Commercial espionage between Foxconn and BYD

2012/11/22,By Doris Li, China IP Magazine,[Trade Secrets]

On June 20th 2012, Foxconn Technology Group (Foxconn) received a disappointing verdict in the appeals against BYD Auto (BYD) in Hong Kong. The High Court of Hong Kong rejected the plaintiff’s serial appeals. Meanwhile, the judge expressed his reservations about the counter charge brought by BYD against Foxconn, i.e. BYD may also have engaged in a libelous act or misused the proceedings.

Reportedly, BYD denied Foxconn’s charge of trade secret theft, and brought a counter charge against Foxconn for illegal infringement on BYD’s business for the following reasons: Foxconn was allegedly involved in an illegal detention and intimidation to force its former employees to admit a leakage of trade secrets to BYD; furthermore, Foxconn once bribed its former employees of 10 million yuan to be allowed to falsify the contents in their computers. Legal counsel for Foxconn held that the counter charge brought by BYD may lead to severe consequences.

“Spare no effort to combat against BYD”

Before the case of Foxconn v. BYD in Hong Kong, Terry Gou, CEO of Foxconn once said that: “I will spare no effort to combat against BYD.” Shenzhen Futaihong Precision Industry Company and Hong Fu Jin Precision Industry (Shenzhen) Co. Ltd, which are affiliate and sister companies of Foxconn, filed a lawsuit against BYD to the Shenzhen Intermediate People’s Court in June 2006.

The plaintiff claimed that their former employees, Liu and Si, who were hunted by BYD, had stolen secret business documents from their former companies after they were put in charged of the mobile phone design department of BYD. The plaintiff claimed 5 million yuan for compensation for the trade secret infringement.

At trial, the two parties disputed technical issues. Based on the applications made by both parties, Shenzhen Intermediate People’s Court reported the to the Supreme People’s Court, who commissioned the Beijing JZSC Intellectual Property Forensic Center to conduct an appraisal. The appraisal was conducted on the grounds of a set of files found in the possession of BYD which were detained by the court. Whether this set of files contained information which was “common knowledge” became the core issue.

In the first appraisal reports, among the 116 Foxconn’s files in the portable hard drives, 68 were not common knowledge.

BYD defended on the grounds that Foxconn’s files were not trade secrets because all of the contents and processes could be found in public literature. The appraisal results contradicted this claim and found some information was not common knowledge. In addition, BYD argued that saving the files in portable hard drives were the personal actions of Liu and Si rather than actions of BYD. However, Foxconn insisted that the files were about the whole production, assemblage and test processes as well as regulations, which had features of exclusiveness and practicality, moreover, it had established strict measures to protect those files, which meant that they could be considered as technology secrets.

Foxconn also pointed out that since 2003, over 400 of its employees in several departments, such as the mobile phone design department and manufactures department etc., quit working for Foxconn and began to work for BYD, including some senior technicians and managers who had studied in the EU with the funding of hundreds of thousands of yuan sponsored by Foxconn. The mobile manufacturing profits of BYD exceeded 5.135 billion yuan in 2006, increased 169.3% compared with the 1.906 billion yuan in 2005, and quadrupled the 2004 profits, which were 939 million yuan. The rapid growth was far from normal, and the time period coincided with the disclosure of Foxconn’s trade secrets and the great loss of its employees.

The case continued into 2007. BYD planned to list its subsidiary company of mobile phone business in Hong Kong at the end of July 2007, whereas Foxconn filed a lawsuit against it to a Hong Kong court on June 11th, 2007. After the first listing application expired, BYD applied for listing on September 27th, 2007 for a second time, however, Foxconn sued BYD again. As a result, BYD had to postpone its listing plan for another half year.

With reference to the appraisal reports of the Intellectual Property Affairs Center of Ministry of Science and Technology P.R.C. and the Beijing JZSC Intellectual Property Forensic Center, teh Shenzhen Baoan People’s Court made the final judgment: the files under the appraisal contained non-public information which could bring economic benefits to the holders, thereby, BYD was found guilty of infringing Foxconn’s trade secrets.

