Guiding Case No. 219: Guangzhou Tian [REDACTED] High-Tech Materials Co., Ltd., Jiujiang Tian [REDACTED] High-Tech Materials Co., Ltd. v. Anhui Niu [REDACTED] Fine Chemical Co., Ltd. et al.
(dispute over infringement of technical secrets)  

Keywords: Civil, Infringement of technical secrets, Engaging in intellectual property infringement as a business, Punitive damages, Amount of damages

Key Points of Judgment

1. In determining whether an act of intellectual property infringement constitutes a “serious circumstance” warranting the application of punitive damages, the court may take into account such factors as: whether the alleged infringer engages in intellectual property infringement as a business; whether they have been subject to criminal or administrative penalties; whether the infringement is repeated; whether there has been obstruction of evidence in litigation; as well as the losses caused by the infringement or the profits accrued therefrom, the scale of the infringement, and its duration.

2. Where an infringer knowingly commits infringing acts which constitute their principal business, it may be determined that they are “engaging in intellectual property infringement as a business”. For those engaging in such infringement on a long-term and large-scale basis, the punitive damages multiplier may be applied on the higher end of the statutory range, or even at the maximum permitted level, when determining the amount of damages.

Basic Facts

On 6 June 2000, Guangzhou Tian [REDACTED] High-Tech Materials Co., Ltd. (hereinafter referred to as “Guangzhou Tian [REDACTED] Company”) was incorporated. On 30 October 2007, Jiujiang Tian [REDACTED] High-Tech Materials Co., Ltd. (hereinafter referred to as “Jiujiang Tian [REDACTED] Company [REDACTED] Company”) was incorporated, with Guangzhou Tian [REDACTED] Company as its sole shareholder. To prove that the two companies had a licensing relationship in respect of Carbomer technology, they submitted two letters of authorization.

The first letter of authorization, dated 30 September 2008, recorded that Guangzhou Tian [REDACTED] Company granted Jiujiang Tian [REDACTED] Company, free of charge, the right to use its independently developed Carbomer production technology and related intellectual property, for a term of ten years from 1 October 2008 to 30 September 2018. During the term of authorization, Jiujiang Tian [REDACTED] Company was entitled to use the technology for purposes including, but not limited to: producing, manufacturing, and selling products; improving its current industrial processes by utilizing the technology; and further developing new technological achievements based on it. Without the written consent and confirmation of both parties, neither Guangzhou Tian [REDACTED] Company nor Jiujiang Tian [REDACTED] Company could license the technology to any other entity or individual. Upon expiry of the authorization term, the right of use would revert to Guangzhou Tian [REDACTED] Company.

The second letter of authorization, dated 15 September 2018, extended the authorization for a term from 1 October 2018 to 30 September 2028, with the content identical to the first letter. The product at issue in this case is Carbomer (also known as Carbopol), a synthetic polymer of acrylic acid and a cross-linking agent, also referred to in Chinese as Polyacrylic acid (PAA) or Ethylene-Vinyl Acetate copolymer (EVA). Neutralized Carbomer forms an excellent gel matrix, widely used in emulsions, creams, and gels.

On 29 August 2011, Anhui Niu [REDACTED] Fine Chemical Co., Ltd. (hereinafter referred to as “Anhui Niu [REDACTED] Company”) was incorporated, with Liu [REDACTED] as its legal representative and holding a 70% equity stake. The legal representative was later changed to Wu [REDACTED].

Hua [REDACTED] joined Guangzhou Tian [REDACTED] Company on 30 March 2004 and resigned on 8 November 2013. From 30 December 2007 until his resignation, Hua [REDACTED] signed with Guangzhou Tian [REDACTED] Company a series of documents including the Labor Contract, the Commercial Confidentiality and Non-Competition Agreement, the Employee Handbook, and the Special Training Agreement, which stipulated confidentiality obligations concerning trade secrets and non-compete restrictions. Zhu [REDACTED]liang and Hu [REDACTED]chun also worked at Guangzhou Tian [REDACTED] Company during different periods and each signed similar Confidentiality and Non-Competition Agreements.

Between 2012 and 2013, while serving as head of R&D for the Carbomer product, Hua [REDACTED] requested from Li [REDACTED], workshop director of Jiujiang Tian [REDACTED] Company, the reactor and dryer equipment drawings of the Carbomer production process, under the pretext of writing an academic paper. In violation of Guangzhou Tian [REDACTED] Company’s management rules, he also repeatedly copied technical and equipment-related materials concerning the Carbomer production project from his office computer onto external storage devices.

After unlawfully obtaining the production process data of the Carbomer technology from the two Tian [REDACTED] companies, Hua [REDACTED] sent the original process drawings and documents, via USB drives or email, to Liu [REDACTED], Zhu [REDACTED]liang, and Hu [REDACTED]chun, and discussed with them the use of such original drawings. During these discussions, both Hu and Zhu raised concerns about possible infringement upon Jiujiang Tian [REDACTED] Company’s rights, but Hua instructed Hu to design Anhui Niu [REDACTED] Company’s production process based on the original drawings of the two Tian [REDACTED] companies’ Carbomer production technology, and told him to avoid making it “identical” to theirs.

