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«Xue Chen TABLE OF CONTENTS Table of contents...1 I. Introduction..2 II. Background on Chinese Economy and Policies.3 III. Trade Secret Laws in the ...»

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HOW SHOULD WE LOOK AT TRADE SECRETS MISAPPROPRIATION FROM CHINA’S

ECONOMIC GROWTH?

Xue Chen

TABLE OF CONTENTS

Table of contents…………………………………………………………………………………..1

I. Introduction……………………………………………………………………………2 II. Background on Chinese Economy and Policies……………………………………....3 III. Trade Secret Laws in the U.S. and China……………………………………………..5 IV. From Business Information to Economic Espionage………………………………….8 V. Substantive Due Process Challenges…………...…………………………………....11 A. Personal Jurisdiction…………………………………………..…………………………11 B. Choice of Law……………………………………………………………………………13 C. Forum Non Conveniens……………………………………………………… ……….13 D. Doctrine of Abstention…………………………………………………………………..15 E. Foreign Sovereign Immunity…………………………………………………………….16 VI. Upward Trend in Trade Secrets Litigation…………………………………………..19 A. Does TianRui v. ITC Reflect A Future Trend?

B. Competition between the U.S. and China Is a Major Concern…………………………..21 VII. Conclusion…………………………………………………………………………...22 I. Introduction A system for protection for intellectual property is a legal guarantee that fosters human creativity and strengthens the competitive power of a nation. Simon Kznets, winner of the 1971 Nobel Prize for Economics, believed that innovation in knowledge and technology was a precondition for economic growth in any historical era.1 But he also pointed out that it was a necessary condition, rather than a sufficient condition, to create that growth. The sufficient condition, in fact, relates to institutional and ideological adjustments, if technology was to be employed sufficiently and widely and, if economic progress was to be stimulated by such use.2 Douglas North, another Nobel Prize winner, who also emphasized the role of such a system, believed that “an effective mechanism for property protection containing managerial innovation and proper incentive for individuals was a decisive factor in facilitating economic growth”, and that “the growth of the global economy was not the result of the Industrial Revolution, but rather rested on institutional mechanisms, in particular legal mechanisms for the determination of property ownership.” He concluded that “it would have been impossible for modern industry to develop if there had been no guarantee of the right to personal property and income augmented by appropriate support systems and consistent incentives.”3 As company operations and supply chains spread over the globe, numerous efforts must be put to protect trade secrets. In a 2012 index benchmarking the intellectual property systems of eleven economically diverse countries, including China, all received the lowest score possible on The reasonableness of this hypothesis is reflected in the history of the development of the Chinese economy since 1978. It is commonly accepted that, since that time, China has progressed at a very rapid pace economically, socially, and culturally.

HAILING SHAN, THE PROTECTION OF TRADE SECRETS IN CHINA, 22-23 (2nd ed.

2008).

Id. at 23.

trade secret protection due to inadequate legal system and enforcement against trade secret misappropriation.4 The article examines the economic growth following the Chinese economic reform, and the effect upon developing intellectual property protection system, the effect reversed upon international marketplace and global business collaboration. In particular, this article examines Chinese economic developmental strategy and its impact on business conduct arising out of the trade between the United States and China.

–  –  –

China has set a goal of becoming an “innovation nation” by 2020 and a “global scientific power” by 2050.5 Presently, China is still a developing country despite its rapid economic growth. One shortcut to push forward the process is through opening up into the global marketplace and absorbing useful information relating to cutting edge technologies and advanced scientific research in developed countries. On the one hand, China has engaged in extensive economic and technological exchanges and cooperation with other countries and regions. On the other hand, with the opening of a commercial gateway into China, western concepts of law have flooded into China. China has in turn reconstructed its legal system with unprecedented courage in line with demand of the international marketplace, “making outstanding achievements, in particular through the setting up of an intellectual property protection system.”6 In reviewing the World Intellectual Property Organization’s past twenty years of cooperation with China, Dr.

