Determination of infringement of computer software trade secrets— Sunrise Technology Co., Ltd. v. AsiaInfo Technologies (China), Inc. et al.

Determination of infringement of computer software trade secrets— Sunrise Technology Co., Ltd. v. AsiaInfo Technologies (China), Inc. et al.[1]

Introduction

On 19 February 2020, the high profile trade secret infringement case, Sunrise Technology Co., Ltd.v. AsiaInfo Technologies (China), Inc. et al., was finally decided by Beijing Higher People’s Court (the “court of second instance”) which upheld the first-instance judgment rendered by Beijing Intellectual Property Court (the “court of first instance”) and rejected all claims of the plaintiff.

In recent years, trade secret infringement cases are distinctive in intellectual property disputes due to the uniqueness of trial paradigm, complexity of fact discovery and professionalism of law application. In judicial practice, courts usually follow the following three-step approach to hear such cases:[2] Step 1—Examine and determine whether the plaintiff has the right to make claims in respect of its trade information and whether thetrade information meets the statutory requirements of trade secrets (i.e. secrecy, confidentiality and practicability).[3]  Since trade secrets are not public knowledge,  the boundaries of rights in them are usually vague compared with those of other intellectual property rights. Therefore, the right holder will have to clarify the scope of its trade secrets, which is generally called “point of secrecy,”[4] in order to prove the existence of trade secrets. Step 2—If the answer is yes to the two questions in Step 1, examine and determine whether the defendant has committed any infringing acts. Step 3—If the answer is yes to the question in Step 2, determine the type and magnitude of civil liability that the defendant should bear.

In trade secret infringement cases, the distribution of the burden of proof is a major concern as it even directly affects the success of the parties in the case. The court usually decides on the economic practicality of trade secrets at its discretion, and places relatively low requirements on the burden of proof of the right holder.[5] Therefore, the distribution of the burden of proof further focuses on the elements of secrecy and confidentiality.

As a typical computer software trade secret case, this case involves many parties, complex legal relations, and the discretion rules to follow when different rights exist on the single object of the computer software source codes. The above factors make this case an excellent sample for the research on the burden of proof in trade secret infringement cases. As the attorney on behalf of most co-defendants in this case, the authors will review representation strategy and the main points of the judgment, and discuss the burden of proof in trade secret cases.

I.Basic facts of the case

Sunrise Technology Co., Ltd. (“Sunrise Technology”) is a provider of software development and information system integration services. Starting from 2004,Sunrise Technology signed a number of technical service contracts with China Mobile Guangdong (formerly known as “Guangdong Mobile Communications Co., Ltd.,” “Guangdong Mobile”), under which Sunrise Technology would provide Guangdong Mobile with services such as development and maintenance of a set of communication service support subsystem software (the “Software”) such as “NGBOSS billing system software,” “NGBOSS accounting system software,” “NGCRM software,” “electronic channel system software” and “business analysis system software.” On 27 August 2014, Guangdong Mobile sent a letter to Sunrise Technology stating that it elected not to renew any previous contracts between both parties in respect of the Software as they had expired.

The 12 individual co-defendants in this case were formerly employed and signed employment contracts and confidentiality agreements with Sunrise Technology or  its Guangzhou-based affiliate, Maywide Technology Co., Ltd (“Maywide”). After resignation from their respective employer successively between July and September 2014, they joined AsiaInfo (Guangzhou) Software Service Ltd. or its affiliates respectively.

In September 2014, AsiaInfo Technologies (China), Inc. (“AsiaInfo”) signed three technical service contracts with Guangdong Mobile, including “China Mobile Guangdong 2014–2015 NGBOSS Billing and Accounting System Maintenance Service Project Contract.” It was agreed that AsiaInfo would provide software maintenance and troubleshooting services for billing, accounting and electronic channel systems for Guangdong Mobile.

In 2015, Sunrise Technology filed a lawsuit with the court of first instance, claiming that the individual co-defendants, including Mr. Bu, stole the source programs of the Software from Sunrise Technology by taking advantage of their accessibility thereto at work. They successively resigned and terminated their employment contracts with Sunrise Technology or Maywide, and provided the stolen software source programs to AsiaInfo. AsiaInfo continued to use those source programs knowing that they were derived from Sunrise Technology’s trade secrets. Its use was obviously out of malice and constituted infringement upon the plaintiff’s trade secrets. The claims raised  by Sunrise Technology in the first instance included that the court should order all defendants to: first, immediately cease from using and holding the source programs of the Software; second, destroy or delete the source programs of the Software from their computers immediately; third, jointly and severally compensate the plaintiff for its economic losses of RMB 100,000,000 due to infringement of the plaintiff’s technical secrets; fourth, jointly and severally compensate the plaintiff for its reasonable expenses of RMB 2,000,000; and fifth, bear all the litigation costs of the case.

