Understand the “Confidential Business Information” in the US-China Phase One Trade Agreement

Introduction

On January 15th, 2020, Chinese Vice Premier Liu 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” (a.k.a. the “Phase One Agreement”), being a milestone (but not even a stop sign, as the raised tariffs still exist) of thse US-China trade war started in early 2018.

According to White House’s announcement, the Agreement has at least achieved two goals with respect to the intellectual property protection: “…China will address numerous longstanding intellectual property concerns in the areas of trade secrets, trademarks, enforcement against pirated and counterfeit goods, and more.”

On the other hand, the Chinese government published the text of the Agreement without adding official comments.  Xinhua, the stated owned news agency, in its Editorial, described Agreement being “in line with the general orientation of China’s reform and opening up” and it “reached a win-win of mutual interests”.

No matter whether it is a “win-win” between the Presidents, lawyers and strategic advisers need to look into the treaty text but not just news reports. The Phase One Agreement places the protection of intellectual property at its Chapter 1, in which the second section (following a general section) is titled “Trade Secrets and Confidential Business Information”. In another note, I have discussed the romantic relationship between this section and China’s 2019 Amendments to its Anti-Unfair Competition Law (“AUCL”). In this note, we are looking deeper into the term “Confidential Business Information” (“CBI”), which was generally not addressed in the AUCL. Therefore, the issue on our table is: would it be necessary for China to further amend the AUCL to include this concept?  

My answer is “no”. To reach this conclusion, we need start from the text of the Phase One Agreement and then review the legal source of CBI under the U.S. legal system.

  1. CBI in the Phase One Agreement

The first paragraph under Section B of Chapter 1 of the Phase One Agreements reads:

“…The Parties agree to ensure effective protection for trade secrets and confidential business information and effective enforcement against the misappropriation of such information.” (underlines added)

Immediately after the above paragraph, there is a footnote defining what is “confidential business information”, which is rare in the format among 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 with its footnote, there is an apparent logical redundant between the term “trade secret” and the term “confidential business information”. In the body text, the “Parties” have agreed to ensure protection for two things: (1) “trade secret”, and (2) confidential business information. However, in the footnote, “confidential business information” was defined to include “trade secrets”.  If this is the case, then why the term “trade secret” is needed in the body text?

However, negotiation is not an art of logic but an art of guns and butter. Where there is a logical redundant, there has likely been a smoking fight during the negotiation. The “confidential business information” (“CBI” hereinafter), being introduced in a format of footnote, has very likely been a battle ground during the multiple rounds of flights between Beijing and Washington.

  1. Where did the concept of “confidential business information” come from?

People who worked in the area of the Section 337 Investigation would find that the footnote definition of “confidential business information” (“CBI”) to be quite familiar.  The definition in appears to derive from the United States International Trade Commission (“ITC”)’s regulations (19 C.F.R. § 201.6. click to view the full text).

The function of the ITC regulation was mainly to restrict the government authority’s (i.e. ITC) acts so that those agencies would not unnecessarily impair private business’s operation or competitivity during their administrative investigations or other proceedings. It appears that the U.S. negotiators wanted Chinese government to act in the same manner as their U.S. counterparts, and increase a new ground of claim under the PRC law, other than the trade secret ground, for private sectors in their actions against Chinese government or other quasigovernment entities.

  1. What requirements are made to China in protection of CBI?

The above reasoning is proven by the text of the Phase One Agreement. Namely, under the Phase One Agreement, confidential business information is not a subject matter universally applicable to each clause under the Section 2 of Chapter 1. In this section of trade secret protection, the Phase One Agreement burdened China to implement seven aspects of measures.[i] Among them, only a Clause 1.9 directly mentioned confidential business information.[ii] More specifically:

First, the title of Article 1.9 is “Protecting Trade Secrets and Confidential Business Information from Unauthorized Disclosure by Government Authorities”.

