Patents and Trade Secrets
By Douglas Clark

Counterfeiting is not the only intellectual property issue for companies in China. The protection of patents and trade secrets is also becoming more important. Here too, weaknesses in China's legal system and certain company approaches have made enforcement difficult.

First, China lacks an effective trade secrets law. The Anti-Unfair Competition Law and Criminal Law both have sections on trade secrets. Criminal action can be effective, but it is difficult to get the Public Security Bureau to take on such a case. Moreover, the Anti-Unfair Competition Law provides only general guidelines for trade secret actions.

On a potentially encouraging note, a draft interpretation issued in late 2005 by the Supreme People's Court appears to have addressed many of the main problems with the trade secret provisions of the Anti-Unfair Competition Law. This interpretation defines trade secrets, provides for reversal of burden of proof when a prima facie case of misappropriation is shown, and provides methods for calculating damages when a breach is proven. The interpretation also makes clear that injunctions are available for a breach of the trade secret law, although no clear method is yet prescribed for enforcing an injunction if a defendant does not comply with the court's order. How this interpretation will be finalized and applied in practice will be important to encouraging greater investment in high tech industries in China.

Many companies transfer technology to China without taking into account the weaknesses in the legal system. Before transferring technology, companies should

Analyze the need to transfer technology Do not be blinded by partners' demands for technology. Ask whether it is really necessary to transfer this technology.

Carefully choose the recipient of the technology If technology is transferred to a state-owned enterprise, there is a far greater likelihood of leakage than if it were transferred to a private firm.

Attempt to break up the technology to be transferred so that it is harder for others to use, if misappropriated.

Patents

Patent litigation is becoming more common in China. The laws and various opinions governing patent litigation are in line with international practices. Given the technical nature of patents, however, China should consider creating specialized courts nationwide to handle patent cases. A number of countries, such as England and Japan, have already done this, and it has led to greater certainty in decision making and greater trust in the system.

Source: This is an excerpt from an article originally published in the Jan, 2006 issue of the China Business Review.