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Chinese Whispers: Protecting Confidential Information and Trade Secrets When Doing Business in China

4 November 2015

The landscape for the protection of confidential information and trade secrets in China is completely different to that in the United States. Many companies doing business in China fail to appreciate this and assume that all is well if the law of their state of domicile in the U.S. is accepted as governing law for a technology transfer agreement, by their Chinese counter party.  The protection of trade secrets in China remains difficult to navigate because of the absence of a unified law. Unlike in the US, where most states protect trade secrets under the Uniform Trade Secrets Act, China offers trade secret protection under contract, criminal, company, labor, and unfair competition laws. 

Chinese trade secret laws offer three enforcement options: i) administrative actions ii) criminal proceedings or iii) civil proceedings. Administrative actions are fast and can be concluded in 90 days but damages cannot be awarded, only fines and the authorities may not be willing to take on a case that presents complex technical issues. Civil proceedings offer the opportunity of receiving damages for misappropriation as well as preliminary and final injunctions. However, plaintiffs may find it difficult to meet  the high evidentiary burden as there is no US-style discovery available. Finally, criminal proceedings are available only in cases where the misappropriation of trade secrets leads to “serious” or “very serious” economic losses. The ability to show that the economic losses suffered fall into one of these categories is crucial but unfortunately not always easy to establish.

It is essential therefore to preemptively protect trade secrets and confidential information when outsourcing to China. Documentary evidence of such protection is crucial as are general and/or specific contract provisions in employee contracts ring-fencing trade secrets and confidential information. Also crucial is knowing the environment in which the company will be operating and in which the trade secret information will be utilized. Any company outsourcing technology to China should consider the following questions prior to sending their technology over:

  • What is the business environment in which the company will be operating? 
  • How can risk be minimized when transferring technology to China?
  • What are the legal provisions regarding intellectual property created by employees? What are the legal provisions regarding intellectual property created by outsourced suppliers?
  • What physical security measures are available for protecting the technology?
  • Is access to the technology limited?
  • Where is highly confidential data stored? Is it stored on a standalone computer as opposed to a network? Does that standalone computer only permit access to authorized personnel? Does the standalone computer block Internet access? Are all external USB ports blocked?
  • Does the secured area prohibit the use of camera phones or taking pictures?
  • Will software/technology be developed or supported under the outsourcing arrangement in China? If so, under what terms will the source code and technical materials be licensed to the service provider?

Additional measures that can be taken to ensure contract provisions are followed and trade secrets are adequately protected should be considered (e.g. having restricted access to area with trade secrets or confidential information using access cards or having an access log book). Such a system could provide useful evidence in the event of a misappropriation, however it should have clearly drawn out procedures to ensure that security measures are being followed at all times.

Regular training sessions should be considered. They should clearly demarcate the protected information and the authorized versus unauthorized use of the information Finally, companies should periodically audit the use of licensed technology to ensure it is being properly used and protected. It may be beneficial to create a separate team dedicated to creating and monitoring trade secret procedures to ensure consistent compliance across the company.

While China has made an effort in recent years to streamline its trade secret laws, the difficulties in protecting trade secrets when outsourcing to China remain. A company considering outsourcing to China should take appropriate measures to preemptively protect trade secrets and confidential information. Efficient protection can be achieved through contractual provisions, security measures, training, and constant monitoring.

Reprinted with permission from the November 4, 2015 edition of InsideCounsel © 2015 ALM Properties, Inc. All rights reserved. Further duplication without permission is prohibited.

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