trade secrets, confidential information and ndas...

Trade Secrets, Confidential Information and NDAs in China Protecting Confidential Information, Preventing Infringement, and Enforcing Trade Secret Rights

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TUESDAY, APRIL 10, 2012

Presenting a live 90-minute webinar with interactive Q&A

Paul D. Jones, Principal, Jones & Co., Toronto, Canada

Xu Jing, Partner, King & Wood, Beijing, China

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Trade Secrets, Confidential Information and NDAs in

China - 商业秘密，保密信息以及保密协议在中国

Paul Jones Jones & Co. 钟保禄律师事务所 Джоунс и Ко. Toronto www.jonesco-law.ca 徐静 (Xu, Jing) 金杜律师事务所 (King & Wood Mallesons) 北京市 (Beijing) http://www.cn.kwm.com/ Strafford Webinars and Teleconferences April 10, 2012

Trade Secrets, Confidential Information and NDAs in China

商业秘密，保密信息以及保密协议在中国

http://www.jonesco-law.ca/�

http://www.cn.kwm.com/�

6

简介 - Introduction

Many commercial transactions start with the signing of a non-disclosure agreement (“NDA”) so that the parties may share confidential information

At such an early stage in deals with China the foreign

party is often reluctant to retain specialized counsel So they use their company’s standard form NDA

prepared for use in North America What happens?

7

简介 – Introduction

在法院的维权—Enforcement in the Courts

8

简介 - Introduction

Unfortunately such standard NDAs do not usually conform with PRC contractual formalities They are not prepared with a view to enforcement in the PRC And the company is not usually prepared to present the best evidence when required by a Chinese court In the PRC there are laws to protect trade secrets and confidential obligations. But the rules of evidence in the courts are quite different -

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商业秘密 — Trade Secrets

反不正当竞争法

(the PRC Anti-Unfair Competition Law) Adopted September 2, 1993

Amendments proposed to State Council 2011

Contains a number of other provisions

Enforced by the State Administration for Industry and

Commerce (known as “SAIC”)/Court

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Article 10: 本条所称的商业秘密，是指不为公众所知悉、能为权利人带来经济利益、具有实用性并经权利人采取保密措施的技术信息和经营信息。 For the purposes of this Article, the term "trade secrets" shall refer to technical information and business information that is non-public, can bring economic benefits to the party that has rights in such secrets and is practical, and for which the party that has rights in such secrets has adopted measures to maintain its confidentiality.

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第十条经营者不得采用下列手段侵犯商业秘密：

Article 10: Business operators may not infringe trade secrets by any of the following methods: （一）以盗窃、利诱、胁迫或者其他不正当手段获取权利人的商业秘密； (1) obtaining trade secrets of the party that has rights in such secrets by theft, enticement by promises of gain, duress or other unfair methods; （二）披露、使用或者允许他人使用以前项手段获取的权利人的商业秘密；(2) divulging, using oneself or allowing others to use trade secrets of the party that has rights in such secrets, where such trade secrets were obtained by any of the methods set forth in the preceding Item; or


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Article 10: cont’d （三）违反约定或者违反权利人有关保守商业秘密的要求，披露、使用或者允许他人使用其所掌握的商业秘密。 (3) divulging, using oneself or allowing others to use trade secrets in one's possession, where such is in breach of an agreement or contrary to the confidentiality requirements of the party that has rights in the trade secrets. 第三人明知或者应知前款所列违法行为，获取、使用或者披露他人的商业秘密，视为侵犯商业秘密。

Third parties that obtain, use or divulge trade secrets of others that they are well aware or ought to be aware to have been infringed by any of the methods set forth in the preceding paragraph shall be deemed to have infringed trade secrets.


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第二十五条违反本法第十条规定侵犯商业秘密的，监督检查部门应当责令停止违法行为，可以根据情节处以一万元以上二十万元以下的罚款。

Article 25: If a trade secret is infringed in violation of Article 10 hereof, the supervision and examination authorities shall order the violator to cease the illegal act and may, depending on the circumstances, impose a fine of not less than Rmb 10,000 and not more than Rmb 200,000. (About $31,675.00 USD)

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中华人民共和国刑法（Criminal Law of the PRC）第二百一十九条【侵犯商业秘密罪】有下列侵犯商业秘密行为之一，给商业秘密的权利人造成重大损失的，处三年以下有期徒刑或者拘役，并处或者单处罚金；造成特别严重后果的，处三年以上七年以下有期徒刑，并处罚金： Article 219. Whoever engages in one of the following activities which encroaches upon commercial secrets and brings significant losses to persons having the rights to the commercial secrets is to be sentenced to not more than three years of fixed-term imprisonment, criminal detention, and may in addition or exclusively be sentenced to a fine; or is to be sentenced to not less than three years and not more than seven years of fixed-term imprisonment and a fine, if he causes particularly serious consequences:

