Record-high damages: Behind China’s recent cases regarding trade secrets protection

Dentons
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In the course of the last two years, the Chinese Supreme People’s Court has awarded damages in the total amount of more than RMB 532 million (US$28 million) in trade secret disputes. One of the decisions, awarding RMB 159 million to the trade secret owner, was even ranked among the top 10 Chinese Supreme People’s Court Cases for 2021. As such numbers appear to be atypically high, the motives behind the court’s rulings need to be critically evaluated.

Trends before the decisions

Prior to the latest judgments of the Chinese Supreme People’s Court, courts were rather reluctant to award high damages in IP disputes. US$20,000 were considered as an average. The main reason appeared to be the refusal of courts to consider the trade secret holders’ calculations when they could not also provide the alleged infringer’s financial data.

Grounds for a record-breaking damages award

In the recent years, however, courts have consistently applied an approach that is more trade secret owner–friendly.

In a judgment dated November 24, 2020 regarding the misappropriation of trade secrets in the manufacturing of Carbomer products, the Chinese Supreme People’s Court awarded punitive damages of RMB 30 million (US$4.6 million). In its decision, it refused to adopt the lost-profit calculation proposed by the defendant, which consisted in estimating past and future price erosion based on the misappropriation. Instead, it took into account the defendant’s profits resulting from the infringement and the trade secret owner’s sales profit margin. Moreover, it doubled the multiplier factor applied with regard to the determination of damages.

In its decision of February 26, 2021, the Supreme People’s Court continued this practice. It awarded RMB 159 million (USD 24 million) in damages to a vanillin maker. In determining damages, the judges also analyzed eight factors, including the high commercial value of the trade secrets and the impact of the infringement on the market.

The reasoning behind those judgments is simple: The importance to the economy of fostering innovation. During his speech in November 2020, China’s President Xi Jinping made clear that IP protection plays a key role in the country’s development, stating that “protecting intellectual property is protecting innovation.”

This shift towards stronger IP protection can be also seen in the establishment of specialized IP courts in Shanghai, Beijing and Guangzhou. The introduction of a Supreme People’s Court, IP Division, illustrated another step in this direction. Thus, it should come as no surprise that alleged IP infringers are now treated more harshly than ever before. The courts’ attempts to give greater effect to the interests of trade secret owners means good news for innovators. Defendants, on the other hand, will need to become more creative than merely relying on the defense that the trade secret owner produced insufficient evidence for the alleged infringement.

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