*AI-generated translation, for reference only.

Judgment Digest

1. In determining whether an act of intellectual property infringement constitutes serious circumstances warranting the application of punitive damages, the court may comprehensively consider such factors as whether the alleged infringer commits intellectual property infringement as its main business, whether it has been subject to criminal or administrative penalties, whether it constitutes repeated infringement, whether there has been obstruction of evidence in the litigation, as well as the amount of losses caused by the infringement or the profits gained from infringement, the scale of the infringement, and the duration of the infringement.

2. Where an actor, knowing that its conduct constitutes infringement, has actually carried out the infringing act and such act constitutes its main business operation, it may be found to have committed intellectual property infringement as its main business. For those that commit intellectual property infringement as their main business and engage in long-term, large-scale infringement, the multiplier of punitive damages may be applied on the higher end of the statutory range, up to the maximum, when determining the amount of damages in accordance with law.

Case Facts

On June 6, 2000, Guangzhou Tian [REDACTED] High-tech Materials Co., Ltd. (hereinafter "Guangzhou Tian [REDACTED]") was registered and established. On October 30, 2007, Jiujiang Tian [REDACTED] High-tech Materials Co., Ltd. (hereinafter "Jiujiang Tian [REDACTED]") was registered and established, with Guangzhou Tian [REDACTED] as its sole shareholder. To prove the existence of a licensing relationship between them with respect to the Carbomer technology, the two Tian [REDACTED] companies submitted two letters of authorization. The first letter of authorization, issued on September 30, 2008, recorded the following: Guangzhou Tian [REDACTED]'s independently developed Carbomer production technology and intellectual property are hereby granted to Jiujiang Tian [REDACTED] for free use, with a term of authorization of ten years, from October 1, 2008 to September 30, 2018. During the term of authorization, Jiujiang Tian [REDACTED] holds the right to use the technology, including but not limited to: using the technology to produce, manufacture, and sell products; using the technology to improve its current industrial processes; and making subsequent improvements to such technological achievements to form new technological achievements, etc. Without the written consent and confirmation of both parties, Guangzhou Tian [REDACTED] and Jiujiang Tian [REDACTED] shall not grant the technology to any other entity or individual for use. Upon expiration of the term of authorization, the granted right of use shall be returned to Guangzhou Tian [REDACTED]. The second letter of authorization was issued on September 15, 2018, with a term of authorization from October 1, 2018 to September 30, 2028, and the content of authorization being identical to that of the first letter. The product involved in this case is Carbo, also known as Carbomer, with the Chinese aliases Polyacrylic Acid and Carboxyvinyl Polymer. After neutralization, Carbomer is an excellent gel matrix, widely used in lotions, creams, and gels.

On August 29, 2011, Anhui Niu [REDACTED] Fine Chemical Co., Ltd. (hereinafter "Anhui Niu [REDACTED]") was registered and established. At the time of its establishment, Liu [REDACTED] was the legal representative, holding a 70% capital contribution. The legal representative was later changed to Wu [REDACTED]cheng.

