Viewing Trade Secret Protection from the Rio Tino’s Case And Inspirations to Foreign Companies

Issue 32, By Zhu Miaochun,[Trade Secrets]

The uproarious Rio Tino’s case seems to have cooled down. However, as we can expect, as the investigative agency furthers its investigation, after the case is transferred to the procuratorial and judicial departments, it will surely re-attract the attention of the people of China. It is not necessarily a bad thing when a case arouses the attention of the people. At least it shows us that the legal sense of the Chinese people is growing. However, what has been inspired in the Rio Tino’s case has far exceeded the case itself. As an intellectual property lawyer, I think it is necessary to consider the Rio Tino’s case as a turning point and start a in-depth discussion on the protection of trade secrets.

Ⅰ.How to differentiate between a trade secret and a state secret
This is a question asked by many companies in respect of the Rio Tino’s case. After all, what is a state secret? What is a trade secret? Where is the standard applied to differentiate between them? As all know, these two concepts are respectively stipulated in the Law on Protection of State Secrets and the Unfair Competition Law in China. According to the Law on Protection of State Secrets, a state secret is a matter which is related to the security and interest of the state, which has been determined according to legal procedures, and which can be known by a limited range of persons within a certain period of time. According to the Unfair Competition Law, a trade secrete is a piece of technical or operational information which is not known to the general public, which can bring economic interests to its holder, which is practical, and for which the holder has taken confidential measures.

Specifically speaking, with respect to a trade secret, the holder of the right is generally a company, enterprise or other businesses. A trade secret need not be approved or recognized by the related agency of the state. Any technical or operational information of a company which is unknown to the public, by which the company obtains a competitive advantage and for which the company has taken reasonable protections, will be recognized and protected by law as a trade secret.

With respect to a state secret, the holder of the right is the state. A state secret is a matter which is related to the security and interest of the state, which has been determined according to legal procedures, and which can be known by a limited range of persons within a certain period of time. Also, before it becomes a state secret, the matter must be reviewed by a properly authorized unit of the state which, in accordance with the rules of state secrets, determines which degree of secrecy applies to the matter in question..

A state secret is recognized and protected by the related regulations of the state. Any matter which is not declared a secret in accordance with the proper procedures established by law is not a state secret. Jurisprudentially speaking, a trade secret is a product of the market competition between companies, while a state secret is a product of the administration and management of state power. As the subject of the market economy, a company is more likely to be engaged in matters related to trade secrets than state secrets.

As I have noticed, in the Rio Tino’s case, the investigative agency began by investigating the incident as a matter of “stealing of state secrets.” However, as the case developed, the Procuratorate finally approved the arrest of suspects under the crime of “commercial espionage.” This has dissatisfied some people. Their dissatisfaction is based mainly on the fact that the business information concerned came from state-owned iron and steel corporations. Under the mind-set of the ideology behind the Chinese government’s traditional long-term planned economy, they assumed that the information in question automatically was qualified as state secrets. Also, it is normal for the people, as Chinese citizens, to exhibit their dissatisfaction, considering the upsurge in the national sentiment aroused by the Rio Tino’s case. Despite this predilection, from the perspective of a professional lawyer, the facts supporting the change in the law under which the defendant’s were charged was based on indisputable facts. We can never downgrade a state secret to a trade secret simply because we wish to; nor can we upgrade a trade secret to a state secret without following legal principles. The best way to solve the case is to act according to how the act is defined in the law.

Ⅱ.Main channels of disclose of trade secrets
Generally speaking, the trade secrets of a company may be disclosed mainly in the following ways:

1. An employee divulges the trade secrets he has obtained after he leaves the company. This is the main way trade secrets are disclosed. It occurs mainly after an employee leaves one employer and obtains a position working for a competitor through job hopping. He discloses the trade secrets of the previous company to the competitor, his new employer, so that the interests of the previous company are harmed.

2. An employee divulges the trade secrets while working for the company that owns the trade secret. The disclosure comes mainly from an employee who works part-time for a competitor. He uses the opportunity of the part-time job to disclose the trade secrets to the competitor. Or, an employee may choose to sell out essential information from his current employer, the company holding the trade secrets, to a competitor in order to obtain unjustified gains through an illegal transaction.

3. A business spy obtains and discloses trade secrets illegally. In today’s society, business spies are omnipresent. They collect the business information of competitors in numerous ways, including illegal means. Their espionage has resulted in huge damages to businesses.

