Factors to be Considered When Applying Punitive Damages in Trade Secret Infringement Cases
Although current laws provide general guidance on the conditions for application of punitive damages in trade secret infringement cases, how to properly apply punitive damages is still a difficult problem in judicial practice. The Judicial Interpretation of the SPC on the Application of Punitive Damages in the Trial of Civil Cases of Infringement of Intellectual Property Rights, which came into effect on March 3, 2021, provide some provisions on how to determine the existence of malicious infringement, how to define whether the circumstances of infringement are serious, and how to evaluate the seriousness of the infringement, but the people's courts still need to explore and summarize how to properly apply such provisions in judicial practice.
The following case is the first civil IP case in which the SPC ruled to apply punitive damages. This case was selected into “Typical Cases on the Application of Punitive Damages to Civil Cases of Infringement of Intellectual Property Rights” and “Typical Cases (the third batch) of the People’s Courts Fully Playing the Role of Adjudicatory Function to Protect Property Rights and Entrepreneurs’ Legal Rights and Interests”. In this case, the Supreme Court, on the basis of the facts ascertained, determined the amount of damages to be five times the profits obtained from the infringement, giving special consideration to the importance of the involved technical secrets in the production of the infringing products and the contribution of such trade secrets to the sales profits. In terms of the applicable conditions for punitive damages, on the basis of determining that the infringers have the direct intention of infringement, the SPC further evaluated the seriousness of the infringement in view of various factors, such as the infringers’ committing infringement as primary business, the infringers’ being subject to criminal prosecution, their obstruction of evidence discovery, the actual losses of the right holder, the profits obtained by the infringers from the infringement, the scale and duration of the infringement. Finally, the SPC held that the infringers maliciously committed the infringement and the circumstances were extremely serious, and the punitive damages borne by the infringers should be 5 times the amount of the infringers’ profits, providing a guidance on the correspondence relationship between the seriousness of the infringement circumstances and the amount of punitive damages.
The plaintiff's employee HUA, during his work for the plaintiff, violated the confidentiality agreements he signed with the plaintiff and disclosed the plaintiff's technical secrets of "Kabo" manufacturing process to the defendant and the staff thereof. The defendant used such trade secrets to manufacture products designed and developed by the plaintiff and sold them at home and abroad.
In the first-instance trial, the plaintiff requested the relevant parties (the infringing company and the infringing individuals) to immediately stop the infringing activities, destroy the raw materials and equipment used for manufacturing “Kabo”, apologize to the plaintiff, and compensate RMB 70,98 million for the plaintiff’s economic losses and other expenses. The first-instance court ruled that: 1) the defendants should immediately stope the infringing activities and destroy the material relating to the plaintiff’s trade secrets; 2) the infringing company should compensate RMB 30 million for the plaintiff’s economic losses and RMB 400,000 for the plaintiff’s reasonable expenses within 10 days from the effective date of this Judgement, and the infringing individuals should bear joint liabilities within the ranges of RMB 5 million, RMB 5 million, RMB 1 million and RMB 1 million, respectively for the aforementioned compensation amount; and 3) the plaintiff’s other requests were rejected.
The plaintiff and the defendants were all unsatisfied with the first-instance judgement and appealed to the SPC. After ascertaining the facts, the SPC ruled that: 1) the first and three points of the first-instance judgement should be maintained; 2) the second point of the first-instance judgement should be changed to: the infringing company should compensate RMB 30 million for the plaintiff’s economic losses and RMB 400,000 for the plaintiff’s reasonable expenses within 10 days from the effective date of this Judgement, and the infringing individuals should bear joint liabilities within the ranges of RMB 5 million, RMB 30 million, RMB 1 million and RMB 1 million, respectively for the aforementioned compensation amount; 3) the plaintiff’s other appeals were rejected; and 4) the defendants’ appeals were rejected.