II.Case adjudication

Similar to the general trade secret cases, the dispute in this case focused on two major issues: whether the plaintiff was entitled to claim the trade secret right, and whether the co-defendants had infringed the asserted trade secrets. Therefore, the parties produced evidence to establish their claims in the above two aspects.

Sunrise Technology submitted a number of contracts with Guangdong Mobile for the development and maintenance of the Software, in order to prove that Sunrise Technology was the developer and the owner of the Software who had the right to claim the protection of trade secrets with respect to the Software. AsiaInfo argued that, according to the technical service contracts between Sunrise Technology and Guangdong Mobile, the succession relationship between different contracts and the subject software, and relevant laws and regulations, the copyright in the Software belonged to either Guangdong Mobile alone or Guangdong Mobile and Sunrise Technology jointly. Sunrise Technology had no right to claim the protection of trade secrets for the source codes of the non-exclusively owned Software.

In addition, Sunrise Technology did not specify the “point of secrecy” of its asserted trade secrets when filing the case. In the first instance, Sunrise Technology also failed to prove the specific content and carrier of its asserted trade secret. The court of first instance repeatedly clarified that the source codes of the Software submitted by Sunrise Technology should establish that the Software was in conformity with the legal requirements of trade secrets. However, Sunrise Technology did not produce the source codes of the Software until the second instance, and the formation time, content and form thereof were inconsistent with its claims. AsiaInfo refuted that Sunrise Technology neither provided evidence to establish the carrier and specific content of the Software and its source codes, nor explained the “point of secrecy”   of the Software. Since the plaintiff failed to fulfill its most basic burden of proof, it should bear the legal consequences resulting from the failure.

In view of the focus of the dispute in this case, the court of first instance held  as follows: Firstly, the source programs of the computer software, apart from being protected by the Copyright Law of the People’s Republic of China (Copyright Law), is also protected by the Anti-Unfair Competition Law of the People’s Republic of China (Anti-Unfair Competition Law) as technical information. The prerequisite for claiming so is to enjoy copyright in the software. Secondly, Sunrise Technology was the developer of the Software. However, based on the agreement between Sunrise Technology and Guangdong Mobile and the relevant industry practices, Sunrise Technology exclusively enjoyed the copyright in some of the Software only. Regarding the software source codes of the non-exclusively copyrighted part of the Software, Sunrise Technology had no right to claim the protection as trade secrets (while the court of second instance changed the argumentation of the court of first instance. See below for details). Finally, Sunrise Technology did not produce evidence to prove that AsiaInfo and the other co-defendants violated its trade secrets, and thus should bear the legal consequences resulting from its failure to fulfill its preliminary burden of proof.

Accordingly, the court of first instance rendered the judgment on 18 September 2018, rejecting all claims of Sunrise Technology. After Sunrise Technology and AsiaInfo both appealed,[6] the court of second instance rendered the final judgment on 19 February 2020, upholding the judgment of first instance.

III.Case analysis

(I)When should the plaintiff specify the “point of secrecy”?

In judicial practice, many right holders, just like the plaintiff in this case, did not specify the “point of secrecy” but only generally claimed that their trade secrets  have been violated at the time of filing the lawsuit. This strategy will directly affect the defendant’s strategy and preparation for defense and place the defendant at a disadvantaged position at the beginning of the litigation. If the asserted trade secrets are too general, it will be difficult for the court to identify the focus of the dispute   in a timely manner, thus reducing the efficiency of the trial. Therefore, in practice, most courts will require plaintiffs to clarify the scope of the asserted trade secrets. Otherwise, it will be difficult for the court to proceed with the substantive trial, and even probable for the plaintiff to lose. The judgments of first and second instance   in this case also mentioned for times that Sunrise Technology had a preliminary burden of proof to establish that the asserted trade secrets conformed to the statutory requirements. As a matter of fact, due to Sunrise Technology’s failure to fulfill its burden of proof, the court could not conclude that the information of the Software was substantively identical to the asserted trade secrets based on the existing evidence. The court of second instance even rejected the identity authentication application submitted by Sunrise Technology.

