I. Features of civil cases involving technical secrets
Technical secrets protected by the Anti-Unfair Competition Law of the People’s Republic of China (Anti-Unfair Competition Law) must be: (i) Unknown to the public; (ii) of commercial value and (iii) with confidentiality measures taken by right holders. “Unknown to the public” means not generally known and readily available to relevant personnel in certain technical field. “Commercial value” refers to the definite actual or potential value or competitive advantages that targets seeking legal protection have or those brought to the right holder. “Confidentiality measures” refer to measures taken by the right holder to prevent information breach that are in proportion to the value of the technical secrets, which do not require compliance with all the conditions of rules, protocols, hardware constraints or carrier encryption.
Infringements of technical secrets usually include: (i) obtaining technical secrets (by subjects not directly related to right holders) through theft, bribery, fraud, coercion, electronic invasion or other improper means (means of acquisition); (ii) disclosing, using and allowing others to use technical secrets obtained through improper means (means of infringement); and(iii)disclosing, using or allowing others to use technical secrets (by internal employees or partners) in violation of confidentiality obligations or in violation of the right holder’s confidentiality requirements for such technical secrets.
Persons who commit the above acts may constitute contributory infringement if they have liaison of intention and division of labor which jointly result in damages to technical secrets. For contributory infringement, the right holder as plaintiff may file a joint litigation in the court of the domicile (habitual residence) of any defendant as it prefers.
Features of cases involving technical secrets are as follows: First, in civil actions the principle of upholding people’s legal rights is advocated, including the rights requiring public announcement approved and granted by state administrative authorities and the private rights claimed and determined by parties. The right to technical secrets is not one of the rights requiring public announcement approved and granted by state administrative authorities. Therefore, the scope or even existence of such right is subject to the accurate identification of the boundary, content or scope of technical secrets, which is also a major issue contended by parties in litigation. Second, “technical secrets” indicates that it is more difficult to find and obtain evidence in such cases than others. In addition, the application of the litigation principle that “the burden of proof is on the party who makes claims” makes it much more difficult for plaintiff to win. Therefore, it will help to improve the quality of proof and the odds to win by analyzing and determining the scope of rights from the numerous and complicated existing technologies, and skillfully applying the rules regarding shift of burden of proof, obstruction of evidence and preservation of evidence.
II.Overview of the NHU case involving technical secrets
Located in Xinchang County, Zhejiang Province, Zhejiang NHU Co., Ltd. (“NHU”) is the world’s leading manufacturer of vitamin E products. Vitamin E was first synthesized in 1938, of which the basic synthesis procedure is based on prior art. However, in today’s mass production, to ensure higher purity, higher yield and lower production cost at the same time is the core for the survival of the fittest among competitors in this industry. NHU’s independent IP is the technological and operational procedures for the production of vitamin E, based on which NHU has the right to seek protection of technical secrets in this case.
NHU’s R&D on the technological and operational procedures of vitamin E began in April 1996 and continued until September 2008. During this period, NHU have undergone restructuring and reforms, but the origin and attribution of relevant technologies are clear. In 1997, natural person Yu Mu (pseudonym) started to work at NHU, who successively served as section chief and director of the workshop for vitamin E production. This experience made him familiar with the technologies at issue.
In 2008, Fujian Rongyao Pharmaceutical Co., Ltd. (pseudonym) decided to launch its vitamin E production project. It approached Yu Mu through an intermediary as the company had no established technology in this field. In May of the same year, Rongyao signed a vitamin E technology transfer agreement with Yu Mu, in which it agreed to accept the NHU’s technologies mastered by Yu Mu for a consideration of RMB 800,000. In October 2010, Yu Mu left for Rongyao where he worked as deputy general manager. In 2011, several shareholders of Rongyao invested and established Fujian Jianghai Pharmaceutical Co., Ltd. (pseudonym), a company specialized in vitamin E production. Relevant technological achievements and personnel of Rongyao were transferred to Jianghai. Yu Mu applied the technologies he had mastered for vitamin E production during his employment with NHU, as well as the follow-up technologies he had stolen to the design and construction of Jianghai’s equipment and facilities for vitamin E production.
