Supreme Court Ruling: Trade Secrets Must Be Reviewed Holistically And Cannot Be Invalidated By Piecemeal Disassembly

The Supreme People's Court recently concluded a dispute over trade secret dispute. In its ruling, the Court established that: If a right holder, through repeated experiments, modifications, optimizations, and adjustments, has developed a complete technical solution that can be used in actual production and achieves good technical results, that solution cannot be deemed publicly known simply because individual pieces of information are disclosed separately in different pieces of prior art. In other words, courts must look at the whole technical solution, not just its isolated parts, when determining whether it qualifies as a trade secret.

This case involves a dispute over trade secrets. Company A filed a lawsuit with the first instance court, claiming that it was the rightful owner of certain trade secrets related to a production process and product preparation method for a product called PR3. Individual X, after leaving Company A, became a major shareholder and the legal representative of Company B. Company A alleged that X breached his confidentiality obligations by disclosing its trade secrets to Company B. Together with Company B, he then used those secrets for illegal gains and even filed a patent application based on them. Company A argued that this patent application caused its trade secrets to be disclosed to the public, seriously harming its legal rights and interests.

Company B and X jointly defended themselves. They argued that the patent application was developed independently by Company B. They claimed that Company A had not provided any R&D documents and therefore could not prove it was the true owner of the trade secrets. They also argued that the information at issue did not meet the legal requirements of being "not known to the public" and “being not easily obtainable,” and thus did not constitute a trade secret. Finally, they pointed out that there were many differences between the patent application and Company A's trade secrets, and that mere partial similarity did not mean the two were substantially the same.

After investigation, the first instance court made several key findings. First, Company A was indeed the owner of the trade secrets. When X joined Company A, he signed a confidentiality and intellectual property ownership agreement. This agreement stated that during and after his employment, he could not disclose or use any confidential information he learned while working at Company A. It also stated that Company A owned all work products created by X during his employment. While working at Company A, X had access to the standard operating procedures for producing PR3. After leaving Company A, he became an 80 percent shareholder of Company B. Company B then filed a patent application listing X and his wife as the inventors. The court also found that although some individual steps or parameters of Company A's technical information existed in the public domain, the entire technical solution as a combination of steps and parameters was not widely known within the industry. Company A had also taken reasonable confidentiality measures to protect its information. Therefore, the court concluded that Company A's technical information qualified as a trade secret. As for Company B and X's defense of independent development, the court found that the evidence they provided did not show any specific research projects, processes, parameters, or results. Moreover, the equipment they used was not specifically dedicated to implementing the technology claimed in the patent. Their evidence was therefore insufficient to prove independent development. When the court compared the patent application with Company A's trade secrets, it found that the patent application used and partially disclosed those trade secrets. Furthermore, Company B's own website, as well as its Chinese distributor's website, contained promotional and sales information for PR3 products. Based on this, the court determined that Company B had actually used Company A's trade secrets to produce PR3 products. X had breached his confidentiality obligations by disclosing Company A's trade secrets to Company B and allowing Company B to use them. Together, they had misappropriated Company A's trade secrets, and shall bear joint and several liability to cease the infringement and compensate for the losses.

As a result, the first instance court ordered both Company B and X to stop their infringing activities and to bear joint liability for damages. The court also ruled that during the term of the patent, neither Company B nor X could exploit or license the patent to others. Both defendants appealed, but the Supreme People's Court upheld the lower court's decision.

Company B and X appealed.

The Supreme People's Court issued its judgment, rejecting the appeal and upholding the original ruling. In its effective decision, the Court identified the one of the key issues was whether the technical solution qualify as a trade secret under the law.

The Supreme People's Court stated that technical information claimed for protection by a right holder must satisfy three requirements set forth in Article (4) of the Anti Unfair Competition Law. 1) The information must not be publicly known. 2) It must have commercial value. And 3) the right holder must have taken reasonable confidentiality measures to protect it.

In this case, neither Company B nor X raised any objection against the commercial value of the technical information. Therefore, the Court confirmed that requirement 2) was met. The Court then examined the remaining two issues separately:

1. Did Company A Take Reasonable Confidentiality Measures?

   In this case, the main carrier of the trade secret was Company A's internal standard operating procedures. These procedures contained a complete technical solution for producing the relevant product. They were clearly a core trade secret of Company A. X had signed an Employee Confidentiality and Intellectual Property Ownership Agreement with Company A. The agreement clearly stated that during his employment, all research and development information and results, including technologies, products, systems, and any work or information completed by X, would be considered confidential information. X was not allowed to disclose this confidential information or use it for any other purpose. The agreement also stated that X would continue to treat the information as confidential even after his employment ended. Company A had a clear intention to keep the technical information confidential and imposed clear confidentiality requirements. X was fully aware of these requirements. In the first instance proceedings, X also acknowledged that the premise where Company A's laboratory and R&D offices were located was equipped with an access control system.

   Based on the above, the Court concluded that Company A not only clearly defined X's confidentiality obligations through a contract, but also took reasonable confidentiality measures. Therefore, the argument by Company B and X that Company A had failed to take reasonable confidentiality measures was rejected.

2. Was the Trade Secret in Question Publicly Known?

   The trade secret in question contained a large amount of technical information and formed a relatively complete technical solution. Even if some individual pieces of that information were publicly known, courts must still consider how those pieces relate to each other and whether the overall technical solution as a whole is publicly known.

   In this case, the fact that isolating and purifying PR3 from certain blood cells was a known technique did not mean the entire standard operating procedure was publicly known. The standard operating procedure involved many specific steps, their order, reagents and their concentrations, and various operating parameters. Developing a complete technical solution that could be used in actual production and achieve good results would necessarily require repeated experiments, modifications, optimizations, and adjustments, as well as significant research and development costs. Therefore, the Court held that information separately disclosed in different pieces of evidence could not prove that the entire trade secret or each specific step corresponding to each secret point was publicly known. Accordingly, the defendants' argument failed.

   This decision clarifies the standard for determining whether confidentiality measures are reasonable. It establishes that courts must review trade secrets holistically rather than dissecting them into isolated parts. It effectively shuts down the common defense strategy of trying to dismantle a core technology by claiming each individual component is publicly known. Most importantly, it strengthens judicial protection for corporate research and development investments and core competitiveness, and serves as an important model for maintaining fair competition and encouraging technological innovation.

 (2023) Zui Gao Fa Zhi Min Zhong No. 2913 

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