Following Hua’s instructions, Hu modified Guangzhou Tian [REDACTED] Company’s process design drawings and then commissioned the Hefei branch of a certain Shandong engineering design company to prepare the designs, engaged a Jiangsu machinery company to manufacture the reactors, placed orders with a Shanghai powder machinery manufacturer (which had business relations with the two Tian [REDACTED] companies) for identical crushing equipment, and engaged a Wuxi stirring equipment company to design assembly drawings based on the Jiangsu company’s technical plan, which were then used to produce stirrers.

By no later than 2014, Anhui Niu [REDACTED] Company had been using the unlawfully obtained production process and equipment technology to produce Carbomer products, which it sold domestically and to more than 20 countries and regions worldwide. Producing Carbomer products was Anhui Niu [REDACTED] Company’s principal business, and there was no evidence that it manufactured other products.

In January 2018, Anhui Niu [REDACTED] Company’s former legal representative Liu [REDACTED] and others were held criminally liable for the offence of infringing trade secrets. Even after the relevant criminal judgments had established that Hua [REDACTED], Liu [REDACTED], and others had committed acts infringing upon the right holders’ technical secrets, Anhui Niu [REDACTED] Company continued its infringing activities. Evidence showed that from 2014 until August 2019, Anhui Niu [REDACTED] Company continuously sold Carbomer products.

In 2017, Guangzhou Tian [REDACTED] Company and Jiujiang Tian [REDACTED] Company brought a civil action against Anhui Niu [REDACTED] Company, Hua [REDACTED], Liu [REDACTED], Hu [REDACTED]chun, and Zhu [REDACTED]liang, on the grounds of infringement upon their Carbomer technical secrets, seeking orders to cease the infringement, compensate for losses, and make a public apology.

Judgment

On 19 July 2019, the Guangzhou Intellectual Property Court rendered the Civil Judgment (2017) Yue 73 Min Chu No. 2163, deciding as follows: 1. Hua [REDACTED], Liu [REDACTED], Hu [REDACTED]chun, Zhu [REDACTED]liang, and Anhui Niu [REDACTED] Company shall, with immediate effect upon the entry into force of this judgment, cease infringing upon the technical secrets of Guangzhou Tian [REDACTED] Company and Jiujiang Tian [REDACTED] Company, and destroy the process materials containing such technical secrets. 2. Anhui Niu [REDACTED] Company shall, within ten days from the date this judgment takes effect, compensate Guangzhou Tian [REDACTED] Company and Jiujiang Tian [REDACTED] Company for economic losses in the amount of RMB 30 million and reasonable expenses in the amount of RMB 400,000. Hua [REDACTED], Liu [REDACTED], Hu [REDACTED]chun, and Zhu [REDACTED]liang shall be jointly and severally liable for the above compensation up to RMB 5 million, RMB 5 million, RMB 1 million, and RMB 1 million, respectively. 3. All other claims of Guangzhou Tian [REDACTED] Company and Jiujiang Tian [REDACTED] Company are dismissed.

Following the first-instance judgment, Guangzhou Tian [REDACTED] Company, Jiujiang Tian [REDACTED] Company, Anhui Niu [REDACTED] Company, Hua [REDACTED], and Liu [REDACTED] lodged appeals with the Supreme People’s Court.

On 24 November 2020, the Supreme People’s Court rendered the Civil Judgment (2019) Zui Gao Fa Zhi Min Zhong No. 562, deciding as follows: 1. The first and third items of the Civil Judgment (2017) Yue 73 Min Chu No. 2163 of the Guangzhou Intellectual Property Court are upheld. 2. The second item of the above judgment is varied as follows: Anhui Niu [REDACTED] Company shall, within ten days from the date this judgment takes effect, compensate Guangzhou Tian [REDACTED] Company and Jiujiang Tian [REDACTED] Company for economic losses in the amount of RMB 30 million and reasonable expenses in the amount of RMB 400,000. Hua [REDACTED], Liu [REDACTED], Hu [REDACTED]chun, and Zhu [REDACTED]liang shall be jointly and severally liable for the above compensation up to RMB 5 million, RMB 30 million, RMB 1 million, and RMB 1 million, respectively. 3. All other appeal claims of Guangzhou Tian [REDACTED] Company and Jiujiang Tian [REDACTED] Company are dismissed. 4. The appeals lodged by Hua [REDACTED], Liu [REDACTED], and Anhui Niu [REDACTED] Company are dismissed.

Following the second-instance judgment, Anhui Niu [REDACTED] Company, Hua [REDACTED], and Liu [REDACTED] applied to the Supreme People’s Court for retrial.

On 12 October 2021, the Supreme People’s Court issued the Civil Ruling (2021) Zui Gao Fa Min Shen No. 4025, dismissing the retrial application of Hua [REDACTED], Liu [REDACTED], and Anhui Niu [REDACTED] Company.