In March 2013, NHU reported to the Public Security Bureau of Xinchang County (the “PSB”) upon discovery that Yu Mu, Rongyao and Jianghai were suspected of committing crimes of infringing its technical secrets. The PSB filed a case for investigation, and later seized the technical files regarding NHU’s technological and operational procedures from Yu Mu’s computer. In addition, the PSB successively seized the technical data on the identical theme signed by Jianghai from the design and construction units of Jianghai’s vitamin E project, and Fuzhou Administration of Work Safety.
When reporting to the PSB, NHU classified its infringed technological and operational procedures into 10 key secrets. Each key secret represents a technical unit that independently performs certain technological functions and produces independent technical effects. They endowed NHU with the right to seek protection for its technical secrets in this case. The PSB commissioned a forensic identification center to identify whether the above key secrets were unknown to the public, which confirmed that such key secrets were unknown to the public by means of patent novelty search. The PSB further entrusted the forensic identification center to conduct the comparison between the 10 key secrets of NHU and the seized technical files with identical themes of Jianghai. After comparison, the forensic identification center confirmed that the two were identical in legal sense.
In November 2015, the People’s Court of Xinchang County found that the defendants constituted a crime of infringing trade secret and made a first-instance criminal judgment. It held that Rongyao constituted crime and imposed a fine of RMB 14 million; that Jianghai constituted crime and imposed a fine of RMB 17 million; that Yu Mu constituted crime of infringement and sentenced him to prison for six years plus a fine of RMB 200,000. In addition, four other defendants who committed individual crimes were also sentenced to different terms of imprisonment. In July 2016, the Intermediate People’s Court of Shaoxing Municipality upheld the first- instance judgment.
In December 2014, NHU filed a civil lawsuit for infringement of technical secrets with the Intermediate People’s Court of Shaoxing Municipality. For one thing, the PSB by then has found preliminary evidence that Yu Mu, Rongyao and Jianghai had infringed NHU’s technical secrets. Thus, by filing such lawsuit, NHU may effectively use such evidence to protect its legitimate rights and interests. For another, in this criminal case, NHU could not be compensated for the pecuniary losses it suffered as a result of Rongyao and Jianghai’s infringement, and even a specific injunction for cessation of such infringement could not be issued either.
NHU filed a joint litigation against Yu Mu, Rongyao and Jianghai as co-defendants since there had liaison of intention and division of labor which had jointly resulted in damages of infringement of NHU’s technical secrets. Meanwhile, considering that Yu Mu’s habitual residence was under the jurisdiction of the Intermediate People’s Court of Shaoxing Municipality, and so were the place of execution and performance of the sales contract of the technical secrets at issue, NHU chose to file this lawsuit therewith. The major claims in its civil lawsuit involving infringement of technical secrets are: (i) Requesting the court to order the three defendants to immediately cease infringement and destroy relevant equipment, facilities and technical data; (ii) requesting the court to order the three defendants to jointly and severally compensate the plaintiff for infringement losses of RMB 50 million and reasonable expenses of RMB 1 million.
In January 2017, after hearing the case in accordance with law, the Intermediate People’s Court of Shaoxing Municipality made its first-instance judgment. First, it ordered Rongyao, Jianghai and Yu Mu to immediately cease infringement on NHU’s technical secrets until such technical secrets are known to the public. Second, it ordered Jianghai to compensate NHU for infringement losses of RMB 35.22 million, while Rongyao and Yu Mu shall be jointly and severally liable for such compensation. In May 2018, the High People’s Court of Zhejiang Province made its final verdict in which it dismissed the appeal and upheld the first-instance judgment.
