A company's most valuable assets are often its proprietary and confidential business and technological information. Executives and owners of Canadian businesses understand that they cannot ignore the Chinese market if they wish to grow their business internationally. However, they may, at the same time, be concerned about trade secret theft. As with any other business risks, Canadian companies can manage and minimize risks of trade secret theft by understanding applicable Chinese and Canadian laws, taking proactive steps to protect valuable confidential information, and aggressively enforcing rights that have been infringed upon.
Trade Secrets are Recognized and Protected in Canada and China
Trade secrets, also described as confidential business information, are protected in both Canada and China. The ability to enforce trade secret protection in the two countries is similar. However, there is a material difference in the procedural rules that has a significant impact on the prosecution of trade secrets disputes involving Chinese parties: the lack of a discovery process under the Chinese rules of civil procedure. Practically, it means that the plaintiff bears the burden to collect evidence on infringement prior to the commencement of an action. This burden of proof can be very difficult and onerous to discharge when the infringing products are not widely distributed.
In Canada, courts have recognized the commercial value of confidential business information and will provide remedies to a claimant who can establish that its rights to the proprietary information have been violated and the duty of confidence has been breached. To constitute trade secrets qualifying for common law protection, the information must be confidential and original. Further, the purportedly stolen information must have been acquired by the owner with the expenditure of time and effort, and be specific, identifiable and commercially valuable. Lastly, the owner of the trade secrets must have adopted judicious measures showing a clear intention to maintain the confidentiality of the information, and have communicated the confidential information on a need-to-know basis.
China is a civil law country in which legal rights and obligations are stipulated by statutes and regulations. The statutory protection of trade secrets is found in the Anti-Unfair Competition Act, 1993. In February 2007, the Supreme Court of China issued an explanatory note under the Act, which offers authoritative guidelines for the Chinese courts. The statutory criteria for trade secrets under the Act are similar to the factors set out by Canadian courts in the protection of confidential business information.
The statutory criteria qualifying trade secrets for protection under the Act are four-fold: (1) technological and business information; (2) unknown to the public and could not have been easily acquired by others without much effort; (3) commercially valuable and practical in that it would provide a competitive advantage to the owner, and (4) protected by confidentiality measures adopted by the owner.
Specific Confidentiality Measures are Key
Specific confidentiality measures are key to the protection of trade secrets in both countries. A blanket claim of confidentiality over documents and information is insufficient. If an owner of trade secrets fails to take adequate steps to protect the confidentiality of the information, it will have to counter the defence that the information is not in fact secret, and therefore not enforceable.
Chinese courts will assess the adequacy of confidentiality measures by taking into account a number of contextual factors including (1) the medium carrying the impugned information; (2) the owner's intention to maintain confidentiality; (3) whether the measures are easily identifiable; and (4) whether it is easy or difficult for others to obtain the same information through legal means.
Depending on the nature of the business and the trade secrets, Canadian companies should consider adopting the following confidentiality measures while selling products or services, whether in China or elsewhere:
- Implement a written communication policy to ensure that trade secrets are disclosed only if needed;
- Add privacy measures to the medium carrying the trade secrets, for example adding a password to electronic documents;
- Mark the medium carrying the trade secrets as confidential;
- Sign confidentiality agreements where necessary; and
- Restrict visitor access to the machines or manufacturing plants that involve trade secrets.
A Successfully Prosecuted Trade Secrets Case
Wang Xiaohui worked as an engineer for GE from 1999 to 2002. He was trained by GE as a maintenance engineer to service the medical equipment distributed by GE in China. In July 2002, Wang resigned from GE. In July 2003, he registered a company under the name of Xi'an Jiuxiang Co. (X Co.) that offered installation and maintenance services of medical equipment to major Chinese hospitals, in direct competition with GE. The manuals and training materials used by X Co. were similar to those authored by GE.
GE sued X Co. and Wang in his personal capacity alleging that they jointly infringed both GE's rights of trade secrets under the Act and the copyrights attached to the training materials. In the end, the Chinese court found in favour of GE and issued a permanent injunction prohibiting the defendants from infringing GE's trade secrets until such time as the protected information become publically known. The damages awarded exceeded $1 million.
In this case, GE was able to demonstrate that all relevant documents contained core technological information developed by the company as a result of its own research and development, and they were of significant economic value to GE. Further, GE had taken a number of steps to maintain the confidentiality of those documents including marking them as copyrighted and confidential. In addition, there was a confidentiality provision in Wang's employment contract with GE. All of these measures were influential in the Chinese court's final decision in the case.
It is important for Canadian companies to assess their policies and practices for the protection of trade secrets when dealing with the Chinese market. The assessment should be conducted in view of the relevant laws in both Canada and China, the nature of the confidential information, and the categories of people who may have access to the confidential information. The best time to conduct such an assessment is prior to the entry into the market. The next best time to do so is now.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.