Questions that commonly arise in trade secret litigation
Four questions are answered here. Whether a breach of a non-compete or confidentiality agreement goes to labor arbitration or to court turns on whether the employer sues in contract, which is a labor dispute, or in tort, which is not. Forensic appraisal of a trade secret covers only the factual questions of secrecy and identity, not questions of law. Loss may be measured by the rights holder's loss, the infringer's operating profit, one to three times a licence fee, or a statutory award of RMB 10,000 to 1 million, and reasonable costs are recoverable if properly evidenced.
1. Where an employee breaches a non-compete or a confidentiality agreement, should the matter go to labor arbitration or to litigation?
A. An employee's breach of a non-compete may at the same time infringe the employer's trade secrets. Because a breach of a non-compete does not necessarily infringe the company's trade secrets, the trade secret must still be established as the law requires: the employer must prove that the information covered by the contract meets the statutory elements of a trade secret, and that the employee has disclosed or leaked it, before infringement is made out. In that situation, if the employer asserts its rights on the ground of breach of contract, the matter is a labor dispute and must go to labor arbitration; if it asserts them on the ground of infringement, it may bring proceedings in the People's Court.
B. Where an employee's breach of a non-compete does not infringe the employer's trade secrets, the matter is a labor dispute.
C. Where an employee breaches a confidentiality agreement after leaving, the matter is not a labor dispute, and the employer may bring an action for breach of contract independently.
D. Where the employment contract expressly provides for keeping trade secrets confidential, and the employee's breach of those provisions causes the employer's trade secrets to leak, the labor dispute arbitration committee shall accept the case.
2. The content and function of forensic appraisal of a trade secret
Forensic appraisal of a trade secret is generally directed only at "questions of fact" that the judge genuinely cannot decide on his own capacity but may understand with the help of scientific, technical or other specialist knowledge; "questions of law" are not appraised. The appraisal covers non-publicity and identity, that is, whether the infringed trade secret is unknown to the public, and whether the information used by the infringer is the same as, or substantially the same as, the rights holder's trade secret.
3. Establishing the rights holder's loss
Compensation for loss is calculated in the following ways:
A. The loss the rights holder has suffered through the infringement, such as loss from a fall in sales. This is comparatively hard to establish in practice.
B. The profit the infringer has gained through the infringement; in calculating damages for infringement this is generally taken as the infringer's operating profit, not its profit on sales.
C. Compensation calculated by reference to one to three times a licence fee.
D. Where none of the three methods above can establish the amount, the People's Court may, according to the type of patent right, the nature and circumstances of the infringing act and other factors, award compensation of not less than RMB 10,000 and not more than RMB 1 million.
In addition, according to the 2017 Report on Typical Intellectual Property Cases in the Shanghai Pilot Free Trade Zone before the Pudong Court, where the amount of compensation is at issue in a criminal case of disclosure-type infringement of a trade secret, and the rights holder has used the trade secret and derived output and income from it, an assessment may be made by taking account of the cost of research and development, the income from working it, the benefit obtainable and the time for which the trade secret can maintain its advantage.
4. How reasonable costs are calculated
The amount of compensation for infringement should also include the reasonable expenses the rights holder has paid to stop the infringing act.
Reasonable expenses are the reasonable costs the rights holder has laid out directly in investigating and stopping the infringement, generally including notarial and authentication fees; the cost of investigation and of obtaining evidence; translation fees and lawyers' fees. It should be noted that the use and the amount of these expenses must be "reasonable": besides avoiding costs so high that the court will not support them, the rights holder should keep the vouchers, such as invoices, contracts and transfer records.