Ascertainment of the Client List in Trade Secret and Application of Injunctive Order against Infringer

——Hebi Reflective Material Co., Ltd. v. Song Junchao, Hebi Ruimingte Technology Co., Ltd., and Li Jianfa

[Syllabus]

The Client List infringed accounts for a large proportion of disputes over trade secret. The Client List in the trade secret is not an ordinary list of client name, but should also contain in-depth information affecting the transaction. Important information, such as VAT invoice, delivery list, remittance voucher, notice of goods requisition, parcel bill, etc. between the Obligee and the client, includes the special client information that is different from the publicly-known information, such as, trading habits, trading needs, and price tolerance of the client. Such information has real or potential commercial value and constitutes the secrets of business information., and It would be a trade secret after the Obligee takes reasonable confidentiality measures.

After the court recognized determined the occurrence of the infringement and ordered the infringer to stop the infringement and compensate the loss, the infringer continued to use the trade secret already in control, causing greater injuries to the Obligee. To this end, in accordance with the provisions of Article 16 of the Interpretation of the Supreme People's Court on Some Issues Concerning the Application of Law in the Trial of Civil Cases Involving Unfair Competition, the infringer was ordered to stop misappropriating using the trade secret within a specified period, thereby preventing the infringer from continuing to infringe. 

[Case No.] Henan High People's Court (2016) YuMingZhong No. 347

[Cause of Action] Disputes over Misappropriation of trade secret  

[Collegial Panel Members]  Zhao Zheng   Zhao Yanbin   Jiao Xinhui

[Keywords] Misappropriation of trade secret, client list, application of injunction 

[Relevant Legal Provisions] Article 10 of the Anti-Unfair Competition Law of the People's Republic of China (this law was amended on November 4, 2017, and Article 9 of the Amendment)

Article 16 of Interpretation of the Supreme People's Court on Some Issues Concerning the Application of Law in the Trial of Civil Cases Involving Unfair Competition

[Basic Facts]

In the case of disputes over missapproriation of trade secret among the Appellant Song Junchao, Hebi Ruimingte Technology Co., Ltd. (hereinafter referred to as Ruimingte Company), the Appellee Hebi Reflective Material Co., Ltd. (hereinafter referred to as Reflective Material Company), and Li Jianfa (Defendant in first instance), the Obligee, Reflective Material Company, was established on April 4, 1996, and its business scope covers the processing and sales of reflective materials and applications of reflective materials and coated products. Song Junchao was a sale person at Reflective Material Company since 2006, responsible for sales and customer development in Heilongjiang, Jilin, Liaoning, and Inner Mongolia Autonomous Region. Reflective Material Company has entered into two labor contracts with Song Junchao, which included confidentiality clauses and non-competition clauses. Reflective Material Company has established a confidentiality system for its business information, taken necessary confidentiality measures for information of clients and potential clients, and paid confidential fees to Song Junchao and other salespeople. After noticing Song Junchao purchased the reflective cloth on his behalf, Reflective Material Company filed a lawsuit and asked for preliminary injunction, and demanded to seize 14 pieces of reflective fabric stored by Song Junchao, of which the consignee is Song Junchao, and to enjoin Song Junchao, Ruimingte, and Li Jianfa from the misappropriation, and to compensate for reasonable expenses and losses of RMB500,000.

