Trade secret infringement – measures to reduce burden of proof for rights holders
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How can trade secret rights holders enforce their rights and protect their market? By using licence value assessment in criminal proceedings to stop ex-employees from disclosing trade secrets. Meanwhile, trade secret rights holders can also shift the burden of proof to impose more pressure on the infringer (eg, the ex-employees) to deter any possible IP theft or misuse.
On 18 September 2020, the Supreme People’s Procuratorate and the Ministry of Public Security issued the Decision on Revising the Thresholds for Putting on File and Prosecuting Criminal Cases of Trade Secrets Infringement. The decision provides that, according to Article 219 of the Criminal Law, a case of trade secret wrongdoing that is suspected of falling under any of the following circumstances will be put on file for prosecution:
- where the loss caused to the rights holder reaches or exceeds Rmb300,000;
- where the wrongdoer has obtained a trade secret by improper means, but has not disclosed, used or allowed others to use it; and
- where the loss may be determined based on the reasonable licensing fee of the trade secret.
Such a decision is the first authority through which to establish a reasonable licensing fee for the trade secret as a threshold for a criminal case. Where the loss is calculated to be more than Rmb300,000, the minimum threshold requirement for a criminal case might be satisfied.
Determining the loss based on the reasonable licensing fee of the trade secret does not limit the fee as, according to market assessment rules, it theoretically contains the appraisal agency’s reasonable and virtual measurements of the licence fee. Because the licence fee need not be appraised, the judicial authorities can discover the fee based on the text of the licence agreement and the payment certificate. Where the trade secret is not licensed to any third party, the licence fee can be evaluated by an appraisal agency through an official appraisal report.
Creating an appraisal report is difficult, since trade secret licence fees are determined by, among other things, the licensor and licensee, the transaction relationship and the licence mode. The basis of the appraisal report, which is the evaluation of marketing standards, remains uncertain.
The appraisal report, including the fee as evidence, should be reviewed carefully in accordance with the relevant provisions of the criminal procedure law appraisal and evaluation opinions.
On 8 January 2019, the Jiangsu Higher People’s Court made a second-instance judgment on a criminal case regarding trade secrets owned by Sennics and infringed by Xiangyu. The court held that Xiangyu had infringed Sennics’ trade secrets and that it constituted a criminal offence.
Sennics’ loss was determined through a value assessment of the licence fee for the trade secrets. The valuation assessment took an income approach by considering the remaining period of the intangible asset and the rate of the intangible asset accounting for profit.
The Jiangsu Higher People’s Court found that the trade secrets owned by Sennics had a definite licence value. Since technology in the form of trade secrets was stolen and used illegally by others, Sennics failed to earn the corresponding licence fee for the use of the trade secrets, resulting in a loss. On the other hand, Xiangyu illegally obtained and used the trade secrets and paid no consideration for the licence, resulting in illegal gains. There was both a factual and a legal basis through which to determine that the licence value of the technology – Rmb201.54 million – resulted in serious consequences. Sennics trusted an appraisal agency to conduct an appraisal report on the status of its trade secrets and to collect evidence to prove how the trade secrets were accessed and used by Xiangyu. During the trial the judge accepted the licence fee as the loss of the rights holder.
Burden of proof in civil proceedings
Article 32 of the latest version of the Anti-unfair Competition Law has revised the burden of proof regarding trade secret civil litigation. If owners of trade secrets have preliminarily proved the existence of infringement, the burden of proof will be transferred to the infringer. This revision will significantly reduce the burden of proof on rights holders and improve trade secrets protection.
Article 32(2) stipulates three situations in which the rights holder prima facie proves the existence of infringement. Evidence is available to prove that a trade secret has been disclosed or used by a suspected infringer or that there is a risk of it being disclosed or used. In determining infringement, the rights holder is not required to prove that the infringer has disclosed or used the trade secret. Instead, as long as the rights holder can prove that there is a risk of it being disclosed or used, the burden of proof is transferred to the suspected infringer. ‘Risk’ means the possibility of infringement, rather than direct infringement having actually occurred. If the suspected infringer establishes a company, hires employees, rents facilities and purchases equipment for the use of the trade secrets, this business preparation would result in the possibility of infringement and identify the risk of a trade secret being disclosed or used. As long as the trade secret is under the suspected infringer’s control, there is a risk that it may be disclosed or used. From this perspective, Article 32(2) transfers the main burden of proof to the alleged infringer to prove that there are no infringing acts.
According to Article 32, rights holders must provide preliminary evidence showing that they have adopted confidential measures to protect their trade secrets and to reasonably indicate that a trade secret has been infringed. Doing so will transfer the burden of proof to the alleged infringer. The alleged infringer may argue legal resource, substantive difference or reverse engineering. If the alleged infringer fails to defend their activity, it may constitute trade secret infringement and bear civil liability.
China – the world’s factory – has a complete industrial chain. Many foreign entities use Chinese companies as an important part of their supply chain, particularly when it comes to manufacturing plants. During manufacture, foreign companies must send their trade secrets, including design specifications, to these plants in China. As a result, plant employees, theoretically, have access to the trade secrets and may steal or misuse them to benefit from their economic value.
Article 32 greatly reduces the rights holder’s burden of proof; in fact, the burden of proof is almost reversed. This means that the suspected infringer plays the main role in proving whether the trade secret has been infringed. According to the new standard, the rights holder need only provide reasonable evidence indicating that the trade secret has been infringed or that there was risk of infringement, and the infringer must prove either that there is no trade secret or no infringement. The rights holder has obtained the legal advantage and need only bear the relatively easy burden of proof. This shows that China has strengthened the protection of trade secret owners’ legitimate rights.
According to the Anti-unfair Competition Law, to transfer the burden of proof to the alleged infringer it is advisable to use an appraisal report for trade secrets, collect evidence to prove that ex-employees have had access to the trade secrets and have the opportunity of using them. During negotiations, shifting the burden of proof can be one of the greatest bargain chips available.