics, functioning, production process or marketing “significantly benefits” from trade secrets unlawfully acquired, used or disclosed. The production, offering or placing on the market of infringing goods or the importation, export or storage of such goods for those purposes will be unlawful where the person carrying out such activities knew, or ought under the circumstances to have known, that the trade secrets were used unlawfully (acquired unlawfully or in breach of confidentiality agreement or other duty not to disclose or in breach of a contractual duty or duty to limit the use of the trade secret). However, these are not intellectual property rights as such and are not subject to the IP Enforcement Directive (2004/48). Nevertheless, the Directive makes provision for injunctions and damages to be awarded in respect of unlawful use as well as the recall and destruction of “infringing goods” or the deprivation of their infringing quality, so, in many respects, the remedies are very similar to those provided for under the IP Enforcement Directive. 

The Directive's Recitals state that the Directive is not intended to grant the holder of a trade secret the exclusive right to exploit the information if parties arrive at it via independent means. Reverse engineering is allowed. Article 3 sets out the means by which a trade secret may lawfully be acquired (by independent discovery or creation or by observation, study, disassembly or testing) but only where the product has been made available to the public or is lawfully in the possession of the acquirer of the information which is free from any legally valid duty to limit the acquisition of the trade secret; or any other practice which under the circumstances is in conformity with honest commercial practices – although, in each case, only where the acquirer of the information “is free from any legally valid duty to limit the acquisition of the trade secret”. 

Many terms within the Directive are not given definitions, such as “significantly benefits” and “in conformity with honest commercial practices” (although trade mark practitioners will be familiar with this term) and will no doubt create the opportunity for CJEU references in the near future. Whilst the UK may by then not be bound by its decisions its pronouncements will likely still be of evidential value to UK courts (if the Directive has been implemented). 

In the meantime, for those seeking to rationalise their trade secret and confidential information controls across the EU, and to future-proof them to any extent possible pre-Brexit, it is worth taking “reasonable steps in the circumstances” by: (i) identifying, cataloguing and labelling commercially critical confidential information held within the business; (ii) protecting the information using appropriate confidentiality obligations in employment contracts and any joint ventures or other interactions where such information needs to be shared with third parties (confidentiality clubs); (iii) educating the workforce and management about intellectual property protection and confidentiality and embedding these elements into security policies; (iv) restricting access to key information on a “need to know” basis and limiting the circulation of such material, whilst establishing a means by which its mis-distribution can be reported; (v) using security measures such as encryption and passwords; (vi) monitoring employee emails (although note that such surveillance can be more difficult to put in place in some jurisdictions where there are greater privacy protections in place than in the UK); and (vii) preventing the loss of confidential information when staff leave by repeating the messages about their obligations and ensuring that there is sufficient awareness as soon as their departure is indicated, including the surrender of company property, where necessary. 

Where a business has to rely on trade secrets alone to protect its key business assets, there is cause for concern, since the possibility of an unauthorised disclosure to the world at large risks the continued nature of protection of a trade secret, unless legal steps are taken to address this. Despite this, many businesses – particularly SMEs - continue to rely on trade secrets, either through a lack of appreciation of the IP rights available or to avoid to costs that registering such rights entails. Thus a strengthening of the standing of trade secrets and a more universal appreciation of their worth and substance can only assist these sorts of businesses across Europe. 

In general, the “minimum harmonisation” standard of the Directive should provide comfort to pan-European businesses that there will be a basic standard of protection for their trade secrets, although there will be variations in procedure and process in each jurisdiction, with some (arguably such as the UK) providing broader protection than others. Competitors beware!


↵*Email: rachel.montagnon@hsf.com.
↵1 Directive EU 2016/943 of the European Parliament and of the Council of 8 June 2016 on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use and disclosure.
© The Author(s) (2016). Published by Oxford University Press. All rights reserved.

December issue -- and trade secrets: a perfect storm?

The December issue of the Journal of Intellectual Property Law & Practice (JIPLP) is available in full online to its electronic subscribers. However, the list of contents of the current edition is accessible to everyone -- and if you aren't a subscriber but do want to read a specific item, you can purchase short-term access instead.

This month's editorial is the latest in a line of guest editorials by members of the JIPLP editorial board. The author is Neil J. Wilkof, who writes as follows:

"Trade secrets: a perfect storm of unavoidable neglect?

My physics friends tell me that one of the great research challenges is trying to conceptualize and explain dark energy and dark matter. We ‘know’ that dark energy and dark matter are both out there, and together they comprise most of the universe. But because we cannot directly perceive them, our current ability to explain them empirically is limited.

