Trade Secret Misappropriation in China: The Courts’ Approach

The Supreme People’s Court of China designated a case concerning the unlawful use of electric vehicle manufacturing technology as a Guiding Case. The defendants were ordered to pay approximately RMB 637.6 million in damages and RMB 5 million in litigation costs. The court also imposed detailed measures aimed at bringing the infringement to an end.

The dispute arose after nearly 40 executives and technical specialists left one automotive group to join a competitor. Some of these employees had previously had access to technologies used in the manufacture of vehicle chassis. Several were subsequently named as inventors on 12 utility model patents registered by their new employer.

Although the competitor did not possess a comparable technological base, it began mass-producing electric vehicles approximately two years after its establishment. A comparison of the technical documentation revealed substantial similarities with the drawings, digital models and other materials belonging to the employees’ former employer.

The Court’s Position

The Supreme People’s Court established an important approach to the allocation of the burden of proof in trade secret cases.

Where a company:

• recruits employees of a competitor and thereby gains access to the competitor’s technical information;
• launches a product incorporating the relevant technology within a period substantially shorter than would normally be required for independent development; and
• fails to provide convincing evidence that the technology was developed independently,

the court may infer that the company acquired and used the competitor’s trade secrets. The burden of proving the independent origin of the technology may then shift to the defendant.

Modifying or further developing the acquired technology does not eliminate the infringement and does not constitute independent development. The use of trade secrets remains unlawful where the information has served as the basis for modified or improved technical solutions.

In calculating damages, the court relied on information concerning the defendants’ sales. For profits earned after the punitive damages provisions for trade secret infringement had entered into force, the court applied a multiplier of two. The calculation was based on the defendants’ profits of RMB 204.2 million, with an additional RMB 408.5 million awarded as punitive damages under China’s Anti-Unfair Competition Law.

In addition to awarding compensation for the misappropriation of trade secrets, the court ordered the defendants to:

• cease using and disclosing the technologies in question;
• cease manufacturing and selling products developed using those technologies;
• refrain from assigning, licensing, pledging or otherwise disposing of patents obtained on the basis of the unlawfully used information;
• destroy the relevant technical documentation and digital models or transfer them to the rights holder;
• notify employees, executives, affiliated companies and suppliers of the terms of the injunction; and
• obtain undertakings from the relevant persons to preserve the confidentiality of the trade secrets and prevent further infringement.

For failure to comply with the prohibition on the use of the technologies, the court imposed a penalty of RMB 1 million for each day of delay. Separate penalties were established for breaches of the requirements relating to the patents and technical documentation, as well as the obligation to notify employees and counterparties.

What This Means for Businesses

Foreign companies are often cautious about working with Chinese manufacturers and suppliers because of concerns that transferred technologies may be copied and subsequently used to manufacture competing products. This risk is particularly relevant when localising production, establishing joint ventures in China or providing a Chinese partner with drawings, technical documentation and manufacturing processes.

Guiding Case No. 273 concerns precisely this type of situation. The court found that infringement includes not only the direct copying of technical materials, but also the use of another party’s technology after it has been modified or improved. The rights holder is not always required to produce direct evidence of the transfer of files or documents. Access to the technology through former employees, similarities between the technical solutions and the launch of a comparable product within an unusually short period may be sufficient to establish misappropriation.

The decision does not eliminate the risk of technology being copied when working with Chinese partners, but it confirms that effective legal remedies are available. To mitigate this risk, the technologies being transferred, the permitted scope of their use, and the content and procedure for disclosing trade secrets should be defined clearly and in detail before any disclosure takes place.