Global Intellectual Property Center, Measuring Momentum - The GIPC International IP Index, 48, 54, and 65, available at http://www.theglobalipcenter.com/measuring-momentum-the-gipcinternational-ip-index/ [hereinafter GIPC Index].





“The National Medium – and Long-Term Plan for the Development of Science and Technology (2006-2020),” State Counsel, People’s Republic of China.

HAILING SHAN, THE PROTECTION OF TRADE SECRETS IN CHINA, at 20 (2nd ed.

2008).

Arpad Bogsch, former director-general of the Organization of Intellectual Property, points out that “China has accomplished all this at a speed unmatched in the history of intellectual property protection.”7 But Rome was not built in a day. There is still a considerable gap between the legal system in China and that in western countries, which as a consequence, has created barriers for U.S. firms to seek civil justice in China. According to a survey by the United States International Trade Commission (USITC), between 2007 and 2009, only 0.6% of U.S. firms injured by trade secrets theft in China pursued trade secrets misappropriation proceedings in China.8 China underwent a process of development in the scope of trade secret protection: first industrial technology, then know-how, followed by industrial and commercial secrets, and finally trade secrets. The concept of trade secrets in the Law against Unfair Competition includes industrial technology and technical secrets, as well as industrial and commercial secrets as contained in the provisions of former laws, and basically conformed to the international trend in definition and scope.9 However, Chinese law places stricter demands on what constitutes a trade secret than does TRIPS or other relevant laws of the United States or other countries.10 “Among the challenges highlighted in enforcing trade secrets in China are: constraints on evidenceCentral People’s Government of PRC, “Status Quo of Intellectual Property Protection in China”, www.gov.cn/zwgk/2005-05/27/content_1605.htm, 1 January 2008.

KURT CALIA, et.al., Economic Espionage and Trade Secret Theft: An Overview of The Legal Landscape and Policy Responses, Covington & Burling LLP, September (2013) (quoting U.S.

Int’l Trade Comm’n. Pub. 4226, China: Effects of Intellectual Property Infringement and Indigenous Innovation Policies on the U.S. Economy, 3-44 (May 2001), available at http://www.usitc.gov/publications/332/pub4226.pdf.) HAILING SHAN, THE PROTECTION OF TRADE SECRETS IN CHINA, at 27 (2nd ed.

2008).

The State Industrial and Commercial Administrative Bureau, in promulgating the Law against Unfair Competition, asserted that technical and managerial information includes designs, procedures, directions for products, process technologies, know-how, client lists, information regarding supply of goods, strategy for production and sale, sealed tenders (in the submission of tenders or innovations to bid) and the content of bidding documents (in the submission of tenders or invitations to bid).

gathering for use in litigation, difficulties in meeting the criteria for establishing that information constitutes a trade secret, unclear criminal threshold requirements, significant prosecutorial delays, difficulties obtaining preliminary injunctions, and a lack of deterrent penalties.”11 The very first preliminary injunction granted in a trade secret case was heard by Shanghai No. 1 People’s Court, representing “a potential positive step forward toward improving trade secrets protection in China.”12

–  –  –

In the United States, A trade secret is useful commercial information that gives a competitive advantage as to its owner by being kept secret. Unlike patents and copyrights, which do not protect ideas, trade secrets also protect ideas, but only if their secrecy is maintained. An owner of a trade secret has rights only against those who (a) have agreed, either explicitly or implicitly, not to disclose the secret information, or (b) have obtained the secret information by misappropriation. The Uniform Trade Secrets Act of 1976 (“UTSA”) defines a trade secret as information, including 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, other persons who can obtain economic value from its disclosure or use, and (2) is the subject of efforts that are KURT CALIA, et.al., Economic Espionage and Trade Secret Theft: An Overview of The Legal Landscape and Policy Responses, at 14, Covington & Burling LLP, September (2013) (citing from Office of the United States Trade Representative, 2013 Special 301 Report, 33 (May 1, 2013), available at http://www.ustr.gov/sites/default/files/05012013%202013%20Special%20301%20Report.pdf [hereinafter USTR Special 301 Report]; GIPC Index, supra note 59, at 50.).