In judicial practices of trade secrets infringement cases, the judge usually has discretion to decide when the plaintiff should specify the “point of secrecy” of the asserted trade secrets. According to the relevant research report of the Supreme People’s Court, some Beijing local courts tend to order the plaintiff to ascertain the scope of trade secrets before the end of a certain stage of the trial. For example, if the plaintiff applies for evidence preservation, the court will probably require the plaintiff to clarify the scope of the asserted trade secrets when submitting such an application at the latest.[7] However, with the increasing number of trade secret cases, some local courts have issued unified regulations on the timing of specifying the “point of secrecy.” Jiangsu Higher People’s Court has issued relevant guidance under which generally the point of secrecy may be determined after rounds of cross-examinations or court hearings since the process is complex and controversial between the parties. In the trial of a case, the court shall generally require the plaintiff to clarify the   basic content of the asserted trade secrets before the end of the evidence discovery.[8] According to the Guidance of Henan Higher People’s Court on Trial of Trade Secret Dispute Cases (For Trial Implementation), the right holder shall, when filing the case, submit evidence containing the carrier of its asserted trade secrets, indicate the actual existence, position and content of its asserted trade secrets, and define the scope of its asserted trade secrets clearly.[9] To sum up, in judicial practice, according to the specific circumstances of the case, the plaintiff may be required to clarify the specific scope of its asserted trade secrets when filing the case, before the end of evidence discovery and when submitting the application for evidence preservation.

(II)Does the plaintiff have the right to make trade secret claims?

1.May single computer software be treated as a carrier of both copyright and trade secrets at the same time?

In general, computer software that meets the statutory conditions is protectable as a work under the Copyright Law. If the software source codes meet the requirements of trade secrets, it can also claim protection as trade secrets. As mentioned above,after determining that Sunrise Technology enjoyed the copyright in the Software exclusively or jointly with Guangdong Mobile, the court of first instance further held that Sunrise Technology had the right to claim the protection of trade secrets only with respect to its exclusively owned source codes. However, the court of second instance corrected the above conclusion of the court of first instance, holding that as long as Sunrise Technology was one of the right holders of the Software, it had the right to make trade secret claims in respect of the Software in its own name.

The above opinion of the court of second instance indicates a method for determining the ownership of computer software trade secrets in current judicial practice. First, the source codes of computer software can be protected either as works or as technical information. Where the objects of different rights coincide,  the agreement on the ownership of copyright shall be regarded as the agreement on the ownership of technical information. Secondly, as long as the party is one of the software copyright owners, it may claim legal rights, including those in technical information, in respect of the software source codes in its own name. Therefore, when signing the contracts regarding the commissioned or cooperative development of software, the parties shall expressly agree on the ownership of the software, especially the intellectual property ownership of the documentation, model, applied software products and derivative products, as well as on the exercise of the right to seek protection, and the distribution of benefits.

2.New approach for identifying secrecy in computer software trade secret cases

Article 9 of the Interpretation of the Supreme People’s Court on Several Issues Concerning the Application of Law in the Trial of Civil Cases of Unfair Competition (the “Anti-Unfair Competition Judicial Interpretation”) provides that the information which is not generally known and easily available to relevant personnel in their fields shall be deemed as “not known to the public” as provided in Article 10 Paragraph 3 of the Anti-Unfair Competition Law. Therefore, the court will usually consider whether the requirement of “not generally known to relevant personnel in their fields” or “not easily available” has been met when examining the secrecy of trade secrets. It is worth noting that due to the similarity of the wording, the parties in trade secret infringement cases often defend by analogy of the prior art defense in patent infringement cases. They claim that the trade secrets are publicly unknown on the ground that the technical information contained in the trade secrets is identical to or substantially similar with the corresponding technical feature in a prior art. It is still controversial over this issue. The current mainstream judicial point of view is that the standards for prior art

defense in patent infringement are different from those for deciding whether the trade secrets are publicly unknown. They are different legal issues and are not comparable.[10] Regarding whether the source codes of the Software are unknown to the public, the courts of first and second instance both developed argumentation from the characteristics of computer software development. Specifically, as the developer of the Software, Sunrise Technology had made creative efforts in the process of software writing. Although the source codes of the Software contained some open source or third party code, Sunrise Technology still made creative efforts in the selection of open source and third party code and their combination. The technical information formed by this labor effort had certain particularity, and thus was different from publicly known information and may be identified as information not known to the public.

