December 10, 2021 Articles

The U.S. Defend Trade Secrets Act and China’s Anti–Unfair Competition Law

Why extraterritoriality and extra territories in which to litigate are not the same thing.

By John A. Stone

The Defend Trade Secrets Act

U.S. trade secret law began, as most American civil law does, as an accumulation of various judicial opinions that made up the common law of trade secrets. Eventually, in an attempt to create a uniform multi-state body of trade secret law, 49 states and the District of Columbia adopted some form of the Uniform Trade Secrets Act (UTSA). However, most states’ versions of the UTSA changed from the initial “uniform” version, and each state’s courts interpreted at least some aspects of its statute differently, rendering American trade secret law anything but uniform. Therefore, in 2016, the U.S. Congress enacted the Defend Trade Secrets Act (DTSA) to provide greater uniformity, as well as the additional remedy of seizure and extraterritorial application.
 

The DTSA’s Definition of Trade Secret

Under the DTSA, a “trade secret” means all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if

(a) the owner thereof has taken reasonable measures to keep such information secret; and
(b) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, the other person who can obtain economic value from the disclosure or use of the information.

18 U.S.C. § 1839(3)(A) and (B).

“Misappropriation” means either the “acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means” or

disclosure or use of a trade secret of another without express or implied consent by a person who—
(i) used improper means to acquire knowledge of the trade secret;
(ii) at the time of disclosure or use, knew or had reason to know that the knowledge of the trade secret was—
(I) derived from or through a person who had used improper means to acquire the trade secret;
(II) acquired under circumstances giving rise to a duty to maintain the secrecy of the trade secret or limit the use of the trade secret; or
(III) derived from or through a person who owed a duty to the person seeking relief to maintain the secrecy of the trade secret or limit the use of the trade secret; or
(iii) before a material change of the position of the person, knew or had reason to know that—
(I) the trade secret was a trade secret; and
(II) knowledge of the trade secret had been acquired by accident or mistake[.]

18 U.S.C. § 1839(5)(A); 18 U.S.C.A. § 1839(5)(B)(i)–(iii).

“Improper” means of acquiring a trade secret include, without limitation, “theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means.” It is important to note that “improper” does not encompass reverse-engineering, independent derivation, or any other lawful means of acquisition. 18 U.S.C. § 1839(6)(A) and (B).

The DTSA’s Remedies

In a DTSA civil suit for misappropriation of a trade secret, a court may award damages caused by the misappropriation and for unjust enrichment, or a reasonable royalty for the disclosure or use of the trade secret. 18 U.S.C. § 1836(b)(3)(B) (i) and (ii). If the trade secret is willfully and maliciously misappropriated, a court may also award exemplary damages up to two times the amount initially awarded. 18 U.S.C. § 1836(b)(3)(C) and (D).

Importantly, the DTSA provides a seizure remedy not provided by the UTSA, one that is extremely rare under common law, where the court may issue an order for the seizure of property to prevent the propagation or dissemination of the trade secret. However, this remedy is available only in “extraordinary circumstances,” subject to strict prerequisites and conditions regarding implementation. 18 U.S.C. § 1836(b)(2)(A)(i) and (ii).

The DTSA’s Extraterritoriality

A trade secret misappropriation claim may be brought under the DTSA “if the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce.” 18 U.S.C. § 1836(b)(1). However, the DTSA retained the Economic Espionage Act’s express application to “act[s] in furtherance of the offense” that were “committed in the United States.” 18 U.S.C. §§ 1831 and 1837(1)–(2). If some conduct related to misappropriation or use of the stolen trade secret occurred in the U.S., then the DTSA may be applied to the parties or conduct that occurred outside the U.S., regardless of any other conduct that occurred in U.S. territory. Motorola Sols., Inc. v. Hytera Commc’ns Corp., 436 F. Supp. 3d 1150, 11165 (N.D. Ill. 2020). Conduct warranting extraterritorial application of the DTSA includes the offending party having “advertised, promoted, and marketed products embodying the allegedly stolen trade secrets domestically at numerous trade shows” (id.), or “recruited plaintiff’s former employee” and “coordinated the alleged misappropriation during his trips to California,” (MACOM Tech. Sols. Inc. v. Litrinium, Inc., 2019 WL 4282906, *4–5 (C.D. Cal. 2019)), or marketed the product made using a trade secret—even if only via the internet—within the U.S. (Personalize Inc. v. Magnetize Consultants Ltd., 2020 WL 534505, at *13 (W.D. Wash. 2020)).

