Unlike patents, trade marks and copyrights, there is no separate Trade Secret Law in China. But instead, a trade secret protection system based on the Anti-Unfair Competition Law, supplemented by the Civil Code (which integrates the former General Principles of the Civil Law and the Contract Law), the Law on Promoting the Transformation of Scientific and Technological Achievements, the Labour Contract Law, the Company Law, the Civil Procedure Law, and the Criminal Law. In the Civil Code passed in May 2020, trade secrets are, for the first time, explicitly classified as a type of intellectual property rights. The types and infringement acts of trade secrets are stipulated in Article 9 of the Anti-Unfair Competition Law. According to this provision:
At the same time, according to Article 219 of the Criminal Law, the first three acts are subject to criminal punishment when the circumstances are serious.
According to Article 9 of the Anti-Unfair Competition Law, commercial information such as technical and business information not known to the public, have commercial value, and kept confidential by the right-holder are classified as trade secrets and protected.
According to the relevant judicial interpretation of the Supreme Court:
According to Article 9 of the Anti-Unfair Competition Law, trade secrets must meet three elements:
A trade secret right-holder needs to prove that it has taken reasonable confidentiality measures to protect its trade secrets. Whether the right-holder has taken reasonable confidentiality measures shall be determined according to factors such as the nature of the trade secret and its carrier, the commercial value of the trade secret, the identifiability of the confidentiality measures, the reasonability of the confidentiality measures according to the nature of the trade secret, and the right-holder's will to keep the secret.
According to the relevant judicial interpretations, if one of the following circumstances is sufficient to prevent the leakage of trade secrets under normal situations, it shall be determined that the right-holder has taken reasonable confidentiality measures:
Employers can sign confidentiality agreements with employees or agree on confidentiality clauses in labour contracts. Even if the employer and employees do not specifically agree on the confidentiality obligation, the employee's obligation to keep the employer's trade secrets confidential is an implied and accompanying obligation.
However, it should be noted that the employee's implied duty of confidentiality with respect to trade secrets cannot be regarded as the employer's taking reasonable confidentiality measures. In a typical case, the Supreme People's Court held that the accompanying obligation to keep secrets derived from the principle of good faith cannot reflect the subjective will of the owner of the trade secret to take confidentiality measures for information and cannot constitute a positive behaviour of confidentiality measures.
According to the relevant judicial interpretations, if the accused infringing information is obtained through self-development or reverse engineering, it should be determined that it does not constitute trade secret infringement as stipulated in Article 9 of the Anti-Unfair Competition Law. Here, "reverse engineering" refers to disassembling, mapping, and analysing products obtained from public channels, through technical means to obtain relevant technical information about the product.
However, if the party concerned has learned of the trade secrets of others by improper means, and then claims that the acquisition is legal on the grounds of reverse engineering, it shall not be supported.
In China, the protection of computer software and/or technology is mainly through copyright protection, but software, especially related data, can also be protected through trade secrets. For example, models formed by sorting, processing and analysing data obtained through massive public channels may sometimes not be protected by copyright law because of their low "originality", but such data and models can be protected through trade secrets.
In theory, as long as the relevant information meets the three element requirements for trade secrets, there is no time limit for its protection. According to relevant judicial interpretations, information publicly disclosed in public publications or other media, or disclosed through public reports, exhibitions, etc, can no longer be regarded as trade secrets due to the loss of confidentiality. Instead of disclosing in such a permanent manner that once disclosed, confidentiality is lost as described above, accidental disclosure does not result in loss of confidentiality. Furthermore, controlled disclosure, such as disclosure with a signed NDA, does not result in a loss of confidentiality. After accidental disclosure, steps should be taken as soon as possible to prevent further disclosure, such as signing an NDA with a person with knowledge.
Right-holders of trade secrets have the right to license their trade secrets to others in a non-exclusive, sole or exclusive manner and charge licensing fees. There is usually a confidentiality clause in the license contract. Even if there is no obligation of confidentiality in the license contract, the licensee is also obliged to keep the confidentiality according to the principle of good faith. Therefore, generally speaking, licensing does not affect the protection of trade secrets. In order to ensure that the licensee of trade secrets takes reasonable confidentiality measures, it is recommended that the licensor of trade secrets agrees on confidentiality obligations with the licensee when licensing and verify the licensee's confidentiality measures.
Trade secrets are often associated with the protection of new technologies, often also protected by patents. But the nature of trade secrets and patents is very different.