Hua [REDACTED] joined Guangzhou Tian [REDACTED] on March 30, 2004 and left on November 8, 2013. From December 30, 2007 until his departure, Hua [REDACTED] successively signed with Guangzhou Tian [REDACTED] the Labor Contract, Confidentiality and Non-Compete Agreement, Employee Handbook, Specialized Training Agreement, and other documents, which stipulated his confidentiality obligations regarding trade secrets, non-compete obligations, and other matters. Zhu [REDACTED]liang and Hu [REDACTED]chun had also been employed by Guangzhou Tian [REDACTED]. During their employment, both signed with Guangzhou Tian [REDACTED] the Labor Contract, the Confidentiality and Non-Compete Agreement, the Commercial and Technical Confidentiality Agreement, and other documents. During the period from 2012 to 2013, Hua [REDACTED], taking advantage of his position as head of Carbomer product research and development, on the pretext of writing a paper, obtained from Li [REDACTED], the head of the production workshop of Jiujiang Tian [REDACTED], drawings of the reactor and dryer equipment used in the Carbomer production process technology. He also, in violation of the management rules of Guangzhou Tian [REDACTED], on multiple occasions copied materials concerning the Carbomer production project's process equipment from his office computer at Guangzhou Tian [REDACTED] to external storage media. After Hua [REDACTED] unlawfully obtained the production process materials within the Carbomer production technology of the two Tian [REDACTED] companies, he successively, by means of USB flash drive copying or email transmission, sent the original drawings and documents of the two Tian [REDACTED] companies' Carbomer production process to Liu [REDACTED], Zhu [REDACTED]liang, Hu [REDACTED]chun, and others; moreover, Hua [REDACTED], Liu [REDACTED], Zhu [REDACTED]liang, and Hu [REDACTED]chun discussed the use of the original drawings of the two Tian [REDACTED] companies' Carbomer production process technology. During this process, both Hu [REDACTED]chun and Zhu [REDACTED]liang raised the question of whether such conduct would infringe the relevant rights of Jiujiang Tian [REDACTED], and Hua [REDACTED] then required Hu [REDACTED]chun to design Anhui Niu [REDACTED]'s production process based on the original drawings of the two Tian [REDACTED] companies' Carbomer production process technology, and instructed Hu [REDACTED]chun not to make the design exactly identical to that of the two Tian [REDACTED] companies, and so forth. Accordingly, Hu [REDACTED]chun modified Guangzhou Tian [REDACTED]'s Carbomer process design drawings as requested by Hua [REDACTED], and finally entrusted the Hefei Branch of Shandong [REDACTED] Engineering Design Co., Ltd. to make the design based on the modified drawings, entrusted Jiangsu [REDACTED] Machinery Co., Ltd. to manufacture the reactor, ordered crushing equipment identical to that of the two Tian [REDACTED] companies from Shanghai [REDACTED] Powder Machinery Manufacturing Co., which had a cooperative relationship with the two Tian [REDACTED] companies, and further entrusted Jiangsu Wuxi [REDACTED] Mixing Equipment Co., Ltd. to design a general assembly drawing based on the technical solution of Jiangsu [REDACTED] Machinery Co., Ltd., and then to produce the agitator in accordance with the general assembly drawing.

From 2014 at the latest, Anhui Niu [REDACTED] used the Carbomer production process and equipment technology that Hua [REDACTED] had unlawfully obtained from the two Tian [REDACTED] companies to produce Carbomer products and sold them to companies both at home and abroad, with the sales reaching more than twenty countries and regions. The production of Carbomer products was Anhui Niu [REDACTED]'s principal business operation, and there is no evidence proving that it also produced other products. In January 2018, Liu [REDACTED] and others, the former legal representative of Anhui Niu [REDACTED], were held criminally liable for the crime of infringing trade secrets. Even though the relevant criminal judgment had already found that Hua [REDACTED], Liu [REDACTED], and others had committed acts of infringing the right holder's technical secrets, Anhui Niu [REDACTED] still did not cease its infringement. According to the relevant evidence, Anhui Niu [REDACTED] continuously sold Carbomer products from 2014 through August 2019.

In 2017, Guangzhou Tian [REDACTED] and Jiujiang Tian [REDACTED] filed a lawsuit with the court on the ground that Anhui Niu [REDACTED], Hua [REDACTED], Liu [REDACTED], Hu [REDACTED]chun, Zhu [REDACTED]liang, and others had infringed their Carbomer technical secrets, requesting the court to order each defendant to cease the infringement, compensate for losses, and make a formal apology.

Judgment Result

On July 19, 2019, the Guangzhou Intellectual Property Court rendered Civil Judgment (2017) Yue 73 Min Chu No. 2163: I. Hua [REDACTED], Liu [REDACTED], Hu [REDACTED]chun, Zhu [REDACTED]liang, and Anhui Niu [REDACTED] shall, from the effective date of this judgment, immediately cease infringing upon the technical secrets of Guangzhou Tian [REDACTED] and Jiujiang Tian [REDACTED] involved in the case, and destroy the process materials recording the technical secrets involved in the case. II. Anhui Niu [REDACTED] shall, within ten days from the effective date of this judgment, compensate Guangzhou Tian [REDACTED] and Jiujiang Tian [REDACTED] for economic losses of RMB 30 million and reasonable expenses of RMB 400,000, and Hua [REDACTED], Liu [REDACTED], Hu [REDACTED]chun, and Zhu [REDACTED]liang shall bear joint and several liability for the foregoing amount of compensation within the scope of RMB 5 million, RMB 5 million, RMB 1 million, and RMB 1 million respectively. III. Other litigation claims of Guangzhou Tian [REDACTED] and Jiujiang Tian [REDACTED] are dismissed. Following the pronouncement of the first-instance judgment, Guangzhou Tian [REDACTED], Jiujiang Tian [REDACTED], Anhui Niu [REDACTED], Hua [REDACTED], and Liu [REDACTED] filed appeals with the Supreme People's Court.

