How China’s New CyberSecurity Laws Can (Will?) Destroy Your Business

In China’s New Cybersecurity Program: NO Place to Hide and China’s New Cybersecurity System: There is NO Place to Hide we wrote how China’s new “cybersecurity” laws are designed to give the Chinese government and its prized companies full and total access to all data and IP held by foreign companies. Yesterday, in China’s New Cryptography Law: Still No Place to Hide, we wrote why encryprition will not provide foreign companies with a way out from China’s wholesale takeover of foreign company data and its concomitant IP. In this post, we set out two ways in which China’s data takeover will harm foreign businesses far beyond China.

The first harm comes from U.S. export control laws that require certain high-tech information not be disclosed to persons who are not U.S. citizens, green card holders or protected individuals without an export license. These export control laws directly conflict with Chinese law  equiring full and total government access to that information in China and a company that puts information regarding a controlled technology on a server or a computer in China will instantly be creating significant export control problems for itself.

Foreign companies typically seek to protect their private information in China by putting it on a private server isolated from the Chinese government. China’s new laws make clear that foreign companies are required to turn over this information to the Chinese government and failing to do so could and likely will lead to prison time. This conflict creates an enormous problem for US high tech companies with computer servers in China with substantial high tech information on them because their “willingness” to give this information to the Chinese governement (which obviously is not a U.S. citizen or green card holder) almost certainly in some instances constitutes criminal law violations of U.S. export control laws.

The second way in which China’s latest data subervions will be disastorous for many foreign companies is by eviserating their trade secret protections. To prevail on a trade secret claim in most countries in the world you must be able to prove the following three things:

1. The secret was taken qualifies for trade secret protection.
2. The holder of the secret took reasonable precautions to prevent disclosure of the secret.
3. The secret was wrongfully taken.

It is number 2 above that could prove to be the downfall of companies that operate in China, and here is an example of how that could happen. Suppose your Australian company has a trade secret regarding how it cost efficiently makes a particular product. Suppose you make your product in China and you provide the production information to your China subsidiary so it can cost efficiently make your product. Now suppose one of your employees at your Germany subsidiary quits the company and sells your trade secret to your largest competitor. Now suppose you sue your ex-employee and your largest competitor for trade secret violations. They will argue that what was bought and sold was not a trade secret at all because by revealing this alleged secret to the Chinese Government (and to its SOEs and Universities, etc.) you clearly did not take reasonable precautions to prevent disclosure of the information and therefore the information lost its standing as a trade secret and your case should be dismissed. Will they win on this argument? Who knows at this point, but I would think they will because companies that go into China do so voluntarily and they know that their data is freely available to others.

We will be discussing the practical aspects of Chinese law and how it impacts business there. We will be telling you what works and what does not and what you as a businessperson can do to use the law to your advantage. Our aim is to assist businesses already in China or planning to go into China, not to break new ground in legal theory or policy.