On March 14th, 2008, after the investigation and evidence collection of the local public security bureau, the case was considered as not only a civil action but also one involving criminal activity. Afterwards, Foxconn withdrew the civil lawsuit against BYD in mainland China, and sought criminal prosecution instead. On March 20th, Xia, the former Executive Director and Vice President of BYD was arrested. Then on March 24th and 31st, Si and Liu, the former employees of Foxconn were arrested and sentenced to1 year and 4 months and 4 years in prison respectively.

In December 2008, half a year after Foxconn’s success, there was a change of circumstances with severely affected Foxconn. On December 3rd 2008, BYD said that the public security bureau had revoked the investigation of BYD because the Deputy Director and two other responsible staffs of the Beijing JZSC Intellectual Property Forensic Center were arrested for destroying and forging evidence as well as taking bribes. In addition, a former employee of Foxconn, Zhang, was arrested after being suspected of taking bribes to help Foxconn steal confidential information. At that time, BYD officially stated that Foxconn had applied twice for modifications of its claims in October 2008 and September 2009 and included the Hong Fu Jin Precision Industry (Shenzhen) Co. Ltd as one of the plaintiffs. BYD filed counter charge in October 2009.

Provisions of protecting “trade secrets” scattered in several laws and regulations

The Foxconn v. BYD case of IP infringement, leakage of confidential information of former employees of Huawei Company, WISDRI Engineering & Research Incorporation Limited and Alcatel-Lucent, all these trade secret infringements are highly related to the development or even the existence of enterprises. How should companies deal with these infringements?

It is reported that at present there is no specific law protecting trade secrets in many countries, including China. Provisions related to the protection of trade secrets scattered in several laws and regulations. For example, as Article 23 of the Labor Contract Law of the People’s Republic of China stated, “Employers and workers may stipulate such issues as keeping confidential the business secrets and intellectual property of the employer in the labor contract. With respect to a worker who has the obligation of keeping secrets, the employer may stipulate limitation of competition clauses with the worker in the labor contract or in the confidentiality agreement and stipulate that economic compensations shall be given to the worker within the period of limitation of competition in terms of months after the labor contract is discharged or terminated. Where the worker is in violation of the stipulation on limitation of competition, he shall pay a penalty for breach of contract to the employer.”

As in Article 24, “The personnel under limitation of competition shall be limited to senior managers, senior technicians and other personnel who have the obligation to keep secrets in the entity. The range, geographical scope and time limit for limitation of competition shall be stipulated by the employer and the worker. The stipulation relating to limitation of completion shall not violate any law or regulation. After the discharge or termination of a labor contact, the period of limitation of competition for any of the persons referred to in the preceding paragraph to work for any other employer producing or engaging in products of the same category or conducting business of the same category as this employer shall not be more than two years.”

As Article 10 of the Anti Unfair Competition Law of the People’s Republic of China stated: “Managers shall not use the following methods to infringe upon business secrecy: 1. to steal, coerce, or use any other unfair method to obtain the other’s business secrets; 2. to disclose, use or permit others to use the business secrets mentioned in Section 1 of this Article. 3. to violate the contract or the requirement to publish, use or permit others to use the business secrets, which were maintained as secrets by the legal owner of the business secrecy. The third party who knows or should know the illegal activities as first mentioned, and who gains, uses or publishes the business secrecy shall be looked as activities of infringing upon the others’ business secrecy. ‘Business secrecy,’ in this Article, means the utilized technical information and business information which is unknown by the public, which may create business interests or profit for its legal owners, and also is maintained secrecy by its legal owners. ”

As in Article 25, “Supervisor shall order to stop the illegal activities, may fine amount from more than 10,000 to less than 200,000 RMB yuan, if a manager violates Article 10 to infringe upon the business’ secrecy.”