III.Inspiration from NHU’s technical secret case
First, it is important to accurately identify the foundation of rights which can give NHU the right to seek protection and to actively create conditions for shifting the burden of proof. It is the cornerstone of this case to identify key secrets that deserve protection of the Anti-Unfair Competition Law and accurately conform to the current judicial policies and law enforcement standards from a large number of prior arts regarding the technological and operational procedures of vitamin E production. If we tend to err on the side of lenity, it could have easily resulted in the foundation of rights in the whole case eroded and shaken by prior arts; if we tend to err on the side of stringency, it could have failed to include all valid rights under legal protection. NHU carefully identified the key secrets, repeatedly conducted novelty search, and meticulously determined the foundation of rights in this case after full queries and several rounds of self-denial. In addition, NHU collected and put together internal and external evidence based on the clues that Yu Mu, who mastered and was familiar with NHU’s technologies at issue, left for Rongyao as a senior executive officer, that Rongyao had never had technology for the R&D of vitamin E production but was eager to start the project, and that shortly after the transfer of technologies and personnel to Jianghai, it produced finished products, which enabled NHU to preliminarily restore the basic facts, corroborating that Yu Mu, Rongyao and Jianghai were suspected of infringing NHU’s technologies at issue. The positive attitude of NHU and its collection of preliminary evidence satisfied the conditions for shifting the burden of proof in the legal sense. As a result, it could seek help from the PSB to make up the missing evidence of infringement, and thus restore relevant history and facts with the support of concrete evidence.
Second, the criminal evidence can be used in civil cases. The dual-track approach of criminal relief and civil relief provided legitimate grounds for NHU to seek these two reliefs against the same infringement act. Criminal relief effectively cracks down on crimes and has great warning effect by restricting the personal freedom of offenders, which is in line with the public’s fear of penalties. However, a criminal judgment cannot explicitly order the offender to cease infringement. Although it may impose a fine on the offender, it cannot have the victim compensated by the unlawful gains of the offender. In order to make up for such disadvantages of criminal lawsuit, it is necessary to file civil lawsuits to explicitly order the tortfeasor to cease infringement and effectively compensate for damages suffered by the right holder. Therefore, NHU filed a civil infringement lawsuit in due course in which it submitted the criminal evidence obtained earlier. In this way, evidence collected can be shared in both the civil and criminal cases, and the facts in these two lawsuits corroborated each other. The res judicata effect of the prior criminal judgment is conducive to the judges’ free evaluation of evidence through inner conviction in the civil lawsuit. We can see that the integration of the respective advantages of criminal and civil reliefs is conducive to consolidating and expanding the fruits of litigation, as well as intensifying the crackdown on crimes and expanding the incremental effect of rights protection.
Third, when the first-instance judgment is served, it is admissible to serve the defendant an interlocutory injunction ordering immediate cessation of infringement, which can effectively stop the defendant’s continuous infringement act before the first- instance judgment comes into effect. During the first instance of this case, Jianghai continued its infringement act. Thus, in order to effectively stop such continuous infringement, NHU applied to the court for an injunction. On the same day when making its first-instance judgment, the Intermediate People’s Court of Shaoxing Municipality ordered Jianghai to immediately cease infringing NHU’s technical secrets. According to the injunction ruling by the court of first instance, there was concrete evidence that NHU’s technical secrets at issue were qualified for protection, and the technical secrets claimed by NHU and the technologies at issue employed by Jianghai were identical in the legal sense. In addition, there was sufficient evidence that Jianghai’s infringement act lasted during the trial of this case. Thus, it was necessary to order such injunction without delay. Such enforceable injunction with immediate effect effectively prevent the continuous damage to NHU caused by the delay in the entry into force of the first-instance judgment due to the appeal procedure and further infringement by Jianghai. The above practice sets an example for other similar cases. Fourth, punitive damages should be introduced to increase the amount of compensation for infringement. Upon NHU’s request, the court of first instance obtained the sales invoices of Jianghai’s vitamin E products from the tax authority in the place where Jianghai domiciles and the export declaration of its