Trade secrets are often different from other types of intellectual property in the subject matter to be protected, so theoretically, intellectual property rights can be protected by combining trade secrets and other types of intellectual property at the same time. However, due to the different ways of obtaining trade secrets and patents, where the former requires the relevant technology to be kept secret, while the latter must disclose the technology in exchange for monopoly protection, the same technical content cannot be protected by both trade secrets and patents. In addition, although software, eg, can be protected by both trade secrets and copyrights, the two lawsuits are concursus actionum, and only one of them can be chosen to sue.
The types and infringement acts of trade secrets are stipulated in Article 9 of the Anti-Unfair Competition Law. According to this provision:
Article 9 also stipulates that other natural persons, legal persons and unincorporated organisations other than the business operators who commit the illegal acts listed in the preceding paragraph shall be deemed as infringement of trade secrets.
Therefore, an employee who violates the fiduciary duty to steal trade secrets can be subject to a lawsuit either for breach of contract or infringement of trade secrets. Trade secret infringement claims can also be brought against defendants who induce employees to breach their contractual confidentiality obligations to the right-holder/employer.
According to Article 219 of the Criminal Law, anyone who commits one of the following acts of infringing trade secrets, if the circumstances are serious, shall be sentenced to fixed-term imprisonment of not more than three years, and concurrently or solely with a fine; if the circumstances are especially serious, shall be sentenced to fixed-term imprisonment of not less than three years but not more than ten years imprisonment and fine:
At the same time, well knowing the acts listed in the preceding paragraph, still obtaining, disclosing, using or allowing others to use the trade secret shall be regarded as infringement of trade secrets.
According to the relevant judicial interpretations, the implementation of the infringement of trade secrets stipulated in the Criminal Law, (i) causes losses to the right-holder of the trade secrets or the illegal gains from the infringement of trade secrets of more than CNY300,000; or (ii) directly causes bankrupt or closes down of the right-holder of the trade secret due to major operational difficulties, it shall be deemed as "causing heavy losses to the right holder of the trade secret". If the amount of loss caused to the right-holder of the trade secret or the amount of illegal gains due to infringement of the trade secret is more than CNY2.5 million, it shall be determined as "causing especially serious consequences" as stipulated in Article 219 of the Criminal Law.
For the infringement of trade secrets, both civil and criminal proceedings can be brought. Due to the stronger ability of the police to investigate and collect evidence, many plaintiffs will choose to report the case to the police first and obtain relevant evidence from them before proceeding with civil litigation.
Generally, trade secrets are territorial rights and cannot be prosecuted in China for misappropriation that occurs in other countries. However, if, eg, the trade secrets of a company located in China were stolen by electronic intrusion outside of China, it is possible that Chinese courts have jurisdiction since the result of the infringement occurred in China. In addition, if the infringer steals the trade secret abroad and uses it in China, eg, using the trade secret to produce and operate, the right-holder can sue before a Chinese court for the infringement of the infringer's use of the trade secret. In addition, according to the principle of Lex Personalis of the Chinese criminal law, if the perpetrator of the misappropriation is a Chinese company or individual, even if the misappropriation occurs in another country/region, a criminal lawsuit against the Chinese company or individual can be instituted.
In China, the condition for filing a trade secret infringement lawsuit is to prove that the plaintiff is the holder or interested party of the trade secret, generally the licensee; the alleged trade secret meets the definition of trade secret in Article 9 of the Anti-Unfair Competition Law, namely, it belongs to technical or business information not known to the public, has commercial value and been kept confidential by the right-holder by reasonable confidentiality measures; the defendant has infringed trade secrets as stipulated in Article 9 of the Anti-Unfair Competition Law. For non-employees, it needs to be proven that the defendant committed an improper means.
The right-holder does not need to prove that his trade secret has been used, but just enough to prove that the defendant obtained the trade secret without permission to file a trade secret infringement lawsuit.
If the infringer of a trade secret is an employee, who breaks the duty of confidentiality or disobeys the right-holder’s requirement to keep trade secrets, and discloses, uses or allows others to use the trade secrets in his possession, it is also an act of infringement of trade secrets. Therefore, the elements of a trade secret misappropriation claim are different.
For employees, if there is a confidentiality agreement signed with the employer, the confidentiality obligation shall be fulfilled. If there is no confidentiality agreement, the employee has a negative obligation of inaction, ie, to keep the trade secret, not use it beyond the scope or authority, nor disclose or allow others to use the trade secret.
Based on the principle of good faith, joint venturers have a negative obligation of inaction, ie, the obligation to keep each other's trade secrets known during co-operation.
At present, there are no special provisions for industrial espionage in Chinese laws. Such acts of stealing trade secrets are still dealt with in accordance with the Anti-Unfair Competition Law and Criminal Law. Similar to other intellectual property rights, remedies for trade secret infringement include damages and injunctions.