As Article 219 of Criminal Law of the People’s Republic of China stated, “Whoever commits any of the following acts of infringing on business secrets and thus causes heavy losses to the obligee shall be sentenced to fixed-term imprisonment of not more than three years or criminal detention and shall also, or shall only, be fined; if the consequences are especially serious, he shall be sentenced to fixed-term imprisonment of not less than three years but not more than seven years and shall also be fined: (1) obtaining an obligee’s business secrets by stealing, luring, coercion or any other illegitimate means; (2) disclosing, using or allowing another to use the business secrets obtained from the obligee by the means mentioned in the preceding paragraph; or (3) in violation of the agreement on or against the obligee’s demand for keeping business secrets, disclosing, using or allowing another person to use the business secrets he has. Whoever obtains, uses or discloses another’s business secrets, which he clearly knows or ought to know falls under the categories of the acts listed in the preceding paragraph, shall be deemed an offender who infringes on business secrets. “Business secrets” as mentioned in this Article refers to technology information or business information which is unknown to the public, can bring about economic benefits to the obligee, is of practical use and with regard to which the obligee has adopted secret-keeping measures. “Obligee” as mentioned in this Article refers to the owner of business secrets and the person who is permitted by the owner to use the business secrets.”

As in Article 7 of the Interpretation of the Supreme People’s Court and the Supreme People’s Procuratorate Concerning Some Issues on the Specific Application of Law for Handling Criminal Cases of Infringement upon Intellectual Property Rights, “Where any person who has committed one of the acts as prescribed in Article 219 of the Criminal Code and caused a total loss of over 500,000 yuan to the right-holder of trade secrets shall be deemed as “having brought significant losses to the right-holder of trade secrets” and the offender shall be sentenced to imprisonment for a definite term of no more than three years or criminal detention, concurrently with a fine, or exclusively to a fine upon conviction of Crime of Trade Secrets Infringement. Where any person that has caused a total loss of over 2,500,000 yuan to the right-holder of trade secrets shall be deemed as “having caused very serious consequences” as prescribed in Article 219 of the Criminal Code and the violator shall be sentenced to imprisonment for a definite term from no less than three years up to seven years with a concurrent fine upon conviction of Crime of Trade Secrets Infringement.”

How to protect trade secrets

Referring to the frequency of trade secret infringement cases, Zhang Yazhou, a lawyer of Unitalen, stated that enterprises should take intensive measures and prepare for trade secret infringement in advance for it is too late to repair the damage done after secret information is stolen.

1.       Information selection

The criteria in information selection should be based on whether it has commercial value. A large amount of information emerges during the operation of enterprises, some of them have no commercial value such as general meeting minutes, general information of personnel, information of training programs etc.

2.       Information encryption

Once the commercial values of information are determined, enterprises should immediately encrypt them. Firstly, the source of trade secrets should be encrypted. It is well known that the leakage of trade secrets, especially technology trade secrets, mainly come from in the following forms: (1) employees’ official conduct; (2) employees’ nonofficial conduct; and (3) cooperation development and commissioned development of enterprises with third party. Secondly, how trade secrets are used and applied should be encrypted. Trade secrets can easily be disclosed during the usage and licensing processes, thus they should be tracked during these processes. Since agreements regarding the use of trade secrets are mainly conducted through contractual arrangements, it is highly necessary that all parties involved should explicitly stipulate the protection provisions in all stages related to the contracts. This includes actions prior to signing the contract and during the performance and completion stages.

3.       Information decryption

With the development of technology and adjustment of business plans, some trade secrets gradually become less valuable to enterprises. Trade secrets of different enterprises with same contents or same essence, which already have been used by a third party, eventually become common knowledge. Once this occurs it is no longer necessary to invest in protecting that information. Enterprises should regularly evaluate and analyze the commercial value of the trade secrets they possess, on an annual basis or longer. Trade secrets which hold no value should be decrypted promptly.

4.       Integrate trade secrets with patents

Due to the complexity and systematic nature of technology, enterprises should specify which constituents of technology could be granted patents, which ones could be protected as trade secrets. Enterprises can enjoy great profits from a sound intellectual property protection system.

5.       Protect clients list as trade secrets

Generally, it is controversial whether a company should choose to protect clients lists as trade secrets. But once the obligee take measures which meet the legal requirements, it is quite reasonable that clients lists could be protected as trade secrets.

Finally, Zhang Yazhou stressed that enterprises need to construct a comprehensive protection system if they want to protect trade secrets, including appointing specific staff to oversee the protection of secrets and inviting professionals to give guidance.

(Translated by Emily Tan)

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