Id. at 14 (citing from Ex-employee banned from circulating trade secrets, Shanghai Daily (Aug. 3, 2013), available at http://www.china.org.cn/china/2013-08/03/content_29613779.htm).

reasonable under the circumstances to maintain its secrecy.13 “It is not enough to point to broad areas of technology and assert that something there must have been secret and misappropriated.

The plaintiff must show concrete secrets.''14 Misappropriation is the wrongful acquisition, disclosure or use of a trade secret. The UTSA defines it as (a) acquiring a trade secret through improper means or from another person knowing that the person acquired the secret by improper means, or (b) disclosing or using the secret without consent when the circumstances created a duty not to disclose or use it.15 The two principal claims that are asserted in misappropriation civil cases are breach of contract and breach of confidence. The UTSA imposes civil rather than criminal liability for misappropriation of trade secrets. Remedies for misappropriation of trade secrets under the UTSA are injunctions including preliminary injunction relief for both threated and actual misappropriation, damages (actual losses as well as unjust enrichment), including exemplary damages, if the conduct was found to be “in bad faith”, or “willful and malicious”, and reasonable attorney’s fees.16 Criminal trade secrets statutes include the Economic Espionage Act of 1996 (“EEA”),17 which is the federal law criminalizing misappropriation of trade secrets intended to benefit foreign governments or agents,18 Federal Computer Crime Laws (“CFAA”),19 and state laws.

Over the past two decades, china has developed a wide range of laws, regulations, and judicial interpretations designed to protect the rights of intellectual property owners.20 Trade Uniform Trade Secrets Act of 1979 §1(4).

Composite Marine Propellers, Inc. v. Van Der Woude, 962 F.2d at 1266 (7th Cir. 1992) Uniform Trade Secrets Act of 1979 §1(2).

Id. at §§§ 2, 3, 4.

Economic Espionage Act of 1996, 18 U.S.C. §§1831-39.

18 U.S.C. § 1831.

CFAA is the principal federal statute creating criminal and civil liability for unauthorized access to computers that are used in the United States in interstate commerce.

secret laws in China are substantially the same, but the evidentiary burden is defined differently.

There are three ways to enforce trade secrets law in China, including civil litigation, administrative enforcement and criminal enforcement. Civil remedies, including permanent injunctions and damages, are available for trade secrets misappropriation. Damages are typically assessed in reference to patent law, and are based on losses to trade secrets owners, profits following misappropriation, reasonable royalty or discretionary damages. Where a statute of limitation is applicable, trade secret owners may claim up to two years of damages for continuous misappropriation.21 Administrative enforcement can be initiated at Local Administrations for Industry & Commerce (AICs) against trade secrets misappropriation. AICs can impose administrative fines, and order the return or destruction of materials. However, administrative enforcement may not be suitable for complex technical cases and does not usually grant damages awards to owner of trade secrets.22 Cases exceeding criminal thresholds can be investigated by Public Security Bureau (PSBs), which result in both fines and prison sentences.23 Without the same discovery system as is in the US, the enforcement of trade secrets in China is not straightforward. The evidentiary burden for a plaintiff to bring a trade secrets misappropriation case in Chinese courts is relatively high.24 Therefore, most U.S. firms who are unable to bring actions against Chinese companies in a Chinese court would file lawsuits in U.S.

district courts against Chinese companies who allegedly misappropriated their trade secrets.

J. BENJAMIN BAI, GUOPING DA, Strategies for Trade Secrets Protection in China, Northwestern Journal of Technology and Intellectual Property, 9(7), at 351 (2011).

Id. at 369.

Id. at 361-362.

Id. at 364.

Id. at 369.



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