Understanding the courts' approach to trade secret cases

In practice, courts would require the rights owner to break up the asserted trade secret into multiple TSPs with each delineating a specific boundary and scope. For example, according to the Guidelines for Adjudicating Trade Secret Misappropriation Cases (2011) published by the Jiangsu Higher People's Court, the rights owner has to identify TSPs at the early stage of litigation in trade secret disputes. For both confidentiality and infringement, well-defined TSPs help courts analyze the issues with higher efficiency and clarity. Furthermore, they allow both the trade secret owner and the accused infringer to better structure their respective claims for the purpose of the litigation. The owner would draw up the TSPs that can withstand scrutiny on both confidentiality and infringement issues, and the alleged infringer would have a clear target of attack for its defense arguments.

Using TSPs, however, may lead to inadequate protection for owners if the TSPs are considered as replacements, rather than representation, of the asserted trade secret. In many circumstances, the value of technology is reflected in its superiority over the competing alternatives. If the court's focus is placed on isolated technical features, it may lose sight of the function and value of the asserted trade secret as a whole. Take the production process for an industrial chemical as an example: if a chemical company is able to lower the costs, or increase the efficiency, of production even by a single percentile through upgrades, it would likely gain significant advantage over its competitors. But the upgrades may be due to modifications to different parts of the process, such as mixing of the reagents, quantity of the catalysts or control of temperature during reaction – changes that may not be viewed as significant in isolation. In this situation, the rights owner needs to highlight the technical and commercial values of the changes, and their importance to the trade secret as a whole. As the SPC warned in Chengdu Jialing Electric Manufacturing v Chengdu Xiwang Electric Research Institute (2002) that, even if the theory and technology of the asserted TSPs are public knowledge, their unique designs and parameters as part of the technology-at-issue can remove the TSPs from the public domain.

Protecting trade secrets, not trade secret points

Under the Patent Law, each claim provides the scope of protection conferred by the patent and informs the public about what must be done to avoid infringement liabilities. The validity, coverage and economic value of the patent are all defined in the four corners of the patent claim. On the contrary, each TSP is a component that combines with the other parts of the trade secret (including other TSPs) to complete the technology. In other words, individual TSPs cannot be disentangled from the trade secret itself. Therefore, equating TSPs with patent claims may not help the trade secret owner to claim the full value of its technology.

The alleged infringer in a trade secret dispute typically sifts through extensive public records, trying to identify those that can rebut the trade secret owner's confidentiality claim over each of the TSPs. There is no clear statutory framework that a court can rely on to evaluate whether a TSP has been disclosed by a public document, or a set of documents.

While the validity analysis from the patent regime may offer some insight, it is rooted in the inventive nature of the patented technology and the monopoly conferred by the rights. At the outset, assuming a person skilled in the art would have knowledge of all public information may work well to limit the patentee's monopoly power over the technology.

But using a similar analysis in a trade secret dispute would be a stretch. As the rights owner has to prove that the accused infringer acquired its technology-at-issue through illegal means, the amount of information that the infringer can learn from public knowledge after the fact should not negate the illegality of its actions against the owner. Instead, allowing the infringer to peruse and analyze the public documents ex post in order to defeat the confidentiality of the TSPs would provide the infringer a free pass for its saved time and costs by not working from the public documents ex ante. Nonetheless, the rights owner should be fully prepared for the accused infringer's dumping of extensive public records as part of its defense during litigations.

Many Chinese courts apply an analytical framework to the confidentiality of TSPs similar to that applied to patent novelty or inventiveness tests. But this method may be susceptible to hindsight bias – the inclination to see a technology as having been predictable with the knowledge of how the technology was developed. While hindsight bias exists in patent cases, it can be even more pronounced in trade secret disputes as courts may overlook the intensive and exacting trial-and-error processes that went into developing the technology. The factors which lead to the advances in technology may not be adequately presented in the description of the TSPs, but likely form the basis of the rights owner's decision to protect the technology as a trade secret. This bias can be exacerbated if the analysis of individual TSPs is disconnected from that of the overall trade secret, by further overlooking the difficulty of integrating ostensibly minor modifications of TSPs into the entire technology. This issue was noted by the Jiangsu Higher People's Court in Yizhi Machinary Equipment v Chen Qishen, et al. (2006), in which the court held that, while every single equipment parameter in the asserted technology may come from public domain, the selection and combination of these parameters reflected the rights owner's intellectual work and thus qualified as a protectable trade secret.

On the issue of infringement, the SPC, in its 2007 Interpretation on Several Issues Concerning the Application of the Law in the Trial of Civil Unfair Competition Cases (最高人民法院关于审理不正当竞争民事案件应用法律若干问题的解释), states that the information used by the infringer for a trade secret misappropriation claim must be identical, or substantially the same, as the asserted trade secret. The SPC clearly refers to the entire trade secret in its “substantial similarity” test, as opposed to the individual TSPs. This is notable because the rights owner's target of protection covers the asserted trade secret as a whole. While courts generally compare each TSP with the corresponding part of the infringer's technology, whether the two technologies are substantially similar should not be based on a simple mathematical calculation of the number of TSPs that are copied, but on the overall analysis. Any modifications made to the TSPs by the infringer that have little effect on the value of the asserted trade secret should not absolve the infringer of any part of its liability, even if the resulting technology falls outside the protection scope of the particular TSPs.

Moving forward

Chinese courts' frequent reliance on patent theories to adjudicate disputes over misappropriation of technical trade secrets, while pragmatic, is also flawed. In practice, the rights owner needs to fully communicate with the court the important technical and commercial details of its asserted trade secret so that judges can conduct their analyses with the understanding that the asserted trade secret is an inseparable and integrated unit, and evaluate each component based on not only its individual features, but also on its value and contribution to the entire trade secret.

Fang Qi, Fangda Partners, Beijing