table of contents
· Preface
1. Definition and scope of protection of trade secrets
II. Methods for Determining Damages for Infringement of Trade Secrets
1. How to calculate the actual loss
2. Calculation of Profits from Infringement
3. Factors commonly considered for statutory damages
4. Conditions and methods for the application of punitive damages
5. Determine the amount of compensation with reference to the royalty
6. Application of Discretionary Damages
III. Conclusion
Foreword
In today's competitive business environment, the protection of trade secrets has become even more important. However, with the rapid development of information technology and the globalization of business activities, trade secret infringement incidents are becoming more frequent. These infringements can lead to huge losses for businesses, and in addition to direct economic losses, they can also lead to indirect losses such as reputational damage, market share loss, price erosion, etc. This article will discuss the legal basis for the determination of damages for trade secrets and relevant judicial practices, aiming to provide some superficial suggestions for rights holders to determine damages when protecting trade secret rights.
1. Definition and scope of protection of trade secrets
According to Article 9 of the Anti-Unfair Competition Law, which was amended in 2019, trade secrets refer to commercial information such as technical information and business information that is not known to the public, has commercial value, and has been subject to corresponding confidentiality measures taken by the right holder. From the definition of trade secrets, it is not difficult to see that trade secrets must meet the three constituent elements of secrecy, value and confidentiality. Secrecy is the core feature of trade secrets, that is, only certain information that is not known to the public can be protected as a trade secret. The confidentiality of trade secrets refers to the fact that the trade secrets have been kept confidential by the right holder, so that the general public cannot directly obtain them from public channels. With regard to the value of trade secrets, it refers to trade secrets that can bring actual or potential economic benefits or competitive advantages to the trade secret rights holder, and can bring potential economic benefits, such as records of failed experiments, although they cannot directly bring economic benefits to developers, but once such information is known to competitors, it is likely to benefit from cost savings and speed up its development progress, and in addition, it cannot exist in a technology more advanced than the disputed technology, that is, it is considered that the disputed technology does not constitute a trade secret. 1]。 With regard to the scope of technical information and business information, Article 1 of the Provisions of the Supreme People's Court on Several Issues Concerning the Application of Law in the Trial of Civil Cases of Infringement of Trade Secrets lists some common circumstances, that is, technical information may include information related to technology, such as structure, raw materials, components, formulas, materials, samples, styles, propagation materials of new plant varieties, processes, methods or their steps, algorithms, data, computer programs and related documents; Business information may include information related to business activities, such as creativity, management, sales, finance, planning, samples, bidding materials, customer information, and data. Among them, customer information includes the customer's name, address, contact information, transaction habits, intentions, content and other information.
II. Methods for Determining Damages for Infringement of Trade Secrets
Damages refer to the responsibility to compensate for the damage caused by the illegal infringement of trade secret rights, which is one of the ultimate footholds of the legal protection of trade secrets and an important form of legal liability for trade secret infringement.
According to paragraphs 3 and 4 of Article 17 of the Anti-Unfair Competition Law, there is an order between the three methods of determining the amount of damages (actual losses, profits from infringement, and statutory compensation), that is, the actual losses are first based on the actual losses, and the actual losses that are difficult to determine are based on the profits from the infringement, and if the actual losses and profits from the infringement are difficult to determine, the statutory damages are based on the statutory compensation, and the so-called statutory compensation means that the court shall award compensation within 5 million yuan according to the circumstances of the infringement. In addition, Article 3 also stipulates that the amount of compensation shall also include the reasonable expenses paid by the business operator to stop the infringement, and stipulates the conditions for the application of punitive damages and the scope of the multiple of punitive damages: if the business operator maliciously commits an act of infringing trade secrets, and the circumstances are serious, the amount of compensation may be determined not less than one time but not more than five times the amount determined according to the actual losses suffered by the right holder as a result of the infringement or the benefits obtained by the infringer as a result of the infringement. It can be seen that the determination of damages mainly follows the principle of filling in the damages, and reflects the judicial determination mechanism of damages with compensation as the main and punishment as the supplement. The following is an analysis of the application, calculation methods and considerations of actual losses, infringement profits, statutory damages, punitive damages and other damages.