Regarding the "best practice" of protecting trade secrets, the relevant judicial interpretations give some "suggestions":
Best practices vary by different technical fields. For example, in the field of computer software, the right-holder is usually advised to divide the development of the software into different modules, and each module is developed by different personnel, so as to avoid the developer from mastering all the source code as much as possible. Another example is in the field of chemistry where codification management is usually adopted for raw materials, intermediates, products, etc.
Different companies have different strategies for exit interviews. Typically, an exit interview should include the following:
At present, there is no specific definition of “employee’s general knowledge and skills” in China’s trade secret practice. In principle, the knowledge and skills acquired by an employee in working for the employer have become part of his personality, and the employee has the right to apply the knowledge and skills acquired in the new job, but the employee should not use trade secrets learnt from the previous employer in the work of a new employer. Usually, if an employer is concerned about the use of trade secrets by a former employee in a particular position, the employer shall enter into a non-compete agreement with the employee, requiring the employee not to engage in an industry that competes with the employer for up to two years, during which the employer must pay a reasonable fee to employee.
The “new” employer should first strictly manage the employment of such resigned employees and recruit such resigned employees through legal and proper means, check whether the employee to be hired has terminated the labour contract with the former employer, and whether he or she has the obligation of non-compete and/or confidentiality of trade secrets and ask the employee to be hired to make a written statement or commitment. The “new” employer should investigate the similarities and differences between the original and current position of the employee to be hired and arrange the current position carefully, fully investigate the actual performance of such employees, and require employees to promise not to use the trade secrets of the previous employer in the work; at the same time, most importantly, the “new” employer should archive and preserve relevant evidence, such as keeping all the materials proving that it obtained the trade secrets of others through lawful measures, such as reverse engineering.
Since there is no discovery in the civil procedure in China, the plaintiff should collect evidence, including evidence of infringement and compensation, before filing a lawsuit.
To file a lawsuit for infringement of trade secrets, the following work should be done:
The statute of limitations does not apply to claims for cessation of the infringement of the trade secrets; for claims for damages from infringement, the statute of limitations begins to be counted when the right-holder knows or should have known the scope of infringement, the infringer and the infringing acts. In principle, the limitation period is three years, but shall not exceed 20 years from the date of infringement. At the same time, trade secret cases, like other civil cases, are subject to the relevant provisions on the suspension and interruption of the limitation of action.
As mentioned above, in China, there is no discovery in the civil procedure. Therefore, after collecting the evidence and finishing other preparations (see 5.1 Prerequisites to Filing a Lawsuit), the plaintiff should file a lawsuit with the court. Generally, after accepting a case, the court will give both parties a time limit for producing evidence, and then organise evidence exchange and pretrial conference. Furthermore, the court will organise at least one formal trial before reaching a final conclusion. Trade secret litigation cases also often involve forensic appraisal, such as appraisal of whether the secret point is known to the public, and whether the accused information is the same as the secret point information. Forensic appraisal can be unilaterally entrusted by the plaintiff or the defendant, or may be entrusted by the court.
In terms of territorial jurisdiction, the court of jurisdiction for cases of infringement of trade secrets includes the court at the place where the infringement is committed (including the place where the infringement is carried out and the result of the infringement occurs) or the court at the place where the defendant is domiciled. In terms of level jurisdiction, the court for technical secret cases is the intermediate people's court designated by the Supreme Court, and the court for trade secret cases other than technical secrets is the basic court. These Supreme Court-designated Intermediate Courts include four Intellectual Property Courts and more than 20 Intellectual Property tribunals across China. In addition, the level of jurisdiction is also affected by the amount of compensation of the lawsuit. For example, for cases with a compensation amount exceeding CNY5 billion, the provincial high court has jurisdiction.
In China, civil cases follow the principle of “who claims, who gives evidence”. Therefore, for trade secret cases, the plaintiff is also required to have conclusive evidence to prove the existence of infringement. However, due to the difficulty of obtaining evidence in trade secret cases, the current trend in legal and judicial practice is to reduce the difficulty of proof for plaintiffs and appropriately reallocate the burden of proof. For example, according to Article 32 of the new Anti-Unfair Competition Law, in the civil trial procedure of infringing trade secrets, the owner of trade secrets shall provide prima facie evidence to prove that it or he has taken confidentiality measures for the claimed trade secrets and reasonably show that the trade secret has been infringed. While the accused infringer shall prove that the trade secret claimed by the right-holder does not belong to the trade secret stipulated in this law.
