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The Role of Valuability in Trade Secret Infringement Disputes

10

JUN

2019

Trade secrets, as a kind of intangible assets, are becoming more and more valuable in helping company occupy an advantageous position in the market competition. A trade secret has three fundamental characteristics: secrecy, valuability, and confidentiality, which are also the criteria in the judicial activities for determine whether a trade secret is established.

According to Article 9 of China’s Anti-Unfair Competition Law of 2019, trade secrets refer to commercial information such as technical information, business information and etc. that are not known to the public (secrecy), have commercial value (valuability) and for which corresponding confidentiality measures have been taken by the right holder (confidentiality). Since the valuability of trade secrets is a very broad concept and the relevant provisions in the Anti-Unfair Competition Law have once been changed from the previous expression "…can bring economic benefits to the right holder and have practical applicability" to the current expression "…have commercial value", the interpretations of the valuability of a trade secret in laws, regulations and judicial cases are not uniform.

Nonetheless, it cannot be ignored that in trade secret infringement disputes, valuability is a very important factor in the identification of trade secrets and the determination of the amount of damages, as mainly reflected in the following three aspects.

1. Trade secrets’ being a kind of property makes it necessary to assess the value of a trade secret.

The Anti-Unfair Competition Law only sets forth the definition of trade secrets, but does not clearly state the legal nature of trade secrets. However, in China’s Criminal Law, infringement on trade secrets is listed as one of the crimes of infringement on intellectual property rights, which indirectly confirms that trade secrets are a kind of intellectual property. As intellectual property is an intangible property, its value becomes the basis and ultimate aim of providing legal protection for it. If the value of some kind of information cannot be determined, even if the holder has taken confidentiality measures in this regard, it cannot say that it is entitled to legal protection. "Commercial value" is generally embodied in two aspects: economic interests and competitive advantage. Pursuant to Article 10 of the Interpretation of the Supreme People’s Court on Several Issues Concerning the Application of Law in the Trial of Civil Cases Involving Unfair Competition. ("Judicial Interpretation"), as long as the relevant information has real or potential commercial value, or can bring competitive advantage to the right holder, it should be considered as satisfying the requirement of valuability.

In a trade secret infringement dispute between Beijing Serious Tech Limited and Tang ((2018) Jing 73 MinZhong 1834), Serious and its employee Tang entered into a Confidentiality Agreement, agreeing that Tang shall keep in confidence the Company’s decisions including high-level policies. However, in subsequent business contacts, Tang sent to a collaborator of the Company a screenshot of his Wechat conversation with a senior executive of the Company, which contained information such as that "the quality does not reach the standard; we need to find a way to stop the loss; the customer resources are not satisfying, and the workload will definitely be deducted; no first party in the market is easy to deal with". The Company believed that the screenshot leaked the company's "high-level policy" but they could not explain what kind of economic benefits or competitive advantages the "high-level policy" would create or bring for the company. In the end, the court determined that the facts claimed by Serious did not conform to the constituent elements of trade secrets.

It should be noted that in determining the establishment of a trade secret, only the presence of its value needs to be determined, while the amount of its value does not need to be considered. According to the Operational Guidelines for Lawyers of All-China Lawyers Association to Handle Trade Secrets (2015 revision), the valuability does not rely on the amount of the assessed value of a trade secret, and some information which has a low value or has not yet yielded economic benefits may still constitute a trade secret.

In a trade secret infringement and property damage dispute between Peiyao Zhang and Suzhou Nanxin Cement Co., Ltd. ((2000)Zhi Zhong Zi No. 3), Nanxin argued that the dust remover installed by Peiyao Zhang did not have any value because there had been more advanced products in the market. Although it was finally determined that Nanxin did not constitute infringement, the Supreme People’s Court did not approve the above argument and held in the Judgment that, “it is unreasonable to deem that the technology in dispute does not constitute a trade secret just on the ground that there have been more advanced technologies. As long as the technical information may bring certain economic benefits or competitive advantages to the right holder or user and is practically applicable, it would meet the valuability requirement of a trade secret”.

2. The valuability of a trade secret is a standard for determining whether the confidentiality measures taken by the right holder are appropriate.

The effectiveness of confidentiality measures is closely related to the value of trade secrets. According to Article 11 of the Judicial Interpretation, the reasonable measures taken by the right holder to prevent information leaks shall be in line with the commercial value of the trade secret, among other factors. The Anti-Unfair Competition Law, when amended in 2017, also added the word "corresponding" before the words "confidentiality measures" to confirm this requirement. In practice, it takes certain costs for the right holder to take confidentiality measures, and if a right holder has a clear assessment on the value of his/her trade secrets, it will help him/her take confidential measures in an appropriate manner.