Hebi Shancheng Ruixin Reflective Material Business Department (hereinafter referred to as Ruixin Business Department) was established on April 3, 2006. The name of its operator is Li Jianfa, and the contact number is 13033895409. Hebi Ruixin Trading Co., Ltd. (hereinafter referred to as Ruixin Company) was established on June 22, 2011. Its business scope covers steel, building materials, hardware, electricity, coated panels, and reflective fences. The contact number of the legal representative, upon two changes, is 13033895409. On November 12, 2011, Song Xiang applied for the change of the company's business scope. The expanded scope encompassed  reflective material products, clothing, textiles, sanitary products, rubber products, etc. On August 27, 2013, Song Xiang handled the procedures for changing legal representative of Ruixin Company. In addition, during the operation of Ruixin Company, Song Xiang also participated in the work related to the business registration procedures of the company, such as applying for a business license, changing company’s business scope, and submitting annual inspection reports. Ruixin Company changed its name to Ruimingte Company on January 19, 2015. The ID number of Song Junchao is 410621197603181537. The ID number of Song Xiang is 410611198102187510. These two names referred to the same person. Song Junchao uses SIM card with the number of 13033895409. Song Jun has sent goods to Northeast China in the name of Song Xiang through Zhengzhou Debon Logistics Limited Hebi Branch over ten times. The goods sent include "reflective cloth, 3 fibers" and "reflective strips, 2 fibers", "cloth, 5 fibers", etc. On February 8, 2014, Song Junchao delivered goods to Northeast China through Hebi Business Department of China Railway Corporation. Song Junchao has sent goods to Northeast China through Shanghai Jiaji Express Co., Ltd. Hebi Branch for 7 times. The goods include "cloth, 3", "cloth, 4" "cloth, 9" and so on. Some of the client lists are the same as the client list of Reflective Material Company. The current account of Ruixin Company shows that from August 1, 2011 to July 31, 2015, among the client of Ruixin Company in Northeast China, there were 10 clients who were the trading clients of Reflective Material Company and there were 38 supply transactions, amounting to RMB830, 512.50. Song Junchao, at his own capacity, withdrew the money from the accounts of Ruixin Company for 27 times, totaling to RMB1, 270, 603.42.

Holding

Henan Hebi Intermediate People's Court rendered (2015) HeMingChuZi No. 96 Civil Judgment on December 25, 2015, which demanded Song Junchao and Ruimingte Company to cease misappropriating the trade secret in two years to come and to pay the damage of RMB 350,000. After the judgment was granted in the first instance, Song Junchao and Ruimingte Company were dissatisfied with it and appealed to Henan Higher People's Court, seeking the reverse of the first-instance decision and dismissing the claims of Reflective Material Company. On August 2, 2017, Henan Higher People's Court issued the (2016) YM No. 347 Civil Judgment to dismiss the appeal and affirm the original judgment.

[Reasoning]

As the court of the appeal, Henan Higher People's Court held that:

I. Whether the Client List claimed by Reflective Material Company constitutes a trade secret

Article 10 of the Anti-Unfair Competition Law of the People's Republic of China stipulates that "trade secret", for the purpose of this Article, means the utilized technical information and business information, which is unknown by the public, may create business interests or profit for its Obligee, and also is maintained confidentially by its Obligee. In this case, Reflective Material Company collected and recorded the client information stated in VAT invoice issued to clients in Northeast China, the delivery list, remittance voucher for fund transfer with clients, notice of goods requisition, the parcel bill, the travel schedule and travel plan, to form a Client List with detailed business information, and thus spent a lot of time and money and contributed amount of labor. Among them, "variety", "specification" and "quantity" can explain the unique needs of clients; "transaction date" can reflect the regular pattern when the client demands for goods; "unit price" can explain the price affordability of clients and the bottom line of price transactions; "Remarks" reflect the special information of clients. All of these items constitute the secret in the business information of Reflective Material Company, reflects the unique client information of Reflective Material Company, and cannot be obtained from the public information. The above evidence matches the requirement of "not known to the public." Transaction records and client transaction bills provided by Reflective Material Company cover a long time and a large number of clients. Such business information has real or potential business value. Some clients have established long-term business dealings with Reflective Material Company. Some clients have not established business relationships with Reflective Material Company, but they are also important resources for Reflective Material Company to obtain trading opportunities. The clients designated in the business information have formed stable supply channels and maintained good trading relationships with Reflective Material Company. Therefore, such information has practical utility in the operation of the business and can bring economic benefits and competitive advantages to Reflective Material Company. The above evidence meets the requirement of "causing economic benefits to the Obligee and having practicality." Reflective Material Company has established a specific confidentiality system for the above business information, and taken necessary confidentiality measures for the information of clients and potential clients. The labor contract entered into with Song Junchao clearly stipulates the confidentiality clause and competition restriction clause. Reflective Material Company also paid the corresponding confidentiality fees to Song Junchao and other salespeople. The above evidence proves that Reflective Material Company has taken reasonable "confidential measures" for the above business information. In summary, the Client List produced by Reflective Material Company constitutes a trade secret.