Judgment’s Reasons

The Supreme People’s Court held that, pursuant to paragraph 3 of Article 17 of the Anti-Unfair Competition Law of the People’s Republic of China (hereinafter referred to as the “Anti-Unfair Competition Law”), the amount of compensation payable to a business operator who has suffered losses due to unfair competition shall be determined according to the actual losses suffered by the right holder as a result of the infringement; where it is difficult to calculate such losses, the amount shall be determined according to the profits obtained by the infringer from the infringement. Where a business operator maliciously infringes a trade secret and the circumstances are serious, the amount of compensation may be determined at between one and five times the amount calculated according to the above methods. Compensation shall also include the reasonable expenses incurred by the right holder in stopping the infringement.

In this case, as the actual losses of the two Tian [REDACTED] companies could not be ascertained, the calculation was based on the partially established sales figures of Anhui Niu [REDACTED] Company, yielding its profits from the infringement. The court found that the processes, procedures, and some equipment used in producing the Carbomer products of Anhui Niu [REDACTED] Company infringed the technical secrets of the two Tian [REDACTED] companies, although the Carbomer formula itself was not found to be infringing.

In determining the infringing profits, the court of first instance did not sufficiently consider the role played by the infringed technical secrets in the Carbomer production process, nor did it adequately account for other production factors outside the scope of the infringed information. Using the sales figure of over RMB 37 million admitted by Anhui Niu [REDACTED] Company, multiplied by the 32.26% gross profit margin for the fine chemicals industry (as disclosed in Guangzhou Tian [REDACTED] Company’s annual report), the ascertainable infringing profit was nearly RMB 12 million. Considering the contribution rate of the infringed technical secrets to the Carbomer production process, the court determined it to be 50%, and accordingly reduced the infringing profit to RMB 6 million (rounded figure).

Regarding the choice of profit margin, as Anhui Niu [REDACTED] Company failed to provide the original accounting vouchers, ledgers, or profit statements as required by the court, and did not submit evidence proving the profit margin of its Carbomer products, it had to bear the adverse consequences of failing to adduce evidence. Therefore, the profit margin was determined according to the industry gross margin disclosed in Guangzhou Tian [REDACTED] Company’s annual report.

Although Anhui Niu [REDACTED] Company submitted its business license at the second-instance stage to show that its business scope was not limited to Carbomer production, the registered business scope reflected only its stated operations at the time of incorporation, which might be broader or narrower than its actual operations. Based on established facts, Anhui Niu [REDACTED] Company produced no products other than Carbomer, and failed to provide further evidence to the contrary. Hua [REDACTED]’s infringing acts of disclosing technical secrets occurred between 2012 and 2013, and Anhui Niu [REDACTED] Company used the unlawfully obtained production processes and equipment technology to produce Carbomer for domestic and overseas sales. Moreover, Anhui Niu [REDACTED] Company admitted that all its Carbomer products were produced using the same set of equipment.

The determination of whether an infringer engages in infringement “as a business” involves both objective and subjective considerations. Objectively, the infringer must have actually committed infringing acts, which constitute its principal business and main source of profit. Subjectively, the infringer (including the actual controller and management) must have been aware of the infringing nature of their acts yet persisted in committing them. The conduct of Anhui Niu [REDACTED] Company and Liu [REDACTED] fell within this category.

Paragraph 3 of Article 17 of the Anti-Unfair Competition Law sets out the conditions for awarding punitive damages and the range of applicable multipliers. Where a business operator maliciously infringes another’s trade secrets in serious circumstances, the right holder may request that the infringer bear punitive damages calculated at the appropriate multiplier.

On the facts, since its incorporation Anhui Niu [REDACTED] Company had engaged in the production of Carbomer as its main business. Although it claimed to produce other products, it adduced no supporting evidence. The names of its Carbomer products may have varied, but all were produced using the same set of equipment. After its former legal representative Liu [REDACTED] was held criminally liable for infringing technical secrets, Anhui Niu [REDACTED] Company did not cease production. Its products were sold in more than 20 countries and regions. At the first-instance stage, it refused without justification to produce relevant accounting books and original vouchers, constituting obstruction of evidence, which demonstrated the extent of its willful intent and the seriousness of the infringement.

Given that the infringing acts spanned both before and after the 23 April 2019 amendment to the Anti-Unfair Competition Law, and that Anhui Niu [REDACTED] Company failed to submit evidence on its specific profits before and after that date, it was objectively impossible to calculate damages separately for each period. Moreover, the evidence showed that Anhui Niu [REDACTED] Company continued infringing even after the first-instance judgment. The infringement was large-scale and long-term. In light of the original legislative purpose of the punitive damages regime (to strengthen legal deterrence, punish malicious and serious infringements, deter potential infringers, and effectively protect innovation), long-term malicious infringers should be dealt with severely. Therefore, based on the established infringing profits of Anhui Niu [REDACTED] Company, the damages in this case were determined at the higher end of the statutory range.

Relevant Provisions

Paragraph 3, Article 17, Anti-Unfair Competition Law of the People’s Republic of China