The key issues in trade secret litigation

2012/04/27,You Minjian, Director of IP Center of Shanghai Co-effort Law Firm,[Trade Secrets]

As trade secret cases have always been hard points in IP practice, this article intends to discuss three issues involved in trade secret litigations, namely, proper jurisdiction, collection of evidence, and litigation strategy.

I. Proper jurisdiction of trade secret cases

In the current legal framework, proprietors may seek protection of their trade secrets through various channels, e.g., administrative, criminal, or civil proceedings, which, therefore, leads to the choice of proper jurisdiction over trade secrets of these authorities. Generally speaking, enterprises would prefer law enforcements of either administrative or police protection, favoring in particular local offices of Administration for Industry & Commercial (AIC). The AIC proceeding has practical advantages in trade secret protection, as the AIC has multiple auxiliary powers, such as in corporate registrations, annual inspections, etc., not to mention the omnipotent impression on general public. Moreover, the AIC advantage also lies in many years of working experience in law enforcement actions in fair trade and market supervision, which certainly lends support in dealing with trade secret cases. Equally omnipotently intimidating to trade secret perpetrators as it is; the police authorities, however, remain extremely cautious in detaining and arresting suspects, and the threshold for police actions is relatively high. On the other hand, the AIC standard is much more relaxed. Finally, judicial solution is the last resort for trade secret protection, which nevertheless may not be an ideal one, in terms of effective and speedy trial considering collection of evidence and the trial procedure.

Of the three channels for trade secret protection, the AIC jurisdiction arises from the locale of the offending acts, and criminal jurisdiction is derived from the criminal investigation by police authorities at the locale of the perpetration, where many companies would wish for law enforcement intervention by police or local AIC of the place in which the proprietors are located and pay their corporate taxes, for, local protectionism is minimized when local AIC’s or police conduct the investigation. Pursuant to the Opinions on Issues Concerning Applicable Laws for Criminal Cases Involving Intellectual Property Right Infringement jointly promulgated by the Supreme People’s Court, the Supreme People’s Procuratorate and the Ministry of Public Security: Criminal investigations of crimes against intellectual property shall be conducted by police authorities of the locale where the criminal acts are perpetrated, and may be conducted by police authorities of the locale where the criminal suspect is resided when necessary. Locales of crimes against intellectual properties include places of manufacture of the offending products, warehouses, logistics, sales, dissemination of offending works, installation of internet servers for promoting the offending products, connections of internet protocols, residences of internet hosts or managers, uploaders of the offending works, or actual injuries for the proprietors.

In practice, however, there are controversies as to defining offenses or the locales of the offending acts. Most trade secret offenses involve two steps: one is the acquisition of the proprietary information by an employee from the proprietors through theft or other fraudulent means, and the other is to disclose the information to third parties after acquiring such information. Thence, controversies remain as to which place it refers to as the locale of the offending acts, the place of acquiring the confidential information, or the place of disclosing. In practice, intervention is more frequent by police authorities of places where the proprietor is located. That being said, police intervention is premised on criminal investigation, which requires, not only proof of proprietorship, but also evidence as to offenses and damages.

In civil cases, jurisdiction has been relatively definitive by statute, whereas places of infringing acts include locales of the acts undertaken and places of the resulting injuries.

II. Issues relating to collection of evidence in trade secret cases

(1) Means of obtaining evidence

Evidence may be obtained by the party, certified by a notary public, procured by criminal investigation or by pretrial preservation. Evidence obtained by private investigators through pursuit is a form of evidence obtained by the party itself, but cannot be used direct evidence of infringement, as it has not yet been legitimized in China.

(2) The contents of evidence

a. Proof of Proprietorship. First and foremost, the plaintiff must establish proprietorship of his rights: did he acquire the rights through independent R&D or by assignment? Is he an exclusive or nonexclusive licensee? This must first be established in civil proceedings.

b. Proof of measures to maintain secrecy. Whether such measures exist will be determined in conjunction with the nature of the confidential information and its media, intention of the proprietor to maintain secrecy, and the degree of noticeability of the confidentiality marking. Specific steps as such include, inter alia, well defined scope of disclosure, encodement of the information, using password or code names for the information, existence of a confidentiality agreements, and requirements of secrecy in places where such confidential information is maintained. The Courts are relatively lenient in recognizing measures maintaining confidentiality, and will generally admit evidence for such measures, in principle, as long as clear intention is shown to maintain secrecy.

c. The practical value of confidential information. The Interpretation of the Supreme People’s Court on Some Matters about the Application of Law in the Trial of Civil Cases Involving Unfair Competition provides that, it shall be ascertained as capable of bringing about benefits to the obligee, and having practical applicability as stipulated in Paragraph 3 of Article 10 of the Law against Unfair Competition in case the related information has practical or potential commercial value, and can be used for enhancing the competitive advantage for the obligee.