II. Do Song Junchao and Ruimingte Company misappropriate the trade secret of Reflective Material Company?

Song Junchao was a salesman of Reflective Material Company since 2006. He was responsible for sales and customer development in Heilongjiang Province, Jilin Province, Liaoning Province, and Inner Mongolia Autonomous Region, and knew very well the client information related to the trade secret of Reflective Material Company. Song Junchao delivered goods to Northeast China 18 times under the name of Song Xiang. Some of the products were named similar to reflective materials. Some of the client lists were also the same as the client list of Reflective Material Company. It can be ascertained that Song Junchao traded with clients of Reflective Material Company without permission. Song Junchao has participated in the work relevant to the business registration of Ruimingte Company, such as application of corporate business license, change of corporate business scope, and submission of annual inspection reports. The contact number of the legal representative of Ruimingte Company, upon two changes, is 13033895409 used by Song Junchao. Song Junchao also withdrew money at his personal capacity from the account of Ruimingte Company for 27 times, with a total of RMB 27, 127,060.42. Thus, it can be ascertained that Song Junchao had a close relationship with Ruixin Company. Song Junchao entered into a non-disclosure agreement with Reflective Material Company. Reflective Material Company also paid confidentiality fees to Song Junchao. Song Junchao was obligated to keep confidential the business information obtained at work. Song Junchao should be aware of the company's relevant management regulations, the non-publicity, and commercial value of client list, but he still conducted transactions at his personal capacity with clients of Reflective Material Company. Thus, he knowingly committed the misappropriation. The act of Song Junchao in breaching confidentiality agreement, disclosing, using, and allowing others to use the business information of Reflective Material Company misappropriate trade secrets of Reflective Material Company. The business scope of Ruimingte Company changed by Song Junchao on November 12, 2011 partially overlapped with the business scope of Reflective Material Company. Under the close ties by Song Junchao and Ruimingte Company, Ruimingte Company conducted the business transaction in a short period with the clients, with whom Reflective Material Company had contacted in a long term. According to current accounts of Ruimingte Company, some of the clients in Northeast China, who traded with Ruimingte Company from August 1, 2011, to July 31, 2015, were the same clients of Reflective Material Company, and the transaction amount was significant. It can be ascertained that client information used by Ruimingte Company is the same or substantially the same with business information of Reflective Material Company. It can be further ascertained that Ruimingte Company actually accesses to the business information of Reflective Material Company through Song Junchao. Due to the fact that Ruimingte Company did not provide evidence to prove that the transaction was initiated by the clients, it can be presumed that Ruimingte Company improperly obtained and used the client list of Reflective Material Company, which was acquired by Song Junchao, to conduct transactions with the particular clients of Reflective Material Company. Such acts infringe on the rights of Reflective Material Company over trade secret of client list, constituting a common subjective intention. Song Junchao and Ruimingte Company jointly infringed on the trade secret of Reflective Material Company.

III. Whether the defendants were liable 

According to Article 16 of Interpretation of the Supreme People's Court on Some Issues Concerning the Application of Law in the Trial of Civil Cases Involving Unfair Competition, when the People's Court imposes civil liability for misappropriation of trade secrets, the time frame for stopping the infringement generally endures until the trade secret has been known to the public. If the period of time during which the misappropriation would have been enjoined would apparently unreasonable, a judgment may be rendered to order the infringer to cease misappropriating the trade secret for a certain period of time or within a particular scope, provided that the competitive advantage bestowed on the Obligee by such trade secret is protected in accordance with the law. As it is impossible to calculate the loss of Reflective Material Company and the profits of Song Junchao and Ruimingte Company, the court determines, as appropriate, that Song Junchao and Ruiming Special Company should compensate RM 350,000 to Reflective Material Company, based on the nature of misappropriation of Song Junchao and Ruimingte Company, knowingness, the trading time and number of transactions, previous transaction price of similar products of Reflective Material Company, and efforts made by Reflective Material Company to collect client business information. In order to preclude the potential damages to be suffered by Reflective Material Company, and to eliminate the continued profits obtained by Song Junchao and Ruimingte Company as a result of misappropriation, Song Junchao and Ruimingte Company must immediately stop misappropriating the trade secret of Reflective Material Company in two years to come.