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China Improves Laws to Enhance Trade Secret Protection——FAQs for Financial Institutional Clients

2021.04.02 YE, ZhenyongXIE, Qing (Natasha)、WANG. Jin、LUO, Danchen

In an Internet era, the financial institution community is increasingly concerned with the prevention of information leakage and data security. The General Provisions of Civil Law of People’s Republic of China (the “General Provisions of Civil Law “) and the Civil Code of People’s Republic of China (the “Civil Code”), to adapt to changes in the demand of intellectual property protection, have successively embedded trade secrets (previously only protected by the competition law) into the civil law protection legal system as one of the major subjects of intellectual property, which has promoted the protection of trade secrets to unprecedented levels, on par with protections for traditional intellectual property subjects such as works, inventions, utility models, design models, trademarks etc.. Meanwhile, China has taken measures for strengthening criminal penalties on serious trade secret infringements. In recent years, for example, the threshold for initiating criminal prosecution has been lowered, relaxing the determining factors for conviction and increasing the ceiling on criminal penalties. In addition, China introduced a punitive compensation mechanism for trade secret infringements and provided legal protection for "confidential business information", a concept closely associated with "trade secrets". For many of our financial institutional clients, particularly quantitative fund managers and trading firms relying heavily on trade secrets in the form of computer software and information data, we have prepared the FAQs below to provide a general picture on the recent legislative changes of trade secret protection in China.

Q1: What Is the Legal Basis for Trade Secrets Being Protected as One of the Major Subjects of Intellectual Property? What Are the Key Takeaways for Financial Institutional Clients?

Item (5), Article 123 of the “General Provisions” in the Civil Code, coming into force on January 1, 2021, explicitly defines trade secrets as one of the subjects of intellectual property, consistent with the General Provisions of Civil Law of October 1, 2017:

Article 123 of the Civil Code stipulates that parties to civil legal relations have intellectual property rights in accordance with laws. Intellectual property rights are exclusively enjoyed by owners of the following subjects in accordance with laws: (1) works; (2) inventions, utility models and design models; (3) trademarks; (4) geographical indications; (5) trade secrets; (6) layout design of integrated circuits; (7) new plant varieties; (8) other subjects prescribed by laws.

This provision officially recognizes trade secrets as one of the intellectual property subjects, thus providing an additional legal remedy aside from existing remedies under the competition law. In addition, Article 501 of the “Contract” in the Civil Code explicitly expands the scope of confidentiality stipulated for the contractual parties, that is, apart from trade secrets, it adds a general description of "other information that should be kept confidential" and therefore include "confidential business information" and other information that should be kept confidential into the scope of legal protection:

Article 501 of the Civil Code stipulates that where parties learn trade secrets or other information that should be kept confidential during contractual arrangements, they shall not divulge or improperly use such information, regardless of whether the contract is established or not; whoever divulges or improperly uses such trade secrets or information, thereby causing losses to the other party, shall be liable for compensation.

In this regard, financial institutional clients are advised to establish and improve their internal compliance system for trade secret protection, safeguarding the safety and stability of the economic value of trade secrets. In addition, financial institutional clients are also advised to take appropriate measures in staff recruitment and business dealings to prevent infringement of the confidentiality of trade secrets and confidential business information owned by others to avoid any disputes.

Q2: What is the Punitive Compensation Mechanism for Trade Secret Infringement under the Civil Code and Relevant Judicial Interpretations?

Article 1185 of the “Tort Liability Provisions” in the Civil Code stipulates that "if a person willfully infringes another person's intellectual property rights and the circumstances of the case are serious, the infringed person shall have the right to claim for corresponding punitive damages". To make this provision more enforceable, on March 3, 2021, the Interpretation of the Supreme People's Court on the Application of Punitive Damages in the Trial of Civil Cases Involving Infringement of Intellectual Property Rights was officially implemented, which provides detailed provisions on the scope of application, the determining factors for “willfulness” and “seriousness”, the calculation of punitive damages, the determination for multiple punishments, etc..

Q3: What is the Scope of Confidential Information?

Under the current laws, confidential information can be divided into two categories:

I. Trade Secrets. According to the Anti-Unfair Competition Law of the People’s Republic of China, trade secrets refer to any piece of commercial information, such as technical information and business information, that have economic value by not being generally known and the owner of which is taking corresponding measures to keep them secret. Namely, trade secrets have three characteristics: (i) not being generally known; (ii) having economic value, and (iii) being subject to corresponding confidentiality measures.

II. Other Information That Should Be Kept Confidential. Although the Civil Code has not specified its scope, it can be determined based on the definition of “confidential business information” in the Economic and Trade Agreement between the Government of the People's Republic of China and the Government of the United States of America entered between China and the US on January 15, 2020, which defines confidential business information as any information that concerns or relates to the trade secrets, processes, operations, style of works, or apparatuses; the production, business transactions, or logistics; customer information, inventories, or amount or source of any income, profits, losses, expenditures of any person, natural or legal; or other information of commercial value, the disclosure of which is likely to have an effect of causing substantial harm to the competitive position of such person from which the information was obtained.

Q4: What are the Implications of the Latest Amendments to the Trade Secret Infringement Crime in the Criminal Law?

As for criminal penalties, the Criminal Law Amendment Act XI, which officially came into force on January 31, 2021, amends Article 219 of the Criminal Law on trade secret infringement, with two major changes. Firstly, it lowers the threshold for initiating criminal prosecution of trade secret infringement. The standard for determining whether to apply criminal penalties to trade secret infringement has been changed from "causing huge losses" and "causing extremely serious consequences" to "if the circumstances are serious" and "if the circumstances are extremely serious". In other words, determining whether the consequences of a trade secret infringement are serious is no longer a specific factor for imposing criminal penalties. Instead, the severity of circumstances of each trade secret infringement becomes the decisive factor to determine whether such an offense constitutes a crime. Hence, as long as the circumstances relating to the trade secret infringement are serious or extremely serious (such as repeated infringements, taking trade secret infringement as a major business, long-lasting infringements, the wide range of influence, making huge profit from an infringement, causing significant economic losses to the intellectual property right holders, or the infringement may endanger personal safety or seriously threaten public interest, etc.), then the offender shall be held criminal liable for trade secret infringement. Secondly, it increases the criminal punishment. The maximum prison term for the trade secret infringement has been increased from seven years to ten, which is a more severe legal punishment and strengthens deterrence.

Our Observations

Through improvement of civil and criminal legislation as well as law enforcement practice, China has been significantly enhancing the overall legal protection for trade secrets so as to effectively protect the legitimate rights and interests of trade secret owners. We recommend that financial institutional clients pay close attention to the emerging legislation and law enforcement practices, and it is advisable to improve your internal trade secret protection mechanisms by: (i) designating specific internal departments or personnel to be responsible for trade secret protection; (ii) managing the process of identifying trade secrets, maintaining secrecy, limiting access to trade secrets, and destroying materials related to trade secrets; (iii) establishing a comprehensive system in terms of the administration of employees, mediums that contain or reflect trade secret information, areas that are highly relevant to trade secret information and business activities, and (iv) taking timely measures for asserting your rights in a case of trade secret infringement, including emergency measures and evidence collection.

We will continue to monitor the situation and keep our clients apprised of any important developments. 

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