4. A partner breaches the confidentiality agreement and discloses the trade secrets. A confidentiality agreement represents confidentiality obligations. Often, the parties will require that each party bear certain obligations to prevent the related information from being disclosed. However, these confidentiality obligations will often exist in name only, often because of a breach by one of the parties. Therefore, laws and business ethics are needed to restrict such breaches.

5. Trade secrets are disclosed because of the negligence of the holder. A good many occurrences of trade secret disclosure are not due to foreign factors, but because of the negligence of their holders. For example, a holder may subjectively consider certain information as a trade secret, but then pays little attention to it or maintains a weak level of protection. It does not take the measures necessary to maintain the confidentiality of the information. As a result, the trade secret is disclosed.

6. Trade secrets are disclosed during a visit or investigation by outsiders. This mainly occurs as a foreign company acquires a domestic one. The domestic company, anxious to obtain the funds and technology of the foreign company, loses the direction of common sense. It is overly cooperative as the foreign company asks for a visit. It never dreams that its trade secrets will be taken by the visitors during their visit through the use of video recording, photographing and sound recording.

The above six scenarios are the main channels of trade secret disclosure. From the reports by the mass media, the Rio Tino’s case was mainly about business spies who obtained information through unjustified means, such as business bribery. They then illegally released the operational information of the domestic iron and steel corporations. Certainly, to them, the related employees of those iron and steel corporations must have released what they knew was secret information.

Ⅲ.Protecting trade secrets
The protective measures necessary to maintain the integrity of trade secrets can be divided into two categories: software protections and hardware protections, in terms of their contents. The former are mainly handled through confidentiality requirements in the corporate regulations and rules. The latter are mainly physical measures that a company takes to prevent trade secrets from being disclosed. Provisions on trade secret protections can be seen in the judicial interpretations of the Supreme People’s Court, as well as the regulations and rules of the State Administration for Industry and Commerce and local people’s congresses and governments. For examples, see the Interpretation on Law Application Issues in the Trial of Civil Unfair Competition Cases, as issued by the Supreme People’s Court; the Rules on Prohibition of Commercial Espionage, as issued by the State Administration for Industry and Commerce; the Measures on Protection of Technical Secrets of Zhejiang Province, as issued by Zhejiang Province; and the Regulations on Protection of Technical Secrets for Enterprises of Shenzhen Special Economic Zone, as issued by the People’s Congress of Shenzhen City. To various degrees, these legislative documents provide information on common protections available to those seeking standards on the protection of trade secrets.

To combine the above legislative documents with the judicial practices in China, I think the protections over trade secrets can be divided into ten categories: 1. Signing confidentiality agreements with employees or customers or visitors; 2. Formulating corporate confidentiality rules; 3. Signing non-competition agreements with employees or senior management; 4. Setting up confidentiality requirements with the related persons; 5. Making confidentiality marks on the vehicles of confidential information; 6. Limiting confidential information only to those persons who must know it; 7. Locking or covering up the vehicles of confidential information; 8. Setting passwords or codes for confidential information; 9. Limiting access to confidential places; and 10. Installing monitoring devices at confidential places.

During the production and operation, a company may take any one or more of these protective measures. Certainly, the more protections that a company puts in place, the lower the possibility that a trade secret will be disclosed and the greater the possibility that these protections will be recognized by the court in event an infringement dispute arises. Also, protections over trade secrets are not limited to the above. Any reasonable measures that a company takes to protect its trade secrets can be held as protections, such as the procedures for safekeeping, borrowing or returning of technical documents.

With respect to trade secret protection, the “reasonableness” of the amount protection should be noticed. The protections that a company takes need not be perfect. They will be considered appropriates so long as they are “reasonable.” To be “reasonable” means that the protections should be fit for the commercial value of the subject and other details relevant to the information to be protected. Such a standard is consistent with international practices. In this respect, we can borrow the standards that the courts of the United States apply. They only require measures with “reasonable particularity” rather than those measures which are most extreme or overly expensive. This is best explained in the well-known US Dupont trade secret case. The court held that a protection is like a “fence” against good-faith passers-by. It will be considered legally sufficient so long as it sufficiently protects the trade secret from being readily seen or understood by the good-faith passers-by and warns them that they are not permitted to trespass. Moreover, an opposing party is obligated not to invade the legal interest of another person. The opposing party is required to step back and cease the invading act when it becomes evident that, 1) the protections over trade secrets are made objectively identifiable by the holder of the trade secrets and 2) the protections reasonably convey an expectation of privacy to the other party.