1. How to calculate the actual loss
The amount of damages caused by infringement should be determined according to the actual losses suffered by the right holder, which reflects the principle of filling in damages in civil law. The infringer shall fully compensate the trade secret rights holder for the calculable loss of property and income caused by the infringement, including the research and development costs, use status, market capacity, supply and demand relationship of the trade secret, and the reduction in the victim's turnover. In the author's opinion, according to whether the trade secret has been disclosed, the calculation method of actual loss can be roughly divided into two categories:
(1) If the trade secret has become known to the public as a result of the infringement, the actual loss may be determined based on the value of the trade secret. Article 19 of the Provisions of the Supreme People's Court on Several Issues Concerning the Application of Law in the Trial of Civil Cases of Infringement of Trade Secrets provides that if a trade secret becomes known to the public as a result of the infringement, the people's court may consider the commercial value of the trade secret when determining the amount of compensation in accordance with law. The commercial value should take into account factors such as the cost of research and development, the benefits of implementing the trade secret, the benefits available, and the time for which the competitive advantage can be maintained. Therefore, to determine the commercial value of a trade secret, the right holder may enumerate the various costs of developing the trade secret, such as the audit report issued by the accounting firm, the labor contract, salary expenditure, equipment purchase bills, etc., the income from the implementation of the technical secret, reasonably predict the benefits that can be obtained and the time for which the competitive advantage can be maintained, and may also entrust an appraisal agency to issue an appraisal report on the value of the trade secret. It should be noted that the evidence cited by the right holder should be objective, true and valid, especially the reports issued by professional institutions such as appraisal institutions and accounting firms should be legal and reasonable. In the case of a dispute over infringement of technical secrets between Shenzhen Hua'er Bloom Network Technology Co., Ltd. and Zhejiang Panxing Digital Intelligence Technology Co., Ltd.[2], Hua'er Bloom Company provided the court with a commercial value appraisal report made by an appraisal agency entrusted by it, which showed that the commercial value of the source code involved in the case was 10.12 million yuan on December 31, 2018. From 2019 to 2024, the sharing rate of the technical secrets involved in the case is 23.77%, and there is no gradual decrease in the sharing rate due to the decay of the value of the technical secrets involved in the case, and the R&D expenses from 2019 to 2021 (routine software upgrades) are much higher than those in 2018 (original software development), which is obviously unreasonable; There are more and more R&D enterprises engaged in WeChat Mini Programs, and the estimated sales revenue in 2020 and 2019 in the appraisal involved in the case is the same, which violates market rules.
(2) If the trade secret has not been disclosed, the common methods for calculating the actual loss are: loss of sales, loss of price erosion, loss of profit or loss of market share[3]. Although the actual loss can be calculated through these methods, these methods all need to consider the degree of contribution of the technology involved in the trade secret to the overall technology (except for the publicly known technology), that is, the technical contribution rate of the trade secret in question, which can be determined according to factors such as the proportion of the role or value of the trade secret in the overall technical solution. If the technical secret involved in the case is a key component that embodies the technical function and effect of the product, and cannot be sold separately, and it is difficult to separate the increase in product profits after using the technology from the total product profits, then the overall profit of the product may be considered as the amount of profit for determining the infringement of the specific technical secret. If the technical secret involved in the case does not belong to the key components that reflect the technical function and effect of the product, and can be sold separately, then it is usually necessary to convert the profit sharing rate of the technical secret to determine the amount of profit from the infringement.
In addition, Article 5, Paragraph 1, Item 1 of the Interpretation (III) of the Interpretation of the Supreme People's Court and the Supreme People's Procuratorate on Several Issues Concerning the Specific Application of Law in Handling Criminal Cases of Infringement of Intellectual Property Rights provides that if the trade secret of the right holder is obtained by improper means, and has not been disclosed, used or allowed to be used by others, the amount of loss may be determined on the basis of the reasonable license fee for the trade secret. The second paragraph of Article 5 stipulates that the loss of sales profits caused by infringement of the right holder as provided for in items 2, 3 and 4 of the preceding paragraph may be determined on the basis of the total number of sales losses caused by the infringement multiplied by the reasonable profit of each product of the right holder; Where the total amount of reduced sales volume cannot be determined, it may be determined on the basis of multiplying the sales volume of the infringing product by the reasonable profit of each product of the right holder; Where the total number of sales volume reduced by the infringement and the reasonable profit of each product cannot be determined, it may be determined on the basis of multiplying the sales volume of the infringing product by the reasonable profit of each infringing product. Although this interpretation is only applicable to criminal cases of trade secrets, it has a certain reference role in determining the actual loss of trade secrets in civil cases.
