Law & Practice

CHINA: Supreme Court Clarifies Theft and Damages in Trade Secret Case

Published: August 2, 2022

Bessie Ye King & Wood Mallesons LLP Shanghai, China INTA Bulletins—China Subcommittee

Verifier

Grace Gong

Grace Gong Beijing Lifang & Partners Law Firm Beijing, China INTA Bulletins—China Subcommittee

The Supreme People’s Court (SPC) issued a final judgment on April 11, 2022, in a trade secret case, holding that trade secret “theft” occurred when an employee forwarded their employer’s technical secret files to their personal email account without authorization. Case No.: 2021 Zui Gao Fa Zhi Min Zhong No. 1687.

In this case, a Chinese data company sued its ex-employee, the former manager of its web crawler platform project, for infringing its trade secret. The employee sent the company’s platform data to their personal email account before they left their position in the company. This act breached the parties’ confidentiality agreement, which included a liquidated damages provision, and breached company policies. The Dalian Intermediate People’s Court held that the defendant acquired the trade secret by “other illegal means” and awarded the company damages of RMB 50,000 (US $7,400) (including reasonable expenses). The SPC changed the first instance judgment recategorizing the infringement (from “other illegal means”) to “theft” and increased the damages to RMB 250,000 (US $37,000).

Article 9.1 of the Anti-Unfair Competition Law of the People’s Republic of China defines multiple types of illegal acquisition of trade secrets indicating the nature of the infringement, including theft, bribery, fraud, coercion, electronic intrusion, or other illegal means. The SPC noted that whether the employee had legal access to the trade secret before stealing it should not have affected the determination of theft. It is worth noting that since the ELI LILLY case (Case No.: (2013) Hu Yi Zhong Min Wu (Zhi) Chu Zi No. 119), the first preliminary injunction in a trade secrets case in China, many Chinese courts have been upholding the principle that such behavior shall be defined as “other illegal means” rather than “theft.”

“Other illegal means” refers to a scenario where the acquisition does not meet the requirement of explicitly listed acts such as “theft” and “fraud,” but is found to be infringing because it causes the rights owner to lose control over the trade secret. In judicial practice, an employee’s transfer of their employer’s trade secrets to his personal devices, done in violation of the employer’s company policy, was deemed as “other illegal means.” “Theft,” on the other hand, may appear to be more severe than “other illegal means” in terms of the nature of infringement.

The SPC has effectively escalated the nature of infringement to “theft” in this case and increased the damages in favor of the rights owner. When calculating damages, the SPC took into account how much it cost the plaintiff to develop the trade secret, the severity of the infringement, and the liquidated damages clause in the confidentiality agreement. The confidentiality agreement classified the disputed documents as Top Secret, specified the monthly salary as financial compensation for the employee’s obligations of confidentiality, and further stipulated the liquidated damages at RMB 500,000 to RMB 1 million (US $74,000–US148,000). In light of the above, the court awarded damages of RMB 250,000 and granted reasonable expenses of RMB 15,000 (US $2,200).

One can see a trend emerging: the SPC is increasing protection of trade secrets, together with determining stricter infringement and awarding larger monetary damage awards. It would be wise for any company to sign confidentiality agreements with employees and set policies with specific requirements, including but not limited to: (1) prohibition on downloads or transfers of trade secret documents to personal devices or email addresses; (2) classification of the trade secrets, for example, Confidential, Secret, and Top Secret; and (3) specification of corresponding liquidated damages for different levels of trade secret classification. In addition, if the company can keep records of development costs to prove the damages it is claiming, so much the better.

Although every effort has been made to verify the accuracy of this article, readers are urged to check independently on matters of specific concern or interest. Law & Practice updates are published without comment from INTA except where it has taken an official position.

© 2022 International Trademark Association

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