Second, Subsection 1 of Article 1.9 basically required China to prohibit government agencies from disclosing CBI or other trade secrets during criminal, civil administrative or regulatory proceedings.  This prohibition is functionally similar to the ICT regulations in the U.S.

Third, while Subsection 1 is a general prohibition of unauthorized disclosure of CBI after a Chinese government agency accessing or receipt of CBI during legal proceedings, subsection 2 of Article 1.9 provides more specific scenarios where government agencies are to process the CBI. Namely, the administrative agencies will be required to (a) not collect CBI that is unnecessary for the legal proceeding; (b) limit access to submitted information to governmental personnel on a necessary-to-know basis, (c) ensure the security and protection of submitted information, (d) prevent third party experts or advisors who compete with the submitter (of CBI) from accessing to CBI, (e) establish a process for persons seeking an exemption from disclosure or challenge such disclosure; (f) provide criminal, civil and administrative penalties for the unauthorized disclosure of trade secret or CBI “that shall deter such unauthorized disclosure”.

  1. Are other trade secret-related clauses applicable to CBI?

The answer is both “yes” and “no”.

Article 1.9 of the Phase One Agreement is the only Article throughout the Phase One Agreement in which the protective measures to confidential business information are stipulated. Other than Article 1.9, none of the other Articles have mentioned the CBI. Therefore, it is fair to say that CBI should not be governed by those Articles and should only be a subject matter of the abovementioned Article 1.9.

However, because of the “redundant” I have discussed earlier, “trad secret” becomes a subordinate of “CBI”. Once a piece of information qualified to be a trade secret, all Articles under Section B of Chapter 1 of the Phase One Agreement would apply. Then the question would be: what is the difference between “trade secret” (as one kind of CBI) and the other kinds of CBI?

  1. The differences between “trade secret” (as a kind of CBI) and the other CBI?

According to the definition of CBI, so long as the “disclosure” of a piece of information may cause “substantial harm to the competitive position of the person from which the information was obtained”, such information would be a kind of CBI. This qualification requirement is apparently broader than mainstream definition of trade secret either in the U.S. or in China. Below is a brief comparison between the definitions of CBI and that of “trade secret” under the U.S. and Chinese law respectively.

In the U.S., the most representative definition of the trade secret would be the one in the Uniform Trade Secrets Act (“UTSA”), which has been adopted by 47 states and the District of Columbia. The USTA defines a “trade secret” as “information, including a formula, pattern, compilation, program, device, method, technique, or process that: (1) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and (2) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”

In China, according to the latest 2019 Amendments to the Anti-Unfair Competition Law, the trade secret is defined to be “technological information, operational information and other business information that is unknown to the public, having commercial value and for which corresponding measures have been taken to keep its secrecy by its owner.” (Art. 9, AUCL).

The following table exhibits the similarity and differences between the three definitions:

“Trade Secret” under the US UTSA “Trade Secret” under the PRC AUCL BCI under the Phase One Agreement
“Not being generally known to other persons” (UTSA) / “unknow to the public” (AUCL – broader) required required (broader) implied
“Independent economic value” (UTSA)/ “commercial value” (AUCL – broader) required required (broader) not necessary
“efforts that are reasonable… to maintain its secrecy” (UTSA)/ “security measures taken by its owner” (AUCL – broader) required required (broader) Not mentioned
disclosure may cause substantial harm to the competitive position (Phase One Agreement) Maybe, but not necessary Maybe but not necessary required

In general, to be found a piece of BCI, the subject information does not have to be invested efforts to maintain its secrecy. It also does not necessarily need to have independent economic value to the people who access to it. These loosen tests enables the CBI a concept that is generally easier to be proven by a complainant.

  1. Effect of the reciprocity clauses

Throughout the Phase One Agreement, the following clause has been repeated many times:

“The United States affirms that existing U.S. measures afford treatment equivalent to that provided for in this Article.” See e.g. Phase One Agreement Arts. 1.3(3), 1.4(4), 1.5(3), 1.6(3), 1.8(3), 1.9(3).

