Establishing damages in trade secret infringement

A trade secret is an intangible asset of a company, and its value is sometimes very hard to establish by comparison with tangible property; so how should a company claim damages when its trade secret is infringed? This article discusses the remedies for infringement of a trade secret, their legal basis, and the methods of calculating compensation.

1. Liability for infringement and the routes of remedy

Under article 15 of the Tort Liability Law, the injured party may require the infringer to bear liability by ceasing the infringement, restoring the original state, compensating the loss, eliminating the effects, apologising, and so on. Bearing in mind the special character of trade secret infringement and judicial practice, once a trade secret leaks and becomes known to the public it loses its secrecy and ceases to exist, and the effects and consequences cannot be repaired, so remedies such as restoration of the original state do not apply. By the same token an apology will not be supported. In judicial practice the commonest remedies for infringement of a trade secret are cessation of infringement and damages.

2. The application of "cessation of infringement"

The Interpretation of the Supreme People's Court on Several Issues concerning the Application of Law in the Trial of Civil Cases of Unfair Competition provides: "Where the People's Court orders the civil liability of ceasing infringement of a trade secret, the period of cessation shall generally continue until the trade secret has become known to the public. Where the period of cessation ordered under the preceding paragraph would be manifestly unreasonable, the court may, while protecting the rights holder's competitive advantage in the trade secret in accordance with law, order the infringer to cease using the trade secret for a certain period or within a certain scope." It can be seen that where the rights holder's trade secret has already become public by the time of trial, the infringer will generally no longer bear liability to cease the infringement; that is, the rights holder may require cessation while the right is being infringed or there is a possibility that it will be.

In addition, where cessation would cause the party a major loss of interest, or would not accord with the public interest, or where an order to cease would in practice be difficult to enforce, the court may in the actual circumstances weigh a substitute compensatory measure in place of cessation, and not order the infringer to cease.

3. The application of "damages"

1. The legal basis

Article 17 of the Anti-Unfair Competition Law: the amount of compensation for a business operator injured by an act of unfair competition shall be determined according to the actual loss it has suffered through the infringement; where the actual loss is difficult to calculate, it shall be determined according to the profit the infringer has gained through the infringement. The amount shall also include the reasonable expenses the business operator has paid to stop the infringing act. Where a business operator breaches articles 6 and 9 of this Law, and the actual loss suffered by the rights holder through the infringement and the profit the infringer has gained are difficult to establish, the People's Court shall, according to the circumstances of the infringing act, award compensation of not more than RMB 3 million.

Article 17, paragraph 2, of the Interpretation: where the infringing act has caused the trade secret to become known to the public, the amount of damages shall be determined according to the commercial value of the trade secret. The commercial value of a trade secret is determined by such factors as the cost of its research and development, the income from exploiting it, the benefit that may be obtained, and the time for which the competitive advantage may be maintained.

2. Calculating compensation

(1) The actual loss suffered through the infringement

This chiefly covers research and development costs, such as expenditure of manpower and money; loss of present benefit (the benefit the trade secret is currently bringing the rights holder, involving lower production costs, higher sales, an increased profit margin and so on); and the reasonable expectation of future benefit. But because the value of a trade secret is much affected by the market and other factors, the loss suffered is often hard to establish, and this method is seldom adopted.

(2) The profit gained through the infringement

This may be calculated as the infringer's total sales multiplied by a reasonable profit per item, the profit gained by the infringer generally being calculated on operating profit. The plaintiff should then provide evidence of the annual output and profit margin of both parties, a comparison of the loss before and after the infringement, the annual reports of both, and their tax payments.

(3) A reasonable multiple of a licence fee

Where the loss of the injured party or the profit gained by the infringer is difficult to establish, the amount of compensation may be fixed at one to three times the licence fee.

(4) A fixed award

Where the actual loss suffered by the rights holder through the infringement and the profit the infringer has gained are difficult to establish, the People's Court shall, according to the circumstances of the infringing act, award compensation of not more than RMB 3 million.

(5) The reasonable expenses paid to stop the infringement

Reasonable expenses include notarial and authentication fees; the cost of investigation and of obtaining evidence; translation fees; and lawyers' fees within the prescribed limits.

In addition, proceedings may involve a concurrence of an action in tort and an action in contract, and acts of infringement that also constitute unfair competition; only by taking account of the actual situation, knowing its own strengths and clarifying the legal issues can a company choose the favourable course and set its claims reasonably, and so protect its lawful rights and interests.