There is something akin to the dark energy/dark matter problem in IP, namely the treatment of trade secrets. We cannot gainsay the centrality of trade secrets. As we were most recently reminded in the February 2012 report by John E Jankowski published by the National Science Foundation, Business Use of Intellectual Property Protection Documented in NSF Survey (NSF 12–307), trade secrets may be the most used of all IP rights, as reported by people in business. Similar findings have been reported over a period of years across different locations. The challenge has been and remains: how can we study and research the subject in a professionally robust manner?

Based on anecdotal evidence, it is our decided view that trade secrets are under-emphasized, in comparison with the other IP rights, whether by IP practitioners, IP academics or in managerial education. Indeed, the situation surrounding trade secrets may well be even less encouraging than with respect to dark energy and dark matter. For the latter, numerous physics professionals are at least involved in trying to shed light on these subjects. To the contrary, there is a palpable lack of attention that is devoted to trade secrets. As a result, there appears to be a serious disconnect between how trade secrets are viewed on the ground as a business matter and how trade secrets are approached by persons most likely to be engaged with them at either the IP professional, research or educational level.

At the level of the IP professional, trade secrets lie outside the bounds of one's usual scope of activity. There are no registrations or other filings to be made in order to establish the right, nor any international treaties or other arrangements that establish at least a minimum framework for how trade secret rights are created and protected. With respect to transactions that involve a trade secret, it is extremely difficult to come up with documentation that adequately describes what kind of trade secret rights are involved. When the valuable trade secrets are based on the company's know-how or tacit knowledge of key employees, the task becomes even more daunting. As a result, from the vantage of the IP professional, there is often a huge element of faith in any transaction involving trade secrets.

At the level of the treatment of trade secrets by the legal Academy, perhaps the most important reason for the lack of attention is the problem of categories: trade secrets do not seem to fall within any of the ‘classic’ subject-matters that comprise IP. Rarely, it would seem, do we find an ‘Overview of IP course’ that treats trade secrets on an equal footing, if at all, with patents, copyright and trade marks. Indeed, influential articles continue to be published on whether trade secrets should be treated at all as a form of intellectual property. Perhaps they are better conceived as a sub-category of such legal rights as commercial tort, fiduciary obligation, unfair competition, contract law or local statutory law. Disputes at the theoretical level about the nature of patents, copyright or trade marks are one thing, but when the self-contained underlying subject-matter of trade secrets is itself to dispute, its attractiveness as a focus of IP academic inquiry is significantly diminished.

It may seem a bit misplaced to consider the treatment of trade secrets by management education (most notably MBA and Technology Management programs). But, in truth, given the finding about the centrality of trade secrets for the business community, inclusion of management education as a part of our discussion is understandable. After all, management education research is most distinguishable from the field of economics by the fact that the former focuses on imparting tools to deal with the actual management of assets, including intangible assets such as IP. Trade secrets, however, pose a particular challenge in this regard because trade secrets do not allow a compact description or ready frame of reference. Moreover, the focus on case studies and empirical results makes research about trade secrets especially difficult. In this context, the desire to conduct research in this area is often ultimately abandoned due to the practical difficulties that such studies pose.

The upshot is that none of the major moving parts that must contribute to our understanding of the theory and practice of trade secrets is contributing in a substantial manner. Whether this perfect storm of neglect of trade secrets can be changed is an important but so far unrealized aspiration".

Adequately identifying trade secrets in California trade secret misappropriation litigation

Authors: Robert B. Milligan and Carolyn E. Sieve (Seyfarth Shaw LLP, Los Angeles)

Citation: Journal of Intellectual Property Law & Practice 2009 4(10):703-705; doi:10.1093/jiplp/jpp139

Brescia v Angelin, 172 Cal. App. 4th 133, 17 March 2009

The California Supreme Court left undisturbed a Court of Appeal decision that trade secret identification statements need only be reasonable under the circumstances, and that ‘[t]he identification is to be liberally construed, and reasonable doubts concerning its sufficiency are to be resolved in favor of allowing discovery to commence’. The Court of Appeal found the identification statement of a manufacturer of high protein, low carbohydrate pudding reasonably specific and reversed the trial court's decision dismissing the manufacturer's case.

Legal Context

California Code of Civil Procedure 2019.210 requires, in litigation under California's Uniform Trade Secrets Act, that the plaintiff identify the alleged misappropriated trade secret with ‘reasonable particularity’ before commencing discovery relating to the trade secret. Parties often dispute the meaning of identifying trade secrets with reasonable particularity, which can lead to protracted discovery disputes.