In a trade secret infringement dispute between Beijing Casee Infinite Advertising Co, Ltd. and Wang et al. ((2017) Jing 0105 MinChu 29968), Casee Infinite successively entered into several purchase contracts with its long-term partner Edelman Public Relations Worldwide (China) Co., and appointed Wang et al. to be the project leaders. Later, Wang et al. set up a new company and cooperated with Edelman in the name of the new company. Casee Infinite held that by taking advantage of being the project leaders, Wang et al. stole the outcome of Casee Infinite’s cooperation with Edelman as well as its opportunities for subsequent cooperation with Edelman. Thus, on the basis of the confidentiality provisions set forth in the purchase contracts, Casee Infinite filed a lawsuit against Wang et al. for infringement on trade secrets. The Court held that during cooperation in purchasing projects, many achievements such as trading habits, intentions, cooperation information etc. may be made, which would make Casee Infinite have advantage over other competitors in cooperating with Edelman, and thus such achievements satisfied the valuability requirement. However, the confidentiality provisions in the cooperation contracts only stipulated that the two parties shall keep the contents of the project confidential, and the scope of confidentiality did not include such information as long-formed trading habits or cooperation intention, etc., and Casee Infinite did not sign a separate confidentiality agreement with Wand et al. with respect to such information. In the end, the Court ruled that the confidentiality measures taken by Casee Infinite were not suitable in view of the value of the trade secrets it claimed, and thus its claim was not upheld according to law.

Nowadays business operators are constantly strengthening their awareness of protection for trade secrets, and confidentiality clauses in contracts and confidentiality agreements have been widely adopted as confidentiality measures. But in practice, some confidentiality agreements fail to classify and detail the information involved, and some even just use a general description such as "the company's information, documents and archives", "the company's trade secrets" etc., which is not conducive to the protection for trade secrets. In a case analysis, Fujian High People’s Court pointed out that when taking confidentiality measures, business operators need to consider the characteristics of information carriers and make appropriate confidentiality provisions in contracts or agreements according to the specific situation of the carriers. Information that cannot prove valuability will not be recognized as a trade secret even if it is written into a confidentiality agreement, but instead it may become interference when the operators claim rights. Information with independent or special value, such as business information that is formed in a transaction and independent of the main contract, needs to be protected through additional confidentiality agreements or further technical means, so as to meet the requirements for confidentiality measures in view of its value. In addition, the content of confidentiality agreements and the scope of confidential information shall be updated from time to time based on actual business needs as well as the constant evolution of information patterns.

3. The valuability of a trade secret is the basis for determining the amount of infringement damages.

As mentioned above, a trade secret is essentially an intangible property, so the damages for infringement on trade secrets are also determined based on the principle of compensation for property losses. Article 17 of the Judicial Interpretation sets forth that where a trade secret is known to the public as a result of infringement acts, the amount of damages shall be determined in accordance with the commercial value of the trade secret. The commercial value of trade secrets is determined on the basis of factors such as the research and development costs, the proceeds gained and benefits available from the implementation of the trade secret, and the time period during which the competitive advantage brought by the trade secret is maintained.

In actual cases, due to the intangibility of trade secrets, the actual losses of the right holders are often difficult to calculate, and because of the difficulty in finding out the leak of trade secrets, the right holders are often unable to provide evidence about the infringers’ illegal profits. In order to solve this dilemma, the Anti-Unfair Competition Law significantly increased the statutory amount of compensation for trade secret infringement from no more than 200,000 yuan in the old law to no more than 3 million yuan in 2017, and further to no more than 5 million yuan in 2019, giving the judges greater discretion in the protection of rights holders. Nevertheless, proofs of the value of the trade secrets provided by the right holders are still critical for the court’s determination on the amount of compensations. If the commercial value of a trade secret is underestimated due to lack of proof of its value, although it does not affect the establishment of the trade secret, it is still not conducive to making up for the loss of the right holder.

In a labor dispute between Beijing Emay Softcom Technology Ltd. and Weide Yang ((2016) Jing 01 MinZhong No. 5947), Weide Yang, during his employment, took advantage of the company’s business secret to solicit business for the company’s opponent, and caused Emay Softcom to lose the opportunities of renewing its contracts with existing clients and doing business with potential clients. In determining the damages, Emay Softcom provided proofs that its existing clients once brought it an operation profit of about 1.4 million yuan. The Court determined that the profit loss of Emay Softcom caused by losing the opportunity of renewing contracts with its clients was a direct loss and thus supported its claim for damages. As for the profit which may be brought by potential clients, Emay Softcom failed to sufficiently prove its feasibility or certainty, and thus this claim was not approved by the Court.

In addition to the realized profits and expected potential profits arising from the trade secrets per se, the human and material resources invested by the right holders in protecting the trade secrets can also reflect the importance of the trade secrets, and the relevant evidence can be used to determine the value of the trade secrets. In a trade secret infringement dispute between Yunpeng Zhang et al. and Shanghai Shijing International Trade Co. ((2017) Hu 73 MinZhong No. 38), Yunpeng Zhang obtained Shijing’s client list during his employment with Shijing and thereby robbed Shijing of its opportunities of trading with its clients. The Court held that Shijing’s client list constituted a trade secret, but Shijing did not invested much in the client list, and the role of the list was mainly to provide conditions and convenience for transactions but did not restrain the clients’ right to trade with other sellers. The Court finally ruled that Shijing’s client list only brought a little bit of competitive advantage to it and has relatively low economic value, and then determined the amount of compensation taking into account other factors as appropriate.

Valuability is of great significance to the property attributes of trade secrets. It is the purpose of keeping trade secrets confidential. Right holders should pay attention to it as it is an important basis in judicial practice for identifying trade secrets and determining infringement and damage.

About the Firm

AFD China Intellectual Property Law Office
Address Technology Fortune Center Tower B, 16th Fl. Suite 1601A, 8 Xueqing Road, Beijing 100192, China
Tel 86-10-8273 0790
Fax 86-10-8273 0820
Email afdbj@afdip.com
Link www.afdip.com

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