vitamin E products from the customs, and calculated the production and sales amount of its infringing products. In addition, NHU submitted to the court the average profit rate of its vitamin E products produced and sold within the statute of limitation of this case, which had been specially audited by an accounting firm. The court multiplied the profit rate of NHU by the sales amount of Jianghai’s products at issue as the basis for calculating the amount of compensation for infringement in this case. The court of first instance held that: First, Jianghai was established for infringement, which took infringement as its regular and main business. Knowing that it was illegal for Yu Mu to allow them to use NHU’s technical secrets, it still induced him to provide it with such technologies and put them into illegal use, which constituted intentional infringement. After convicted by the court, it still refused to cease infringement, which constituted repeated infringement. When NHU filed the civil lawsuit, Jianghai adopted dishonest litigation strategies such as raising objection to jurisdiction, applying for withdrawal of collegial panel and court of first instance to deliberately delay the court proceedings, and expanding its scale of infringement, which constituted infringement of bad nature. Second, the value of products at issue produced by Jianghai using infringing technology amounts to RMB 60 million—a large sales amount. The infringing products were widely sold, especially in large quantities to the counties where NHU was located, which directly eaten up its market share and interfered with its pricing order. The infringement lasted for years—a very long time. The active contribution of Yu Mu and Rongyao was necessary for Jianghai to commit such infringement. In light of these facts, the Intermediate People’s Court of Shaoxing Municipality decided to impose punitive tort liabilities on the defendants upon NHU’s claim for punitive damages. It multiplied the product of the defendants’ infringing product sales and the plaintiff’s average profit by 2.26 times to determine the final amount of compensation by Jianghai, which totaled RMB 35.22 million. Such amount makes the case one of the high-value technical secret cases. This case also set a precedent for the identification of punitive liabilities in technical secret cases, which provides guidance for courts in future litigation of similar cases.
Fifth, NHU effectively guaranteed the enforcement of judgment by applying to the court for property preservation when filing the case. In order to ensure effective enforcement of pecuniary damages such as compensation for infringement in the court’s judgment, NHU filed an application for property preservation with the Intermediate People’s Court of Shaoxing Municipality upon the filing of this civil lawsuit. The court successfully seized the bank deposits and land use rights of Rongyao and Jianghai with an approximate value of RMB 50 million according to law. As of the effective date of the final judgment, the court successfully enforced the judgment. On the one hand, such enforcement compensated for the actual economic losses caused to the plaintiff by the defendants’ infringement. On the other hand, it fully indicates that the defendants are required to not only compensate for the evidenced infringement, but also bear punitive pecuniary damages in addition to the actual unlawful gains.
Sixth, it is important to effectively prevent the second-time information leakage so as to improve judicial efficiency. In order to prevent the second-time information leakage, the court did not allow the parties to copy any documentation on core evidence involving the technical secrets at issue, and only counsels and expert witnesses engaged by the parties were permitted to review and extract such evidence. Evidence related to trade secrets was only cross-examined and authenticated in court, which effectively prevented possible second-time information leakage during the court proceedings and successfully protected the legitimate rights and interests of both parties.
Since the equipment and facilities for vitamin E production were considered as hazardous goods for construction projects which are regulated by the Work Safety Law and the Regulation on the Safety Management of Hazardous Chemicals, the “Special Article on Design of Safety Facilities for Vitamin E Production Project” (“Special Article”) of Jianghai reviewed and approved by Fuzhou Administration of Work Safety had in fact fixed, in the form of evidence, the technological and operational procedures for vitamin E production in Jianghai’s physical factories. Therefore, without conducting on-site inspection of the equipment and facilities for vitamin E production at Jianghai’s entity factories, the court could simply identify the actual technologies employed by Jianghai through the identity test between the 10 key secrets of NHU and the technologies in the above-mentioned “Special Article” of Jianghai. As Jianghai failed to prove that the equipment and facilities it actually used were different from those indicated in the “Special Article,” such way of fact finding helped to facilitate judicial efficiency.
