China: What Are Commercial Secrets and How To Manage Them In China

After Rio Tinto
Last Updated: 30 April 2010

By Christopher Clarke, Sammy Fang, Yuet Ming Tham, and Iris Sung

On 29 March 2010, the Shanghai No. 1 Intermediate People's Court (the Court) finally handed down its sentence in the most long awaited and controversial case involving Chinese or Chinese-born employees of foreign companies in recent memory. Stern Hu, the Chinese-born Australian national, and the other three Chinese employees of Rio Tinto (the Employees), were convicted of stealing commercial secrets and taking bribes, and were handed prison terms ranging from 7 to 14 years.1

BACKGROUND

On 5 July 2009, the Employees were detained by the Shanghai State Security Bureau apparently on suspicion of stealing state secrets. On 10 February 2010, the Employees were formally indicted by the Court on charges of bribery and stealing commercial secrets.

The trials were held from 22 to 24 March 2010, and the trial over charges of stealing commercial secrets was held behind closed doors. Reports have since been published that the Employees took various bribes from medium-sized Chinese steel companies in return for securing iron ore allocations for these companies. It has been reported that:

  • Stern Hu admitted that between 2008 and 2009, he took two bribes in the amounts of RMB1,000,000 (about USD150,000) and USD798,000 from two Chinese steel companies in return for securing supply of iron ore for these companies.
  • He, together with the other Employees, was also accused of stealing or obtaining by improper means commercial secrets of a number of Chinese steel companies, including obtaining information relating to commercial negotiations between BHP Billiton Ltd. and the Shougang Group via an employee of the Shougang Group, and also commercial secrets belonging to the China Iron and Steel Association (CISA) (which was conducting iron ore price negotiations with Rio Tinto). It was also alleged that the commercial secrets obtained were reported to Rio Tinto's head office.

COMMERCIAL SECRETS

Under China's Criminal Law (Article 219), 'commercial secrets' are defined as technology information or business information, which is unknown to the public, can bring about economic benefits to the holder, is of practical use and to which the holder has adopted measures to maintain their confidentiality.

It is a criminal offence if an accused person is found to have committed the following conduct in respect of commercial secrets belonging to the holders of such secrets:

  • Obtaining commercial secrets by stealing, luring, coercion or any other improper means;
  • Disclosing, using or allowing another to use the commercial secrets so obtained;
  • Any such conduct above in violation of any agreement or against the holders' request to maintain the holders' commercial secrets; or
  • Obtaining, using or disclosing commercial secrets of others, which the accused clearly knows or ought to know falls under the categories of prohibited conduct listed in the preceding three sub-paragraphs.

If convicted of such an offence, an accused person can be sentenced up to 7 years imprisonment as well as fined, depending on the seriousness of the case. Corporate offenders can be fined, and the people in charge of corporate offenders (such as their legal representatives), as well as people directly responsible for the acts in question, can be subject to the same punishment as that of the accused person.

In addition, under China's Anti-unfair Competition Law, by way of administrative sanction, a corporate offender can be ordered to stop the offending conduct and can be fined up to RMB200,000 (about USD30,000).

WHAT SAFEGUARDS CAN INTERNATIONAL COMPANIES OPERATING IN CHINA ADOPT TO AVOID SIMILAR PROBLEMS?

The Rio Tinto case is likely to introduce a degree of uncertainty for foreign companies operating in China and highlights the risks in their dealings with Chinese counterparts. It is important for all companies doing business in China to address the risks that handling sensitive commercial information may entail. Not surprisingly, the types of information that are treated as particularly sensitive by the PRC Government (such as information relating to oil and mineral resources, information technology and telecommunications) may not be the same as that which foreign corporations are accustomed to treat as sensitive outside of China. There is also the more fundamental issue of needing to ensure compliance with China's anti-bribery laws and regulations.

The definition of 'commercial secrets' under the Criminal Law is wide and offers limited guidance to companies as to what information they can or cannot seek from others, or what information they have obtained from others that may be used in their day-to-day business. That said, various laws and measures outside of the Criminal Law do offer useful guidelines to companies. In our view, it would be prudent for foreign companies to ensure that they are now, and will continue to be, compliant with the relevant Chinese laws and regulations, and we recommend that companies adopt the following measures:

1. Ensure that there is a robust compliance system in place that sets out best practices for handling sensitive commercial information by employees in both a business and social context.

a) The various categories of 'commercial secrets' under Chinese law should be clearly explained to all employees (and made available on-line), including:2

  • Designs, procedures, formulae of products, manufacturing techniques and methods, management secrets, name lists of customers, information about resources, production and sales strategies, pricing information, contents of a bidding document etc that are held by their owners and not directly available through public channels.
  • Commercial secrets learned during contract negotiations.
  • Accounting records of third parties.

b) Provide training to employees so they understand what information they should and should not seek from their customers and contracting counter parties, and that confidentiality in relation to certain information should be maintained, for example:

  • Information that was obtained from third parties not involved in the contract negotiations (in the Rio Tinto case, one of the Employees had apparently obtained information belonging to CISA from a contact at one of the Chinese steel companies).
  • Information that is clearly covered by a confidentiality agreement.
  • That consent to disclose had been obtained from the provider of the third party information.
  • That the supplier of the information had the authority to disclose the same to you in the first place.

2. Maintain sufficient records of information flow:

It is critical to ensure that adequate records of meetings, discussions and emails (and any other written correspondence) are maintained. Apart from being able to ensure that employees are complying with internal guidelines, such records will also serve as a crucial documents trail in the event an investigation is commenced by Chinese authorities against your company (its directors, senior management and/or employees), or against a third party with which your company has had dealings.

3. Be aware of sensitive policy initiatives driven by the PRC Government:

Extra care should be taken when such initiatives are being implemented by the authorities. For example, where there is a focus on a certain industry or sector and to understand what key drivers are behind such an initiative and its potential impact on your business. If in doubt, consult the relevant experts.

4. New regulations to be issued by the State-Owned Assets Supervision and Administration Commission (SASAC):

Immediately after the Court's verdict, on 30 March 2010, SASAC announced that it has approved the issue of the Interim Regulations for the Protection of Trade Secrets in Centrally Administered Enterprises3 (Interim Regulations) with the aim of strengthening the protection of commercial secrets by SOEs under its control and which will include provisions covering the scope of commercial secrets and security measures for protecting the same. Companies should keep a close look out for the publication of these Interim Regulations, particularly companies that deal regularly with SOEs.

1 The four accused also had their assets confiscated and were given fines ranging from RMB700,000 (about USD103,000) to RMB5.2 million (about USD765,000).
2 As defined in the Several Provisions on Prohibiting Infringements upon Commercial Secrets issued by the State Administration of Industry and Commerce on 23 November 1995, Article 43 of the Contract Law, and the Notice of the Ministry of Finance and the State Archives Administration on Issuing the Accounting Archives Management Measures (promulgated on 21 August 1998).
3 We expect that the Interim Regulations will be issued formally by SASAC shortly.

© DLA Phillips Fox

DLA Phillips Fox is one of the largest legal firms in Australasia and a member of DLA Piper Group, an alliance of independent legal practices. It is a separate and distinct legal entity. For more information visit www.dlaphillipsfox.com

This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances.

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