Guarding intangible assets

Uniform labelling standards

In addition to providing for a more formalised administrative structure for the internal classification work of SOEs, including stricter requirements for the approval of classificatory decisions and record-keeping by a centralised commercial secrets department, the Tentative Provisions seek to ensure that the restrictions placed upon the circulation of classified information are more clearly marked on classified material. Thus, Article 15 provides that commercial secrets should be clearly labelled with the following critical information:

n The name of the SOE having ownership of the secret (whether identified by a standardised abbreviation or corporate logo);

n The classification applying to the commercial secrets, with Article 13 providing for a new distinction between “core” (核心商密) and “general” (普通商密) commercial secrets, according to the degree of harm that would be caused to the economic interests of the SOE by disclosure of the information;

n The term of protection of the commercial secret.

Under Article 18, where the classification or term of protection applying to a commercial secret is changed, a new label shall be applied alongside the original label, and clear means used to show that the original classification has been repealed. Moreover, where a commercial secret is de-classified within the term of protection, the term “de-classified” (解密) shall be clearly marked on the classified material.

The definition of “commercial secret”

The greater clarity provided in labelling standards under the Tentative Provisions is unfortunately not matched by any great advance on the definition of what constitutes a commercial secret. Article 2 of the Tentative Provisions restates the existing definition of commercial secrets contained at Article 219 of the PRC Criminal Law (中华人民共和国刑法) and Article 10 of the PRC Anti-unfair Competition Law (中华人民共和国反不正当竞争法).Under PRC law, commercial secrets are defined as technical information (技术信息) and information regarding business operations (经营信息) (i) in respect of which the company has adopted measures to protect its confidentiality, (ii) which is unknown to the public, and (iii) which may be put to practical use and bring economic benefits to the company owning the information.

Although Article 10 of the Tentative Provisions does provide a list of the “key types” of confidential commercial information falling within the above definition, the range of examples given underlines rather than narrows the breadth of the definition. Thus, “information concerning commercial operations” is stated to include “strategic plans, management strategies, commercial models, corporate re-organisation and listing plans, acquisition and restructuring plans, property transactions, financial matters, investment and financing strategies, property purchasing strategies, client details, information regarding bidding and tendering projects, and so on”, while “technical information” includes “designs, processes, product formulas, manufacturing technology, manufacturing methods, technical secrets, and so on”.

Criminal liability and commercial secrets: Guidance from the Rio case?

Given that the Tentative Provisions leave the existing definition of commercial secrets largely untouched, the most that can be said is that they may leave parties doing business with SOEs less vulnerable to becoming unwitting recipients of classified information. Nevertheless, there is nothing in the law as it currently stands to suggest that the absence of proper labelling will serve as a defence to any commercial secrets offence.

Rather, the focus of the relevant criminal prohibitions under the Criminal Law and Anti-unfair Competition Law is on the “improper means” (不正当手段) used to obtain the commercial secrets. In particular, PRC law prohibits the use of coercion (胁迫) or enticements (诱惑) to obtain commercial secrets, or the theft of commercial secrets.

The findings in the Rio case provide an interesting illustration of how these principles might be applied in the context of real-life commercial dealings. In the judgment handed down by the Shanghai Intermediate People's Court, Stern Hu and his colleagues were found to have “enticed” (诱惑) the disclosure of information regarding a series of conferences convened by the Chinese Iron and Steel Association. Attended by representatives of key Chinese steel manufacturers, these conferences chiefly concerned the industry's strategy for upcoming iron ore price negotiations with Rio Tinto.

Importantly, the Court was able to infer that the information was “improperly obtained” notwithstanding that it was volunteered without any suggestion of compulsion or even active solicitation on the part of the Rio employees. The Rio case suggests that the PRC courts are likely to infer impropriety where Chinese companies actively volunteer commercially sensitive information in the hope of obtaining benefits from a stronger party. To this extent, companies should be aware that they might equally violate commercial secrets laws by passively accepting information in circumstances where they are in a position to bestow favours or exert particular influence.

Commercial activities requiring special confidentiality arrangements

One final aspect of the Tentative Provisions likely to be of interest to parties entering into business dealings with SOEs are the provisions requiring the adoption of precautionary measures by SOEs for the protection of commercial secrets in projects or business activities involving third parties. In addition to strengthening preparatory work for the protection of commercial secrets in important events such as public listings and key engineering projects, the Tentative Provisions provide that whenever an SOE is involved in any important activities where commercial secrets may be involved, such as negotiations, co-operative ventures, joint ventures, external audits and due diligence exercises, it must sign a confidentiality agreement with the other party.