Section 2019.210 has four primary purposes: (i) it promotes well-investigated trade secret claims and discourages the filing of meritless claims; (ii) it limits the potential for overreaching in discovery as a means to obtain defendants' trade secrets; (iii) it assists the court in framing the scope of discovery; and (iv) it enables defendants to formulate complete defenses and prepare effectively for trial: Computer Economics, Inc. v Gartner Group, Inc., 50 F. Supp. 2d 980 (S.D. Cal. 1999) (describing legislative history of section 2019.210).

The very few reported decisions that discuss courts' assessments of trade secret identification statements omit specific references about the parties' disputes to protect the information claimed as secret. Indeed, until 2005, no published California court decision had set forth any definitive guidelines on what constitutes ‘reasonable particularity’.

In 2005, a California appellate court for the first time attempted to define ‘reasonable particularity’ under section 2019.210 in Advanced Modular Sputtering, Inc. v Superior Court, 132 Cal. App. 4th 826 (2005). It held that while absolute precision is not required at the pre-discovery stage, the identification must be sufficiently specific to distinguish the trade secrets from matters known in the trade. The court observed that ‘[t]he degree of "particularity" that is "reasonable" will differ, depending on the alleged trade secrets at issue in each case. Where ... the alleged trade secrets consist of incremental variations on, or advances in the state of the art in a highly specialized technical field, a more exacting level of particularity may be required to distinguish the alleged trade secrets from matters already known to persons skilled in that field’ (id at 836).

The court found that, to comport with the ‘reasonable particularity’ requirement, the plaintiff must make some showing that is reasonable, ie fair, proper, just, and rational, under all the circumstances to identify its alleged trade secret in a manner that will allow the trial court to control the scope of subsequent discovery, protect all parties' proprietary information, and allow them a fair opportunity to prepare and present their best case or defense at a trial on the merits (id at 836).

Facts

William Brescia accused his competitors of stealing his ideas by producing and selling a high protein, low carbohydrate pudding based on his alleged formula and business plan. Brescia's competitors sued him for trade libel, and Brescia countersued for misappropriation of trade secrets. He added Sylvester Stallone, chairman of the board of the competitor company, and its CEO John Arnold, as cross-defendants more than two years after the cross-complaint was filed, alleging that they had conspired with the competitors to steal his ideas.

Brescia's trade secrets were initially described in the cross-complaint as ‘a formula, manufacturing process, marketing plan, funding plan and a distribution and sales plan for a high protein, low carbohydrate pudding with an extended shelf life and a stable and appealing consistency and most important, when mass produced, an appetizing flavor’ (172 Cal. App. 4th at 138–139).

Brescia later filed under seal the trade secret designation that was at issue in the appeal. In the statement, Brescia identified two alleged trade secrets: a pudding formula and a manufacturing process. The pudding formula was described as ‘Attached under seal as exhibit 1 is a single page, containing a list of the 15 specific ingredients that constituted Brescia's pudding formula in the last quarter of 2003. The list identifies each ingredient by its common name and the percentage it constitutes of the total pudding. The second list identifies the same 15 ingredients listed by their supplier and brand name. Brescia alleges that this formula is a trade secret’. Exhibit 1 contained two lists, one of which gave the common name of 15 ingredients and their respective percentages in the final product ranging from 82.6 to 0.03 per cent, and the other of which gave the brand name and supplier.

The trade secret designation also described Brescia's manufacturing process: ‘Attached under seal as exhibit 2 is a single page description of the manufacturing process for pudding described above as of the last quarter of 2003. Brescia alleges that this manufacturing process is a trade secret.’ The exhibit listed each step in the mixing, testing, and code marking of the pudding.

Stallone and Arnold argued that the trade secret designation was insufficient ‘because neither the formula nor the manufacturing process was distinguished from matters within the general knowledge of persons skilled in the commercial food science field’. They asked the court to take judicial notice of documents from the United States Patent and Trademark Office. These showed that a patent application of a cross-defendant who (according to Brescia's cross-complaint) allegedly helped Brescia develop his formula had been rejected by the office, ‘concluding that the high protein, low carbohydrate pudding formula submitted by [cross-defendant] Scinto and its ingredients would have been "obvious" to persons of "ordinary skill" in the food science industry when the formula was developed’.

Stallone and Arnold argued that, because the pudding formula and ingredients were obvious to persons of ordinary skill in the industry, Brescia ‘should be required, as part of his designation, to describe what it is about his formula that distinguishes it from matters of general knowledge within the food science industry, and thus makes it a trade secret’.