Where the right-holder of trade secret provides prima facie evidence reasonably showing that the trade secret has been infringed, and provides one of the following as evidence, the accused infringer shall prove that it or he has not infringed the trade secret:
These provisions reduce the difficulty of the plaintiff’s proof and reallocate the burden of proof to the defendant after the plaintiff provides prima facie evidence.
The Civil Procedure Law grants the parties a right to apply to the people's court for preservation of evidence when the evidence may be lost or difficult to obtain in the future. Plaintiffs in trade secret infringement cases often take advantage of this provision of the Civil Procedure Law to file an application for evidence preservation while suing, hoping to obtain direct evidence of the defendant's infringement and relevant compensation evidence through the court. When the court examines the plaintiff's application for evidence preservation, it mainly considers the following factors:
As mentioned above, even if an evidence preservation can be applied, the plaintiff should have prima facie evidence of the defendant's infringement. The plaintiff should complete the acquisition of prima facie evidence by himself and cannot rely on other mechanisms. After the prima facie evidence is presented, on the one hand, the plaintiff can obtain further evidence through the court's evidence preservation; on the other hand, if the defendant infringes technical secrets to a serious extent and is suspected of committing a crime, the plaintiff can also report to the police. Because the police have strong investigative capabilities, the plaintiff can also obtain evidence through this channel for civil proceedings.
The evidence that the plaintiff can furnish includes evidence related to infringement and damages.
According to the relevant judicial interpretation, when the applicant's trade secret is about to be illegally disclosed, it should be determined whether it is "urgent" as stipulated in Articles 100 and 101 of the Civil Procedure Law; if yes, the applicant can require the court to make a conduct preservation ruling, ie, an injunction to order the defendant not to disclose, use or allow others to use the trade secret stolen from the applicant. Since trade secret cases are not heard in public, if the court conducts evidence preservation, the process will not be made public, and the trade secrets involved and their carriers will not be disclosed to third parties.
Common defences in trade secret cases include the following.
There are no dispositive motion related procedures in China's civil litigation. However, in the current trend, before entering the formal trial procedure, the parties can directly conduct a mediation, and the court may also preside over the mediation. If a settlement is reached by both parties, the court can make a mediation statement accordingly, which has legal effect.
For trade secret litigation, the attorney fees usually range from hundreds of thousands to millions depending on the difficulty of the case. For example, in the "Vanillin" case recently heard by the Supreme People’s Court, the court supported a reasonable fee of 3.5 million for rights protection. The expenses that the plaintiff and the defendant can expect include damages, punitive compensation, and reasonable expenses for rights protection, including attorney fees, notarisation fees, translation fees, and appraisal fees.
In China, risk agency is allowed for civil cases. As for litigation financing, or third-party funding, there is currently no clear determination of whether it is legal or not, but litigation financing already exists in practice.
There is no separate jury fact-finding procedure in China. China adopts a unique system of people's assessors. In some cases, people's assessors can participate in the trial of cases. People's assessors have the same rights and obligations as judges.
In China, there is no difference between the trial of trade secret cases and the trial of general civil cases, except that trade secret cases are usually not heard in public. The trial process generally includes stages such as evidence exchange and cross examination, court investigation and court debate, among which court investigation and court debate are often carried out together. Except for a few cases, the witness who has given testimony shall appear and testify in court, otherwise his testimony cannot be used as the basis for independent determination of facts. Generally, trade secret cases are the same as other civil cases, the second instance is final, and the trial period is six months for the first instance and three months for the second instance. The above period may be extended.
In trade secret cases, the plaintiff and the defendant may hire expert witness to give testimony on the technical issues for which they are responsible. Expert witness can provide answers to professional and technical questions and ask questions of the other party's expert witness. However, in trade secret cases, it is more common to ask a professional judicial appraisal institution to issue an appraisal report, such as whether the secret point is unknown to the public and whether the defendant's information is the same as that of the trade secret. The appraisal expert shall appear in court. Usually, according to different appraisal contents, the appraisal cost is about several hundred thousand yuan.
According to the relevant judicial interpretation, when the applicant's trade secret is about to be illegally disclosed, it should be determined whether it is "urgent" as stipulated in Articles 100 and 101 of the Civil Procedure Law; if yes, the applicant can require the court to make an conduct preservation ruling, ie, injunction to order the defendant not to disclose, use or allow others to use the trade secret stolen from the applicant. The preconditions for the preservation of the above acts include:
If the people's court rules to implement the conduct preservation measures, it shall reasonably determine the duration of the measures according to the request of the applicant or the specific circumstances of the case and other factors.
The effect of ruling to stop the infringement of intellectual property rights is generally maintained until the judgment of the case takes effect.
