Handling disputes, trade secrets as data rules tighten

Regulators including the Ministry of Industry and Information Technology and State Administration for Industry and Commerce have significantly increased oversight and obligations on businesses in recent years.

“Businesses must adapt to the new norms,” said Kevin Guo of TransAsia Lawyers. “Complying with these rules will become the standard of doing business in China and the need to deal with the government will decrease,” he said.

In light of the heightened standards on data privacy, taking measures to protect information sacred to the company is of utmost importance, said Yaodong Chen, APAC director of IP for Akzo-Nobel.

“Many regulations now have a long-arm jurisdiction and go beyond the boundaries of countries, and the severity of punishments, as well as criminal liability, has increased for violating private information including trade secrets,” Chen said.

Contractual prevention

“It's important to structure the deal so that you're protected from the other party being able to hurt you in some way,” said Aric Leventhal, general counsel and VP of General Biologic, a Shanghai-based healthcare and consulting firm. This includes clarifying the legal terms surrounding damages, limitations, indemnities, any restricted covenants and anything to do with IP ownership.

If IP is involved in a deal, give only as much as is needed to use the product or service, he advised.

“Monitor that usage to stay aware of any attempted breaches so you can take remedial action and try and avoid a situation where you have to go to court to enforce a term or agreement,” Leventhal said.

Practitioners recommend putting in a proper arbitration clause in the contract. Not all judges have experience in dealing with technical cases, such as for trade secrets, so forum shopping must be done prior to inking the arbitration agreement, said Fang Qi of Fangda Partners.

Time to go to court

When it comes to disputes, “the first thing to do is hire external counsel and explain everything from the players involved, where to look, questions to ask, documents to prepare,” said Leventhal. “There is also a PR aspect to managing the situation, as not everyone in the organization outside of compliance is receptive to litigation.”

“We usually recommend clients arbitrate in the forum of their choice and simultaneously litigate in China,” said Qi. “This increases the likelihood of recovering damages.”

Leventhal noted that rules in China's Free Trade Zones can provide greater interim relief for parties.

Chinese judges tend to give more weight to documentary evidence – preferably provided by a third party – than oral testimony, said Qi.

It is also important for companies to select an in-house or external representative to coordinate parallel litigations, because an argument used in one jurisdiction may not work in another, he added.

When it comes to enforcement, arbitral awards from abroad can generally be enforced in China as per the New York Convention. But foreign court judgments are close to impossible to implement, and the chances wither further if the Chinese party doesn't show up at the overseas court.

Trade secret battles

Trade secret litigation is more difficult than traditional IP disputes because it involves principles of honest commercial practice and anti-unfair competition, as well as highly technical details, said Chen of Akzo-Nobel.

It usually involves either former employees who have obtained or disseminated unauthorized information, technology transfer cases or business partners. The first instance is most common, and courts have gradually taken a hardening line such as by granting pretrial injunctions, Qi said.

The Chinese courts' granting of interim injunctions to Eli Lilly and Novartis in 2013 – in cases that involved misappropriation by former staff – were welcomed by most lawyers as a big development in the protection of trade secrets.

The key is to identify several specific trade secret points, describe them from multiple angles using definitive language and carve out any knowledge that may be public. “Companies can claim their entire production process is their entire trade secret, but courts will require them to pinpoint exactly what they are trying to protect,” said Qi.

He added that parties have to largely rely on court orders for collecting evidence, as there is only so much a plaintiff can do to obtain information from the defendant.

By Katherine Jo

More from the 2015 U.S.-China Legal Summit – Shanghai:

Decoded: The nuances of anti-corruption in China

The changing game for corporate counsel