China’s Anti–Unfair Competition Law

On April 23, 2019, the Standing Committee of the National People’s Congress amended the Anti–Unfair Competition Law (AUCL) to broaden protection of trade secrets and increase the number of offenders who may be held liable for misappropriation. Angela Huyue Zhang, “The U.S.-China Trade Negotiation: A Contract Theory Perspective,” 51 Geo. J. Int’l L. 809, 823–24 (Summer 2020).

The AUCL’s Definition of "Trade Secret" 

The amended AUCL defines trade secrets to include “commercial information” other than “technical or operational” information in the trade secret definition, and it defines the infringer as “a business operator or any other natural person, legal person or unincorporated organization.” Paolo Beconcini, “Changes in China Concerning the Trademark Law and the Trade Secret Provisions of the Anti-Unfair Competition Law Address Concerns of Western Countries,” Nat’l L. Rev., Apr. 30, 2019.

Under the amended AUCL, trade secrets include sales measures, client lists, specific requirements of specific clients, information on sources of materials, advertising strategy, management experience, financial records, price lists and targets of bids, as well as production arts, product formula, design drawings, models, skills and experience that can be put into practice, experimental data and research reports, etc. Cheng Yongshun’ & Li Rong, “Legal Basis for the Protection of Trade Secrets,” in Corporate Counsel’s Guide to Doing Business in China § 28:3 (Mar. 2020 update).

Lastly, the amended AUCL adds hacking as a kind of misappropriation, broadens the scope of the persons who can be liable for misappropriation beyond business operators, and provides liability for a person who induces, contributes to, or offers help with respect to the misappropriation. Ruixue Ran, Sheng Huang, Robert Williams & Andrew Wang, “Trade Secret Protection Is Getting Stronger In China,” Law360, May 23, 2019.

The AUCL’s Definition of Misappropriation 

Under the amended AUCL, the plaintiff needs only to provide prima facie evidence that it has taken measures to keep the alleged trade secret confidential and to reasonably indicate that the trade secret has been “infringed.” If the defendant disagrees, it must prove that the information does not constitute a trade secret according to this law. In addition, the plaintiff may shift the burden of proof to the defendant to show that it did not misappropriate or misuse the trade secret if the plaintiff provides prima facie evidence that (a) the defendant had an opportunity to access the trade secret and that the defendant has information substantially the same as the trade secret; (b) the trade secret has been disclosed or used or is at risk of disclosure or use, by the alleged tortfeasor; and (c) the trade secret is otherwise infringed upon by the defendant. Liu Qinghui, “Practical Issues in Trade Secret Infringement Cases,” China Bus. L.J., Jan. 31, 2021.

The AUCL’s Remedies

The newly amended AUCL makes it possible to hold liable individuals who facilitate trade secret infringements, such as current or former employees responsible for trade secret misappropriation. Zhang, “The U.S.-China Trade Negotiation: A Contract Theory Perspective,” supra, n.74. Under the amended AUCL, the State Administration for Market Regulation (SAMR) and its local branches may pursue an administrative investigation into alleged trade secret theft, conduct on-site inspections and execute “dawn raids,” seal and seize property related to the alleged illegal acts, obtain information on an alleged offender’s bank accounts, cause the offender to forfeit illegal gains from the misappropriation, and fine the offender. Ruixue Ran et al., “Trade Secret Protection Is Getting Stronger In China,” supra. A court may award a preliminary before or after a complaint is filed and within 48 hours of the application if the plaintiff can demonstrate that the request is “urgent,” and possible improper disclosure of a trade secret is defined under this Chinese statute to be an “urgent situation.” Id. Lastly, the amended AUCL raised the statutory limit of compensatory damages from 3 million to 5 million RMB where the scope of the loss cannot be determined, and it raised the amount of possible punitive damages for repeat offenders from one to five times any illicit profit. Beconcini, “Changes in China Concerning the Trademark Law and the Trade Secret Provisions of the Anti-Unfair Competition Law Address Concerns of Western Countries,” supra.