The amount of guarantee provided by the applicant shall be equivalent to the losses that the respondent may suffer from the implementation of the act preservation measures, including reasonable losses such as the sales income and storage expenses of the products involved to stop the infringement.
In the process of implementing the conduct preservation measures, if the losses that the respondent may suffer as a result exceed the guarantee provided by the applicant, the people's court may order the applicant to add corresponding guarantees.
The amount of compensation for business operators who have suffered damage due to unfair competition shall be determined according to the actual loss suffered due to the infringement. If the actual loss is difficult to calculate, the compensation shall be determined according to the profits obtained by the infringer due to infringement. The amount of compensation shall also include the reasonable expenses spent by the operator to stop the infringement.
In order to obtain the above compensation, the plaintiff shall provide corresponding evidence. In order to determine the amount of compensation, the people's court may order the infringer to provide the account books and materials related to the infringement when the plaintiff has tried his best to furnish evidence and the account books and materials related to the infringement are mainly in the possession of the infringer. If the infringer fails to provide or provides false account books and materials, the people's court may determine the amount of compensation with reference to the claims of the plaintiff and the evidence provided.
If it is difficult to determine the actual losses suffered by the right-holder due to the infringement and the profits obtained by the infringer due to the infringement, the people's court shall make a judgment to compensate the right holder less than five million yuan according to the circumstances of the infringement.
If an infringer maliciously commits an act of infringing trade secrets and the circumstances are serious, the amount of compensation may be determined at more than one time and less than five times the amount determined in accordance with the above methods.
Trade secret cases in which plaintiffs win usually result in a cessation of infringement and damages, unless the trade secret has already been disclosed so that the judgment prohibiting the disclosure of the trade secret is meaningless. Generally, unless the case is settled through settlement or mediation, the plaintiff cannot ask the defendant to recall the products. Since employees have the freedom of employment, it is generally impossible to restrict their subsequent employment. Employers can only restrict subsequent employment of a departing employee through a non-compete agreement for a period of no more than two years and for a fee. An injunction to cease infringement generally has no time limit until the invalidation of the trade secret.
Generally, the plaintiff can claim for the reasonable expenses to stop the infringement, including reasonable attorney fees, notarisation fees, translation fees, appraisal fees, etc. Claims for reasonable expenses to stop infringement require relevant evidence, usually including contracts, payment vouchers and invoices.
As mentioned above, successful plaintiffs can obtain damages for infringement, punitive compensation and reasonable expenses spent to stop infringement, including reasonable attorney fees, notarisation fees, translation fees, appraisal fees, etc. The plaintiff shall list the above claims in the indictment, and the judge will hear the case according to the claims. Successful defendants generally cannot obtain compensation unless the plaintiff abuses intellectual property rights.
Either or both the plaintiff and the defendant who are dissatisfied with the first instance judgment, may appeal to the higher court. For technical secret cases, the Intellectual Property Tribunal of the Supreme People’s Court has jurisdiction, and for trade secrets other than technical secrets, the higher court (mostly intermediate people's courts) has jurisdiction. For the judgment, the appeal period is 15 days from the date of receipt of the judgment, for the ruling, the appeal period is ten days from the date of receipt of the ruling, and for a party who has no domicile in China, the appeal period is 30 days from the date of receiving the judgment or ruling. The trial period of the second instance is three months, which can be extended. The appeal procedure will not vary between courts.
The court of second instance focuses more on legal issues, but usually also ascertains factual issues. If the second-instance court finds out that the basic facts determined by the first-instance judgment are unclear, it will usually send it back to the first-instance court for retrial; if other facts are unclear, the second-instance court can also revise the judgment after finding out the facts. Usually, the second instance is not de novo and will be tried according to the appellant's grounds of appeal. For issues that need to be reserved, the appellant should clearly record it in the grounds of appeal. For most trade secret cases, the court of second instance does not merely conduct a written hearing, instead, it usually gives both parties an opportunity to present and debate.
To file a criminal lawsuit against a trade secret case, it is necessary to report the case to the police first and provide preliminary evidence of the trade secret held and the infringement of the trade secret.
According to Article 219 of the Criminal Law, if the circumstances of infringing trade secrets are serious, the infringer shall be sentenced to fixed-term imprisonment of not more than three years, and concurrently or solely with a fine; if the circumstances are particularly serious, the infringer shall be sentenced to fixed-term imprisonment of not less than three years but not more than ten years and shall also be fined.
The defences in criminal cases are basically the same as those in civil cases. However, it should be noted that the proof level of evidence in criminal cases is to eliminate reasonable doubt, while civil cases adopt the high probability standard. Therefore, being recognised as infringement in civil cases is not necessarily recognised as infringement in criminal cases. Holders of trade secrets can actively provide clues, but once the police file a case, the investigation will be completed by them.
