Trade secrets protection in China

Trade secrets litigation in the PRC has long posed a considerable challenge for IP owners, largely due to the onerous burden of proof placed on rightsholders and the absence of a formal discovery process, coupled with the courts’ historical hesitancy to award significant damages. For some time, this has resulted in a less than satisfactory trade secrets protection regime.

However, the 2019 amendment of the Anti-Unfair Competition Law (AUCL) and the 2020 implementation of the Provisions of the Supreme People's Court on Several Issues Concerning the Application of Law in the Trial of Civil Cases Involving Infringements upon Trade Secrets (Judicial Interpretation) has brought about some changes favourable to rightsholders, as part of the Chinese government’s emphasis on IP protection in support of innovation and economic growth. These notably include the reversal of the burden of proof from rightsholders to alleged infringers, and the introduction of punitive damages for bad faith infringement. PRC courts are now increasingly inclined to offer protection for trade secrets owners and make significant damages awards.

On 27 December 2023, China’s Supreme People’s Court (SPC) handed down a landmark judgment in case number (2022) SPC IP Civil Final No. 816 (the Judgment), believed to be the largest damages award for trade secrets infringement in the country to date. The Judgment upheld the Jiangsu Higher People's Court’s (HPC) decision in favour of Sennics Co., Ltd. (Sennics), a provider of rubber additives, and awarded RMB201.54 million in damages against the defendants, Chen Yonggang (Chen) and Yuncheng Jinteng Chemical Technology Co., Ltd. (Yuncheng Jinteng).

Background of the Judgment

In the case, Sennics contended that since 2007, Chen and Shanxi Xiangyu Huagong Co., Ltd. (Shanxi Xiangyu) misappropriated its trade secrets regarding the synthesis of “RT Pace” and the production of the rubber antioxidant 4020 in order to modify and build their own production lines. The secrets included technical information such as operating procedures, materials, control parameters, layout and equipment. Even after Shanxi Xiangyu was criminally convicted of trade secrets infringement in 2018, the infringement did not cease. Chen went on to establish Yuncheng Jinteng which continued to make use of the trade secrets to produce infringing products.

Sennics sought, inter alia, an order for the cessation of infringement, destruction of the infringing production equipment built using the trade secrets (Infringing Equipment) and RMB201.54 million in damages, all of which were granted by the HPC. On appeal by the defendants Chen and Yuncheng Jinteng, the SPC upheld the HPC’s findings of fact, agreed that there had been trade secrets infringement and that the award of damages was appropriate, but called for a retrial on the order to destroy the Infringing Equipment.

Key issues of the Judgment

Issue 1: did the information in question constitute trade secrets?

According to Article 9 of the AUCL, “trade secrets” means technical, operational or other commercial information unknown to the public and of commercial value for which the rightsholder has taken corresponding confidentiality measures.

In their SPC appeal, the defendants argued that the information in question was already in the public domain, citing nearly a hundred pieces of public literature and various patent applications of Shanxi Xiangyu.

The SPC applied Article 3 of the Judicial Interpretation, which states that “where the information for which protection is sought by a rightsholder is not generally known and easily accessible by relevant personnel in the relevant field when an alleged infringement occurs, the People's Court shall determine that the information is not known by the public”. The SPC explained that the test is objective and takes into account the specific content of the information, its similarity to public information, as well as the knowledge and level of understanding of personnel in the field. Crucially, the court should also consider whether the technical information is merely a simple combination of what is already known by the public.

The SPC concluded that the information in question, though scattered across various pieces of literature, still had the status of trade secrets. The information consisted of 22 points which Sennics had coordinated to form a cohesive production process. Here, the SPC applied Article 4 of the Judicial Interpretation: even if the individual points of technical information could be separately located across various pieces of public literature, collating these required considerable time and effort, and the information thus exceeds what is considered generally known or easily accessible to an individual in the field and should thus be deemed unknown to the public.

The SPC also found that while Shanxi Xiangyu's patent applications disclosed the technical principles and methodology to the public, they lacked certain specifics, such as a flowchart of the processes, detailed parameters, and equipment specifications.

Issue 2: could an order to destroy the Infringing Equipment be granted?

Sennics also sought an order against the defendants to destroy the Infringing Equipment. The defendants argued that the ownership of the Infringing Equipment had already been transferred to some third parties by way of a finance lease and a subsequent assignment of non-performing debts, and that a destruction order against the third parties was therefore inappropriate.

At the HPC, it was held that the finance lease was merely a leaseback financing arrangement and not a true transfer of title. In any event, the third party had the option to claim damages from Shanxi Xiangyu for any loss resulting from the destruction order under the terms of the finance lease. The existence of the finance lease did not change the fact that the Infringing Equipment was an instrument of crime and would not be a valid justification to preclude a destruction order.

On appeal, while the SPC acknowledged that Article 18 of the Judicial Interpretation provided a clear basis for an order to destroy a carrier of trade secrets as a remedy for the rightsholder in case of infringement, the SPC nevertheless overturned the HPC’s order because the ownership of the Infringing Equipment was still in dispute and could not be accurately resolved in the absence of the interested third parties. Consequently, the SPC ordered a retrial by the HPC on this issue, with the interested third parties to be joined in the proceedings.

Issue 3: for the infringement of trade secrets, what quantum of damages should be awarded?

The HPC’s decision set a record as the largest award of damages for trade secrets infringement in China to date, with a groundbreaking award of RMB201.54 million made. The SPC upheld the HPC’s decision. Applying Article 17 of the AUCL, the SPC took into account both the actual loss suffered by Sennics and the profits gained by the infringers. In particular, the SPC cited Article 23 of the Judicial Interpretation, which provides that the court should support claims for damages based on the actual loss or profits as determined by a judgment in a related criminal matter.

In its decision, the SPC concluded that the amount of damages of RMB201.54 million had a sound factual basis, given the appraisal report recognised in the 2018 criminal judgment against Shanxi Xiangyu, as well as the infringers' substantial revenues, with average annual sales exceeding RMB680 million (a figure which clearly exceeded the claimed damages).

Key takeaways

Although the outcome of trade secrets litigation is heavily dependent on the facts of each case, the Judgment is a positive development for rightsholders in China. On the other hand, the Judgment may encourage defendants to be more rigorous in defending against infringement claims.

Such measures can include non-disclosure and confidentiality agreements, internal confidentiality protocols for employees, vendors, clients, and visitors, access restriction and encryption, and a management system for classified documents and information. Not only do such measures guard against trade secrets misappropriation, but proof of such actions being taken will strengthen the rightsholder’s case in the event of a dispute. After all, part of the definition of ‘trade secrets’ under the AUCL is that the rightsholder has taken appropriate confidentiality measures.

Such measures can include non-disclosure and confidentiality agreements, internal confidentiality protocols for employees, vendors, clients, and visitors, access restriction and encryption, and a management system for classified documents and information. Not only do such measures guard against trade secrets misappropriation, but proof of such actions being taken will strengthen the rightsholder’s case in the event of a dispute. After all, part of the definition of ‘trade secrets’ under the AUCL is that the rightsholder has taken appropriate confidentiality measures.

For more information and if you have any questions, please contact Edward Chatterton or your usual DLA Piper contact.