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Protecting Software Trade Secrets in China Matthew Laight/Rieko MichishitaJune 19, 2013, Beijing

Page 2© Bird & Bird LLP [2013]Today’s TopicsComparison among Copyright, Patent and Trade SecretsIntroduction of Trade Secret laws in the PRCProtection scope of Software Business Secrets Legal Remedies in Trade Secrets Infringement Protection measures

Section I Comparison among Copyright , Patent and Trade Secrets Protection

Page 4© Bird & Bird LLP [2013]I. Protection of Copyright, Patent and Trade Secrets under the PRC Law

II. Important of Protecting Software Trade Secrets Copyright: does not cover ideas, concepts, algorithm or operation method. Patent: protect combination of software and hardware; need publication; protection period is limited. Pros and Cons of trade secrets protection Pros: apply to all know-how, especially those not patent eligible; no publication, no time limit (Coca Cola formula was protected since 1886!)Hard to enforce; high evidence threshold; lose rights when published. Page 5© Bird & Bird LLP [2013]

Section II Introduction of PRC Trade Secrets Laws

I. Competition Law Trade Secrets: (1) unknown to the public; (2) may create business interests, and (3) kept with certain security measures by the owner. Not known to the public: the information as a whole, or accurate layout or elements are not commonly known or easy to know by the general public in the industry. Business interests: may create certain economical interests or competitive advantages. Security measures: appropriate measures that could keep the information in secret status under normal circumstance. Page 7© Bird & Bird LLP [2013]

II. Criminal Law Caused significant losses to the trade secrets owners: imprisonment under 3 years, with monetary penalties. Caused particularly significant losses to the trade secrets owners: 3 years to 7 years imprisonment, with monetary penalties. Judicial Interpretations Significant losses: more than RMB500,000. Particularly significant losses: more than RMB2,500,000. Corporate criminal: 3 times threshold to individual criminal.Very hard to enforce in judicial practicePage 8© Bird & Bird LLP [2013]

III. Contract LawParties should keep business secrets obtained during negotiation, regardless the deal is successful or not.The ownership of improved technologies: Based on stipulation in the contract; Based on commercial practice; or Belongs to the parties who developed such improved technologies. Issue: can a company stipulates all improved technologies belongs to it rather than the contractor/customer? Page 9© Bird & Bird LLP [2013]

IV. Labor Law Confidentiality clause Non-compete clausePay compensation to employeeLess than two years. Applies to senior management, senior engineers and others who have such obligations. Supreme Court: balance employees’ freedom of choice and protection of employer’s business secrets.3. New employer’s joint and several liabilities Page 10© Bird & Bird LLP [2013]

V. Corporate Law Duties of loyalty of directors, supervisors and senior management. Violation of duty of loyaltyIllegal incomes belongs to the company. Pay compensation to the company, should such violation caused damages. Page 11© Bird & Bird LLP [2013]

Section III Protection Scope of Software Business Secrets

I. Software Technology Secrets & Operation SecretsTechnology Secrets: technical solutions, methods, skills, information etc.Operation Secrets: operation strategy, plan, pricing scheme , marketing strategy, competing strategy, customer list, distribution channel etc.Page 13© Bird & Bird LLP [2013]

II. “Secret Points” and Protection ScopeIn researching a software, it need to analyze the commercial needs in the market, develop structure of a software, test the software etc.. The data obtained in these researching and testing activates could be deemed as trade secrets. The design of a technology plan reflects the intelligence of engineers, and reflects their understanding of contraction, processing, mathematic model, technical realization method etc., and thus could be deemed as trade secrets. The specific logical rules that developed by engineers could be deemed as trade secrets.The “personalized designs” of engineers could be deemed as trade secrets. Page 14© Bird & Bird LLP [2013]

Section VI Legal Remedies in Trade Secret Infringement

I. Identification of Trade Secret Infringement (from Judicial Interpretation of Anti-Unfair Competition Law)Steal, inducements, coerce or other unlawful measures to obtain trade secrets. Violate the confidentiality obligations and disclose or permit others to use trade secrets (employees, contractors). Disclose or use trade secrets obtained through aforesaid measures. Page 16© Bird & Bird LLP [2013]

II. Civil ProceedingsFile before People’s Court. Damages: typically calculated from defendant’s illegal income.Proceedings: Evidence collection and preservation (notarization etc.)File the civil lawsuit; Case trialed by IP division of the court; Damages normally award under RMB500,000, unless plaintiff has solid evidence to exceed. Evidence collection, evidence preservation and asset preservation.Page 17© Bird & Bird LLP [2013]

III. Administrative ProceedingsFile before Administration of Industry and Commerce (AIC). Penalties include: (1) order to stop infringing acts; and (2) monetary fines under RMB200,000.ProcedureFile complaint before local AICAIC accepts the case, conduct relevant inspection; AIC raids the target, detain relevant goods and information. AIC issue penalty decision. Page 18© Bird & Bird LLP [2013]

IV. Criminal ProceedingsCriminal LiabilitiesCase could be accepted only if the threshold is reached. Corporate criminal: threshold is three times to individual criminal; punish both company and the individuals who carry out the criminal offense.Public Prosecution Self Prosecution Strict evidence Requirement Page 19© Bird & Bird LLP [2013]

Section V Protection Measures

I. Lost of Trade Secrets Unauthorized publication by employees; Disks or other carriers obtained by competitors. Reverse engineering (differs under patent law and copyright law). Disclosure during commercial negotiation. Sold by employees or contractor’s employees.Illegal access to email system or database.Unauthorized visit. Disclose by contractors, outsourcing companies or professional firms. Employees jumps to competitors and illegally take trade secrets. Page 21© Bird & Bird LLP [2013]

II. Internal Security MeasuresInternal security management system.Mark the “confidential” sign on all confidential information. Confidentiality agreement and non compete agreement with key employees and officials. Actively control business secrets. Page 22© Bird & Bird LLP [2013]

III. External Security MeasuresConfidentiality agreement with distributorsConfidentiality agreement with contractors and outsourcing companies.Auditing clause and periodically audit carried out by accountant and lawyers. Page 23© Bird & Bird LLP [2013]

IV. Pay Specially Attention to Confidentiality AgreementContracts are evidenceContracts defines the scope of business secrets. Contracts stipulates the confidentiality obligations. Contracts divide business secrets from other IPRs. Confidentiality clause in technology agreement Confidentiality clause in software copyright licensing agreement.Page 24© Bird & Bird LLP [2013]

V. Issues in dealing with Big SOEsBig state owned enterprises (SOEs) have overwhelming advantages that foreign entities do not have. Hard to apply evidence collection. Hard to enforce the audit clause. Legal risk of “back door”. The scope of “state secrets” can be very large. Up to 7 years imprisonment. May cause significant damage to market reputation.Page 25© Bird & Bird LLP [2013]

V. Issues in dealing with Big SOEs5. Legal Remedies Arbitration: in Hong Kong or Beijing. Litigation: in Beijing or Shanghai.Complaint to upper level companies or headquarters. Complaint to Ministry of Commerce. Complaint to Medias. Negotiation through commercial means. Page 26© Bird & Bird LLP [2013]

Contact UsMatthew.Laight(Partner)E-mail:Matthew.Laight@twobirds.comContact:00852 2248 6006Fax:00852 2248 6011Rieko Michishita(Managing Associate)E-mail:rieko.michishita@twobirds.comContact:010 5933 5680Fax:010 5933 5666Page 27© Bird & Bird LLP [2013]