Regarding the ADR for trade secret disputes, the more mature mechanism in China is mediation, which includes not only court mediation, but also people's mediation and administrative mediation. The main pros of mediation include:
However, mediation also has cons, including:
Due to the difficulty in proving evidence and the low success rate in trade secret cases, the plaintiff may consider mediation to achieve the purpose of protecting trade secrets to a certain extent for cases with pessimistic prospects for litigation. Usually, the mediation process can guarantee the confidentiality to avoid further disclosure of trade secrets.
In addition, as another ADR mechanism, if a "contract" has been signed between the right-holder and the infringer and both parties voluntarily reach an arbitration agreement, they can apply for arbitration to the local arbitration institution or the arbitration institution agreed in the arbitration agreement in accordance with the Arbitration Law of the PRC.
Alternative dispute resolution mechanisms can be used as a pre-procedure to litigation and are not inconsistent with litigation procedures, so interim measures can be obtained from the courts.
In addition, the mediation statement issued by the court according to the mediation agreement of the parties has the force of enforcement, and the parties can apply to the court of first instance or the court at the same level where the property being enforced is located for enforcement. The arbitration award issued by the arbitration institution is also enforceable, and the parties may apply for enforcement to the intermediate people's court in the place where the person subjected to enforcement has his domicile or where the property subjected to enforcement is located.
Introduction: New Era for Trade Secrets Protection in China
China has striven to enhance intellectual property protection for years, including the rights to trade secrets. Trade secrets are protected under the Anti-Unfair Competition Law (AUCL) and the Criminal Law in China. The specific rules for trade secrets remained unchanged since the AUCL was enacted in 1993, until it was amended in 2017 and 2019.
The amendments provided evidence rules more favourable to right-holders of trade secrets, and damages rules more deterring to the infringers, including increasing the maximum statutory damages to CNY5 million and introducing punitive damages. In practice, the Chinese courts adopt a more flexible attitude in shifting the burden of proof to the defendant and awarding higher damages to the right-holder.
In general, the amended AUCL and development in practice increases the possible success of the right-holder. In addition, the judicial practice reflects that the court is willing to grant a preliminary injunction in trade secret cases, allowing trade secrets to be protected in a timelier manner.
Evidence Rule: Easing of Proof Burden for Right-Holders
Particular amendments to evidence rule for right-holders of trade secrets
It is a fundamental evidence rule in China that a party assumes the burden of proof to support its allegation, including trade secret cases. Before the amendment to the AUCL in 2019, the right-holder for a trade secret must prove the technical or business information it alleges to be a trade secret, by fulfilling the statutory requirements of trade secrets:
According to the conventional evidence rule, the right-holder shall initially prove all requirements are fulfilled in a trade secret infringement lawsuit, including the first requirement that the alleged information shall not be known to the public. The amendment in 2019 eased the burden of proof for right-holders: if the right-holder submits preliminary evidence showing the alleged trade secrets taken with corresponding confidentiality measures and that these are infringed, the burden of proof will be shifted to the defendant who shall, in turn, prove the alleged trade secrets do not fulfil the requirements of the AUCL.
The new evidence rule is more reasonable and favourable to right-holders. The High People’s Court of Jiangsu Province of China stated in the Guidelines for Trials of Trade Secret Civil Cases announced in April 2021 that as the alleged information is not known to the public, it would be difficult for the plaintiff to prove. As a result, the plaintiff may explain how the alleged information is distinguished from that known to the public or provide an appraisal or search report to prove it is not known to the public, which means this report will no longer be essential. Before the amendment of 2019, the judicial appraisal report was essential for the plaintiff to win the case.
In the judicial practice, the Chinese courts also show a more friendly attitude toward the burden of proof for right-holders. The IP Court of the Supreme People’s Court of China confirmed in the precedent Ji’nan Sike Testing Technology Co Ltd v Ji’nan Lan’guang Electromechanical Co Ltd over a trade secret infringement dispute that according to the amended AUCL, the right-holder is not required to prove that the alleged information is not known to the public. If it proves the alleged information has corresponding confidentiality measures and the defendant conducted infringing acts, the burden of proof shall be shifted to the defendant. The local first-instance courts such as Shenzhen Intermediate Court also follows the same rule, as shown in the precedent announced in 2021.
Based on the new evidence rule for trade secrets, the right-holder does not have to prove that the alleged information is not known to the public, but is still obliged to point out the scope of a trade secret and explain how it is distinguished from the public information before the court debate. Therefore, it is suggested that the plaintiff should reasonably summarise the scope of the trade secret before the court hearing. As a safer approach, albeit not necessary, ex-parte searches are recommended to confirm whether the summarised trade secrets have been disclosed to the public to prepare for potential challenges from the defendant.