Throughout the Phase One Agreement, there are at least 17 occurrences of the same term. The above citations are just those under the section for protection of trade secrets and CBI. The U.S. negotiators must have been very confident that those IP protection measures they wanted China to implement have already provided in the U.S., or at least certain equivalent measures have been taken in the U.S. Following this commitment, if the clauses other than Article 1.9 were construed to be covering CBI (other than trade secret), U.S. would have to proves that its domestic laws supporting such construction. In a country where the trade secret protection is subject to state laws, such addition will be hard, if not impossible.

In fact the existing clauses have already raised concerns – for example, according to Article 1.5 of the Phase One Agreement, the U.S. asked China to shift burden of proof in trade secret misappropriation civil actions, which appears not the case in the U.S. legal system. Under the reciprocity arrangement, this could be a backfire, in particular in situation where more Chinese company would likely to defend civil actions in the U.S. in future. Therefore, before seeking more from the other party, one might needs to calm down and check out his own pocket.

  1. Conclusion

Confidential business information is a significant addition to the Phase One Agreement. The PRC legal system did not have a comparable concept. This concept derives from the U.S. administrative law (and more specifically the ITC’s regulations) guiding and limiting the government authority’s investigations and proceedings. Its original purpose was to prevent the government agency’s disclosure of business information during their procedural or judicial proceedings. Its application should be limited to the circumstances where government agency is processing information collected by private businesses. Although they are overlap, the application of CBI should be limited to circumstances under Article 1.9. Therefore, it is not sound to argue that the AUCL should embed this CBI, as there is neither treaty obligation nor legitimate value for China to do so. It would be both logically reasonable and practically simpler that China should leave the CBI to the area of government agency’s processing of information.

NOTES

[i] These seven aspects are:

  • expand the subject matters of trade secret protection to “confidential business information” (as discussed in this essay);
  • confirm that all kinds of legal person, including natural person, legal entity or organizations, can be accused of, and liable to, trade secret misappropriation (Art. 1.3 of the Phase One Agreement);
  • enumerate certain acts that constitute trade secret misappropriation (Art. 1.4);
  • shift the burden of proof to defendant in proving misappropriation (Art. 1.5);
  • make the provisional injunctions available for trade secret owners (Art. 1.6);
  • enhance of criminal threshold (Arts. 1.7 and 1.8); and
  • prevent misappropriation of trade secret and confidential business information made by government officials and agencies (Art. 1.9).

[ii] Article 1.9 of the Phase One Agreement reads:

“Article 1.9: Protecting Trade Secrets and Confidential Business Information from Unauthorized Disclosure by Government Authorities

  1. To further strengthen the protection of trade secrets, as well as better encourage various enterprises to innovate, China shall prohibit the unauthorized disclosure of undisclosed information, trade secrets, or confidential business information by government personnel or third party experts or advisors in any criminal, civil, administrative, or regulatory proceedings conducted at either the central or sub-central levels of government in which such information is submitted.
  2. China shall require administrative agencies and other authorities at all levels to: (a) limit requests for information to no more than necessary for the legitimate exercise of investigative or regulatory authority; (b) limit access to submitted information to only government personnel necessary for the exercise of legitimate investigative or regulatory functions; (c) ensure the security and protection of submitted information; (d) ensure that no third party experts or advisors who compete with the submitter of the information or have any actual or likely financial interest in the result of the investigative or regulatory process have access to such information; (e) establish a process for persons seeking an exemption from disclosure and a mechanism for challenging disclosures to third parties; and (f) provide criminal, civil, and administrative penalties, including monetary fines, the suspension or termination of employment, and, as part of the final measures amending the relevant laws, imprisonment, for the unauthorized disclosure of a trade secret or confidential business information that shall deter such unauthorized disclosure.
  3. The United States affirms that existing U.S. measures afford treatment equivalent to that provided for in this Article.”