Recently, the Intellectual Property Division of the Supreme People’s Court concluded an appeal concerning a trade secret infringement case. The court found that the rights holder had implemented adequate confidentiality measures and that the accused parties had indeed utilized the trade secrets in question. The collegiate panel published a featured article on the official site of SPC to explain the determination of trade secret usage.

Case Overview

The case began when a mold company lodged a complaint against an electronic materials company in Kunshan and a precision mold company in Suzhou, alleging that they had unlawfully acquired and used the mold company’s technical and business secrets, despite being aware that Lu, Zhou, and Cai were former employees. The mold company sought the following remedies: 1. An immediate halt to the infringement by the electronic materials company, the precision mold company, and the individuals involved; 2. Compensation for economic losses and reasonable expenses totaling 10 million yuan, with specific liabilities assigned to Zhou and Cai.

First-instance Court Judgement

The first-instance court determined that the mold company was the sole licensee of the relevant technical information. The mold company presented evidence demonstrating that it had implemented appropriate confidentiality measures for its technical and business information. These measures included establishing confidentiality protocols, signing confidentiality agreements with employees such as Lu, Zhou, and Cai, and enforcing physical security measures.

After Lu departed from the mold company, he founded Kunshan Electronic Materials Company under his son’s name and effectively managed Suzhou Precision Mold Company, engaging in mixed operations. During this time, he recruited former employees from the mold company, including Zhou and Cai. On June 28, 2018, the mold company discovered that Kunshan Electronic Materials Company and Suzhou Precision Mold Company were producing and selling hot runner products that falsely claimed to be based on the mold company’s technology, resulting in a decline in customer orders for the mold company. Consequently, the mold company reported the matter to the local market supervision department.

As part of the administrative law enforcement process, the market supervision department commissioned the Beijing Intellectual Property Judicial Appraisal Center to evaluate the confidentiality of the technical information claimed by the mold company. The appraisal concluded that the information was not publicly known.

The first-instance court ruled that Kunshan Electronic Materials Company, Suzhou Precision Mold Company, Lu, Zhou, and Cai had infringed upon the mold company’s trade secrets and ordered them to cease their infringing activities. Additionally, Kunshan Electronic Materials Company, Suzhou Precision Mold Company, and Lu were collectively ordered to compensate the mold company for economic losses and reasonable expenses amounting to 2 million yuan. Zhou was held jointly liable for 1 million yuan, while Cai was responsible for 500,000 yuan.

Dissatisfied with the first-instance judgment, Kunshan Electronic Materials Company, Suzhou Precision Mold Company, Lu, Zhou, and Cai appealed to the Supreme People’s Court.

• They contended that the numerous secret points claimed by the mold company were not confidential and that no adequate confidentiality measures had been implemented.
• They argued that the actual production processes of Kunshan Electronic Materials Company and Suzhou Precision Mold Company were entirely distinct from the mold company’s production process secrets, and that their final products were manufactured by an external company.
• Furthermore, they asserted that they did not utilize the disputed drawings and that the mold company had never required its customers to maintain confidentiality regarding pricing and related information.
• They claimed that the individuals privy to this business information included at least the mold company’s customers, who had no obligation to keep such information confidential.

Opinions from Supreme People’s Court

The Second Instance of the Supreme People’s Court has established the following key points:

If a rights holder can demonstrate that they have implemented reasonable confidentiality measures to protect the information in question, and the alleged infringer does not provide evidence that this information was already widely known and easily accessible to relevant professionals at the time of the alleged infringement, it should be concluded that the commercial information sought for protection by the rights holder is indeed confidential. The confidentiality measures must be reasonable, meaning they should be appropriate to the nature and value of the trade secret and its carrier, and sufficient to prevent the leakage of trade secrets, though not necessarily infallible. Confidentiality is a relative concept; it is not expected that the rights holder will employ excessively stringent or flawless measures. As long as the confidentiality measures are recognized by others and demonstrate a reasonable level of intensity, they can be deemed adequate.

The term “use” of trade secrets encompasses their application in product design, manufacturing, marketing, and related improvements, as well as research and analysis. There are typically three methods of utilizing trade secrets: directly applying them in production and business activities, modifying and enhancing them prior to use, and adjusting or optimizing relevant activities based on these secrets. The latter two methods are often referred to as improved use and passive use. Even if the information ultimately utilized by the alleged infringer in the final production stage differs from the original trade secrets, they may still have employed the trade secrets during the design, improvement, or research phases. This could lead to reduced research and development costs or the adoption of targeted strategies, resulting in unfair competitive advantages, thus constituting a use of the trade secrets.

In this particular case, the evidence presented indicates that the mold company implemented various confidentiality measures prior to the alleged infringement, including signing confidentiality and non-compete agreements with employees, establishing confidentiality obligations, and enforcing confidentiality requirements in company policies. Additionally, they managed confidential workshops separately and entered into confidentiality agreements with customers to safeguard trade secrets. These actions reflect the company’s commitment to confidentiality and are generally adequate to prevent trade secret leakage. The business secrets claimed by the mold company include customer information and product quotation data accumulated through actual business operations. It is important to note that trade secrets are considered relatively secret rather than absolutely secret; the fact that customers are aware of transaction prices does not imply that this information is widely known among industry professionals. The confidentiality measures taken by the mold company, including agreements with customers, support the conclusion that the business information in question qualifies as trade secrets.

Furthermore, the electronic materials company in Kunshan and others have unlawfully acquired the relevant technical secrets, utilizing them in their production and processing drawings and other materials. Even if the heat treatment process was conducted by an external company, this does not negate the determination that the electronic materials company and others have indeed used the technical secrets. Consequently, the court has decided to dismiss the appeal and uphold the original judgment.

As a result, the Supreme People’s Court upheld the original judgment, reinforcing the principle that confidentiality measures must be reasonable and proportionate, while clarifying the various ways in which trade secrets may be used. This ruling serves as a valuable reference for future cases involving trade secret infringement.