2. Calculation method of infringement profits
There are at least two types of profits: operating profits and sales profits.
In the case (2020) Zui Gao Fa Zhi Min Zhong No. 17, "operating profit" is understood as follows: "Referring to the provisions on profits in Article 106 of the Accounting System for Business Enterprises, a normative document of the Ministry of Finance, operating profit refers to the amount of income from the main business minus the cost of the main business and taxes and surcharges on the main business, plus other business profits, minus operating expenses, administrative expenses and financial expenses. The calculation of operating profit when selling the allegedly infringing products can be simplified as follows: operating profit = sales revenue - sales cost and taxes - sales expenses, administrative expenses and financial expenses. The sales profit is generally understood as the income from the sale of a certain product minus the cost, and the calculation method is generally as follows: sales profit = sales revenue - cost of sales (including raw materials and labor only). It can be seen that the difference between operating profit and sales profit is that sales profit does not deduct operating costs, management expenses and other operating costs, while operating profit needs to deduct the corresponding sales expenses, management expenses, financial expenses, business taxes and surcharges, so compared with the two, sales profit is higher than operating profit.
Although the current Interpretation of the Supreme People's Court on Several Issues Concerning the Application of the Anti-Unfair Competition Law of the People's Republic of China has deleted the previous Article 17, which stipulates that "the determination of the amount of damages for trade secret infringement as provided for in Article 10 of the Anti-Unfair Competition Law may be carried out with reference to the method for determining the amount of damages for patent infringement", since the infringement of trade secrets and the infringement of patent rights are both intellectual property infringements, there are still some commonalities between the two. The author believes that it is still worth learning from each other in terms of damages. Article 14 of the Several Provisions of the Supreme People's Court on Issues Concerning the Application of Law in the Trial of Patent Dispute Cases (2020 Amendment) stipulates that "the benefits obtained by the infringer as a result of infringement shall generally be calculated according to the business profits of the infringer, and may be calculated on the basis of sales profits for infringers who are solely engaged in infringement". It can be seen that for the infringer who is completely engaged in infringement, the damages compensation system will increase the compensation accordingly, and its profits are basically completely dependent on the infringement, so there is no need to deduct the operating costs, and the compensation should be increased for the serious infringement.
In the well-known "vanillin" case, the Supreme People's Court held that Wang Long Group and other alleged infringers had illegally obtained, continued to use, and used a large number of technical secrets with high commercial value, and that their actions had impacted the global vanillin market, and that Wang Long Group and other alleged infringers had circumstances such as obstruction of proof and dishonest litigation, and that the accused infringers had failed to implement the effective act preservation ruling of the original trial court, and the Supreme People's Court decided to calculate the amount of damages for infringement in this case based on the sales profits. Since the alleged infringer refused to submit the account books and materials related to the infringement in this case, there were circumstances that hindered the presentation of evidence, and the Supreme People's Court could not directly calculate the sales profit based on its actual sales data. Considering that the sales price and sales profit margin of the vanillin products of Jiaxing Zhonghua Chemical Company can be used as a reference for determining the relevant sales prices and sales profit margins of Wang Long Group Company, Wang Long Technology Company and Xifu Lion Wang Long Company, in order to severely punish the malicious infringement of technical secrets and fully protect the legitimate interests of the right holders of technical secrets, the Supreme People's Court decided to calculate the amount of damages in this case based on the sales profit margin of vanillin products of Jiaxing Zhonghua Chemical Company during the period from 2011 to 2017. The amount of damages was finally determined: 155,829,455.20 yuan, plus the above-mentioned reasonable expenses of 3492216 yuan, totaling about 159 million yuan.