On November 24, 2020, the Supreme People's Court rendered Civil Judgment (2019) SPC IP Civil Final 562: I. Items I and III of Civil Judgment (2017) Yue 73 Min Chu No. 2163 of the Guangzhou Intellectual Property Court are upheld. II. Item II of Civil Judgment (2017) Yue 73 Min Chu No. 2163 of the Guangzhou Intellectual Property Court is amended as follows: Anhui Niu [REDACTED] shall, within ten days from the effective date of this judgment, compensate Guangzhou Tian [REDACTED] and Jiujiang Tian [REDACTED] for economic losses of RMB 30 million and reasonable expenses of RMB 400,000, and Hua [REDACTED], Liu [REDACTED], Hu [REDACTED]chun, and Zhu [REDACTED]liang shall bear joint and several liability for the foregoing amount of compensation within the scope of RMB 5 million, RMB 30 million, RMB 1 million, and RMB 1 million respectively. III. The other appellate claims of Guangzhou Tian [REDACTED] and Jiujiang Tian [REDACTED] are dismissed. IV. The appellate claims of Hua [REDACTED], Liu [REDACTED], and Anhui Niu [REDACTED] are dismissed. Following the pronouncement of the second-instance judgment, Anhui Niu [REDACTED], Hua [REDACTED], and Liu [REDACTED] filed an application for retrial with the Supreme People's Court.

On October 12, 2021, the Supreme People's Court rendered Civil Ruling (2021) SPC Civil Retrial 4025: The application for retrial of Hua [REDACTED], Liu [REDACTED], and Anhui Niu [REDACTED] is dismissed.

Judge's Opinion

The Supreme People's Court holds that: Article 17, Paragraph 3 of the Anti-Unfair Competition Law of the People's Republic of China (hereinafter the "Anti-Unfair Competition Law") provides that the amount of compensation for a business operator harmed by an act of unfair competition shall be determined according to the actual losses it has suffered as a result of the infringement; where the actual losses are difficult to calculate, the amount shall be determined according to the profits gained by the infringer as a result of the infringement. Where a business operator maliciously commits an act of infringing trade secrets and the circumstances are serious, the amount of compensation may be determined as not less than one time but not more than five times the amount determined by the foregoing methods. The amount of compensation shall also include the reasonable expenses paid by the business operator to stop the infringing act.

In this case, the actual losses of the two Tian [REDACTED] companies cannot be ascertained, and therefore the profits from infringement are calculated based on the part of the sales of Anhui Niu [REDACTED] that has been ascertained. The processes, procedures, and part of the equipment of the Carbomer products produced by Anhui Niu [REDACTED] infringed upon the technical secrets of the two Tian [REDACTED] companies involved in the case, but the Carbomer formula was not found to infringe the technical secrets of the two Tian [REDACTED] companies. When determining the profits from infringement, the court of the original instance did not take into account the role of the technical secrets involved in the case in the production of Carbomer, and also did not adequately consider the role played by production factors other than the technical secret information involved in the case in the production process of Carbomer products; instead, it multiplied the sales amount of more than RMB 37 million admitted by Anhui Niu [REDACTED] by the gross margin of 32.26% of the fine chemicals industry, arriving at a partial profit from infringement of Anhui Niu [REDACTED] that could be ascertained at nearly RMB 12 million. Now, taking into comprehensive account the role played by the infringed technical secrets involved in the case in the production process of Carbomer products, the contribution rate of the technical secrets involved in the case is, at the court's discretion, determined to be 50%, and therefore the profits from infringement of Anhui Niu [REDACTED] are correspondingly reduced and rounded to RMB 6 million. As for the choice of profit margin, since Anhui Niu [REDACTED] failed to provide the original accounting vouchers, books, and profit statements as required by the court, and also failed to produce evidence proving the profit margin of its Carbomer products, it shall bear the unfavorable legal consequences of failing to discharge its burden of proof, and therefore the profit margin of its products is determined in accordance with the gross margin of the fine chemicals industry published in the annual reports of Guangzhou Tian [REDACTED].

