Xiaoxia Zhang, an IP Partner in KWM’s Beijing office, introduces an IP dispute involving the determination of Damages Compensation for the illegal disclosure of software code. The Supreme People’s Court of the People’s Republic of China (SPC) has ruled that the commercial value, including R&D cost, of the software code should be considered.
How to determine the damages compensation awarded to the rights holder by a Chinese court in a technical secret infringement case involving illegal disclosure? The Supreme People’s Court (SPC) has given a clear answer in the civil judgment of (2021) Zui Gao Fa Zhi Min Zhong No. 2298.
The trade secret infringement case led to the determination of damages based on the commercial value of the disclosed technical secrets and the circumstances – despite the court being unable to accept an appraisal report. Those looking to seek damages for infringements should consider opting for an appraisal report, but the case shows a court can still determine damages using other factors.
Publicly sharing ‘technical secrets’: the Flowers Blossom case
- In October 2018, Flowers Blossom Co., Ltd. licensed the software source code developed on its own to Panxing Co., Ltd. for use.
- In December 2018, Panxing illegally disclosed the software source code of Flowers Blossom on a public website.
- In October 2019, Flowers Blossom sued Panxing and its sole shareholder Panshi Co., Ltd. for infringing its technical secrets before Shenzhen Intermediate People’s Court (the first-instance court), and requested to order the defendants to bear the liability for infringement and compensate the damages. During the hearing, Flowers Blossom submitted a commercial value appraisal report of the software source code, rendered by an appraisal agency unilaterally entrusted by Flowers Blossom, as evidence for claiming damages.
- In June 2021, the first-instance court held that Panxing’s illegal disclosure of the software source code of Flowers Blossom constituted an infringement of technical secrets, and ordered Panxing and Panshi to compensate Flowers Blossom’s loss with the amount of RMB 5 million. All parties were dissatisfied with the first-instance judgment and appealed to the SPC.
- In November 2022, the SPC rejected the appeal and upheld the first-instance judgment.
How the SPC upheld the judgment (and the damages applied)
The SPC’s judgment concluded that:
- ‘Technical secret’: The software source codes illegally disclosed by Panxing satisfies the three constitutive requirements to constitute technical secrets, that is, the software source code:
- is not known to the public
- is of commercial value and
- Flowers Blossom adopted proper measures to keep it confidential.
- Confidentiality obligation: A confidentiality clause was clearly stipulated in the license agreement signed between Panxing and Flowers Blossom, which means that Panxing has an obligation to keep the software source code confidential. Therefore, regardless of whether the illegal disclosure of the software source code was a personal act of Panxing’s employee or Panxing intentionally did so, Panxing should bear the liability for infringement.
- Commercial value determinable: In the commercial value appraisal report of technical secrets in this case, rendered by an appraisal agency unilaterally entrusted by Flowers Blossom, many details were doubtful. Nevertheless, the SPC pointed out that while it was difficult to accept the relevant appraisal report, it was still possible to determine the commercial value of the technical secrets by comprehensively considering:
- the research and development costs of the technical secrets
- the benefits of implementing the technical secrets
- the available benefits and
- the time for maintaining a competitive advantage, among other considerations.
The commercial value of the technical secrets determined according to the above method could be further used as one of the basis for determining the damages.
- Damages upheld: The SPC upheld the damages determined by the first-instance court including by comprehensively considering the nature and circumstances of the accused infringement in this case, the commercial value of the technical secrets.
Key takeaways
In a technical secret infringement case involving illegal disclosure, damages should be determined based on the commercial value of the disclosed technical secrets and comprehensive consideration of the specific circumstances of the case. Appraisal and audit is an optional way to determine the commercial value of technical secrets. When the appraisal report is not accepted due to various reasons, the commercial value of the technical secrets in the case can be determined by comprehensively considering factors such as the research and development costs of the technical secrets.
Want to know more about the cases that are informing how businesses protect their IP in China? See our recent post on the SPC refusing to include the costs of defending a parallel patent claim as part of the reasonable expenses of a patent holder. And watch this space for more!
