"Primum non nocere" or "first, do no harm"
is a fundamental precept of the medical profession. Though not
often cited by lawyers, this principle should also guide us when we
assist clients in legal disputes and internal investigations
involving companies doing business in the People's Republic of
China.
Western lawyers new to handling matters involving China soon learn
that the legal instincts developed in their home countries cannot
always be relied upon when handling the sensitive and contentious
matters encountered in China. In fact, those very instincts, if not
tempered with caution and diligence, can quickly run afoul of
Chinese law. This risk arises whether we represent a Chinese
company in U.S. litigation, a Western company in an internal
investigation of its Chinese operations, or a multinational company
involved in domestic or cross-border litigation coordinated with
Chinese litigation counsel. In each of these circumstances, we
cannot be too careful.
This Commentary highlights some of the obstacles
encountered and lessons we have learned while representing U.S. and
Chinese companies in internal investigations and litigation matters
involving China.
Managing Uncertainty
China has no shortage of laws. Over the last two decades, China
has enacted laws and regulations reaching every subject one would
expect in a modern economy. Some of these laws touch directly on
the activities undertaken by companies and their lawyers when
conducting internal investigations or collecting evidence for a
local litigation or the U.S. discovery process. These laws range
from familiar subjects such as privacy law to more sensitive and
arcane subjects such as the Chinese state secrets law.
However, all these laws share a common trait. Generally speaking,
the laws of the PRC suffer from an overwhelming lack of clarity.
Whether stating broad principles of protection or proscribing
specific conduct, the PRC laws and regulations inevitably leave
open large areas of ambiguity and uncertainty.
This common theme of ambiguity and uncertainty in Chinese law may
be no accident. Viewed in a positive light, it allows for
flexibility and the exercise of administrative discretion by
decision-makers in China. More cynically, it also allows the
government to charge any company with some violation of the Chinese
law should the company ever fall out of favor with the local
authorities.
How are lawyers to advise their clients in such an uncertain and
ambiguous legal environment? While the specific advice depends on
the facts of the individual case and the specific law in question,
the general approach is the same in most
circumstancesâ€"recognizing there will always
be a residual risk under the laws of the PRC, lawyers and their
clients must gather evidence with caution and diligence in order to
be ready to demonstrate, in the event of a future legal challenge,
that the company acted in a good faith effort to comply with the
requirements of the specific PRC law. Below we discuss how this
approach may be implemented in the specific context of data privacy
law, state secrets law, accounting archives law, and the law
regarding private investigation.
Data Privacy in China
As between the state and the individual, there is no right of
privacy under the Chinese Constitution or any other PRC law. The
state has the absolute right to review any communications it wants,
including what in common law countries would be attorney-client
privileged communications.
The Chinese Constitution, however, does protect an
individual's dignity and the secrecy of his or her
communications against invasion by any entity except the state.
Furthermore, specific laws protect the individual's private
telecommunications, including email communications. For example,
Article 66 of the Telecommunications Regulations protects the
telecommunications customer's right to use telecommunications,
and it explicitly protects his or her communication
secrets.1 Other than examinations by the public security
organs and the prosecutorates, no entity or individual may examine
the content of telecommunications for any reason. Violations can
result in civil liability and criminal punishment.
Western lawyers might be inclined to think that 1.3 billion people
living in a country with such significant government oversight
would have little expectation of privacy. Nothing could be further
from the truth. Individual Chinese are keenly aware of their rights
under Chinese law and value their privacy every bit as much as
Westerners. While they may be resigned to government review of
their communications, Chinese employees often react negatively when
their employers attempt to collect their working documents or
obtain forensic images of their workplace computers in connection
with a dispute or investigation.
In view of these strong feelings, it would be a mistake to assume
that the document collection process in China will go smoothly or
unfold in a manner similar to document collections in Western
countries. On the contrary, in China, employee opposition and
sometimes outright interference should be expected and prepared for
in advance.
In order to manage employee concerns, all levels of company
management, from the company's CEO down to the affected
employees' immediate supervisors, must support and be seen to
support the collection process. Without active management
engagement, the collection process can quickly become bogged down
in employee complaints, interference, or even sabotage. In
addition, if the company does not carefully manage employees'
concerns, it could easily find itself the target of a civil lawsuit
or criminal complaint.
Employee opposition to the collection process is made more
challenging by the uncertain state of Chinese privacy law. The
Chinese law states broad principles protecting the privacy of
individual telecommunications, while providing little guidance as
to the exact contours of that protection. For example, it is
unclear exactly what is included in the concept of
"telecommunications secrets." Are personal emails
necessarily coextensive with "telecommunications
secrets," or does secrecy depend on the content of the email?
Are emails on company-owned computers inherently public, or can an
individual maintain "secrets" on company computers?
Chinese law provides no answer to these basic questions.