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（一）以盗窃、利诱、胁迫或者其他不正当手段获取权利人的商业秘密的；(1) acquire a rightful owner's commercial secrets via theft, lure by promise of gain, threat, or other improper means;

（二）披露、使用或者允许他人使用以前项手段获取的权利人的商业秘密的；(2) disclose, use, or allow others to use a rightful owner's commercial secrets which are acquired through the aforementioned means; （三）违反约定或者违反权利人有关保守商业秘密的要求，披露、使用或者允许他人使用其所掌握的商业秘密的。(3) disclose, use, or allow others to use, in violation of the agreement with the rightful owner or the rightful owner's request of keeping the commercial secrets, the commercial secrets he is holding.

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明知或者应知前款所列行为，获取、使用或者披露他人的商业秘密的，以侵犯商业秘密论。

Whoever acquires, uses, or discloses other people's commercial secrets, when he knows or should know that these commercial secrets are acquired through the aforementioned means, is regarded as an encroachment upon commercial secrets.

本条所称商业秘密，是指不为公众所知悉，能为权利人带来经济利益，具有实用性并经权利人采取保密措施的技术信息和经营信息。

The commercial secrets referred to in this article are technical information and operation information that are unknown to the public, can bring economic profits to their rightful owners, are functional, and are kept as secrets by their rightful owners.

本条所称权利人，是指商业秘密的所有人和经商业秘密所有人许可的商业秘密使用人。

The rightful owners referred to in this Article are owners of the commercial secrets and users who have the permission of the owners.

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中华人民共和国劳动合同法

(PRC Employment Contract Law ) 第二十三条用人单位与劳动者可以在劳动合同中约定保守用人单位的商业秘密和与知识产权相关的保密事项。 Article 23: In an employment contract an Employer and a worker may provide for the maintenance of the confidentiality of the Employer's trade secrets and intellectual property.

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Employment Contract Law – Article 23: cont’d 对负有保密义务的劳动者，用人单位可以在劳动合同或者保密协议中与劳动者约定竞业限制条款，并约定在解除或者终止劳动合同后，在竞业限制期限内按月给予劳动者经济补偿。劳动者违反竞业限制约定的，应当按照约定向用人单位支付违约金。 An Employer may specify in the employment contract of, or a confidentiality agreement with, a worker who bears an obligation of confidentiality an anti-competition clause and monthly compensation for the anti-competition period after the termination or ending of the employment contract. If the worker breaches the anti-competition restriction, he/she shall pay the Employer liquidated compensation as agreed.

19


《公司法》 (the PRC Company Law) 第一百四十九条董事、高级管理人员不得有下列行为：

……（七）擅自披露公司秘密；

高级管理人员违反前款规定所得的收入应当归公司所有。

Article 149：No director or senior manager may: …7. Unlawfully disclose confidential company information; Any income received by any director or senior manager in violation of

this Article shall be treated as the property of the company.

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商业秘密 — Trade Secrets 保守国家秘密法 Law of the PRC on Guarding State Secrets 第二条国家秘密是关系国家安全和利益，依照法定程序确定，在一定时间内只限一定范围的人员知悉的事项。

Article 2: The state secrets shall be the issues which are related with national security and interests, and shall be known to a limited number of personnel in a certain period of time, as determined by the relevant legal procedures. 第三条国家秘密受法律保护。一切国家机关、武装力量、政党、社会团体、企业事业单位和公民都有保守国家秘密的义务。任何危害国家秘密安全的行为，都必须受到法律追究。

Article 3: The state secrets shall be protected by law. All State organs, armed forces, political parties, social associations, enterprises, working units and citizens shall fulfill their obligations of protecting the state secrets. Any act which harms the act of the State secrets shall be investigated and punished in line with law.

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保守国家秘密法 Law of the PRC on Guarding State Secrets Regulations require the relevant SOEs to define and confirm the range and extent of their commercial secrets that require protection, including: • business information relating to strategic planning, restructuring and listings, mergers and acquisitions, property transactions, financial information, client information, biddings and tenders etc; and • technological information such as designs, programmes, product formulae, production technology, production methods, technical know-how etc.

