Trade Secrets: Foreigners' Reluctance to sue in China

The Chinese legal system offers an array of legal tools to protect trade secrets. Also, in the past two years, Chinese courts have increased damages awards in favor of right holders, compare to the average awards for patent and trademark infringement cases. Why then, there has not been one single case filed by foreign right holders with a Chinese court of the Chinese PSB since 2021?

I. Trade Secret Enforcement

Trade secret enforcement has been one of those areas of heavily disputes between China and the US during the Trade Wars. The U.S. government specifically criticized the discretionary thresholds for lodging criminal complaints and the difficulty of winning cases in civil court and the low damage compensation awards. In response to these critics, China has started improving the statutes dealing with trade secrets since 2019 and even more so from 2020, thanks to the intervention of the Supreme People's Court to clarify some of the most debated legal issues (See one of my previous articles on the topic: https://repository.law.uic.edu/cgi/viewcontent.cgi?article=1490&context=ripl).

Trade secrets in China can be enforced before an administrative body, a civil court, or by filing a criminal complaint with the police. Criminal cases are rare to see, as the thresholds for lodging a criminal complaint are very high. In particular, the police retains a certain degree of discretion in determining the "severity" of the alleged infringement (see again my article in the link above).

Civil lawsuits are therefore, the most common enforcement tool used by right holders against infringement of their trade secrets. However, according to the Beijing IP Court, there were only 89 trade secret lawsuits filed from 2021 to the end of 2023 (https://baijiahao.baidu.com/s?id=1783965206816070634&wfr=spider&for=pc). This means about 50 lawsuits per year. None of them involving foreign companies. These are really very low figures compared to patent and even more, trademark lawsuits in general, and filed by or against foreigners in particular.

II. Why so few cases involving foreigners?

We can think of a number of reasons why foreign businesses are reluctant to sue in China even when their trade secrets have been infringed there.

a) Unfamiliarity with a foreign legal system

Trade secret cases are difficult cases. Probably, the most difficult infringement litigation in the field of intellectual property. Unlike a patent, where the invention is claimed and described in the patent documents, a trade secrets is by definition undefined and undisclosed. To file a lawsuit that has at least some chances of succeeding, the right holder must disclose the secret to the court and the other party. The more accurate the disclosure and definition of the trade secret points, the higher the chances to win and be justly compensated. However, this makes right holders uncomfortable. On one hand, right holders feel uncomfortable to lay their secret bare to a foreign court and a foreign court experts. Often there are parts of the secret that the competitor could not figure out in spite of the theft of know-how and these may have to be revealed in the lawsuit. On the other, the unfamiliarity with the foreign jurisdiction and its laws may create challenges in defining the key trade secret points and retain the needed evidence. In sum, there is often a difficulty in translating the technical language in actionable legal arguments and evidence. This is perceived even more as a burden when litigating in a foreign and unfamiliar jurisdiction. and it explains why foreign companies often prefer enforcing their trade secret before their own, familiar courts, even if they know the case will have little or no effect on the Chinese infringer(s) and their use of the stolen technologies.

b) Biases

Unfortunately, unconscious biases are another factor that may affect to a certain degree the decision of foreign businesses to eschew litigation of trade secret infringements in China. Biases are the product of associative perceptions that our unconscious memory forms based on our life experience. Given the decades long diatribes between the West and China over intellectual property, Westerners have formed biases about the fairness of the Chinese IP system. Therefore, the simple mentioning of enforcing a complex IP like trade secret in China, triggers such biases. Obviously, they should be remove when making a critical decision as to whether and how to protect your trade secrets in China, as they are not rationally founded.

c) Local Factors

A subset of biases have to do with the belief that local factors and Chinese interests will be given a preference over the rule of law. Although this may be true to a very small extent and under very localized circumstances, it is not the rule and such risk can be evaluated and neutralized as we shall see below.

III. These Beliefs and Biases about China's IP enforcement are not unfounded

Let me here use an old Chinese saying that was revamped and popularized by Deng Xiaoping back in 1978: "Seek truth from facts (实事求是)."

Obviously, Deng said that in a very politicized context referring to the need to test the party theories against reality rather than dogmatically. Nonetheless, it seems to contain a more universal message that can apply to many things in life and can be rephrased as: "don't judge immediately without having acquired knowledge and direct experience". Here therefore, some facts that will help find the truth about enforcement of trade secrets in China.

a) Do nothing is not an option

Looking at competitors tearing apart your business, while you seek ineffective enforcement solutions in the wrong jurisdiction, will not fix the problem. It will simply make the infringer bolder. He will know that your inactivity in China is a clear sign of your weakness. Suing him in the US or in the EU, will be like taking a Tylenol to cure COVId-19. He will know that.

b) China's legal system works

The provisions on the protection of trade secrets in China have improved a lot. They are nowadays on the same level as any Western regulations. There are no strange norms or requirements. What you would expect to be a trade secret in the US, will also be protectable as a trade secret in China. Recent judicial trends clearly favor right holders over infringers, making China relatively plaintiff friendly.

Chinese IP courts are very good courts. They can handle the most complex cases. They have experienced IP judges that are often very familiar with foreign legal systems. If there may be local factors at play, forum shopping is available to bring the case away from the defendant's domicile and before a more competent court.

c) Many good experts to help you

Now to knowledge. There are many good lawyers (including foreigners like me) and investigators that can help you navigate the legal waters of China. They will know how to assess the risks of a case, determine whether you have an enforceable trade secret, obtain evidence of infringement even in most complex circumstances and deal with the most difficult defendants. They will provide that fact-based knowledge you need to make informed decisions about the enforcement of your IP rights, and trade secrets in China.

d) Damages and the political barometer

Damages awards are on the rise and case law favors right holders. Most recent cases saw awards in the tens of millions worth of US dollars. In spite of international tensions, we have not felt any specific and consistent instances of bias from Chinese courts towards foreign plaintiffs in IP enforcement cases. China has committed and seems to remain committed to enforce foreigners' IP rights! Recent damages awards in trade secret infringement lawsuits in China have reached level never seen before. In the case (2022) 最高法知民终1816号, the Supreme People's Court awarded the plaintiff RMB 201.54 Million (US$28 Million) in damages. This award was overshadowed by the same court decision (2023) 最高法知民终1590号 which awarded an all time record damage compensation of RMB 605 Millions (US$89 Million).

IV. Conclusion

Foreign right holders must design their IP enforcement strategies based on facts and not on biases or insufficient knowledge. The facts clearly tell us that enforcing IP in China today is better than it ever was before and that there are more chances to obtain fair court decisions today than it was a decade ago. The overall quality of the legal operators have improved, the will to uphold IP is there and the rule of law has climbed up the ladder of priorities for Chinese judges when making decisions.

I cannot imagine a better time than now for foreigners to bring more court cases of trades secret infringement before Chinese courts.

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