The AUCL Lacks Extraterritoriality

The AUCL “is a domestic law and does not include language that suggests its extraterritorial jurisdiction” and its amendments do not expressly change that. William Rossoff & Jiang Jingli, “The Proposed Amendments to China’s AUCL Commercial Bribery Provisions: Comments and Suggestions,” 8 Tsinghua China L. Rev. 191, 199 (2016). Moreover, as discussed below, at least one American court dismissed an AUCL claim as inconvenient and not appropriate for adjudication in the U.S. as compared with China. Tongfang Glob. Ltd. v. Element Television Co., LLC, 2020 WL 4354173 (C.D. Cal. 2020).

Where and under Which Statute Should a Plaintiff File Suit Regarding Trade Secret Misappropriation in China or By a Chinese Party?

U.S. Courts’ Decisions

In Austar International Ltd. v. Austarpharma, LLC, 425 F. Supp. 3d 336 (D.N.J. 2019), a New Jersey federal court denied motions to dismiss or stay trade secret litigation pending in that court in favor of a similar suit in China, based on some detailed legal and factual analysis.

Plaintiff Austar International Ltd. filed suit against AustarPharma LLC, Rong Liu, and Guangzhou Bristol Drug Delivery Co., Ltd. (which became known as Bostal Drug Delivery Co., Ltd.), alleging that Bostal stole plaintiff Austar International’s pharmaceutical trade secrets. Id. at 343, 362. The court ruled that it had jurisdiction over a nonresident offender whose actions affect the plaintiff within New Jersey who “felt the brunt of the harm caused by that tort” in New Jersey, “if New Jersey was the focal point of the harm suffered by the plaintiff as a result of that tort,” and when the defendant “expressly aimed” his tortious conduct at New Jersey. Id. at 360–61. The court noted that the plaintiff alleged that Bostal’s actions focused on “technological products that were researched and developed in New Jersey” and that “AustarPharma’s employees who became employees of Bostal,” including Dr. Liu—who was alleged to be the key driver behind AustarPharma’s business and using his position as AustarPharma’s chief executive officer to gut a New Jersey business for the benefit of Bostal—all lived in New Jersey. Id. at 362. Moreover, AustarPharma was incorporated and headquartered in New Jersey, and it researched and developed its products there. Id. at 362. The court held that those allegations established, for jurisdictional purposes, that the plaintiff was primarily harmed in New Jersey and that the defendants aimed their tortious conduct at New Jersey. Id. at 361 n.6, 362.

The court went on to deny the Chinese defendants’ motion to dismiss or stay Austar International’s New Jersey action, finding that the New Jersey and Chinese litigations were not parallel because, despite commonalities, the Austar Chinese action “would not protect Austar International’s rights to seek redress for violations of the DTSA,” the remedies sought in the two suits were not identical, Dr. Lui resided in New Jersey, and the New Jersey court was better suited to address New Jersey and U.S. law. Id. at 363–65. Moreover, public policy favored not dismissing the New Jersey suit because “it serves the public interest to ensure that a United States owner of intellectual property has a forum to seek redress for alleged misuse of that intellectual property by another United States citizen living here and by a foreign corporation” and to allow “a U.S. court to interpret and enforce the provisions of a U.S. contract entered into by a U.S. citizen and which concerns a U.S. corporation.” Id. at 365. Indeed, the “rationale and purpose of the DTSA is, of course, the protection of trade secrets from foreign encroachment.” Id.

About seven months later, a California federal court reached a different result in Tongfang Global Ltd. v. Element Television Co., LLC, 2020 WL 4354173 (C.D. Cal. 2020). The court dismissed counterclaims, based on the AUCL and the Chinese Anti-Monopoly Law, that alleged breaches of “agreements whereby Tongfang would sell televisions directly to customers in the U.S. market under a license to use [defendant’s] brand.” Id. at *1–2. The court noted that the same claims had been filed in China and that China was an “adequate forum” because those claims are based on Chinese statutes, Tongfang Ltd. and relevant third parties reside in China, the alleged misconduct occurred in China, and the counterclaimant in New Jersey had previously “agreed to subject itself to foreign jurisdiction in Asia with respect to claims arising from the Supply Agreement.” Id. at *4. The court found that public interest favored dismissal because “U.S. courts have minimal interest in adjudicating foreign antitrust claims” or a foreign law dispute, which would be “at home” in China. Id. at *5–6. The court also stressed that the defendant voluntarily engaged in business with international parties and “already contemplated and consented to litigating claims related to the Supply Agreement in Asia.” Id. In addition, the majority of the parties, witnesses, documents, and physical evidence were in China. Id. at *5. Moreover, and in the court’s words “perhaps most importantly,” the court found that “even if the [defendant] were to obtain a judgment in its favor, it is unlikely (or at the very least uncertain) that a Chinese court would enforce such a judgment.” Id.           