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Contractual Issues For protection of trade secret, it is a must to have a contract

specifying: a. Definition of Trade Secret b. Obligation of non-disclosure of trade secrets With respect to the Employer & Employee Relationship, in the

contract, it is preferred to have: a. Non-Competition Term during/after employment; b. Non-Soliciting Obligation

23


Labor Contract vs. Separate Covenant- Separate Covenant Preferred

1. Flexibility of Dispute Resolution 2. Variation from the Standard Form of Labor Contract

Recommended by Local Authority

24


Non-Competition Term- Requirement to ensure its ensure its enforceability

1. Only place to the employees of senior management staffs, senior technicians

and others who bears confidentiality liability to the employer’s trade secret; 2. the non-competition obligation is reasonable and to the extent of the necessity

to protect the employer’s trade secret a. Non-Competition Term: at most 2 years b. Non-Competition Geographic Scope: the business operation area

3. Compensations: must in China No uniform standard nationwide, and the practical guideline is 30% to 50% of

the last year salary prior to the termination of the employment One payment is not required, and installments are preferred

25


Non- Soliciting Obligation 1. Not available in Statutory Law and Regulations 2. Generally not enforceable in China 3. Better than none if stipulated in the Contract with

the Employee

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在法院的维权——Enforcement in the Courts

27

在法院的维权 – Enforcement in the Courts

Basic Facts: -China is a civil law system, modeled primarily on Germany

-The World Bank “Doing Business” survey on enforcing a contract ranks the PRC courts 16th out of 183, on the basis of time, cost and procedures.

- The U.S. ranks 7th, Canada is 59th

-The PRC Civil Procedure Law mandates trials within 6 months, appeals within 3 months (although patent trials are generally longer), but said restriction is not available for foreign related cases.


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Other Differences: -Judges are assumed to know the law, and may make their own investigations. Civil law judges have less status and are supervised more than common law judges

-There are no juries

-Decisions are based primarily on documentary evidence, strictly authenticated according to PRC evidence rules; generally nobody testifies in person


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Article 19 of the Civil Litigation Law – Intermediate People’s Courts have jurisdiction as courts of first

instance over “major cases involving foreign elements.” Courts have several divisions such as criminal, civil, administrative. Most Intermediate Courts and above have an “Intellectual Property

Bench” made up of judges who decide cases related to intellectual property rights, anti-monopoly cases and franchise cases.

IPR cases are broadly defined to include license disputes such as

non-payment of royalties The IPR Bench is considered the “elite” bench to which the better

judges are allocated


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Evidence -证据

There is no discovery – each party is responsible for

its own evidence; and

there is little oral evidence, documents etc. should be

notarized, and if evidence is from outside China, it

must be notarized and legalized!


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证据——Evidence Evidence Rules- Time Lines

- Most Critical Time Period: Evidence Production Date

appointed by the Court

- Exceptional Rules for Evidence Submissions beyond the

Court’s appointed period

- Rebuttal Evidence

- New Evidence

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证据——Evidence

Nature - Documentary Evidence vs. Testimony - Evidence from Third Party vs. Evidence originated inside the Company - Evidence being notarized vs. Evidence in plain form - Evidence in its original vs. Evidence of copies - Evidence originated outside of territory of mainland China

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民事诉讼 - Civil Procedure

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Elements to Establish Trade Secret Misappropriation Claim in China 1. Qualified Trade Secret a. Confidential: Unknown to the Public b. Valuable and Practical c. Appropriate Measures have been taken to safeguard the disclosure of the Trade Secret


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2.The Information Used by Defendant is Identical with or Substantially Similar to the Trade Secret Claimed by Plaintiff

3. Improper Means Taken by Defendant in

Obtaining Trade Secrets of Plaintiff Note: The Burden of Proof is on the Plaintiff


36


Alternative Proof For “Improper Means” “Access and Substantial Similarity”

- Principle as a Substitute for Burden of Proof regarding “Improper Means” borne by the Plaintiff


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Access and Substantial Similarity: cont’d Two Elements to be Proved by Plaintiff - The information used by Defendant is identical or substantial similarity to that of Plaintiff; and - The Defendant had access to the Trade Secret. Shift of Burden of Proof Upon satisfying the above two elements, the burden of proof shall be shifted to the Defendant for the specific means it has adopted to obtain the trade secret in suit


38


Access and Substantial Similarity: cont’d

Level of Proof Concerning “Access”: Actual “access” is preferred, for instance, the access of a trade secret through a former employee; or Probability of “access” could be reasonably inferred through circumstantial evidence produced by the Plaintiff


39

在法院的维权– Enforcement in the Courts

Access and Substantial Similarity: cont’d

Level of Proof Concerning “Substantial Similarity”: High Level of Similarity (preferably Identical) Between the

information of Defendant and that of Plaintiff; The Accidental “Identical nature” of the Information could

be Reasonably Excluded by the Nature of the Information

The Probable Access Avenue to Trade Secret by the

Defendant


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在法院的维权– Enforcement in the Courts

Available Defenses: Information Available to the Public: Prior Art Search Report Non sufficient measures to safeguard the trade secrets Unclear Definition of Trade Secret Reverse Engineering - “Clean Hands”