Therefore, some experimental data, including those from failed experiments, should also be considered of practical value.

d. The points of confidentiality. Confidential information may be classified into technical information or commercial information, which is the most difficult part to prove in litigation. In trade secret cases, a plaintiff tends to overreach by listing all and any information as confidential, but his counsel must distill useful ones from the listed information by first excluding the information that are not commercially confidential, such as information which cannot be deemed as know-hows according to common sense in the pertinent technical field or under industry customs; if the information merely relates to the size, structure, materials, or simple combination of component parts, which can be cognized through direct observation, such information will be incapable of being maintained as confidential. Of the elements of sizes, structures, materials, and simplicity of combination of component parts, the emphasis is placed on the latter, because if the structure is comparatively complex, requiring special equipment for inspection, information as such will be commercially confidential.

After excluding non-confidential points, next is the choice of secrecy points. It is very difficult to choose and determine the right secrecy points in trade secrets cases. A plaintiff tends to assert that his trade secrets have covered extremely extensive information in order to increase the workload of the defendant. In addition to the craft, the plaintiff can make other secrecy points by combination of materials, dimensions, and sizes, or by composition of a series of feature of the information. Therefore, his combination of secrecy points may be established even if one of his secrecy points is invalidated by the defendant. This is a skill in litigation. Of course, the technical staff may not be aware of this sometimes, which has to be brought up by the counsel.

e. Naming the defendant. All the evidences must point to the defendant. The proprietor must also show by evidence that defendant has contact with confidential information, such evidence including library records of borrowing drawings, job description of employees, etc., and that the defendant has conducted the breaching acts.

It will be very complicated to prove whether the technology used by the defendant is identical to or similar with that of the plaintiff’s, and whether the secret is established, usually by means by expert testimony. In addition, attention should be paid to the secondary disclosure of trade secrets in presentation of evidence, that is, the proprietor should take effective technical measures to mitigate further damages.

f. Accounting of damages. It is very difficult to calculate the actual loss of rights holders and the infringer’s illegal profits. In reality, many infringers make counterfeit in shabby workshops. They had no complete accounting books. Besides, there are many changing factors, such as market conditions, inflation, and economic situation. All these make it more difficult to know how much profit the infringer has made.

There is still a disagreement in practice on the inclusion of overhead investment R&D as damages. There is a gap between R&D investment and its possible price. The author thinks that R&D may be a reference in calculating damages and this is more reasonable. Of course, statutory compensation shall be ordered if it is difficult to prove the right holder’s actual losses and the infringer’s illegal profits. The statutory compensation is 500,000 yuan in infringement upon the right to copyright and trademark, and one million yuan in infringement upon patent to the utmost. The right holder’s actual loss may be more than the statutory compensation. It does not meet the principle of filing. Therefore, it needs to be improved in quantity.

III. Litigation strategy

The first is to choose an appropriate method for trade secrets protection. The right holder should make a choice among the foresaid administrative, civil and criminal remedies according to circumstances.

The second is to bring the lawsuit to an appropriate court. There are many differences between different courts, different time for trial, different experience of the judge, different attitude of the court on cases involving trade secrets, and different views of judges on the protection of trade secret. It may be helpful to have some research on these issues for trade secrets litigation.

The third is the initiation of the lawsuit. The plaintiff should make a serious study on him and the defendant in order to determine the time of initiation and the content of the claim.

The fourth is the shift of burden of proof and the reverse burden of proof. The author thinks that there should be no reverse burden of proof in cases involving trade secrets; otherwise, the defendant will definitely lose the case because it is very difficult for him to bear the burden of proof under that condition. In addition, it is difficult to get the defendant’s drawings as evidence in practice. The author believes that the defendant may lose the case because of his failure to submit drawings where the court orders his to do so. However, the court seldom does so. If the defendant can present the drawings of his products, there may be one more item in the application of authentication. If the product is manufactured according to the drawings, the defendant will win the case; otherwise, he would be defeated. The author believes that this is a shift of burden of proof instead of reverse burden of proof.

The last is the exclusion of  plea of  reverse engineering. It is found in many past cases that defendant raises a plea that his technical secrets were acquired by reverse engineering. The plaintiff’s lawyer needs to make serious examination of the defendant’s reverse engineering, the connection between these evidences and the case, the time it was completed, and applied for judicial authentication when necessary. Of course, the defendant shall have no plea of reverse engineering if he had a contact with the trade secrets in advance in accordance with the judicial interpretation by the Supreme People’s Court. The plaintiff should bear this in mind.

The plaintiff has the highest possibility to lose cases involving trade secrets in comparison with other IP cases. This may be attributed to the characteristics of trade secrets and the system of burden of proof and unclear provisions of laws, different application of law and other reasons. We hope an amendment to the Law against Unfair Competition will be launched as soon as possible.


(Translated by Yuan Renhui)

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