The best way to protect trade secrets is to prevent them from being misappropriated in the first place, but when trade secret misappropriation occurs, a trade secret holder will likely want to obtain adequate damages through litigation. The methods of calculating damages for trade secret misappropriation are thus crucial, since remedies available to the trade secret holder are determined by these methods. Although China lacks formal remedies for trade secret misappropriation, it has a body of trade secret law that flows from various statutes.
According to Article 20 of the Anti-Unfair Competition Law of China (effective December 1, 1993), damages for trade secret misappropriation are calculated as follows:
- actual losses incurred by the trade secret holder; or
- if it is difficult to measure the actual losses of the trade secret holder, profits obtained by the infringer during the misappropriation period.
According to Article 17 of the Interpretation of the Supreme People's Court on Issues Concerning the Application of Law in the Trial of Civil Cases Involving Unfair Competition (effective February 1, 2007), calculation of damages for trade secret misappropriation may make reference to patent infringement damages. More specifically, by reference to Article 65 of the Patent Law of China (effective March 12, 1984; amended December 27, 2008), when neither the actual losses of a trade secret holder nor the profits of an accused infringer can be determined, damages for trade secret misappropriation should then be calculated using the following methods:
- an appropriate amount determined by multiplying a reference royalty for the same or similar trade secret by a reasonable number; or
- if it is difficult to determine appropriate royalties, statutory compensation between ¥10,000 ($1,600) and ¥1,000,000 ($160,000).
In addition, according to Article 20 of the Anti-Unfair Competition Law, the trade secret holder is also entitled to claim reasonable costs paid to investigate the misappropriation, including attorney's fees.
Liability for trade secret misappropriation in China is limited to compensatory damages—the calculation of damages based on the actual losses suffered by the trade secret holder or the profits obtained by the infringer is aimed to return the trade secret holder and the infringer to their positions before the misappropriation occurred. In judicial practice, however, such restitution is hardly achievable and these two calculation methods are seldom applied, because it is hard for a trade secret holder to prove a plausible nexus between the alleged misappropriation and the claimed damages. The amount determined by reference to a reasonable royalty for the trade secret is also rarely applied, because there are few royalty references available in the market. Statutory compensation determined by a court thus has become, in practice, the most frequently used method for determining damages. And although this method purports to compensate the losses of the trade secret holder, it is generally considered as having a punitive nature depending on the intentional nature of the misappropriation. However, this method also rarely makes up for the actual losses of the trade secret holder.
As an example, in Yifan Xinfu Pharmaceutical Co., Ltd. v. Xinfa Pharmaceutical Co., Ltd. (Hu Gao Min San Zhong Zi Di 62 Hao), a case called the "Top IP litigation in 2008" in China, the lower court awarded ¥31,557,903.87 ($5.1 million) in damages. However, on December 24, 2014, the Shanghai High People's Court lowered those damages to ¥9,000,000 ($1.5 million), holding that it was not right to directly use research costs as the actual losses of the trade secret holder, because factors such as prospective profits and the endurance of competition of the trade secrets, etc., should also be taken into consideration. Furthermore, since Xinfu did not provide specific evidence illustrating actual losses, and the contribution of the misappropriation to the overall profits of Xinfa could not be accurately inferred, the appellate court used statutory compensation as a reference amount to determine the damages. Based on the fact that Xinfa experienced significant increases in profits after the misappropriation occurred (from a deficit in the year before the misappropriation to ¥4,661,478.46 ($750,000) in profits the year of the misappropriation to ¥93,880,684.16 ($15.1 million) in profits the year after the misappropriation), the court decided that ¥1,000,000 ($160,000) would be too low. How the court decided on the final damages figure of ¥9,000,000 ($1.5 million), the court did not explain.
Due to the difficulty of restoring the secrecy and value of trade secrets after misappropriation, it is essential for the victim of trade secret misappropriation to obtain sufficient monetary compensation. However, given evidentiary difficulties and inadequate ways of determining compensation amounts, damages awarded in China for trade secret misappropriation are often significantly lower than the actual economic losses of the trade secret holder. The following table shows statistics based on this Blog's review of trade secret misappropriation cases in China over the past five years:
* When calculating the averages, we excluded the highest and the lowest numbers of each year to give more accurate statistics.
** These highest awards are not included in calculating the averages.
As shown in the above table, trade secret cases in China often receive very low damages awards, and even the highest damages award in the past five years was only ¥10,000,000 ($1.6 million). Recovery of monetary damages through litigation in China is a big challenge for trade secret holders. We highly recommend that trade secret holders take sufficient precautionary measures, and reserve as much proof of research and development costs contributing to trade secrets as possible. If an infringer has started a commercial operation using misappropriated trade secrets, we also recommend that the trade secret holder make a timely application to the court to preserve the infringer's financial reports and related sales contracts as evidence showing the infringer's profits resulting from the use of trade secrets.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.