In addition, when proving the profits generated by the trade secrets involved in the case, the right holder may also enumerate the profits generated by the same type of items. In the case of Anyitai Geological and Microbial Technology (Beijing) Co., Ltd. v. Yingsuo Oil Energy Technology (Beijing) Co., Ltd. et al.[4], the court accepted the calculation method of infringement profits provided by the plaintiff, referred to the profit margin in the special audit report of similar microbial oil and gas exploration service projects, and finally fully supported the amount of Anyitai's claim.
3. Factors commonly considered for statutory damages
Statutory damages usually mean that the amount of compensation is determined by the court based on specific considerations, within the range predetermined by law. Paragraph 4 of Article 17 of the Unfair Competition Law stipulates that if a business operator violates the provisions of Articles 6 and 9 of this Law, and it is difficult to determine the actual losses suffered by the right holder as a result of the infringement and the benefits obtained by the infringer as a result of the infringement, the people's court shall make a judgment to give the right holder compensation of not more than RMB 5 million based on the circumstances of the infringement.
Paragraph 2 of Article 20 of the Provisions of the Supreme People's Court on Several Issues Concerning the Application of Law in the Trial of Civil Cases of Infringement of Trade Secrets stipulates that when a people's court determines the amount of compensation in accordance with paragraph 4 of Article 17 of the Anti-Unfair Competition Law, it may consider factors such as the nature of the trade secret, its commercial value, the cost of research and development, the degree of innovation, the competitive advantage it can bring, the subjective fault of the infringer, and the nature, circumstances and consequences of the infringement. For example, in the case (2021) Yue 73 Zhi Min Chu No. 393, the actual losses suffered by the right holder due to the infringement and the infringement profits of the infringer could not be determined, and the court comprehensively considered various factors such as the core technical secrets involved in the case belonging to the high-tech enterprise, the asset appraisal value of the technical secrets, the historical research and development costs, the subjective malice, the circumstances and the nature of the act, and the appraisal fees, evaluation fees and attorney fees paid by the right holder to stop the infringement in this case. Where appropriate, the amount of compensation was determined at $300,000.
4. Conditions and methods for the application of punitive damages
First, it is necessary to clarify the applicable time of punitive damages for trade secrets. Article 17, paragraph 3 of the Anti-Unfair Competition Law of 2019 clearly stipulates that punitive damages can be claimed in cases of trade secret infringement if certain conditions are met, and the law came into effect on April 23, 2019. The Civil Code of the People's Republic of China clearly stipulates that punitive damages can be claimed in cases of intellectual property infringement, and the law came into force on January 1, 2021. Therefore, punitive damages will only apply if the infringement occurred or continued after April 23, 2019.
Second, according to the law, the conditions for the application of punitive damages are that the business operator maliciously commits an act of infringing trade secrets, and the circumstances are serious.
Finally, it is necessary to clarify the determination of the base and multiple of punitive damages clauses. Among them, the base amount is the actual loss or infringement profit we talked about earlier, but the reasonable expenses incurred by the plaintiff to protect the rights are generally not included in the calculation base; The determination of the multiple needs to comprehensively consider the malicious intent of the business operator and the severity of the circumstances. In practice, the malicious intent of the operator and the severity of the circumstances are generally determined from the following aspects:
(1) The subjective intent of the infringer, that is, the actor is well aware of the possibility of his or her conduct causing the occurrence of the harmful result, or actively pursues the occurrence of the harmful result, or allows the harmful result to occur. For example, in the "Kabo Technical Secret Infringement Case"[5], when Liu, the former legal representative of Anhui Newman Company, was investigated for criminal liability for the crime of infringing trade secrets and was found to have committed an act of infringing the rights holder's technical secrets, Anhui New Company still did not stop production, and its sales scope reached more than 20 countries and regions, and at the same time, it refused to provide relevant accounting books and original vouchers without justifiable reasons, which constituted an obstacle to the presentation of evidence, and the court held that the defendant's subjective intent for infringement was serious.
