Japan: New Legislation For The Unfair Competition Prevention Act

Last Updated: 21 January 2017
Article by Naoki Okumura

I.BACKGROUND OF THE LEGISLATION

Many incidents have recently been reported concerning misappropriation of Japanese companies' trade secret, especially by foreign entities. To take some examples:

i) Nippon Steel and Sumitomo Metal ("NSSM") v. Posco

Posco, a Korean steel giant company, allegedly misappropriated NSSM's trade secrets related to manufacture of steel. A civil litigation was brought before the Tokyo District Court by NSSM, claiming about 1 billion USD as compensation for damages NSSM had suffered. It was recently reported that settlement agreement was concluded between NSSM and Posco in which Posco agreed to pay approximately 0.3 billion USD to NSSM as settlement money.

ii) Toshiba v. SK Hynics

SK Hynics, another Korean company, allegedly misappropriated Toshiba's semiconductor related trade secrets through a retired employee of Toshiba. It was reported that SK Hynics paid 0.3billion USD as settlement money before the Tokyo District Court.

In addition to these two cases, there is another case where one of the most famous child education companies in Japan, Benesse, suffered misappropriation of personal information of about 20 million children and their families by an employee through a smart phone. The employee, an alleged misappropriator, was arrested and prosecuted. What happened in this case is that the employee sold the information and reselling of such information was repeated by subsequent acquirers. Reportedly, there was even a fifth hand acquirer who sent direct mails to children on the list.

Against these backgrounds, the object of this new legislation is to revise part of the Unfair Competition Prevention Act so as to address such incidents involving huge damages due to such outflow of trade secret, as well as to enhance the deterrence against infringement of trade secrets in terms both of criminal and civil charges.

The new legislation took effect on this January 1, 2016.

II. OUTLINE OF THE LEGISLATION

1. Providing enhanced institutional deterrence against misappropriation of trade secrets

The revised act first aims to stipulate measures to enhance institutional deterrence against misappropriation of trade secrets, in terms of both criminal and civil charges.

i. Raising criminal fines

The new legislation raised criminal fines against misappropriation of trade secrets for both individuals and legal entities to deter such acts.

  1. For Individuals
    Previously the amount of criminal fine was up to 10 million Japanese yen (Approximately, 80,000 USD, in present value). This was raised up to 20 million JPY (30 million JPY in case of misappropriation for overseas countries).
  2. For Legal entities
    Previously the amount of fine was up to 300 million JPY (Approximately, 2 million USD). This was raised up to 500 million yen (up to 1 billion JPY in case of misappropriation for overseas countries).

As seen from the above, the new legislation made it subject to heavier penalty to use a Japanese company's trade secret in other countries or acquire and leak such a trade secret, intending to use it overseas. This change was made in consideration of the adverse impact of such acts on employment and subcontracting companies (criminal charge).

ii. Confiscation of criminal proceedings

The legislation further stipulates the provision to confiscate criminal proceeds targeting both individuals and legal entities in a criminal proceeding. This confiscation will be made at the discretion of the criminal court.

iii. No need for a formal complaint any longer (criminal charge)

Previously, formal complaint from victims was required for the authority to start criminal proceeding against a trade secret misappropriator. The new legislation made a formal complaint not necessary for the authorities to start criminal proceeding against a trade secret misappropriator. This change was made in view of the recent incidents where there are so many parties involved and victims of misappropriation are not limited to just one company.

iv. Relieving the plaintiff's burden in proving misappropriation in a civil suit (claims for compensation, etc.)

The legislation newly created the provisions to relieve the plaintiff from the burden of proving misappropriated "use" of trade secrets in a civil litigation, which was quite difficult under the old Act. Under the new legislation, the plaintiff has only to show the below three (3) requirements in order to enjoy the benefit of this presumption clause:

  1. The plaintiff is a legitimate owner of the trade secret at issue;
  2. The defendant obtained the trade secret illegally with intention or gross negligence; and,
  3. The defendant manufactures the products which can potentially be made by using the plaintiff's trade secrets.

If the above three requirements are satisfied, the products for which the defendant is suspected of having used the trade secret shall be presumed to be those manufactured by the defendant using the trade secret. This presumption is rebuttable by the defendant by proving "non-use" of the trade secret at issue, namely, the use of its own original method of manufacturing the products at issue.

v.Prohibition against distribution of goods made by illegal use of trade secret

The legislation creates a provision to prohibit assignment, import and export of products made by illegal use of trade secrets. The legislation registered the products in the list of suspension in a civil charge as long as the distributor knows that such products are made by illegal use of trade secrets, or there is a gross negligence in his/her not knowing it. The legislation made such act also subject to a criminal charge as long as there is a willful intention (criminal charge).

2. Improving the scope of punishment concerning the crime of trade secrets misappropriation

The legislation also aims to improve the scope of punishment concerning the crime of trade secret misappropriation. This change was made in order to address the recent changes in the IT environment, including dissemination of mobile terminals.

i. Expansion of punishment to second-hand and subsequent acquirer of a trade secret

The legislation expanded the scope of punishment to add a person who acquired a trade secret with the knowledge that such trade secret's disclosure is improper and resold it to another party. On the contrary, the previous Act had only limited the scope of punishment to those who directly received a trade secret from a person who had received it improperly.

The background to this change is that in recent incidents, there are so many parties involved in trade secret misappropriation cases and thus it seemed improper to relieve subsequent acquirers of trade secret from any sanction. For example, in Benesse case, there were even fifth-hand or sixth hand acquirers of the information who possibly knew that the information had been obtained from Benesse or other legitimate owner of the information illegally.

ii. Acquiring Japanese companies' trade secret overseas becomes subject to criminal charge

The new legislation added an act of acquiring a trade secret overseas as criminal act subject to criminal penalty. This provision includes an act of acquiring a trade secret under management of Japanese companies, which are stored in servers located overseas.

The background of this change is to make it clear that such act is punishable, which was not clear under the previous legislation.

iii. Attempts to misappropriate trade secrets subject to criminal charge

Previously, only accomplished misappropriation of trade secret was punished. In order to broaden scope of protection over trade secrets, the legislation newly included attempt to misappropriate trade secret as acts subject to criminal punishment.

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.

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