Although Anhui Niu [REDACTED], in the second-instance proceedings, submitted to the court its business license and other evidence to demonstrate that its scope of business extended beyond the production of Carbomer products, the scope of business recorded on the business license is merely the choice made by Anhui Niu [REDACTED] at the time it applied for registration and establishment, and its actual scope of business may be either broader or narrower than the scope recorded on the business license. Moreover, according to the facts ascertained, apart from Carbomer products, Anhui Niu [REDACTED] did not produce any other products, and Anhui Niu [REDACTED] did not further produce evidence to prove the fact that it produced products other than Carbomer products. In this case, the alleged infringing act of Hua [REDACTED] disclosing technical secrets occurred during the period from 2012 to 2013, and Anhui Niu [REDACTED] used the Carbomer production process and equipment technology that Hua [REDACTED] had unlawfully obtained from the two Tian [REDACTED] companies to produce Carbomer products and sell them domestically and abroad. In addition, Anhui Niu [REDACTED] expressly stated that the Carbomer products it produced were all manufactured by the same set of equipment. To determine whether an actor commits infringement as its main business, the matter may be judged from both subjective and objective aspects. Objectively, the actor has actually carried out the infringing act, and such act is the company's principal business operation and constitutes its main source of profit; subjectively, the actor — including the company's de facto controller and management — knowingly carries out the act despite being aware that it constitutes infringement. The conduct of Anhui Niu [REDACTED] and Liu [REDACTED] and others in this case falls within such circumstances.

Article 17, Paragraph 3 of the Anti-Unfair Competition Law provides for the conditions for imposing punitive damages and the range of multipliers of punitive damages. Accordingly, where a business operator has maliciously infringed upon the trade secrets of another and the circumstances are serious, the right holder may request the infringer to bear punitive damages at a corresponding multiplier of the amount of compensation. Therefore, this case requires that the question of whether to apply punitive damages be determined on the basis of judging whether Anhui Niu [REDACTED] maliciously committed the infringement and whether the circumstances are serious. According to the facts ascertained in this case, since its establishment, Anhui Niu [REDACTED] has carried on the business of producing Carbomer products; although it contends that it also produces other products, it has not submitted evidence to support this contention, and although the Carbomer products it produced bore different names, all of them were processed by the same set of equipment. In addition, after its former legal representative Liu [REDACTED] was held criminally liable for the crime of infringing trade secrets and was found to have committed acts of infringing the right holder's technical secrets, Anhui Niu [REDACTED] still did not cease production, with the scope of sales reaching as many as more than twenty countries and regions, and at the same time, during the first-instance proceedings in this case, it refused without justified reason to provide the relevant accounting books and original vouchers, thereby constituting obstruction of evidence, which sufficiently demonstrates the gravity of its subjective intent to infringe and the seriousness of the circumstances of the infringement. In view of the fact that the alleged infringing acts in this case straddle the date of April 23, 2019 on which the amended Anti-Unfair Competition Law took effect, that Anhui Niu [REDACTED]'s refusal to provide financial accounting books and other materials constitutes obstruction of evidence, that the profits from infringement found are determined on the basis of the sales amount admitted by Anhui Niu [REDACTED] and constitute only part of its profits from infringement; that the infringer in this case did not submit evidence proving the specific profits it gained before and after the legal amendment, making it impossible to calculate the amount in segments using April 23, 2019 as the dividing line; and that existing evidence shows that Anhui Niu [REDACTED] did not cease its infringing acts after the first-instance judgment, that its conduct is of a continuous nature, and that the scale of its infringement is enormous and the duration is long — for these reasons, it is objectively difficult to calculate the amount of compensation in segments on the basis of the evidence on record. The original purpose of the Anti-Unfair Competition Law in establishing the punitive damages system is to reinforce the deterrent effect of the law, combat malicious and serious infringing acts, deter and dissuade future or potential infringers, and effectively protect innovation activities; long-term malicious engagement in infringing activities shall be treated with greater severity. Therefore, in this case, the amount of damages may be determined at the higher end on the basis of the ascertained profits from infringement of Anhui Niu [REDACTED].

Related Index

Article 17, Paragraph 3 of the Anti-Unfair Competition Law of the People's Republic of China (amended on April 23, 2019)