The long-awaited revisions to the 1993 Anti-Unfair Competition Law were finally approved by the standing committee of National Congress on November 4, 2017 (“New Law”) and will take effect on January 1, 2018. The final form of the revisions has been eagerly anticipated following two previous drafts of the revised law, which were released for public consultation in February and September, respectively.
In addition to the revisions to anti-bribery related provisions, the New Law contains some important changes in relation to trade secrets and confidentiality. While the changes are not as detailed as they could be, and there may still be questions as to interpretation and how the provisions will be enforced, the revisions nevertheless should be helpful for better protecting an employer’s confidential information in addition to the existing legal mechanisms available, such as non-compete laws and regulations.
According to the Article 9 of the New Law, “ a business operator shall not engage in any of the following infringements of trade secrets :
- obtaining the trade secrets from right holders by theft, bribery, fraud, intimidation or other improper means
- disclosing, using or allowing others to use the trade secrets of right holders obtained by the means mentioned in the preceding paragraph, or
- disclosing, using or allowing others to use the trade secrets under its possession by breaching agreements or violating the requirements of the right holders on keeping the trade secrets confidential.
Where a third party obtains, discloses, uses or allows others to use the trade secrets of others when it has, or should have, the clear knowledge of the employee or former employee of the right owner, or any other entity or individual conducts the illegal acts infringing the trade secrets of the right holders, the third party shall be deemed to have infringed on the trade secrets of others.
For the purpose of this article, trade secrets refer to the technical information and operational information that is not known to the public, and has commercial value and for which the right holders have taken measures to ensure confidentiality.”
Based on the above, there are three key revisions in the New Law in terms of protection of confidential information. Firstly, the definition of trade secrets. The New Law specifies “information of commercial value” will be protected, replacing the previous “information that could bring economic benefit to the right holder and have practical usage” in the old law. This is in essence just a small change, but may widen the scope for what information is protected and ease the plaintiff’s burden for proving that that certain information is a trade secret, because the new definition seems broader and there is no express requirement to show practical usage. We will keep a close eye regarding what factors the courts or relevant government authorities take into consideration when determining what constitutes “commercial value” in practice.
Significantly, the New Law also expressly provides protection for trade secrets in the context of former employees moving to a new employer or business. In particular, if a third party obtains, discloses, uses or allows others to use the trade secrets of another party when it has, or should have, the clear knowledge that such information is being unlawfully used or provided by a former employee of the rightful owner (or by another third party who happens to provide such information), the third party can be deemed to have infringed on the trade secrets of others.
The background to this revision is that confidentiality infringements involving former employees have resulted in a large number of disputes and legal cases. It has been very hard for right holders to protect themselves by taking action against a third party (such as a subsequent employer), if a former employee uses confidential information at or for the benefit of the third party, because the third party / subsequent employer generally is not a party to any agreements signed by the former employer and employee, so has no contractual relationship with the former employer. As such, the revised Anti-unfair Competition law provides a possible route for a former employer to file a claim against a third party / subsequent employer, in addition to other potential legal actions against the former employee only, such as enforcement of any non-compete obligations.
A third and eye-catching revision in the New Law relates to how to determine liability for infringement of the trade secret provisions. According to Article 17 of the New Law, “if any business operator violates the trade secret related clauses” and “if it is hard to determine the actual damage caused to the right holder, or to determine the unlawful benefit received by the infringer, the court can award compensation of up to RMB three million. ” This is the rough equivalent of USD 475,000.
Under Chinese law, for any infringement related cases, compensation is usually determined according to either actual damage caused to the right holder, or by any illegal benefit gained by the infringer through the infringing activities. However, in practice, it is often extremely difficult to quantify or prove either of these figures. The New Law provides the possibility for compensation even if damages or illegal benefit cannot be clearly determined. This concept may take a reference from relevant laws regarding intellectual property rights infringements. This new provision in relation to trade secrets should act as a useful deterrent against potential infringement.
One point which is not clear is whether a “former employee” will be deemed to be a “business operator” under Article 2 of the Anti-Unfair Competition Law. There has been considerable discussion on this point, although given that the former employee and the new employer are usually listed as joint defendants, and bear joint and several liabilities if an infringement is confirmed, this probably is not such a big issue in infringement cases. As always, it will be important to monitor how the New Law is interpreted and enforced as cases are brought and there additional implementing regulations or legislative guidance may also be issued in due course.
At present, using the Anti-Unfair Competition Law is probably the final remedy for a former employer to take action in relation to disclosure and use of its confidential information by a former employee in his/her new circumstances, if there are no other legal remedies available under other laws and regulations. If there are any agreements in place, such as non-compete or other similar agreements, the courts tend to look at the rights and obligations in those agreements first before considering the Anti-Unfair Competition Law. However, the New Law seems to provide enhanced protection for employers in situations where former employees use trade secrets when working for subsequent employers, not least because right holders will have a basis to claim against the subsequent employer directly.
This document is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.
Simmons & Simmons is registered in China as a foreign law firm. We are permitted by Chinese regulations to provide information on the impact of the Chinese legal environment and also to provide a range of other services. We are not admitted to practise in China and cannot, and do not purport to, provide Chinese legal services. We are, however, able to co-ordinate with local counsel to issue a formal legal opinion should this be required.