Published on May 14, 2014 In the realm of cross-border discovery, each country presents different issues and potential concerns when pursuing information and document collections. For many countries, the most significant issues result from laws that limit the scope of collection permitted. However, when collecting from Chinese companies, a more significant issue is often the laws regarding the broad protection of “state secrets.” Every entity in China and based in China is required to protect state secrets. This includes businesses and private citizens, whether they are located in China, the United States, or elsewhere. Therefore, understanding the applicable Chinese laws is essential to prevent serious repercussions.
Chinese State Secrets and Data Transfers
The Law on Guarding State Secrets of the People’s Republic of China (the “State Secrets Law”) and the recently enacted 2014 Regulations on the Implementation of the Law of the People’s Republic of China on Guarding State Secrets (the “2014 Regulations”) present which types of information may be deemed a state secret.
State secrets are deemed by Article 2 of the State Secrets Law to be “matters that have a vital bearing on State security and national interests and, as specified by legal procedure, are entrusted to a limited number of people for a given period of time.” While this definition seems limiting, it is then expanded upon in Article 8 to include the following issues (emphasis added):
(1) major policy decisions on State affairs;
(2) the building of national defense and the activities of the armed forces;
(3) diplomatic activities, activities related to foreign countries, and information maintained as commitments to foreign countries;
(4) national economic and social development;
(5) science and technology;
(6) activities for safeguarding State security and the investigation of criminal offences; and
(7) other matters that are classified as State secrets by the State secret-guarding department.
Some of these items, such as national defense, present restrictions common to most countries and document collections. However, subjects such as science and technology are so commonplace in private businesses around the world that the notion of a government claiming them as secret is not the norm. Regardless of the delineated first six items, the seventh item is particularly alarming. In essence, anything the government wants to deem a state secret, it can.
Even more concerning is that there is no requirement that a state secret be denoted as such from its outset. In fact, the Chinese government explicitly reserves the right to retroactively deem issues to be state secrets, and has previously done this, including with materials that have been released into the public realm [1]. An example of how serious this situation can be is a 2010 case where a Chinese court ruled that a U.S. citizen, Xue Feng, had been performing espionage against the Chinese government simply because he had obtained the locations of oil wells in China in 2005 for his employer [2]. The catch? The Chinese government didn’t declare that information to be a state secret until 2007. This hapless “spy” is now serving 8 years in a Chinese jail and was ordered to pay a fine of $30,000.
Notably, in addition to barring transferal of state secrets, Article 21 of the State Secrets Law requires that Chinese authorities clear any transferal that is for the purpose of co-operation with a foreign country. In context of a U.S. litigation, it is possible that the Chinese government would conclude that even if a company can produce information that does not contain any state secrets, it would have to clear the information with the Chinese authorities as complying with a discovery request is co-operating with a foreign country.
If pursuing discovery, or responding to requests on behalf of a client with ties to Chinese data, the baseline concern is the specific provisions in the State Secrets Law regarding the review and transmission of data from territorial China. Article 18 explicitly states that any document deemed to be “most confidential” (the highest of the three levels of secrecy for Chinese information) must be maintained as follows:
(1) They shall not be copied or extracted without approval by the State organ or unit that determined their categories or by superior departments.
(2) People shall be specially designated and necessary security measures taken for their dispatch, reception, delivery and carrying; and
(3) They shall be kept in perfectly equipped safes.
So even if copies of documents are made, regardless of whether they are maintained inside territorial China, this can be viewed as a violation of the State Secret.
In addition to Article 18, Articles 19, 21, 24, 25, 26, and 27 combined all address the measures of protecting and maintaining state secrets. The crux of these provisions is that permission must be obtained from the Chinese government prior to any data being transferred or reviewed that is, or may be, a state secret. It also expressly prohibits the transfer of data outside territorial China, and mandates that any data that is transferred must be encrypted. The State Secrets Law does not indicate that this means data can be transferred outside of China if encrypted, but rather that data transferred within China must be protected as state secrets cannot be transferred outside of China.
U.S. View
Adding to complications in the context of discovery in U.S. litigation, it is unclear how U.S. courts view the State Secrets Law, particularly as a reasonable objection to discovery requests.
While U.S. courts are not bound by international laws or those of foreign countries, there is a set of guidelines arising from the Restatement (Third) of Foreign Relations Law Section 442(1)(c) (“the Restatement”) to which the Supreme Court has looked for governance in these matters [3]. The factors from the Restatement are:
(1) the importance to the investigation or litigation of the documents or other information requested;
(2) the degree of specificity of the request;
(3) whether the information originated in the United States;
(4) the availability of alternative means of securing the information; and
(5) the extent to which noncompliance with the request would undermine important interests of the United States, or compliance with the request would undermine important interests of the state where the information is located.
In addition, the Supreme Court expressly noted that other factors can be added to this list, including issues such as hardship [4]. However, no authority has provided a point-by-point evaluation of those factors as to the appropriate weight given to each factor. As a result, courts have discretion to assign weight as they see fit and to include other factors, such as expert opinion, as part of their evaluation.
So where does this leave those in pursuit of discovery?