The usual response of Western companies to the uncertainty of
Chinese privacy law is to require employees to sign employment
agreements and/or abide by company policies, recognizing the
company's ownership of data on company-owned equipment and
asserting the company's right to copy that data. While there
may be no other practical choice but to rely on the company's
policies and agreements to justify document collection, it is
important to understand that the legal effectiveness of the
practice remains untested in China.
Furthermore, if a company chooses to rely on its policies, there
are Chinese legal requirements that should be considered well in
advance of the document collection process. Under Article 4 of the
PRC Labor Contract Law of the People's Republic of China,
employers are required to announce to, or otherwise inform their
employees of, the rules and important events that are directly
related to the interests of the employees.2
Although companies generally advise employees of the company's
policies when they are hired, they do not always formally announce
the policies at regular intervals or make new announcements when
changes are made to the policies. Thus, before conducting the
document collection, companies should review whether they have
adequately communicated the policies on which they intend to rely
to the specific employees whose documents they seek to collect. The
results of this review can be surprising.
State Secrets Law
In the rush to complete the internal investigation or discovery
process, Western lawyers are sometimes tempted to export the data
collected from employee computers and company servers so that this
electronic evidence can be conveniently hosted and reviewed in
their home jurisdictions. This approach to the electronic discovery
process can have severe consequences for everyone involved.
China has enacted a series of statutes and regulations to
safeguard secrets belonging to the state, provincial, or local
governments and state-owned enterprises ("SOEs"). For
example, the revised Law of the People's Republic of China on
Guarding State Secrets ("state secrets law")3
includes provisions restricting the export of electronic data and
the use of computers and internet. The export of data before it has
been reviewed and cleared of sensitive information can violate the
state secrets law and subject the company and its attorneys to
severe administrative and/or criminal sanctions.
Unfortunately, the state secrets law is as vague as it is broad.
It provides that state secrets are "matters that have a vital
bearing on state security and national interests and, as determined
according to statutory procedures, are known by people within a
certain scope for a given period of time."4 While
the law does identify seven categories of secret matters for which
protection is mandated (and which are themselves open to
interpretation), it also includes a broad, catch-all category
covering "other secret matters of the state which shall be
kept confidential as determined by state departments for the
maintenance of secrets."5 Past prosecutions
demonstrate that Chinese enforcement authorities have almost
unlimited discretion to define what information may constitute a
state secret.6
Because so many clients in China (both Western and PRC companies)
have dealings with the government or with SOEs, they are constantly
exposed to information from and communications with these
governmental or quasi-governmental entities. In many cases, the
clients have no idea whether these entities may have shared with
them information that contains state secrets.
For example, when a Western company receives an email from its
state-owned joint venture partner attaching a document labeled
"confidential," does it mean that the company is now in
possession of state secret information? Does a memo from a
company's government relations department become a state secret
when it memorializes a lunch conversation in which a government
official described upcoming regulations or technical standards?
Perhaps. Only the Chinese government knows for certain.
The fact that the information was delivered without any indication
of confidentiality, let alone state secrecy, certainly provides no
protection. One of the most notorious cases under the state secrets
law involved an American geologist, Xue Feng, who was prosecuted
for purchasing data regarding Chinese oil wells under a commercial
contract at a time when such information had not yet been
classified as secret.7
When the issue of state secrets arises during an investigation or
litigation involving China, caution and diligence must guide the
process. It is no answer to export the data to Hong Kong, where
many Western law firms and discovery vendors have offices. For
purposes of the state secrets law, Hong Kong is treated as a
foreign country. Nor is it necessary to take such a risk.
At one time, there were few alternatives to offshore hosting and
review of data. Increasingly, however, vendors offer data analysis
and review platforms in China that allow for documents to be
reviewed and cleared of any secrecy concerns before they are shared
outside China. Thus, today, one should carefully consider
conducting the entire document collection and review process in
China, including a well-managed state secrets document review
protocol, to minimize the risk of violating the state secrets
law.
Matters get particularly complicated where the state secrets
document review protocol identifies relevant documents that may
potentially include secret information. In this situation, the
client and its attorneys must consider whether there are
alternatives to use of the document outside of China, such as
redaction of the sensitive information, or a summary of the
document's contents. If these alternatives are not possible,
the document cannot be exported or disclosed to others without
first seeking clearance from the PRC authorities, a process that is
unlikely to be completed in a reasonable time frame, if at
all.
In the end, it may not be possible to reconcile the conflicting
demands of Western national laws, such as the U.S. discovery laws,
and China state secrets law. Given the potential criminal sanctions
for violating the state secrets law, this usually means that the
lawyers will need to explain to their clients and perhaps the
courts of their country that the documents cannot be removed from
China. This may not be a satisfactory solution for anyone and may
lead to an unsatisfactory result. However, by undertaking a
diligent state secrets protocol, the company will have at least put
itself in the best possible position to demonstrate to the Western
court and the Chinese authorities that it has taken every
reasonable step to provide the full range of relevant documents
without violating the PRC law.
