Trade Secrets Protection in U.S. and China Becomes More Salient

Trade secrets, of course, comprise a large set of assets that includes more than just patentable innovations. As noted by the United States Patent and Trademark Office, to meet most definitions, it “must be used in business, and give an opportunity to obtain an economic advantage over competitors who do not know or use it.”

As they develop their strategies to protect their innovations, companies should note that not all trade secret laws are created equal. A clear example would be the different approaches employed by the United States and China – now locked in a bitter trade war with allegations of trade secret theft taking center stage.

Both countries have recently updated their laws around trade secret protection. But those reforms are rooted in different legal traditions. A company doing business in China should not expect the same protection under the law as in the U.S. This reality should inform how companies think about how they plan to resolve trade secret disputes.

China Strengthens Trade Secret Protection   

Trade secret protection laws in China are far less robust than in the U.S. Since 1993, the principal statute to protect trade secrets theft has been the Anti-Unfair Competition Law.

Under the statute, claimants can pursue compensatory damages and injunctions. Historically, however, injunctions have been hard to come by. One reason: plaintiffs are not entitled to discovery. That means to obtain an injunction, plaintiffs must convince a court to raid the defendant's premise without potentially powerful discovery.

It's not impossible to obtain an injunction. In one high-profile case, the American pharmaceutical company Eli Lilly was granted a preliminary injunction by a Chinese court in August 2013. The case involved a dispute over stolen documents by former chemistry researcher at Eli Lilly's Chinese subsidiary.

Still, it is widely considered an uphill battle for claimants in trade secret cases in China. In 2017, in response to critics of its legal regime, China updated the Anti-Unfair Competition Law. Among the changes, which took effect in January 2018, were clarifications over the liability of third parties with knowledge about a trade secret's provenance and how a trade secret is defined. The prior definition required that a trade secret have “practical value.” That requirement was dropped and a trade secret is now defined as “technical information or business information which is unknown to the public, has commercial value and for which the rights owner has taken corresponding measures to ensure confidentiality.”

Despite the reforms, the country still has skeptics. A 2017 report by the Office of the U.S. Trade Representative found that “China has not signaled an intention to develop the standalone legislation that would best remedy concerns.”

The Defend Trade Secrets Act

In 2016, in an effort to counter the negative impact of trade secret theft on the American economy, President Obama signed into law the Defend Trade Secrets Act of 2016 (DTSA). The statute provides the owner of a misappropriated trade secret a civil cause of action. Prior to the enactment of the federal law, victims of trade secrets thefts in the United States seeking civil remedies relied on state causes of action.

Under the DTSA, a plaintiff can seek injunctive relief as well as attorney's fees and monetary damages. Those damages include actual losses caused by the misappropriation of the trade secret as well as unjust enrichment not included in the calculation for actual losses. In addition, if it is found that a trade secret was willfully and maliciously misappropriated, a plaintiff may be awarded up to two times the amount of damages.

Another crucial aspect of the DTSA: the full scope of discovery under federal rules is available to plaintiffs. And nowhere in the DTSA does it require plaintiffs to describe in detail the trade secret in question. In extraordinary circumstances, the law also provides plaintiffs an opportunity to seize the misappropriated secret on ex parte basis to ensure it is not further disseminated.

Although still in its infancy, the legislation appears to be having a major impact. Trade secrets case filed in the federal court increased more than 30 percent in 2017, according to data from Lex Machina.

Arbitration vs Litigation: A case study

The case of Uber v Waymo provides a dramatic example of the different outcomes that can arise from arbitration and litigation in trade secret disputes. Whilst this occurred in the U.S., it shows the impact such a decision can have, no matter where in the world such a dispute occurs.

The case centers around the leader of a group at Waymo (a Google subsidiary) that was developing a self-driving car. In early 2016, he resigned and formed his own company, called Otto, using technology that was allegedly independently-developed while working at Waymo.

By July 2016 he sold Otto to Uber for around $680 million and became an Uber employee. However, before he departed Waymo, it transpired that he had downloaded 14,000 files from his company computer onto a drive and then wiped his computer clean.

When this came to Waymo's attention, it brought claims against both him and Uber. As his employer, Waymo had an arbitration agreement with him and brought its claims against him in arbitration. This case has proceeded confidentially and privately in accordance with arbitration procedures.

Not having an arbitration agreement with Uber however, Waymo filed a suit in federal district courts in San Francisco, relying on the DTSA.

Perhaps unsurprisingly, the press attended each hearing and reported extensively. As a result, although they were excluded when details of the trade secrets were being discussed in court, those familiar with the technology gained a good idea of the trade secrets in question.

Furthermore, during the pre-trial phase both sides disparaged the other, bringing up details of personal problems involving top executives. For example, even a nanny employed by one of the top executive was involved, alleging abusive conduct. The press interest was predictably large, and each detail subsequently became common public knowledge.

A few days after the trial commenced, Waymo, worried that all its trade secrets might become public, settled. Having originally demanded $1.85 billion, it settled for 0.34% equity interest in Uber, or about $245 million.

Conclusion

The fact that such information is available from the Waymo vs Uber case demonstrates one of the most obvious advantages of arbitration proceedings. Companies that have a dispute and are interested in submitting to arbitration, rather than going through the public courts, can make a post-dispute arbitration submission agreement. This agreement simply confirms that the parties have a dispute and describes the arbitration process they would like to use.

It will likely take many years to determine what impact, if any, international reforms will have on the protection of trade secrets. But the uncertainty means companies should be considering alternative ways to protect their valuable secrets in the country. Arbitration clauses in contracts with employees and business partners should certainly be near the top of the list.

Barbara Reeves is a highly regarded arbitrator and mediator, and a neutral with JAMS.  Before becoming a full-time neutral, Barbara Reeves was a litigator for more than 30 years, with the United States Department of Justice, Antitrust Division in Washington, D.C. and Los Angeles, a partner at national law firms and Associate General Counsel and Vice President for Southern California Edison and Edison International. JAMS is the largest private provider of alternative dispute resolution services worldwide.