The amended State Secrets Law

Keeping track with the information age

Amendment of the State Secrets Law has been in the legislative pipeline for some time now. An explanatory statement released in conjunction with the July 2009 draft version of the law set out the key concerns and legislative objects underlying the amendments. Chief among these was the belief that the legal framework for the protection of classified information had fallen behind major technological developments in the information age. To that extent, many of the new provisions of the amended State Secrets Law more closely regulate the storage and transmission of classified material. While much of this additional content is directed at the internal practices of workplaces involved in state secrets protection, other aspects of the new provisions have clearer implications for parties operating outside of the state secrets regime. In particular, the new law:

n expressly prohibits connecting computers, storage devices or public information networks containing classified information to the internet or other public information networks;

n expressly states that private exchanges and communications must not “touch upon” (涉及) state secrets; and

n places an obligation on internet and other public information network operators and service providers to co-operate with public and national security authorities in the investigation of cases involving the disclosure of state secrets. This obligation extends to preventing the continued transmission of classified information and providing details regarding the transmission of classified information to the authorities, with penalties imposed for any failure to comply.

Administrative restructuring and stricter labelling standards

Another shortcoming of the existing state secrets regime identified in the explanatory statement accompanying the draft law was a perceived lack of rigour on the part of workplaces involved in the identification and labelling of classified material. According to one legal academic involved in drafting the new law, the practice had developed among certain classification departments of simply sticking a “classified” label on certain documents. Concerns also existed as to the lack of oversight and control over classification decisions. The amended State Secrets Law addresses these concerns through a combination of internal administrative restructuring and a greater degree of precision in classification standards.

In addition to maximum periods of protection for the various categories of classified information, the new law provides that in prescribing rules for classification at lower levels of the bureaucratic chain, the National State Secrets Bureau shall wherever possible identify the specific people who are permitted access to the information. Moreover, the new law provides that all devices and objects carrying classified material, including paper, light, electromagnetic and other “carriers” (载体) of information, as well as equipment and products that are identified as state secrets, shall be clearly marked as such.

To the extent that these new provisions lead to a more rigorous and systematic approach to the classification and labelling of information, the amended State Secrets Law should make it easier for parties standing outside of the classification regime to avoid any violation of the national laws. Nevertheless, as with the commercial secrets regime, there is no suggestion under PRC law that a failure to clearly label classified state secrets is a defence to any criminal act. Moreover, the criminal boundaries are more tightly drawn for state secrets, with Article 20 of the PRC State Security Law (中华人民共和国国家安全法) prohibiting any individual or organisation from “holding” (持有) any state secrets. In this context, although the new law's more tightly-regulated approach to internal classification is to be welcomed, it does not entirely eliminate the element of doubt for those coming into contact with commercially and politically sensitive information.

Definition of state secrets and the three classification levels

Despite PRC lawmakers' stated desire that the classification of information by state secrets authorities proceed on a more “scientific basis”, the new law does not fundamentally alter the existing definition of what constitutes a state secret. Article 9 introduces a minor gloss on the previous law, introducing the various categories of state secrets in general terms as “matters affecting national security and the public interest, the disclosure of which would be likely to harm China's security and interests in the political, economic, national defence and foreign policy realms”. In reality, however, this additional language in Article 9 was already implicit in the tripartite classification under the existing law, with the division between “top secret” (绝密), “highly secret” (机密) and “secret” (秘密) information determined by the degree of harm caused by disclosure. The fundamental categories of state secrets contained under the previous law are also unchanged, and with the net cast wide enough to include categories such as “secret matters concerning the national economy and social development”, the potential for a broad range of commercial information concerning large state-owned enterprises to be caught cannot be ignored.

Summary and recommendations

The Tentative Provisions and the newly amended State Secrets Law go some way toward addressing the current uncertainty with respect to the standards applying to the classification of confidential commercial and state secrets in the PRC. The new developments recognise the need for consistency and clarity in the application of classification standards. Through a combination of internal administrative reforms aimed at formalising classification procedures and providing for a stricter allocation of responsibility for classification, as well as an emphasis on clarity in the labelling of classified material, the Tentative Provisions and the State Secrets Law seek to address criticisms directed at the perceived inconsistency and arbitrary nature of current classification practices.

Nevertheless, on the key question of the standards applying to the classification of commercially and politically sensitive material, neither of these new developments presents a significant improvement on the existing law: it remains very difficult for parties standing outside of the PRC commercial and state secrets networks to intelligibly distinguish information that will and will not be caught by the prescribed definitions. Therefore, the best approach for companies operating in the PRC is to adopt a strong suite of internal compliance policies aimed at avoiding any exposure to classified information. For example, companies should consider:

n conducting regular training sessions with employees and company representatives, giving an overview of the classification standards under PRC law and the ways in which classified material can be identified;

n establishing centralised internal procedures for the handling of classified information by employees and company representatives, with a designated compliance officer appointed to deal with all related queries;

n including explicit warranties and representations with regard to the provision of classified information by business counterparties (particularly large SOEs in key industries). Such protections will be necessary in any exercise requiring the exchange of information with another PRC company (e.g., due diligence investigations and other such exercises conducted in advance of major investment decisions); and

n ensuring that, where a significant investment is being contemplated in a PRC company, they gain a thorough understanding of the internal procedures adopted by that company for the classification and protection of state and commercial secrets.

Peter Thorp and Michael Edwards, Allen & Overy, Beijing