There are also precedents before this case to determine the secrecy of trade secrets by reviewing whether there are creative or intellectual input and other elements. For example, Hangzhou Intermediate People’s Court holds that technical secrets should be understood as designs, procedures, processes, etc. obtained through intellectual labor in order to solve a certain technical problem. They naturally include technical measures or a combination of those measures.[11] Generally speaking, creative work for computer software is usually used to evaluate whether its expression is original and constitutes a protectable work under the Copyright Law. Although originality  is different from secrecy in the legal context, in this case, we note that the court, based on the characteristics of computer software development, flexibly applied the originality defined by the Copyright Law. That means originality can be used as a factor for determining the existence of secrecy in civil cases of computer software trade secrets. This undoubtedly provides a new way to further study and solve the problem of how to establish the secrecy that perplex the right holder and the judge.

3.Legally effective security measures

Article 11 of the Anti-Unfair Competition Judicial Interpretation provides that reasonable protection measures, commensurate with the commercial value  and  other specific circumstances of the information, taken by the right holder to prevent information leakage shall be deemed as “confidentiality measures” as prescribed in Article 10 Paragraph 3 of the Anti-Unfair Competition Law. In practice, the court will generally determine whether the right holder has taken the confidentiality measures according to the factors such as the characteristics of the information carrier, the right holder’s willingness to keep the information confidential, the identifiability of the confidentiality measures, the proper accessibility of the information. In most trade secret cases involving employee resignation, the court will preliminarily determine that the plaintiff has adopted confidentiality measures based on the confidentiality agreement produced. For example, in this case, Sunrise Technology and Maywide signed employment contracts, non-competition agreements, and intellectual property ownership and confidentiality agreements with the co-defendants respectively, explicitly informing them that the software developed by Sunrise Technology would be a trade secret and that all employees should keep the secret confidential and should not disclose it to the public. The courts of first and second instance believed that   the agreements were equivalent to the confidentiality measures taken by the right holder of trade secrets, and thus the confidentiality requirements of trade secrets were met. Therefore, it is of great significance for the employers to sign written confidentiality agreements with their employees in order to prove that they have adopted confidentiality measures for trade secrets. However, there are also many precedents where the plaintiff’s confidentiality agreement is not clear or specific enough as it simply requires employees to keep trade secrets confidential in principle. It is found impossible for employees to be informed of the scope of information to be protected by the right holder as trade secrets. Ultimately, such confidentiality agreement is not determined as a practical and effective confidentiality measure to prevent the disclosure of trade secrets.[12]

(III)Does the alleged act constitute an infringement?

1.The court’s review of the necessity for identity authentication

As mentioned above, if the plaintiff alleges that the defendant has violated its trade secret, it shall bear the burden of proof to establish that the defendant’s information is identical or substantially identical to its trade secret and that the defendant has taken improper means. As the contents of trade secrets are usually highly specialized, the plaintiff usually needs to rely on identity authentication opinions to perform     its preliminary burden of proof. According to Article 121 of the Interpretation of  the Supreme People’s Court on the Application of the Civil Procedure Law of the

People’s Republic of China (the “Interpretation of the Civil Procedure Law”), the parties may apply to the court for authentication before the expiration of the time limit for adducing evidence. It should be noted the above Article further provides that the people’s court shall not grant permission if the subject matter of authentication  is unrelated to, or meaningless to establish, the facts to be verified. In this case, the identity authentication application filed by Sunrise Technology was therefore not approved by the court of second instance.

Sunrise Technology submitted two mobile hard disks containing the source code of the Software for the first time in the second instance, and applied to the court for evidence preservation against AsiaInfo. During the evidence preservation, AsiaInfo submitted to the court the source codes of its business analysis system software and electronic channel system software. Sunrise Technology applied for identity authentication of the source codes of the foregoing software of the parties. After investigations, however, the court of second instance found the following in the identification materials submitted by Sunrise Technology: First, the source code documentation of Sunrise Technology was generated later than the occurrence of the alleged infringement. Second, the source code documentation submitted by Sunrise Technology contained a large number of codes written in non-C++ languages. However, the Software at issue was written in C++ language. Third, the source codes submitted by Sunrise Technology contained third party codes. Fourth, the two disks submitted by Sunrise Technology to be used as the basis to make the comparison contained multiple folders but it could not specify which folder was to be used. Sunrise Technology also recognized that there were some overlapping files in the two disks. The overlap might affect the conclusion of judicial identity authentication. Therefore, the court of second instance finally decided, based on the facts of the case, to deny the application for judicial authentication submitted by Sunrise Technology because it was not legally necessary.

