Criminal Sanctions for Trade Secret Offences

As expected, the protection of intellectual property rights (IPR) proved to be one of the focal points of the April 2006 meeting between the PRC President Hu Jintao and US President George W. Bush. Despite recent improvements to the legal regime for IPR protection, weak enforcement remains a source of tension between China and its trading partners and amongst domestic and foreign companies operating in China. Nonetheless, China has started to make some progress in certain areas of IPR protection, among them the protection of trade secrets.

Trade secret misappropriation

Since 1997, the PRC Criminal Code (Criminal Code) has provided criminal sanctions for any serious trade secret offence that causes 'material losses' to the owner of the trade secret. Under the Criminal Code, offenders can be sentenced to a maximum imprisonment term of three years; where consequences are 'especially serious', the sentence may be up to seven years. Additionally, offenders may also face a fine. The sanctions apply to both natural persons and business operators. However, in the past, these sanctions were rarely exercised, contributing to the lax legal environment that allows IPR infringement to continue to grow.

In the first half of 1998, only two criminal cases were reported as being tried in China. The lack of criminal prosecution of trade secret offences can be partly attributed to the absence of official guidance regarding what constitutes 'material losses' and 'especially serious consequences'. Inadequate official policy requiring prosecution may be another reason.

The Interpretations for Several Questions Regarding the Application of Relevant Laws in Criminal Cases Involving the Violation of Intellectual Property Rights (Interpretations for Criminal Cases), issued by the Supreme People's Court and the Supreme People's Procuratorate, provide definitive guidance for natural persons regarding the magnitude of 'material losses' (defined as losses exceeding Rmb500,000 ($US62,300)) and 'especially serious consequences' (defined as losses exceeding Rmb2.5 million). The Interpretations for Criminal Cases also provide that the threshold applied to business operators will be three times that for natural persons. Since the promulgation of the Interpretations for Criminal Cases in 2004, numerous media reports have focused on claims brought by employers against former employees for trade secret misappropriation.

On December 31 2004, Shanghai's Second Appellate Court sentenced an engineer to three years' imprisonment for stealing trade secrets from his employer, Shanghai Engineering Machinery. (Shanghai Machinery), for the benefit of its competitor, Hong Xu. The court also sentenced Hong Xu's general manager to one-and-a-half years in prison for asking the engineer to steal the trade secrets and knowingly using the stolen information. Additionally, both individuals, as well as Hong Xu (the three defendants), were fined individually and the engineer was ordered to remit any illegal income obtained from selling the trade secrets back to Shanghai Machinery. In 2005, the Shanghai Supreme Court upheld this judgement. The difference in the length of the prison sentences was partly due to the court determining that the direct economic loss caused to Shanghai Machinery was Rmb5.9 million. This amount exceeded the Rmb2.5 million threshold of 'especially serious consequences' for natural persons, but still fell within the range of 'material losses' for business operators.

Following the announcement of the criminal trial verdict, Shanghai Machinery began civil proceedings against the three defendants.

Trade secret protection

As China has yet to develop an independent trade secret law, the current legal framework governing trade secret protection is comprised of a patchwork of criminal law, administrative law, competition and civil law. From the administrative law perspective, the Provisions Prohibiting the Acts of Misappropriating Trade Secrets (as amended in 1998) grant various branches of the Administration of Industry and Commerce the power to assess administrative fines of up to Rmb200,000, as well as to suspend the sale of products developed as a result of trade secret misappropriation. From the competition law and civil law perspective, in the Interpretations for Several Questions Regarding the Application of Relevant Laws in Civil Dispute Cases Involving Unfair Competition (draft for comments version, November 18 2005) (Draft Interpretations for Civil Cases), the Supreme People's Court interpreted the relevant provisions of the PRC Unfair Competition Law and the PRC General Principles of Civil Law and provided more specific guidance regarding the definition of 'a trade secret', the elements required for committing an act of trade secret misappropriation, the possibility of burden shifting and the calculation of damages. Once finalized, the Draft Interpretations for Civil Cases will play a key role in the civil trials of trade secret offenders.

Necessity for trade secret law

National People's Congress (NPC) member Kong Weiliang stressed the need for a trade secret law during this year's NPC meeting, stating that '[many people] do not think of trade secret activity as an illegal activity'. Also, scholars have for years advocated the passage of a single unified body of trade secret law that will systematically govern and protect commercial trade secrets, eliminating the need for victims of trade secret misappropriation to sort through the complex legal framework. Therefore, a trade secret law that can be applied fairly and uniformly regardless of who or what entity owns the rights to the trade secrets may be a necessity for China and its trading partners, such as the US.