Key points of the trials
1. Application of new law or old law
In the Amendment to the Law Against Unfair Competition of the People's Republic of China which took effect on April 23, 2021, provisions on punitive damages were added. Based on the general principle of non-retroactivity of law, punitive damages are generally not applicable for any behavior which occurred before the amendment of the law, and the amount of compensation for infringement committed before and after April 23, 2019 should be calculated respectively. In this case, however, the defendant refused to provide their financial accounts, the sales amount they admitted was only part of the infringement profits, there was no evidence about the specific amounts of their infringement profits obtained before and after the Law was amended, and the defendants even continued the infringing activities after the first-instance judgment was issued. In view of the large scale and long duration of the infringement, it was hard to determine the amount of compensation based on different periods of time, and therefore punitive damages were applied to the sued infringing activities as a whole.
2. Subjective element: maliciously committing infringement
Punitive damages, as an aggravated penalty for infringers, have higher requirements on the punishability of infringing activities, such as "intentional infringement of another person’s intellectual property rights” as mentioned in the Civil Code, and “malicious infringement of trade secrets” as mentioned in the Law Against Unfair Competition. The association between “intentional” and “malicious” should be made clear, and it would be appropriate to interpret “malicious” as “subjectively intentional” rather than as “directly intentional”, i.e. no matter whether a person’s behavior is “directly intentional” or “indirectly intentional”, it is a subjectively intentional behavior rather than a negligent behavior. Subjective intent, as a psychological state, must be manifested through a person’s certain behavior. In this case, from the actual behaviors of the infringers, it can be seen that they committed the infringing activities being fully aware that their activities would infringe other’s trademark secrets, and therefore their infringement belongs to intentional infringement.
3. Objective element: serious circumstances
For the application of punitive damages, the judges also need to determine, according to the facts of the case, whether the circumstances of the infringement are serious. As an important factor for analyzing whether to apply punitive damages and how to determine a reasonable amount of punitive damages, the seriousness of circumstances should be determined based on a comprehensive consideration of various factors, such as the overall situation of the case, the means, scale, duration, negative impact (including direct and potential impact) of the infringement, the actual losses suffered by the right holder or the economic benefits obtained by the infringer, the extent of malice shown by the infringer in the whole course of the infringement and whether the infringer has taken remedial measures.
In this case, the infringing company admitted that their sales amount of the infringing products exceeded 37 million, and the products were sold to more than 20 countries and regions; the infringed technical secrets involved product manufacturing technique, process and equipment, which played a key role in the formation of the products. This caused the plaintiff to suffer tremendous losses. Additionally, it was obvious that the defendants intentionally committed the infringement. In view of these factors, the SPC raised the amount of punitive damages from 2.5 times the amount of infringement profits as determined by the first-instance court to 5 times. At the same time, infringement profits should have a causal relationship with infringing activities, and profits arising from other rights and production factors should be reasonably deducted. Thus, in this case, the SPC held that the product formula and part of the equipment as claimed by the plaintiff did not constitute technical secrets, so the cost of this part, human cost and sales cost, etc. should be deducted. Based on an overall consideration of the particulars of this case, the SPC determined that the contribution rate of the technical secrets was 50%, and therefore, although the amount of punitive damages was increased to 5 times the amount of infringement profits, the total amount of compensation remained unchanged.
As a special note, for the calculation of the amount of compensation when applying punitive damages, in the Judicial Interpretation of the SPC on the Application of Punitive Damages in the Trial of Civil Cases of Infringement of Intellectual Property Rights, which came into effect on March 3, 2021, the calculation method of “base amount + base amount * times” is adopted.
In summary, the punitive damages system has played an effectively role in combating malicious infringement, protecting competitive advantages arising from trade secrets, and thus maintaining the order of market competition. In trade secret infringement cases, the subjective element “malice” is subjective intent, and the objective element “serious circumstances” is about a comprehensive consideration of the infringing activities and the overall particulars of the cases. The determination of the amount of compensation should adhere to the principle of moderation and the principle of proportionality, and the amount of punitive damages should have a correspondence relationship with the seriousness of the infringement circumstances.