US-China Phase One Trade Agreement and China’s 2019 Amendments to Anti-Unfair Competition Law

On January 15th, 2020, China’s Vice Premier Liu He and the U.S. President Trump signed an “Economic And Trade Agreement Between The Government Of The United States Of America And The Government Of The People’s Republic Of China” (the “Phase One Agreement”), as a milestone (but not even a stop sign, as the raised tariff still exists) of the US-China trade war started in early 2018. The Phase One Agreement put intellectual property as its first chapter, in which the first section (other than a general section) is about the trade secret protection.

In general, the Phase One Agreement addressed seven key issues on the protection of trade secret: (a) the definition of “confidential business information” (footnote 1 under Section 2 of the Phase One Agreement), (b) the scope of persons who are subject to misappropriation liability (Art. 1.3), (c) the scope of acts that constitute the trade secret misappropriation (Art. 1.4), (d) shifting the burden of proof in proving misappropriation (Art. 1.5), (e) availability of provisional injunctive reliefs (Art. 1.6), (f) criminal liabilities (Arts. 1.7 and 1.8), and (g) prevention of trade secret misappropriation by governmental agencies (Art. 1.9).

In China, legislations and their amendments are made in a semi-transparent way. When a law is amended, only a relatively small circle of people gets de facto privilege to know the real reasons of those amendments. That said, experienced observers may smell the reasons of amendments by referring to overall political, diplomatic and economic background at the time of those amendments. For example, in April 2019, the Standing Committee of the National People’s Congress passed a bill of amending the PRC Anti-Unfair Competition Law (the “AUCL”, the 2019 amendments to AUCL will be abbreviated to the “2019 Amendments”). Because (i) the AUCL was just amended in November 2017 and (ii) the 2019 Amendments are focused on trade secret protections, I have suspected that these amendments are directly linked to the US-China trade war when they are passed by China’s legislative branch. When the Phase One Agreement was released, the suspicion was proven accurate.

In other words, the 2019 Amendments at least addressed four of the above seven issues with regard to protection of trade secrets under the Phase One Agreement.

1. “Confidential business information”

The first paragraph under Chapter 1, Section B of the Phase One Agreement stated that “[t]he Parties agree to ensure effective protection for trade secrets and confidential business information and effective enforcement against the misappropriation of such information.” (underline added). Immediately after this sentence, there is a footnote explaining what is “confidential business information”, which is rare either in its substance or format among international treaties. The footnote reads:

“The Parties agree that the term “confidential business information” concerns or relates to the trade secrets, processes, operations, style of works, or apparatus, or to the production, business transactions, or logistics, customer information, inventories, or amount or source of any income, profits, losses, or expenditures of any person, natural or legal, or other information of commercial value, the disclosure of which is likely to have the effect of causing substantial harm to the competitive position of such person from which the information was obtained.” (underlines added)

Comparing the main body text and its footnote, there is an obvious logical redundant between the term “trade secret” and the term “confidential business information”. That said, the purpose of this footnote is clear: U.S. negotiators wished to specify as wide as possible scope of information that could be found trade secret, so long as the disclosure of such information may cause “substantial harm to the competitive position of the person from which the information was obtained”.

The 2019 Amendments to the AUCL defined “trade secret” as following:

“Trade secret under this law refers to such technology information, operational information or other business information that is unknown to the public, containing business value and has been taken measures by its right holder to protect its secrecy.” (underline added)

In the above statutory definition, the term “and other business information” was inserted in 2019. Now we know it is from the China-US trade negotiation.

2. Activities that should be found misappropriation of trade secret

The Phase One Agreement enumerate certain acts as trade secret misappropriation activities (Clause 1.4):

“China shall enumerate additional acts constituting trade secret misappropriation, especially: (a) electronic intrusions; (b) breach or inducement of a breach of duty not to disclose information that is secret or intended to be kept secret; and (c) unauthorized disclosure or use that occurs after the acquisition of a trade secret under circumstances giving rise to a duty to protect the trade secret from disclosure or to limit the use of the trade secret.”

The language was quite hard to be digested, but after careful review, one may conclude that they have largely (if not all) been addressed in the 2019 Amendments.

First, Article 9, Paragraph I of the amended AUCL reads as follows. I have underlined the changed/added terms:

“The operator shall not commit the following trade secret infringing activities:

 (1) Obtaining the trade secrets of the right holder by theft, bribery, fraud, coercion, electronic intrusion or other improper means;

(2) Disclosing, using or allowing others to use the trade secrets obtained by the previous means;

 (3) violating confidentiality duties or violating the rights holder’s requirements for conservative trade secrets, disclosing, using or allowing others to use the trade secrets they have;

(4) Instigating, tempting, and helping others to violate confidentiality obligations or to violate the rights holder’s requirements for conservative trade secrets, to acquire, disclose, use or allow others to use the rights holder’s trade secrets.

Obviously, the term “electronic intrusion” under the above sub-paragraph (1) corresponded the above Clause 1.4(a) of the Phase One Agreement. The amendment to sub-paragraph (3) corresponded the Clause 1.4(b) and (c).

3. Shifting the burden of proof in proving misappropriation to defendant

Article 1.5 of the Phase One Agreement required China to make a law shifting the burden of proof when there is a claim of trade secret misappropriation. This requirement has indeed been addressed in the newly added Article 32 of the 2019 AUCL – it provides that once “preliminary evidence” has been produced by a complainant, the defendant shall bear the burden to prove that there is no misappropriation of trade secret. The same Article 32 of the 2019 AUCL has also enumerated the categories of “preliminary evidence”, which are largely same to the items stipulated under Article 1.5 of the Phase One Agreement.

4. Infringement of trade secret by government agencies

The 2019 Amendments added a section under existing Article 9 of the AUCL, particularly stipulating that “Natural persons, legal entities or other organizations that are not business operators shall be found infringement of trade secret if they committed acts [that are enumerated earlier in the law to regulate the business operators].” This provision partially addressed the concerns raised in Article 1.9 of the Phase One Agreement (titled “Protecting Trade Secrets and Confidential Business Information from Unauthorized Disclosure by Government Authorities”).

Next

After discovering the source of the 2019 Amendments, it would be interesting to dig further: Are the requirements made by U.S. to China regarding trade secret protection in line with the jurisprudence of trade secret protection under the U.S. law? This will be the topic of our next post.