(2) The objective performance of the infringer, which mainly refers to the means used in the infringement, the place where the infringement occurred, and other factors. For example, whether the perpetrator has adopted improper means such as theft, bribery, fraud, coercion, or electronic intrusion, whether he has instigated, enticed, or helped others to commit tortious acts, whether he has violated laws and regulations such as food, drugs, and medical treatment, whether he has endangered the personal safety of others, and whether he has damaged environmental resources. In such cases, infringement is more harmful to society, not only harming the legitimate interests of others, but also undermining the order of the market economy. For example, in the case (2019) Yu 05 Min Chu No. 1225, the defendant Yealink Jinhui Company illegally obtained the plaintiff's trade secrets through the defendant Tan Qing and used them for its own production and operation, and shared them with the defendant Tan Qing after making profits, which was an infringement of the company's employees colluding with outsiders (or competitors in the same industry of the company) to infringe trade secrets. In addition, the objective performance of the infringer also includes whether the infringer is engaged in infringement, whether the infringer's production scale is huge, whether the infringer lasts for a long time, whether the infringer's refusal to provide evidence makes the court unable to ascertain that all the profits from the infringement constitute an obstacle to the production of evidence, and whether the infringer has repeatedly infringed on the trade secrets of others or infringed on multiple trade secrets of others.
(3) the consequences caused by the infringement, which mainly include the losses caused by the infringement to the right holder or the illegal benefits obtained by the infringer, in addition to whether the technical secret plays a key role in the formation of the product, whether the number of secret points used by the infringer is too large and whether the proportion is relatively high, whether the trade secret itself is of high value, and the degree of impact of the infringer's act on the market.
5. Determine the amount of compensation with reference to the license fee
Paragraphs 1 and 2 of Article 5 of the Interpretation (III) of the Supreme People's Court and the Supreme People's Procuratorate on Several Issues Concerning the Specific Application of Law in Handling Criminal Cases of Infringement of Intellectual Property Rights (hereinafter referred to as the "Interpretation (III)") limits the use of reasonable royalties as the criterion for determining losses in criminal cases to two situations: (1) where the trade secrets are obtained by improper means, but are not disclosed, used or allowed to be used by others, reasonable royalties may be directly applied; (2) Where a trade secret is obtained by improper means and disclosed, used or allowed to be used by others, a reasonable royalty shall be applied to the loss of sales profits that cannot be calculated for those who have not benefited. For those who benefit, the amount of loss shall be determined according to the higher of the reasonable license fee and the loss of sales profits of the right holder.
According to the Understanding and Application of the Interpretation (III) on Several Issues Concerning the Specific Application of Law in Handling Criminal Cases of Infringement of Intellectual Property Rights, "when the appraisal and assessment opinions of the trade secret royalties involved in the case are used as evidence, the appraisal and assessment opinions shall be carefully reviewed in accordance with the relevant provisions of the Criminal Procedure Law", and "the reasonable royalties shall comprehensively consider the fees charged by the trade secret rights holder or other trade secret rights holders involved in the case for licensing the use of the same or similar trade secrets, determination of factors such as the time of holding the trade secret after it has been obtained by improper means". It can be seen that the Interpretation III does not limit the trade secret license fee to the actual expenses incurred, and theoretically also includes the license fee calculated virtually by the appraisal agency in accordance with the market assessment rules[6]. However, this assessment is not easy, because the trade secret is not known to the relevant public, and the determination of the trade secret license fee varies from subject to subject, which is affected by various factors such as the transaction method, the license method, and the term of use, so it is difficult for the appraisal and evaluation agency to have a reasonable and unified standard for measuring the value of the trade secret and the license fee.
Paragraph 1 of Article 20 of the Provisions of the Supreme People's Court on Several Issues Concerning the Application of Law in the Trial of Civil Cases of Infringement of Trade Secrets stipulates that if a right holder requests to determine the actual losses suffered due to infringement with reference to the trade secret license fee, the people's court may make a determination based on factors such as the nature, content, actual performance of the license, and the nature, circumstances, and consequences of the infringement.