A different California federal court addressed similar issues in Inventus Power, Inc. v. Shenzhen Ace Battery Co., Inc., 2021 WL 1978342 (N.D. Cal. 2021), and denied a forum non conveniens motion to dismiss the complaint based in large part on expert testimony regarding the Chinese legal system and the following findings. Two of the plaintiff’s “key witnesses” who would “testify about the development of Inventus’ trade secrets, the former ACE employees’ scope of work, and their access to and use of Inventus’ trade secrets” were located in the U.S. Id. Chinese law required witnesses’ permission for video testimony, but U.S. courts could require such testimony. Id. at *4. The Chinese court’s orders imposing injunctions “cannot be executed outside the territory of the PRC, which would additionally lead to insufficient protection of the Plaintiffs’ trade secrets.” Id. at *5. However, the DTSA provided “worldwide injunctive relief and remedies,” including that court’s temporary restraining order “enjoin[ing] Defendant throughout the world” with which that defendant had complied. Id. Lastly, any international discovery regimes, such as the rules issued by the Hague Convention, can be, and often are, litigated in the U.S. Id. at *7–8.

 In Phillips Medical Systems (Cleveland) Inc., 2021 WL 3187709 (N.D. Ill. 2021), a federal court in Illinois examined similar issues concerning DTSA and state trade secret claims that Chinese defendants, when working for the plaintiff in the U.S., downloaded trade secrets that they used to develop a competing x-ray tube product in China. Id. at *3–4. The court rejected claims that “compulsory attendance of witnesses” was not available for witnesses in China because they were employed by the defendant, over whom that court had jurisdiction. Id. at *6. Moreover, witnesses in China could be compelled to appear for depositions pursuant to the Hague Convention, electronic discovery made cross-border production of documents relatively easy to accomplish, and there was “no indication that Plaintiffs will seek to inspect the . . . defendants’ premises” in China. Id. at *8–9. Interestingly, the court did not find that a U.S. judgment could not be enforced in China. Id. at *11.

Pros, Cons, and Strategic Thinking

The proper forum and governing law in the litigation of trade secret disputes arising between Chinese and U.S. parties is fact-sensitive and turns on the location of the parties and their interaction.

When cases are litigated in the U.S., the DTSA is a valuable tool with which to obtain proactive interim remedies during litigation to protect trade secrets via an injunction or seizure. Enforcing foreign judgments in China has been a problem in the past—see Aaron D. Simowitz, “Convergence and the Circulation of Money Judgments,” 92 S. Cal. L. Rev. 1031, 1038 (2019)—and is still of great concern given the Rules on Counteracting Unjustified Extraterritorial Application of Foreign Legislation and Other Measures, known as a “Blocking Statute,” that China’s Ministry of Commerce enacted in January 2021, which loom large and are untested. However, again at least on paper, China’s increased trade secret protection under the AUCL may make it easier, if necessary, to enforce an injunction or final judgement in China. Moreover, China may find enforcement of the DTSA more palatable given its decision to protect trade secrets under Chinese law. Even if a party has to litigate in China, due to the location of witnesses and events or because Chinese injunctions and judgments should obviously be enforceable in China, the DTSA provides an initial forum that may yield information needed to obtain relief in the Chinese courts but cannot be obtained there because China—like most non-U.S. jurisdictions—does not provide extensive discovery (e.g., document production, interrogatories, and depositions) that is available in the U.S. courts.

Proactive legal consultation and strategizing regarding the DTSA’s application to an actual, or merely potential, trade secret dispute with Chinese parties are critical to risk reduction, success, and return on investment.

John Stone is a partner with DeCotiis, Fitzpatrick, Cole & Giblin, LLP, in Paramus, New Jersey.


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