Benefits from the reform on general procedural rules
In China, there is no discovery proceeding and it is particularly difficult for right-holders of intellectual property to produce evidence in terms of infringement and damages. The Chinese courts have attempted to ease the burden of proof for IP right-holders, by using the tools to shift the burden of proof within the scope of the Civil Procedural Law.
In the Interpretation on Application of the Civil Procedural Law of China issued by the Supreme People’s Court (SPC) in 2014, the SPC firstly established the rule of a written evidence submission order for general civil cases. According to this rule, a party may apply to the court to order the counterparty to submit written evidence, provided it is controlled by the counterparty. If the court approves the application while the counterparty fails to do so without any justified reason, the court may infer that the fact as alleged by the applying party regarding the content of the evidence is true. In the SPC’s Several Provisions on Evidence in Civil Procedures Involving Intellectual Property Rights enacted in 2020, this rule is expanded to all evidence, including physical products in IP-related civil cases.
The rules of proof burden shifting, including the rule of evidence submission order, has significant benefits for right-holders of trade secrets in judicial practice. In the precedent over a trade secret infringement dispute Union Brother (Shanghai) Machinery Co Ltd v Shanghai Woodsea Machinery Co Ltd et al announced by the IP Court of the SPC in April 2021, the related products optimised cut-off saws and the alleged infringing models included V200 and S200. The first-instance court rejected all claims of the plaintiff because the named product could not work in the length mode, in which the alleged trade secrets were used. During the appellate proceeding, only one notarised physical sample of V200 was available for technical investigation by the SPC. The SPC overruled the conclusion of the first-instance court because the infringing mode of the investigated V200 could be unlocked with a password. For another model S200, the SPC inferred that it also used the alleged trade secret because:
The recent precedents of the Chinese courts, including the above, shows a trend that more and more courts are willing to apply the rule of proof burden shifting, when the plaintiff has exhausted all reasonable ways to produce evidence and provided preliminary proof for what it alleges, based on the general evidence rules for IP or civil cases. This is also particularly significant for trade secret cases, since infringement upon trade secrets is carried out by the infringers secretly.
Higher Damages Awarded
From the statutory damages to more accurate damages calculations
At the beginning of 2021, the IP Court of the SPC published two influential trade secret cases. One of them is known as the Vanillin case, famous for the damages awarded by the SPC amounting to around CNY159 million. This amount is the highest ever awarded in the nationwide trade secret cases.
In the past years, the Chinese courts were more inclined to adopt the statutory damages rule in trade secret cases because it is difficult to calculate the actual economic loss to the plaintiff or the actual infringement profit of the defendant. Although the maximum statutory damages were increased twice by the two amendments to the AUCL to CNY3 million in the 2017 amendment and CNY5 million in the 2019 amendment, the maximum statutory damages may not be sufficient to cover the actual loss suffered by the right-holder.
In the Vanillin case, the plaintiff claimed damages and reasonable enforcement costs amounting to CNY502 million in the first instance. To support its claim, the plaintiff submitted an economic analysis report that concluded that the plaintiff at least suffered damages of CNY790 million through price erosion. The first-instance court, adopting the most conservative approach as stated above, awarded damages of CNY3 million, which was the applicable maximum statutory damages.
During the appellate proceeding, except for the price erosion method, the plaintiffs also proposed two other calculation methods:
The IP Court of the SPC did not ignore the calculation methods of the right-holders but considered them in a comprehensive manner. In considering the value of the trade secrets, the severe circumstances of the infringement and damages caused to the market share of the right-holders, the SPC adopted the sales margin greater than the business margin, and further multiplied the margin with an estimated sales volume based on the conservative annual production volume, acknowledged by the defendant to determine the damages and reasonable enforcement cost amounting to around CNY159 million.
Solving the difficulties in determining the damages in IP cases is a target of reform of the IP trial system in China. As early as September 2015, the SPC established a base in Guangzhou IP Court, aiming to solve the problems in damages determinations, including finding more accurate methods in determining damages. According to the present practice, the Chinese courts are becoming increasingly flexible in comparing various methods in order to obtain a more accurate calculation for damages.
Since trade secret infringement is always intentional and likely malicious in nature, in order to get higher awarded damages, it is proposed that the right-holder should collect and submit preliminary evidence on damages and prepare multiple calculation methods for supporting the claim. If the multiple calculation methods can be cross-checked, the likelihood for the court to award higher damages would increase.