Therefore, the applicant should select the authentication materials to avoid the denial of its application due to the defects of those materials. The Provisions on Evidence in Civil Proceedings amended by the Supreme People’s Court in 2019 (the “Provisions on Civil Evidence”) made special regulations on authentication materials. According to Article 34 Paragraph 1 of the Provisions on Civil Evidence, the court shall organize the parties to cross-examine the authentication materials. Materials that have not been cross-examined shall not be used as the basis for authentication. The above additional provisions actually institutionalize the relatively mature trial approach in judicial practice.

2.Conditions for shifting the burden of proof

The Anti-Unfair Competition Law as revised in 2019 includes a provision on the distribution of burden of proof for infringement of trade secrets under special circumstances.[13] According to the semantic interpretation of such provision, although the preliminary burden of proof remains at the right holder, it is literally understood that the standard of proof for the right holder is obviously reduced. To put it in another way, the plaintiff is required to produce “preliminary evidence to reasonably show that trade secrets have been infringed.” In order to shift the burden of proof, the right holder needs to further provide other prima facie evidence that shows the trade secret has been infringed by the alleged infringer. Although the Anti-Unfair Competition Law 1993 was applied in this case, the judgment of the second instance clarified  that from the perspective of enhancing the protection of the right holder of the trade secret, it was inappropriate to impose a too strict burden of proof on the right holder. But the right holder should have preliminary evidence to prove the occurrence of infringement. Specifically, if the right holder produces preliminary evidence to reasonably show that the trade secret has been violated, the alleged infringer should prove that it has committed no act of infringing the asserted trade secret. For example, if there is evidence that the alleged infringer has channels or opportunities to access trade secrets, and the information it uses is substantially identical to the asserted trade secrets, the alleged infringer should prove that it has not violated the trade secrets. Only at this point will the burden of proof be shifted. In light of the above, the court of second instance commented as below on whether Sunrise Technology had fulfilled its preliminary burden of proof in accordance with the relevant evidence submitted by Sunrise Technology:

First of all, the former employees of Sunrise Technology and Maywide did    not join AsiaInfo immediately after resignation. Secondly, although AsiaInfo and Guangdong Mobile signed a technical service contract (“AsiaInfo-Mobile Contract”), it was agreed that Guangdong Mobile would provide the basic version of the system and that AsiaInfo would maintain and optimize the system. It could not be found that AsiaInfo had developed the software. Thirdly, Sunrise Technology failed to prove that the software under the AsiaInfo-Mobile Contract was substantially identical to the Software claimed by Sunrise Technology as trade secrets in terms of source programs, documentation, target programs or software results (including software interfaces, operating parameters, and database structure).  Fourthly,  the  statement  made  by the individual defendant Mr. Xia in the second instance could not be used as the basis for establishing infringement in the absence of other evidence because it was contradictory with his statement made in the first instance. Last but not least, Sunrise Technology submitted a screenshot of an e-mail to prove that AsiaInfo possessed and made available the source codes of the Software to Guangdong Mobile. Without the original copy of the e-mail, the evidence was found inadmissible. Accordingly, the court of second instance held that Sunrise Technology failed to fulfil its preliminary burden of proof, and thus its alleged trade secret infringement was not constituted. Therefore, the burden of proof was not shifted to AsiaInfo or other co-defendants.

Particularly, the second instance court did not admit the statement made by the individual co-defendant Mr. Xia because it was opposite to his statement in the first instance. As a matter of fact, it is common for former employees to do so in trade secret infringement disputes. The following new provisions on false statements in the Provisions on Civil Evidence can prevent the case from appearing to a certain extent. Article 63 of the Provisions on Civil Evidence provides that the parties shall make a true and complete statement on the facts of the case. If a party’s statement   is inconsistent with its previous statement, the people’s court shall order the party   to explain the reasons, and determine the admissibility of its statement by taking  into account the party’s litigation ability, evidence and the specific circumstances   of the case. If the party intentionally makes false statements to obstruct the trial of the people’s court, the people’s court shall, according to the circumstances, impose punishment in accordance with Article 111 of the Civil Procedure Law.

As the attorney of AsiaInfo in the first and second instance, KWM IP litigation team helped safeguard AsiaInfo’s legitimate rights and interests and avoid the risks of being awarded to pay high damages in the nearly five-year over RMB 100 million proceedings. In recent years, more high value trade secret infringement disputes are arising. The distribution of burden of proof is frequently the focus and difficulty for the court and for the parties. Therefore, in order to prevail, it is important for all parties to accurately understand and properly apply the burden of proof rules in trade secret infringement disputes. We hope this article provides enlightenment for you on the burden of proof in trade secret infringement cases.