Despite the promulgation of these judicial interpretations, from a practical point of view, there are few judicial precedents in which the amount of compensation is determined by reference to the license fee in the assessment of damages in civil cases of trade secrets and the calculation of the amount of conviction in criminal cases, which is different from the widespread application of license fees in the fields of patents and trademarks. The reason for this may be that trade secrets are "non-public knowledge" and "confidential", and the right holder usually does not allow others to obtain or use their trade secrets, and even if this situation exists, it usually mainly occurs between market entities with specific interest relationships, such as parent and subsidiary companies, long-term fixed cooperative companies, etc., and this specific interest relationship also directly leads to the difficulty of verifying the authenticity of relevant evidence.
6. Application of Discretionary Damages
Discretionary damages are not statutory damages, but are a general calculation of the actual losses of the right holder or the profits of the infringer. If there is evidence to prove that the actual losses of the right holder or the profits of the infringer are clearly outside the statutory limit of compensation, the amount of compensation may be reasonably determined beyond the statutory limit based on the evidence of the whole case[7]. Discretionary damages originate from Article 16 of the Opinions of the Supreme People's Court on Several Issues Concerning the Overall Situation of Intellectual Property Adjudication Services under the Current Economic Situation, issued in 2009. In addition, Tao Kaiyuan, Vice President of the Supreme People's Court, said in July 2016 at the National Symposium on Intellectual Property Trial Work of Courts and the "Three-in-One" Promotion Conference of Intellectual Property Trial in National Courts that the trial of intellectual property cases should be guided by the realization of market value, further increase the intensity of damages, and be good at using the discretionary compensation method of determining actual losses or infringement gains based on specific evidence, so as to guide the parties to actively present evidence on the issue of damages, and further improve the rationality of the calculation of damages. In the Melamine case[8], the courts of first instance and the court of second instance both held that the evidence provided by the plaintiff could prove that the actual loss of the right holder or the profit of the infringer was far greater than the statutory compensation of RMB 5 million, so the discretionary amount of compensation also exceeded the amount of statutory damages, with RMB 50 million in the first instance. The profit from infringement can only be determined based on the evidence submitted by the plaintiff in the first instance and the calculation method, and both calculation methods exceed the plaintiff's claim in the first instance, so the court of second instance fully upheld the compensation amount of RMB 98 million claimed by the plaintiff in the first instance.
III. Conclusion
As the determination of the amount of damages is a difficult point in the trial of trade secret cases, the right holder should actively perform the burden of proof, collect the relevant evidence of damages as comprehensively as possible within the scope permitted by law, provide damages claims in accordance with the statutory order of determining damages, and provide as many calculation schemes for calculating damages as possible around the actual losses and infringement profits, and at the same time ensure that the content of the evidence conforms to the industry practice to which it belongs, and whether the evidence can be mutually corroborated with general knowledge and evidence, so as to improve the possibility of the evidence being admissible. Even if it cannot be accepted in its entirety, it can be used as a reference for the judge to apply some of the proof content that can be highly related to the facts of the case and have a high degree of admissibility, and determine the amount of damages through detailed or general calculation, so as to obtain damages to the greatest extent and make up for the losses suffered by the right holder.
Annotations (scroll up and down to view)
[1] See (2000) Zhi Zhong Zi No. 3 Civil Judgment
[2] See the (2021) Supreme Court Zhi Min Zhong No. 2298 Civil Judgment
[3] Trade Secret Practice丨Analysis of Trade Secret Infringement Compensation Practice, Zhu Weixian, Non-litigation Research Institute
[4] See the (2021) Supreme Court Zhi Min Zhong No. 1363 Civil Judgment
[5] See the (2019) Supreme Court Zhi Min Zhong No. 562 Civil Judgment
[6] Tang Zhen, "A Brief Analysis of the Difficulties in Determining Reasonable Royalties in the Crime of Infringement of Trade Secrets", People's Court Daily, November 26, 2020, p. 6
[7] Guiding Opinions of the Beijing High People's Court on the Determination of Damages in Cases of Intellectual Property Infringement and Unfair Competition and the Adjudication Standards for Statutory Damages (2020)
[8] See the civil judgment (2022) Supreme Court Zhi Min Zhong No. 541
Author: Lin Yunying
编辑：Eleven