The punitive damages rule was added to the AUCL in 2019, applicable to trade secret infringement cases. In March 2021, the SPC issued a judicial interpretation providing detailed standards on applicability and calculation of punitive damages in intellectual property cases. The standards have been made clearer through the court’s detailed analysis in particular cases, giving directions to the right-holders of trade secrets to produce evidence to support a meaningful amount of damages.
The punitive damages rule is generally not traceable to the infringement conducted before the effective date, 23 April 2019 of the AUCL amended in 2019. In the Vanillin case, the claim of applying the punitive damages rule was not supported by the court because the accused infringement was conducted before the end of 2017.
The trade secret case in which the SPC firstly applied the punitive damages rule was the Carbomer case, one of the two influential trade secret cases at the beginning of 2021. In the Carbomer case, the SPC applied the punitive damages up to five times, considering:
Since the trade secret infringement is intentional and malicious in nature, the likelihood of applying the punitive damages rule in trade secret cases would be higher than other IP infringement cases. It is recommended that the right-holders of trade secrets claim punitive damages in order to get higher damages awarded.
Joint Liability of Individuals
Legally speaking, a company is independent of its investors and assumes the legal liabilities if it constitutes IP infringement. Trade secret cases are somewhat different because trade secrets are stolen, disclosed and used by individuals. The responsible individuals in trade secret cases will accordingly be held liable for at least part of the joint liability.
Provided the infringing company was founded only for business infringing the alleged trade secrets, the legal representative would be generally held jointly liable for the awarded damages. In the Vanillin and Carbomer cases, the legal representatives of the infringing companies were held jointly liable for all damages awarded by the court, as the SPC opines that the company becomes a tool of the legal representative to conduct infringement upon the trade secrets.
In order to examine trade secret infringement more thoroughly, recommendations include investigating and listing the infringing individuals, in particular, the legal representatives as defendants in the lawsuit and requesting they assume joint liabilities with the infringing company.
Preliminary Injunction: a Timely Protection
It is known that an IP infringement proceeding may be lengthy, such as two to three years, for an effective judgment, including an injunction. It may seem too long, and the injunction becomes meaningless if the infringement leads to irreparable harm to the right-holder, such as the erosion of the market share of the right-holder.
In the press release conference in February 2022, the vice chief judge of the IP Court of the SPC commented that the Chinese courts are trying an approach of “first-instance judgement + preliminary infringement”, to overcome the problem that the first-instance judgment does not take effect immediately when rendered, and to enhance the protection for intellectual property in a timelier manner. This is even more important for trade secret cases because, due to their confidentiality, the longer the proceeding, the higher the risk of being irreparably harmed or disclosed.
The Chinese courts are more willing to adopt the above approach of “non-final judgment + preliminary infringement” in trade secret infringement cases. In the Vanillin case, the first-instance court granted a preliminary injunction while rendering the first-instance judgment to avoid further damages to the right-holder. In a case called SOC design and mass production case, recently announced by the SPC in February 2022, the SPC granted an injunction when the judgment was remanded to avoid the right-holder winning the lawsuit but losing in the market.
In the future, due to the nature of trade secrets, the above approach of “non-final judgment + preliminary infringement” will be more and more frequently adopted by the Chinese courts, compared to other intellectual property rights. It is suggested that the right-holders of trade secrets file an application with the court for getting a preliminary injunction when the non-final judgment is rendered to get trade secret protection in a timelier manner.
Administrative Enforcement: Another Option for Right-holders
The administrative enforcement was rarely seen in the past, perhaps because the facts for trade secret cases are complex in technical secret cases, and the procedure for the whole case is complicated, as judicial appraisals may be involved in most cases.
Since the general offices of the Central Committee of CPC and the State Council of China issued Opinions on Strengthening the Protection of Intellectual Property Rights in November 2019, the State Administration for Market Regulation (“SAMR”) has become more active in improving regulations for administrative enforcement of trade secrets.
The SAMR announced the Regulations on Protection of Trade Secrets (Draft for Public Comment) on 4 September 2020, which provided detailed rules for determining infringement upon trade secrets. Although the regulations have not been formally promulgated, rules similar to civil proceedings would be a good reference for the administrative authority in trade secret cases. In March 2022, the SAMR further announced the Nationwide Working Solution on Innovative Pilots for Trade Secret Protection, aiming to find 15 to 20 local areas as innovative pilots for administrative enforcement on trade secrets, in order to improve the regulations, system and its mechanism.
It can be foreseen that the administrative enforcement on trade secrets may be more active and frequent in the future. Since administrative enforcement would be more efficient than civil proceedings, it would be preferable if the right-holder would like to protect trade secrets in a timelier manner.