Accounting Archive Law
Even if a client's business is far removed from the world of
state secrets, there are other laws that can hinder the export of
documents for review outside China. Most notably, the Accounting
Archives Management Measures prohibit all entities within the PRC
territory from taking their "accounting archives" outside
of PRC territory.8 Furthermore, the Archives Law of the
People's Republic of China provides that if archives or
duplicates thereof are removed from China in violation of law, the
archives shall be confiscated by China Customs, a fine may be
imposed, and if the case constitutes a crime, criminal
responsibility shall be investigated.9
All this gives rise to the question of exactly what accounting
archives are. Once again, the answer is not completely clear.
Article 5 of the management measures defines "accounting
archives" as "professional accounting materials"
recording and reflecting the economics and business of entities in
China. However, it would be a mistake to conclude that this
definition covers only the work papers of professional accounting
firms. The management measures give specific examples of accounting
archives that include typical corporate accounting documents such
as accounting vouchers, accounting books, financial reports, and
bank statements.
Given the broad definition of "accounting archives" and
the prohibition on exporting both the original archives and
duplicates thereof, there is a significant risk that any export of
financial documentation and data may violate the law. In view of
this dilemma, a safer approach is to conduct all review and
analysis of financial information in China and to share only the
results of that work outside China.
Where it is not possible to confine all financial information to
China, as for example, where financial discovery is required by a
U.S. court, there is unfortunately no simple solution. One can
reduce the risk by taking steps to ensure that none of the specific
examples of accounting archives enumerated in the law are exported
from China. It is also advisable to ensure that only copies of
financial documents, and no originals, are exported. If the
original accounting archives are well maintained and readily
available for inspection in China, the risk posed by export of
copies may be manageable. But the risk remains and must be
understood before a company exports financial documentation.
Private Investigators
In the U.S., companies and outside counsel commonly retain the
service of private investigators to conduct due diligence, buy
sample counterfeit products, and observe the premises of a
competitor or the conduct of an individual believed to have harmed
the company. Before hiring an investigator to help with similar
matters in China, you should know this: Traditional private
investigation as we know it in the West appears to be illegal in
China.
While there is no law explicitly addressing private investigation,
the Ministry of Public Security issued a notice in 1993 that bans
any entity or individual from establishing any kind of "civil
affairs investigation agency" or "security matters
investigation agency." The MPS stated that it would close any
such agencies and prevent them from doing business under different
names.10
In the face of this apparent ban on private investigation,
companies describing themselves as "consulting" or
"market research" companies have arisen to fill the void.
The professionalism of these companies varies widely. Therefore,
Western companies should take care to retain only companies with
established reputations for lawful research.
In addition, the engagement letter retaining the consulting
company should carefully circumscribe the scope of the
consultant's research and avoid language broadly empowering the
consultant to "investigate." Moreover, the engagement
letter should be explicit in requiring the consultant to use only
those methods that do not violate Chinese law. By limiting and
monitoring the services of the consultant in this way, a company
should be able to obtain the information it needs without violating
Chinese law.
Coordinating With Chinese Counsel
In working through all of the legal obstacles discussed above,
there is a fundamental issue that Western lawyers and their clients
need to bear in mind. Chinese law prohibits Western lawyers from
practicing law in China, including giving opinions on Chinese
law.
While they can advise on the legal environment affecting a
company's operations in China and can provide the benefit of
their experience representing other companies in similar
situations, they cannot act as Chinese lawyers. Thus, when
difficult issues of Chinese Law arise, a Chinese lawyer should be
consulted, and where their services are required, PRC counsel must
be retained.
Conclusion
By now, it should be clear that the practice of law in China is
a study in ambiguity. While lawyers must make every effort to
ensure that their client's litigation and internal
investigation activities comply with Chinese law, there will often
be a residual element of uncertainty. For companies accustomed to
clear answers, this can be disconcerting. Some of this uncertainty
can be eliminated by conducting sensitive aspects of the
fact-finding process in China. That process, however, still needs
to be implemented with caution and diligence, and it should be
supervised by experienced litigation counsel in coordination with
PRC local counsel.
Footnotes
1. Telecommunications Regulations, Article 66, promulgated by the State Council on Sept. 25, 2000.
2. The Labor Contract Law of the People's Republic of China, Article 4.
3. Revised on April 29, 2010, effective on Oct. 1, 2010.
4. State Secrets Law, Article 2.
5. State Secrets Law, Article 9(7).
6. See Sky Canaves, "Murky State Secrets Laws At Issue in Rio Tinto Case," Wall St. J., July 9, 2009.
7. See James T. Areddy, "China's Culture of Secrecy Brands Research as Spying," Wall St. J., Dec. 1, 2010.
8. Management Measures, Article 18.
9. Archives Law, Article 24.
10. Notice on Banning the Establishment of Private Organizations
with the Nature of a "Private Detective Agency," issued
by the Ministry of Public Security, 1993.
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.