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民事诉讼 - Civil Procedure

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临时措施 - Interim Measures

Injunction: Not available for trade secret claim in China

It can only be attempted from the perspective of

“enforcement of the Judgment before the rendering”, but unlikely to obtain

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临时措施 - Interim Measures

- Evidence Preservation Order: Commonly applied by the Plaintiff to get the evidence

supporting the use of the confidential information by the Defendant

- Property Preservation Order: To ensure the enforcement of the damage award - Court Investigation Order: if the evidence is in the

possession of the third party

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救济 - Remedies

a) Injunctions: will not be granted if it has been released to the public

b) Damages:

-Not disclosed to the Public: referring to the damage calculated under patent law, i.e.,

Losses suffered by the plaintiff;

Profits gained by the defendant;

Royalty fee, if available; or

Statutory damages with the maximum amount of RMB one million

-Disclosed to the Public: commercial values of the trade secret

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Enforcement in Other Venues

Criminal Prosecution -Threshold: Damages Suffered by the Right Owner are

more than RMB 500,000 -Authority District PSB-Investigation Local Prosecutor: Prosecution Local Court: Adjudication

46


Key difficulties: From the legal perspective: Preliminary Evidence should be collected to prove: Qualified Trade Secret-Forensic Appraisal is desired Damages meet the threshold-Damage Assessment Report is preferred Likelihood of illegal acts of the defendant From the practical perspective: Lacking knowledge required for assessing the trade secret related issues Reluctant to investigate into such type of crimes -Criminal Penalty: Imprisonment of Less than 7 years, probation and/or

fine

47


Administrative Protection -Authority: Local AIC -Measures it can take: Impose a Fine: RMB 10,000 to RMB 200,000; Request the infringer to return the blueprint, or software etc which

contains the trade secret; Supervise the infringer to destroy the products which use the relevant

trade secret. -As to damages, Local AIC is not allowed to determine the damages but

has the authority to mediate

48

Enforcement of Other Venues

Arbitration under Labor Contract Law -Labor Arbitration Tribunal has jurisdiction over dispute arising

from confidentiality obligations of a labor contract; -Always favorable venue for the Employee Only recommended if the infringing acts are committed by the

employee/former employee, and not involving the competitor

49

准备和预防Preparation &Prevention

Non-Disclosure Agreement (“NDA”) Many commercial transactions start with the signing of a (“NDA”) As the proposed transaction is at an early stage the foreign party is often reluctant to retain specialized legal counsel, so they use a standard form NDA prepared for use in North America.

50

准备和预防Preparation&Prevention NDA: cont’d Prepare contracts and license agreements in Chinese, use all Chinese contractual formalities -The name of the Chinese party must be in Chinese, based on its business license. -Verify the business license

-Have the contract signed by the 法定代表人 or other duly authorized person

-Have the contract sealed!!

-Initial all pages

51

准备和预防Preparation&Prevention

NDA: cont’d Law, Forum and Venue: Generally China does not enforce foreign

judgments, U.S. judgments in particular Trade secret enforcement often involves a third

party: choice of arbitration may not be binding on them In any event arbitration is significantly slower and

more costly

52

准备和预防 Preparation& Prevention

Special precautions for trade secrets

– identify the trade secrets that are to be protected

- Identify and record measures the measures used to keep them confidential – document numbering; encryption, security codes etc.

- Audit your confidentiality measures

53

准备和预防 Preparation&Prevention

Damages

- must be proved - but there is no discovery - accordingly carefully drafted liquidated damages

clauses are very important

54

准备和预防Preparation& Prevention

Internal Monitoring Implement plant security measures Ensure that new employees are trained on

security and confidentiality in Chinese In supplier’s plants have a representative on site

55

准备和预防Preparation &Prevention

Otherwise Comply with Chinese Laws - register licenses - obtain import permits - comply with scope of business license - use your Chinese name consistently

56

总结 - In Summary

胡锦涛 – Hu Jintao 2010-06-08

科技创新推动创造更多社会财富，为促进社会和谐充实物质基础。 Promote scientific and technological innovation to create more social wealth, in

order to enrich the material basis for social harmony.

57

提问？- Questions ?

Trade Secrets, Confidential Information and NDAs in

China - 商业秘密，保密信息以及保密协议在中国

Paul Jones Jones & Co. 钟保禄律师事务所 Джоунс и Ко. Toronto www.jonesco-law.ca 徐静 (Xu, Jing) 金杜律师事务所 (King & Wood Mallesons) 北京市 (Beijing) http://www.cn.kwm.com/ Strafford Webinars and Teleconferences April 10, 2012

Trade Secrets, Confidential Information and NDAs in China

商业秘密，保密信息以及保密协议在中国

http://www.jonesco-law.ca/�

http://www.cn.kwm.com/�

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