After some procedural manoeuvrings, the trial court entered judgment in Stallone and Arnold's favour on the trade secret misappropriation claim, after it sustained their demurrer to the third amended cross-complaint, based on the alleged inadequacy of Brescia's trade secret designation statement.

The trial court reasoned that the trade secret designation was defective because it made ‘no attempt ... to identify why certain aspects or all of the aspects of the manufacturing process are anything other than matters generally known to persons skilled in the field’, and ‘no attempt ... to indicate why the peculiar product formulation here that is stated with precision is a trade secret, as opposed to the typical ingredients involved in formulating other low-calorie, low-fat puddings’.

The trial court found it significant that Brescia's submission was silent as to whether the alleged trade secrets were known to skilled persons in the field: ‘So by its silence it's doomed to failure, because there's no attempt even to commence to describe why this formula is unique and not known to others. ... It just is a formula. Likewise, it is a cooking or manufacturing process of many steps. Some of which apparently, according to matters of which I believe I can take judicial notice are actually fairly familiar when you are trying to make a comparable product.’

Allowing Brescia's appeal, the California appellate court concluded that his trade secret identification statement was sufficient and remanded the case to the trial court. Though Stallone and Arnold requested that the California Supreme Court review issues regarding Brescia's trade secret identification, in June 2009 that court denied Stallone and Arnold's petition for review. The Court of Appeal decision therefore stands and is binding precedent in California.

Analysis

The California Court of Appeal held that Brescia's trade secret designation met the reasonable particularity standard of section 2019.210. According to Brescia's identification statement, two alleged trade secrets were identified: the pudding formula and the manufacturing process. The statement ‘particularly described’ the details of the pudding formula as of the last quarter of 2003, listing the 15 specific ingredients by common name and the percentage of the total pudding. The statement also listed the same 15 ingredients by their supplier and brand name and particularly described each step in the mixing, testing, and code marking of the pudding.

Brescia's statement was adequate because (i) it permitted Stallone and Arnold to investigate possible defenses; (ii) there was no deficiency in the trade secret designation that would hamper its ability to protect the parties' proprietary information or to determine the scope of relevant discovery; and (iii) there was no showing that the trial court was unable to understand the nature of the alleged secrets and fashion discovery.

The appellate court noted that the nature of the identification required in any particular case need only be reasonable under the circumstances. It held, contrary to the trial court, that section 2019.210 does not require in every case that a trade secret claimant explain how the alleged trade secret differs from the general knowledge of skilled persons in the field. Such an explanation is required only when, given the nature of the alleged secret or the technological field in which it arises, the details provided by the claimant to identify the secret are themselves inadequate to permit the defendant to learn the boundaries of the secret and investigate defenses or to permit the court to understand the designation and fashion discovery. Further, the trade secret designation is to be liberally construed, and reasonable doubts regarding its adequacy are to be resolved in favour of allowing discovery to go forward.

Practical significance

Difficulties remain in ascertaining what level of particularity is required when identifying trade secrets in California trade secret litigation. As courts have recognized, ‘reasonable particularity’ is intended to be flexible, so courts can achieve just results depending on the facts, law, and equities of the cases before them. The level of specificity required depends upon the circumstances of the individual matter.

The California appellate courts, however, have provided some guidance on what ‘reasonable particularity’ means. Brescia clarifies the principles articulated in Advanced Sputtering, particularly that court's holding that the identification must be sufficiently specific to distinguish the trade secrets from matters known in the trade. Although that general standard remains viable, Brescia instructs that the standard does not require every trade secret plaintiff to state specifically in its identification statement how the alleged trade secret differs from the general knowledge of skilled persons in the field to which the secret relates (though this explanation may be required in some cases but not this pudding case). In other words, plaintiffs are not required to prove the merits of their trade secret claim at the pre-discovery stage in their trade secret identification statement—the statement should simply provide sufficient details to allow the defendant to learn the boundaries of the alleged secret and investigate defenses, as well permit the court to understand the designation and fashion discovery.

In contrast, Brescia confirms that generalized descriptions of trade secrets, such as the original description in Brescia's cross-complaint described above, are insufficient to meet the ‘reasonable particularity’ requirement. Nor is it sufficient for a plaintiff to merely cite in its statement to pages in a voluminous document production, as this practice tends to obscure rather refine the trade secrets description. We expect that California Code of Civil Procedure 2019.210 will continue to be a sword and shield in California trade secret litigation as parties will continue to dispute whether the trade secret has been identified with reasonable particularity.