Recently, the United States District Court of the Northern District of California rejected a Chinese company's argument of China's restriction of cross-border data transfer as a legal justification, and has required the defendant in China to fulfil their duty of discovery of evidence. This acts as a yellow light warning to Chinese companies involved in foreign litigations.
We take a look at this case below.
Defendant Syntronic (Beijing) Technology R&D Center Co., Ltd. (a wholly-owned subsidiary, located in China, of a Swedish company) has filed a motion for reconsideration addressing the Court's prior support of the discovery request proposed by Plaintiff Cadence Design Systems, Inc. Ultimately, the Court upheld the original discovery order, and held that there was no conflict between Chinese law and the Court's previous order. This thereby required the defendant to provide the 24 computers in their control to the plaintiff for inspection in the United States before 15 July 2022.
In this case, both parties hired Chinese legal experts, who expressed their opinions on whether China's Personal Information Protection Law can provide exemption from the duty of discovery. The United States Court has extensively used opinions from both parties, and ultimately supported the suggestions of the plaintiff's legal expert: to require the defendant to fulfil the duty of discovery of evidence.
This case has two focus points of contention: (1), if the provision of relevant computers and its information requires the individual consent of related personnel, i.e., if Article 13, Paragraph 2 of China's Personal Information Protection Law can act as an exemption for Article 39 of China's Personal Information Protection Law; (2), if the United States Court orders for evidence discovery can be interpreted as a legal duty of Article 13 of China's Personal Information Protection Law.
Regarding the first point, the Chinese legal experts from both parties have used the methods of literal interpretation and systematic interpretation to open this debate. Regarding the second point, the United States Court has extensively explained the concept of "legal duty", and held that the order of discovery constitutes a statutory obligation under Article 13. This means that the consent of the subject of this personal information shall be exempted on the basis that the statutory obligation shall be fulfilled. There is room for deliberation of this point, as in current practice and theoretical discussions, there appears to be no cases of extension of statutory obligations to foreign law compliance.
The system of evidence discovery and the blocking statute
In recent years, the United States has continuously expanded its extraterritorial jurisdiction. The United States Courts (and maybe also arbitration institutions) has used evidence discovery processes in civil proceedings to uninterruptedly increase the reach of US Law, often requiring litigants or the foreign businesses of outsiders to disclose facts and evidence outside of US borders. If these parties refuse to do so, they are often faced with fines and convictions.
On 9 January 2021, the Chinese Ministry of Commerce published and implemented "Rules on Counteracting Unjustified Extra-territorial Application of Foreign Legislation and Other Measures". The purpose of this regulation is to block the improper extraterritorial usage of foreign laws and measures, and thus is often used as a weapon against evidence discovery of foreign judiciaries.
However, despite the fact that a number of countries have successively enacted blocking legislation in response to the US discovery system, with the exception of a few successful cases, blocking methods have only remained on paper and cannot effectively block the extraterritoriality of US discovery proceedings.
Key learnings from this case
1. To reasonably use domestic laws to block foreign discovery proceedings.
For instance, companies based in China can use the aforementioned Rules on Counteracting Unjustified Extra-territorial Application of Foreign Legislation and Other Measures, the Personal Information Protection Law, the Data Security Law, the National Security Law, and even the Criminal Law to restrict the scope of the discovery system.
2. To provide an accurate basis for Chinese Law and Chinese law expert witnesses.
From the statement of this case, the focus point of contention is whether the treatment of personal information in the case is "necessary for the performance of legal duties or legal obligations" under Article 13, Paragraph 2 of the Personal Information Protection Law, and that the US Court held that this "legal duty" can be extended to the duty of discovery under foreign law (in this case, US Law). From the publicly available US Court document, it is not yet known whether the defendant has attempted to exempt themselves from the duty of discovery through using Article 36 of China's Data Security Law and Article 41 of the Personal Information Protection Law, but the two aforementioned articles seem to be more apt compared to only using "no separate consent is obtained" under Article 13 of the Personal Information Protection Law as a defense. It is important to note that there have been previous cases where companies based in China have successfully exempted themselves from the duty of discovery under the reasons of state secrets or trade secrets.
3. To keep up to date with the latest laws and precedents.
There have been previous litigants who have invoked relevant regulations in China's Personal Information Protection Law and Data Security Law in foreign jurisdictions, and have successfully restricted the scope of discovery. As a case law country, although this has only been a federal district court order, due to the fact that there are limited cases on this topic, this case could have considerable reference value to other courts. This therefore should act as a yellow light to companies based in China that are involved in foreign litigations and arbitrations.
If you have any questions about this article, please get in touch with Ivy Liang.