As demonstrated, a company should take more protections to more strictly protect its trade secrets. However, obviously the laws are lenient in this respect. They will never impose too heavy a burden on a company, for fear that the normal business operations may be affected. They will shift the attention more onto the obligated, the company has declared if to others through its reasonable acts that it has made efforts to protect the trade secrets.

Ⅳ.Criminal law protection over trade secrets
The infringement of trade secrets, as an act of unfair competition, was first outlined in the Unfair Competition Law of 1993 in China. To strengthen the protection over the holder of trade secrets, the crime of “commercial espionage” was introduced into the Criminal Law in 1993 when it was amended. Under the principle of “a legally prescribed punishment for a specified crime,” before the introduction of this crime, a trade secret infringement could not be dealt with as a crime and only civil law protections and remedies were available.

Certainly, if an act constitutes the crime of commercial espionage, it means that the act has infringed a trade secret. It is serious and extensively harmful to society. It needs to be acknowledged by the criminal law in order to maintain the interest of public society. In respect to the Rio Tino’s case, if the acts of the four suspects have resulted in serious losses to the iron and steel corporations of China, obviously it is not a sufficient punishment or deterrent to require them to merely bear civil liabilities.

I agree that, if applicable, criminal punishments may be employed to protect the holders of their trade secrets. But, the judicial department should be cautious in determining whether an act constitutes a crime of commercial espionage. This is because the current intellectual property adjudication system of China is very unreasonable. For example, a civil trade secret infringement case is tried generally by the intellectual property division of a local intermediate court or the intellectual property division of a few grass-root courts. However, a crime of commercial espionage is tried generally at the criminal division of a local grass-root court. It is very likely that the grass-root court causes injustice, because it often lacks the experience necessary to deal with such special technical intellectual property-related cases. Also, an extremely low proportion of cases are found as constituting civil infringement of trade secrets, which is a fact generally accepted in judicial practice. Consequently, since criminal law requires even stricter evidence for conviction, guided by the principle that “a doubtful crime shall be deemed as a non-crime”, it is particularly difficult to determine whether an act constitutes of the crime of commercial espionage. This sets a high legal standard on the public procurators and criminal judges.

Ⅴ.Three points of enlightenment to foreign companies from Rio Tino’s case

1. Know China’s systems of law, particularly the intellectual property law system
To enter China’s market, a foreign company should first know the legal systems of China. Law is an indispensable link in the socialist market economy that China has wanted to create. The legislative activities have been going on since the reform and opening up in the 1980s. Each department has legislated by borrowing the legislative practices of other countries. But, it is important to know the above is still not enough. The borrowed foreign legal systems will be lifeless until they are combined with the concrete situations of China. Therefore, a foreign company should familiarize itself with the legal systems with Chinese characteristics, so that it will not be disadvantaged in the routine operations.

As more foreign companies begin to locate their R&D centers and manufacturing bases in China, more attention was paid to the development of the system of intellectual property law in China. Currently, such intellectual property-related regulations are being amended, such as the Patent Law, the Trademark Law and the Copyright Law. These laws are vitally related to the interest of each foreign company in China. They will not offer strong and powerful protections for a company’s growth until they are truly understood and mastered by the company.

2. Abide by the “rules of game” and act according to law
The “rules of game” include not only the regulations and rules hereinabove, but also generally accepted commercial and ethical practices. They should be followed by foreign companies operating in China. Once again, what the Rio Tino’s case tells us has proven that the pursuit of profit is forever the final aim of a company. When the hunger for profit reaches a certain degree, a company will do everything to pursue it, even at the risk of violating the “rules of game.” Therefore, abiding by the “rules of game” and acting according to law is absolutely not a slogan. It should run through the operations of a company, from beginning to end. It should be a rule of conduct for each member of the company.

3. It is not necessary to upgrade everything to politics
It could not be more normal that a foreign company in China is investigated by a related agency of China. For a solution, the company should consider its own problems from the perspective of law, but not upgrade any punishment or sanction to the politics between countries. The Rio Tino’s case, in and by itself, is not a political issue. It can be completely solved within the framework of law. In fact, from another perspective, the change in the prosecutorial name of the offence/crime is a proper indication of the attitude of the related agencies. It is evidence that they intend to solve the dispute according to law, not politics. Therefore, when incurring similar issues, a foreign company should deal with them calmly. Any attempt to politicalize a dispute resolvable by law will only serve to complicate it. This very act will “put the cart before the horse”.

About the author:
Zhu Miaochun is President of Shanghai Zhu Miao Chun Law Firm

(Translated by Ren Qingtao)

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