China: Litigate Trade Secret Misappropriation Disputes In Chinese Courts

Last Updated: 22 June 2016
Article by Xiang Wang and Shelley Zhang

How can trade secret misappropriation disputes be litigated in Chinese courts, despite the system's lack of US-style discovery tools? Many companies, especially foreign companies, might be hesitant to even think about bringing trade secret misappropriation actions in China for many reasons, but perhaps most importantly, based on concerns over how to collect evidence.

The case SI Group Inc. and SI Group (Shanghai) Co., Ltd. ("SI Group") v. Sino Legend (Zhangjiagang) Chemical Co., Ltd. ("Sino Legend") and Jie Xu (Final Decision No. 93, Third Civil Division of Shanghai High People's Court) provides a good reference, both for trade secret owners and alleged offenders.  The case demonstrates a good approach for a trade secret owner to initiate legal action, even with limited initial evidence.  The case also offers lessons to an alleged offender regarding how to defend itself from such a case. Here below we will briefly discuss the background of this case and particularly what actions SI Group and Sino Legend took in this case, as well as some takeaways for both plaintiffs and defendants in Chinese trade secrets cases.

SI Group manufactures a resin product for tires called SP-1068.  Sino Legend, established in August 2006, started to sell an allegedly infringing product, named SL-1801, by the end of 2007. On August 11, 2008, Sino Legend filed a patent application for its allegedly infringing product before the China State Intellectual Property Office. Soon after, SI Group initiated legal action in China against Sino Legend.

In November 2008, SI Group reported the case to the Shanghai Public Security Bureau (Shanghai PSB) for criminal investigation against Sino Legend for trade secret misappropriation. (Tip to plaintiff: Initiating criminal investigation is a key in many circumstances to obtain evidence.)

In April and July 2009, the Science and Technology Commission of Shanghai Municipality ("STCSM"), according to a request by the Shanghai PSB, provided a technology appraisal report that confirmed the existence of non-public information involved in the manufacture of SP-1068, as well as a supplemental report that concluded that the technologies used in manufacturing SP-1068 (SI Group's product) and SL-1801 (Sino Legend's product) were basically the same. (Tip to plaintiff/defendant: The parties are entitled to obtain copies of these reports, which could be used as evidence in a later stage.)

In September 2009, Shanghai PSB decided not to institute the case, citing a lack of criminal facts of misappropriation. (Tip to plaintiff: Although the criminal case may not ultimately be filed, the facts and evidence obtained by the PSB's investigation may be used for civil actions at a later stage.)

In March 2010, SI Group sued Sino Legend and Xu before Shanghai Second Intermediate Court for trade secret misappropriation based on the STCSM reports.

In September 2010, SI Group filed a description of its asserted trade secret before the court. (Tip to plaintiff: Plaintiff needs to be careful in identifying its trade secret scope.)

On February 17, 2011, a trial was held, and SI Group revised its description of its trade secret, which was not accepted by the court. (Tip to plaintiff: It is important to precisely identify trade secret scope from the beginning.)

In March 2011, SI Group withdrew the case and soon filed a new complaint based on a further revised description of its trade secret.

In response to an application by the plaintiff, the court then investigated and obtained relevant evidence from the previous criminal investigation, including the STCSM's reports, and from Sino Legend. (Tip to plaintiff: Applying for an investigation by the court is an effective option for collecting evidence in trade secret disputes. However, in practice, it is in the court's discretion to decide whether or not to perform the investigation.)

On August 15, 2012, SI Group applied for a new determination of: (1) whether or not technical information in Sino Legend's SL-1801 manufacturing process is the same or substantially the same as that of SI Group's asserted trade secret; and (2) whether or not the specification of Sino Legend's patent disclosed SI Group's asserted trade secret. (Tip to plaintiff/defendant: Because the alleged trade secret scope was challenged, the determination needed to be updated or redone.)

Also on August 15, 2012, Sino Legend applied for a determination of: (1) whether or not the asserted trade secret was non-public information; and (2) whether or not Sino Legend independently developed the technology used in SL-1801. (Tip to defendant: These determinations are important.  With respect to the latter determination, the defendant must provide information to assist the evaluation.)

On December 21, 2012, the court entrusted the IP Judicial Appraisal Firm under CSIP (Ministry of Industry and Information Technology Software and Integrated Circuit Promotion Center) to investigate the four issues raised by the parties. (Tip to plaintiff/defendant: Either party can separately engage a judicial appraisal firm to perform such an investigation.  As long as the appraisal was conducted procedurally properly and reached logically correct and legally sound conclusions, it could be difficult to the other party to vacate it.)

From March 11 to 13, 2013, the court organized experts to do onsite investigation at both SI Group Shanghai and Sino Legend, including examining relevant processes and equipment, extracting relevant technical materials, interviewing technicians, and asking for supplemental materials for appraisal. (Tip to plaintiff/defendant: Parties need to prepare their manufacturing workshops for possible judicial appraisals.)

From April 10 to 11, 2013, the CSIP IP Judicial Appraisal Firm held an expert hearing before the court. During the hearing, appraisal experts examined both parties on relevant technical issues, and the parties further supplemented evidence after the hearing. (Tip to plaintiff/defendant: Parties may need to provide their own experts who should be well prepared in advance to provide proper answers to the questions from appraisal expert.)

On May 14, the CSIP IP Judicial Appraisal Firm provided its Judicial Appraisal Opinions to the court, which concluded that: (1) only a portion of the accused technology constituted SI Group's trade secret; (2) a few technical points of Sino Legend's technology were the same or substantially the same as the SI Group's trade secret; (3) Sino Legend's patent disclosed a few technical points that were the same or substantially the same as Sino Legend's solution; and (4) R&D materials provided by Sino Legend reasonably reflected the development history of SL-1801. (Tip to defendant: It is important to preserve all R&D records, which may be used as an effective tool against allegations of trade secret misappropriation.)

Trial occurred on May 29, 2013.  After trial, the court issued a decision rejecting SI Group's claims.  The Shanghai High Court affirmed the trial court's decision.

Although SI Group lost the case, this case demonstrates that a plaintiff can strategically use procedural remedies in China to successfully initiate its case, collect necessary discovery, and get the case tried and decided.

Twitter: @TS_Watch

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.

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