By Yi Zhou
RayYin & Partners P.R.C. Lawyers

As the dispute of Foxconn Versus BYD Company Limited is dramatically escalating from a civil case to a criminal case, we are coming to realize that infringement on business secrets are seemingly on the increase. While multinational companies are getting returns from their booming businesses in China, some of them are also suffering huge losses from the infringement of business secrets. This article deals with identification of certain important issues on infringement of business secrets and making suggestions to foreign investors.

Composition of the crime

As far as the crime of violating business secrets is concerned, four factors must be taken into consideration: the wrongdoer conducted activities which infringed the rightful owner’s business secrets; the rightful owner suffered certain losses; the wrongdoer is a full capable person; and the wrongdoer knowingly or ought to know he was infringing on business secrets.

The concept of business secrets

The concept of business secret is stipulated in Article 219 of PRC Criminal Law (Criminal Law) and is subject to Article 10 of Law of the PRC Against Unfair Competition, which includes technology information and management information with the following four characteristics:

(1) that it is unknown to the public

(2) that it can bring about economic benefits to the rightful owner,

(3) it is of practical use and

(4) It considers what steps rightful owner has adopted in maintaining secretkeeping measures.

In relation to what is meant by “unknown to the public”, the latest judicial interpretation promulgated by the Supreme People’s Court of PRC (Supreme Court), The Interpretation on the Application during the Trial of Civil Cases on Unfair Competition which came into effect February 1 2007, sheds some lights on this issue. It lists the following specific circumstances which should be excluded from the scope of business secrets:

a) the information belongs is general knowledge or known practices for those working in the technical or economic lines;

b) the information only relates to the simple organization of the product’s size, structure, material or parts etc., the related public could directly acquire them by observing the product after the product enters into the market;

c) the information has been disclosed in public publications or other medias;

d) the information has been demonstrated by public report or exhibition;

e) the information could be obtained by other public channels;

f) the information could be easily obtained without paying certain prices.

Compared with infringement on business secrets concerning management information, it may not be easy to reach a judgment if it is technical information. Experience shows that the following factors shall be essential in judicial practice. The factors include the information should be unknown to certain members of the public, the information is out of the general knowledge area - which means it often refers to the fruits of ‘mental work’ (patent or know-how) – and finally the wrongdoers generally pay huge prices to obtain the information.

The losses required by constituting infringement to business secrets

In Article 219 of Criminal Law details significant losses and particularly serious losses. This was supplemented in the latest judicial interpretation on Intellectual Property jointly promulgated by Supreme Court and PRC Supreme People’s Procuratorate which came into effect on December 22 2004. Under Article 7 of the interpretation, should the losses caused by the offender reach Rmb500,000, they could be regarded as significant losses referred to in Article 219 of Criminal Law. If the losses caused by the offender reach Rmb2,500,000, this could be regarded as particularly serious losses. However, the real difficulty in practice lies in how to calculate losses. Despite some belief that items apart from direct losses shall be taken as losses, such as research and development costs, the reduced sales of the victims or the profits received by the offender etc, it’s observed in most judgments that only direct losses such as the profits received by the offenders from selling the same or similar products shall be taken into consideration.

Prevention of infringing on business secrets in Foreign Investment

According to current laws, regarding to infringing on business secrets, the line between civil, administrative and criminal responsibilities lies in the amount of losses caused by offender. While it’s just a civil case, the victim could complain to the Industrial and Commercial Administrative Bureau so that the wrongdoer could be given administrative sanction and sue the wrongdoer for civil compensation. While the victim suffers significant losses which reach the amount stipulated in Criminal Law, the victim could choose to report the case to the police so that the offender could bear criminal responsibility. However, in practice, the foreign investors generally would choose not to bring these cases to the police, in order to avoid further leaking of their business secrets and bring them more losses. Therefore, effective prevention is always the preferred choice, which included well drafted internal rules concerning secret-keeping measures and agreements with counter parties.

RayYin & Partners P.R.C. Lawyers
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No.39 Dongsanhuazhonglu, Chaoyang District, Beijing, 100022 P.R.C.
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