In June 2024, the Intellectual Property Court of the Supreme People's Court of China (the IP Court) handed down the final judgment in a trade secret infringement case involving new energy vehicles (the Automobile Chassis case; 2023, SPCIP Civil Final No. 1590). The CNY 640 million damages award set a record in trade secret infringement cases in China, demonstrating the determination of Chinese courts to strongly protect trade secrets and establish fair and orderly competition in the market.
Since 2019, when many trade secret-related provisions in the Anti-Unfair Competition Law were revised, the protection of trade secrets in China has been continuously strengthened. In 2020, the Supreme People's Court (SPC) issued the Provisions on Several Issues Concerning the Application of Laws in the Trial of Civil Cases Involving Trade Secret Infringement (the Trade Secret Provisions), which set forth detailed guidelines on the trial of trade secret cases. The SPC has also been providing guidance by issuing a series of ‘model cases’.
Among the Top Ten Influential Cases selected by the IP Court on its fifth anniversary of establishment, four cases involved trade secrets:
The Melamine case (2022, SPCIP Civil Final No. 541);
The Vanillin case (2020, SPCIP Civil Final No. 1667);
The Rubber Antioxidants case (2022, SPCIP Civil Final No. 816); and
The Carbomer case (2019, SPCIP Civil Final No. 562).
Based on the four cases and the Automobile Chassis case, this article will illustrate trends in Chinese courts regarding trade secret infringement cases.
Increasing amount of damages
One of the most notable features in the above cases is the very high amount of damages. CNY 150 million was awarded in the Vanillin case, CNY 200 million in the Rubber Antioxidants case, and CNY 640 million in the Automobile Chassis case.
The emergence of these high compensation cases has resulted from the amendment of a series of laws and regulations related to intellectual property rights in recent years.
In the Anti-Unfair Competition Law, revised in 2019, the maximum amount of statutory compensation for trade secret infringement was raised from CNY 3 million to CNY 5 million. According to the Anti-Unfair Competition Law, the amount of compensation for trade secret infringement is determined according to the actual losses suffered by the right holder due to infringement. If the actual loss is difficult to calculate, it shall be determined according to the profits obtained by the infringer due to infringement. In practice, the judge can use their discretion to identify the data required for calculating the damage based on facts in the case, to determine a fair and reasonable amount of damages. The amount of damages determined according to the above method is not limited by the upper or lower limit of statutory damages (2020, SPCIP Civil Final No. 376).
The SPC takes the position that statutory damages should always be used with caution, and, if possible, relevant facts should be fully ascertained, and on this basis, sufficient compensation should be awarded.
In the Vanillin case, Zhonghua Chemical, the world's largest manufacturer of the organic compound vanillin, once occupied about 60% of the global vanillin market. Wanglong Company stole the technical secrets related to vanillin manufacturing from Zhonghua Chemical to start producing vanillin, quickly occupying about 10% of the global market share to cut the market share of Zhonghua Chemical to about 50%, causing huge economic losses.
In the first-instance court, in accordance with the provisions of the Anti-Unfair Competition Law before the revision, the damages were determined to be CNY 3 million, which was the upper limit of statutory damage. On appeal, the IP Court comprehensively considered factors such as the seriousness of the infringement, the great commercial value of the technical secrets involved, and the infringer's refusal to implement the behaviour preservation ruling. Based on these facts, the IP Court multiplied the infringer's actual sales by the price and profit rate of the right holder to calculate the profit generated from the infringement. As a result, CNY 150 million in damages was awarded.
Through this judgment, the IP Court conveyed its determination to crack down on trade secret infringement by awarding high damages that fully compensate the right holders.
Active application of punitive damages
Similar to other intellectual property laws, the Anti-Unfair Competition Law also clearly stipulates that when business operators maliciously commit acts that infringe trade secrets, punitive damages can be applied if the circumstances are serious. The Interpretation on the Application of Punitive Damages in the Trial of Civil Cases involving Intellectual Property Rights Infringement, issued in March 2021, provides clear guidance for courts at all levels to accurately apply punitive damages.
The requirements for applying punitive damages are that the infringement is intentional and serious, both of which are often clearly demonstrated in trade secret infringement cases, making trade secret cases more likely to see punitive damages applied than other intellectual property infringement cases.
In the Cabomer case, an individual named Hua, who was in charge of R&D of cabomer products at Tianci Company, stole documents such as drawings of equipment for producing the synthetic polymer cabomer and disclosed them to Newman Company. Newman then produced cabomer products, using the technical secrets of Tianci, including equipment and processes. Since Newman had no products other than cabomer since its establishment, and all the cabomer products were produced by the same equipment, the IP Court found that Newman was entirely engaged in infringement business. With other circumstances such as the large scale of the infringement, the long duration, huge profits, and concealment of evidence, Newman was held to bear five times punitive damages, the maximum stipulated by the law.