It’s a tricky situation. The best practice is to make your judge and the opposing party aware of the issues early in the case. Many judges are not readily aware of this provision and the significant impact its violation can carry. Raising the issue long before discovery begins may facilitate efforts to craft requests narrowly for Chinese entities. If your Chinese client is faced with a broad discovery request, you may file a timely objection that the request runs afoul of the State Secrets Law [5]. Utilizing a foreign law expert’s opinion via an affidavit or letter to the court is another method to help persuade a positive outcome for your client. Even if a party did not outright refuse data on account of it being a state secret (the common practice,) it may instead indicate it must be able to have the information cleared with the Chinese authorities because complying with a discovery request is co-operating with a foreign country. This would obviously be a large imposition on a scheduling order and thus should be considered prior to arranging such matters.
While it may be counterintuitive, a document that may be deemed a state secret is not necessarily something an American company would view as imperative to government matters. In the Feng case, the location of Chinese oil wells was concluded to be a state secret of the “classified” status, the tier just below “most confidential.” Thus regular business matters can fall into a heavily protected class of information despite otherwise appearing to be a document normal to the course of business.
This leaves the possibility for review of documents within China, but there are still possible complications, especially if those documents are intended for eventual use outside of China. The best practice available at present time is first to determine the most narrow set of data possible, and do an initial evaluation of the likelihood that data could be deemed a state secret. If it seems likely, then evaluate whether it is worth the risk (being fines and/or jail,) and if there are any other means by which to obtain this information that would not run afoul of the Chinese government. If the decision to collect goes forward, a good idea is to have local counsel, who are Chinese citizens, collect, host, and review the information entirely within China. Then evaluate whether the reviewed information is necessary to the discovery process, whether it could be obtained elsewhere, and whether it is likely to be later challenged by the Chinese government. An entire review could go forward, and a set of documents be concluded as safe for transfer, but they still can be declared as state secrets after that. In fact there is precedent to suggest that the Chinese government regularly declares data and information to be state secrets only once it has been demonstrated to be harmful to China or helpful to a foreign entity/government [6]. Keep in mind that even a review within China can be deemed a violation of the State Secrets Law with repercussions for any local Chinese citizen involved, as well as possible charges against those outside of China at the helm of the matter.
Important to note, though, is that just because data is outside of territorial China does not mean it is automatically safe for review and transfer. The data could be subject to subsequent determination as a state secret if it originated from China, as happened in the previously referenced 2010 Feng case. The data’s existence in the public realm is also not a protection from a later-in-time conclusion of the presence of state secrets. The assessment of data for points of origin from territorial China or Chinese based/run companies is of paramount importance at an early stage in order to assess the risks that data may carry. Having an open discussion about the nature of your client’s documents, or those you may seek in the discovery process, with local counsel in China who is experienced with such matters is likely the easiest way to gain an accurate perspective as to the likelihood your documents could be called into question or retroactively declared state secrets.
It is also possible to obtain guidance from the Chinese government regarding whether documents or issues are deemed to be state secrets. To do so, the documents in question would be submitted to the local State Secret Organ for evaluation. Once submitted, the documents would be reviewed be internal personnel and declared accordingly. As identified by the 2014 Regulations, if concluded to be a state secret, a document would be marked as such, seized, and an investigation into the point of origin of such document would ensue. This itself can include an inquiry into the entity in possession of the document, seizure of additional materials to verify no additional state secrets have been compromised, and potential fines or jail time depending on how the state secret was obtained and whether it was transferred elsewhere thereafter. This has historically taken a long amount of time, especially if a document is deemed to be a state secret, and it is often practically outside the discovery schedule without a court-ordered delay. If you have time, either because you can pursue this inquiry prior to commencing litigation or because your case schedule allows, it may be a worthy measure to attempt, though, if only as it demonstrates to the court that you have pursued every possible means available to rectify your concerns.
This subject is very murky and rather frightening due to the lack of clarity by both Chinese and U.S. courts. The best approach is to exercise diligence and engage in early planning.
[1] Documents sought in a discovery process were deemed state secrets, but had previously been publicly released to business partners and in trade brochures. Richmark Corp v. Timber Falling Consultants Timber Falling Consultants, 959 F. 2d 1468, 1476 (1992)
[2] James T. Areddy, China’s Culture of Secrecy Brands Research as Spying, Wall St. J., Dec. 1, 2010, available at http://online.wsj.com/news/articles/SB10001424052748704584804575644470575141314
[3] Societe Nationale Industrielle Aerospatiale v. United States District Court, 482 U.S. 522 (1987)
[4] Aerospatiale, 482 U.S. at 544
[5] Failure to present the State Secrets Law in a timely fashion can be ruled as waiving the objection. Richmark, 959 F. 2d at 1473.
[6] Oil well information was in no way deemed a state secret until several years after it had been sold, and was declared as such once an American company moved to profit from such data. Areddy, supra note ii; The financial information of the defendants was openly available at various points via trade brochures and business transactions, but once it was sought for damages against a Chinese company the government declared it to be a state secret. Richmark, 959 F. 2d at 1473.