In the Automobile Chassis case, under an organised inducement of Weltmeister Company, more than 40 senior managers and technicians of affiliated companies of Geely Company left their jobs and joined Weltmeister, taking Geely’s technical secrets of chassis design to Weltmeister. Weltmeister quickly mastered the chassis technology of electric vehicles on the basis of Geely's technical secrets, and launched its own electric vehicles to gain a great competitive advantage in the market. Weltmeister also filed patent applications, illegally disclosing some of the technical secrets.
Considering that Weltmeister had obvious intention to infringe, as well as the maliciousness and serious consequences, the IP Court awarded two times punitive damages and held Weltmeister responsible for CNY 640 million in total damages.
It can be seen that in trade secret infringement cases, the courts are proactive in applying punitive damages concerning malicious infringements with serious consequences.
Comprehensive consideration of the act of using a trade secret
According to the Trade Secret Provisions, in addition to direct use, using trade secrets after modification and improvement – as well as adjustment, optimisation, and improvement in production and business activities based on the trade secrets – also constitutes an act of "using trade secrets" as an element of trade secret infringement. Such an interpretation prevents the infringer from making changes to the stolen trade secrets to escape liabilities.
In the Cabomer case, Hua sent the drawings of Tianci to the employees of Newman, asking them to design a production process based on, but not exactly the same as, the original drawings of Tianci. Even so, the IP Court found that Newman company committed trade secret infringement. It can be seen that the current laws and regulations are providing more comprehensive protection to right holders when the use of stolen trade secrets through simple transformation is also deemed as infringement.
Reasonable standard for identifying a trade secret
The three elements of trade secrets are that the information:
Is not generally known to the public;
Has commercial value; and
Has been kept secret by the right holder through reasonable security measures.
Regarding whether information is not known to the public, the Rubber Antioxidants case provides a clear standard.
In this case, the technical information involved related to specific production process information, including operating procedures, process flow, material ratio, process control parameters, overall layout, equipment selection, and equipment combination. The accused infringer submitted nearly 100 documents attempting to prove that 22 secret points involved were public knowledge. In this regard, the IP Court held that:
No single document combined with common knowledge could disclose all the contents of the secret; and
The accused infringer did not demonstrate the technical relevance between these documents and whether they could be combined.
Even if the information is formed by collating, improving, and processing information known to the public, if the newly formed information is not generally known and cannot be easily obtained by a relevant person in the field, it should be considered as not being known to the public.
According to the SPC, information and a combination of information can be protected as a trade secret. In other words, the new information formed by sorting, improving, and processing the publicly known information can also be protected as a trade secret as long as it meets the legal requirements for a trade secret.
Regarding what a reasonable security measure is, the IP Court in the Automobile Chassis case presented its opinion.
The accused infringer claimed that all the drawings and digital models involved were accessible to each one of the thousands of employees, such that the right holder had failed to take corresponding security measures for the information to qualify as trade secrets. In this regard, the IP Court found that the right holder adopted various security measures for the technical secrets involved, such as formulating rules and regulations for confidentiality management, signing confidentiality agreements with employees, clearly marking drawings and technical documents as confidential with confidentiality requirements, and requiring suppliers to undertake confidentiality obligations, which satisfied the legal requirements.
According to the SPC, the so-called corresponding confidentiality measures are not required to be seamless and foolproof, and would suffice as long as they are "enough to prevent the leakage of trade secrets under normal circumstances".
In trade secret infringement litigation, the identification of trade secrets is a major challenge. The SPC’s position that the criteria of trade secrets should be reasonably grasped in view of the specific circumstances of a case has, to some extent, reduced the difficulty of protecting trade secrets for right holders.
Final thoughts on the protection of trade secrets in China
Compared with other intellectual property cases, it is relatively difficult to find out the facts in trade secret infringement cases, and application of the law is relatively complicated, which had led to a low success rate for plaintiffs for a long time. By issuing these model cases in recent years, the SPC not only gives specific guidance to the courts at all levels in trying trade secret infringement cases but also signals to society comprehensive and strict judicial protection of intellectual property rights, encouraging enterprises to innovate independently and guiding them to operate in good faith and compliance.
From these cases, it is also clear that the leakage of trade secrets often brings a huge loss and irreparable damage to right holders. Although Chinese courts have taken a strong stance on the protection of trade secrets, the fundamental solution for enterprises is to take appropriate measures to regulate and protect their own trade secrets and nip the possibilities of leakage in the bud.
