The verdict rendered by the Supreme People’s Court (SPC) on the “Vanillin” case has drawn wide attention due to the unprecedented record damages awarded for trade secret misappropriation. The damages at the amount of 159 million RMB (about 24.9 million USD) was much higher than the damages awarded in the first-instance verdict, marking the highest compensation awarded in the history of Chinese courts for infringement of trade secrets.

Background of the Case

On February 26, 2021, the SPC issued a verdict on an appeal case regarding technical secret misappropriation with damages at 159 million RMB (about 24.9 million USD) and reasonable expenses to stop the trade secret infringement – the “Vanillin” case.

"Vanillin" is a widely used industrial fragrance in the world. The plaintiff Jiaxing Zhonghua Chemical Co., Ltd. and Shanghai Xinchen New Technology Co., Ltd. jointly developed a new process for the production of vanillin, and protected the same as technical secret. As the world's largest vanillin manufacturer, Jiaxing Zhonghua Chemical Co., Ltd. used to account for about 60% of the global vanillin market.

In 2010, after the defendant, Fu Xianggen, the former employee and of Jiaxing Chemical received a payment from the defendant Wanglong Group, he disclosed the "vanillin" technical secret to one of the defendants in the case, Wang Guojun, who was the supervisor of Wanglong Group and chairman of Ningbo Wanglong Technology Co., Ltd. (Ningbo Wanglong), and began working at the defendant Ningbo Wanglong. In 2015, the defendant, Xifushi Wanglong Fragrance (Ningbo) Co., Ltd. ("Xifushi Wanglong") was established, and the company continued to use vanillin production equipment invested by Ningbo Wanglong to produce vanillin.

After Wanglong Group and Ningbo Wanglong illegally obtained the "vanillin" technical secret, vanillin had been produced since June 2011, which had greatly impacted the original international and domestic markets of Jiaxing Chemical, leading to the decline of global vanillin market share of Jiaxing Chemical from 60% to 50%.

In 2018, Jiaxing Zhonghua Chemical Co., Ltd. and Shanghai Xinchen Co., Ltd. filed a technical secret infringement lawsuit against Wanglong Group Co., Ltd., Wanglong Technology Co., Ltd., Xifu Lion Dragon Co., Ltd., Fu Xianggen, and Wang Guojun before Zhejiang Higher People's Court and requested the court to order the above defendants to stop infringement and compensate RMB 502 million (about 787,638 USD). The court of first instance ruled that Wanglong Group Co., Ltd., Wanglong Technology Co., Ltd., Xifu Lion Dragon Co., Ltd., and Fu Xianggen infringed some of the technical secrets involved in the case, and ordered them to stop the infringement, awarded damages of RMB 3 million (about 470,700 USD ) and reasonable expenses of RMB 500,000 (about 78,466 USD). In addition, the court of the first instance granted an injunction that Wanglong Technology Co., Ltd. and Xifu Lion Dragon Co., Ltd. shall stop using the technical secrets to produce vanillin. However, Wanglong Technology Co., Ltd. and Xifu Lion Dragon Co., Ltd. did not stop their use of the technical secrets.

All defendants in this case, except for Wang Guojun, appealed to the Supreme People's Court. In the second instance trial, the plaintiffs J reduced their claim to 177 million RMB including reasonable expenses (about 277,713 USD).

Facts to determine the damages by the Supreme People's Court

The main legislation that covers trade secrets in China is the Anti-Unfair Competition Law (AUCL), established in 1993 and amended in November 2017 and April 2019.

Article 17 of the AUCL provides that damages shall be based on the right holder’s actual loss, and if the actual loss is difficult to determine, damages shall be based on the infringer’s benefits from the infringing act.

Article 20 of the Judicial Interpretation, the Several Provisions of the Supreme People's Court on Issues concerning the Application of Law in the Trial of Cases on Patent Disputes (2015 Amendment), provides that the infringer’s benefits may be calculated according to the product of multiplying the total amount of that infringing product sold on the market by the reasonable profit of each infringing product. Generally, the benefits obtained by the infringer from the infringement are calculated according to the business profits of the infringer, as to the infringer that depends on infringement as its whole business, the loss may be calculated according to the sales profits.”

The punitive damage was first introduced in AUCL 2019: “If the infringing act is malicious and serious, courts may award compensation to the right holder up to five times the amount determined by the above-mentioned method, plus the right holder's reasonable expenses related to its effort to stop the infringement.”

However, this case does not apply to AUCL 2019 but applies to AUCL 2017 which has not introduced punitive damage.

When determining the damage, in this case, the Supreme People’s Court considered the following facts:

1. The means of illegally obtaining the technical secrets were bad. 2. The numbers of technical secrets illegally obtained were large. 3. The accused infringers had obvious malice of intentional infringement: knowing that their actions constituted infringement of the technical secrets involved, the accused infringers still continued to use a large number of equipment and technological processes that infringed the technical secrets involved to produce vanillin products. 4. The technical secrets involved had high commercial value. 5. The accused infringers depended on infringement as their whole business. 6. The infringement had a serious impact on the global market of vanillin. 7. There were circumstances such as obstruction of evidence and dishonesty litigation by the accused infringers. 8. The accused infringers refused to enforce the effective conduct preservation ruling of the first instance.

Considering the above eight factors, especially factors 1, 3, 5, and 7, the Supreme People’s Court decided to calculate the damages according to the sales profits of vanillin products.

Since the defendant companies refused to submit account books and materials related to the infringement, the court could not directly calculate its sales profit based on the data of its actual sales of vanillin products. To severely punish the malicious infringement of technical secrets and fully protect the legitimate interests of the owners of technical secrets, the Supreme People’s Court decided to calculate the amount of damages in this case based on the sales profit rate of the plaintiff's vanillin products.

Since punitive damage cannot be applied to this case, the Supreme People’s Court considered that the thus-calculated damage is reasonable and appropriate by the specific circumstances such as the degree of malignancy and harmful consequences of the technical secrets infringement by the infringers.

In addition, the alleged infringement, in this case, has been a suspected crime of infringing business secrets, and the Supreme People’s Court will transfer the relevant clues to the police department for handling by the law.

Besides, the Supreme People’s Court also mentioned that the trade secrets owners may seek additional relief for the continued infringement of the technical secrets by the defendants, which apply for AUCL 2019 introducing punitive damage.

Takeaways and Suggestions

In addition to the record damages as high as 159 million RMB (about 24.9 million USD) USD 24 million, the Supreme People's Court also ordered the legal representative of the defendant company that engaged in infringement to bear joint and several liability which effectively cracked down on the illegal behavior of the person in charge of the company using the company as an infringing tool. The verdict of the Supreme People's Court demonstrates the determination to strengthen the judicial protection of trade secrets and has strong guiding significance for judicial practice.

Trade secret is an important strategic resource of enterprises attracting increased attention. There are also some challenges in the judicial practice of trade secret protection. At present, China’s competent departments are studying and formulating new regulations on the protection of trade secrets. It can be predicted that the judicial and administrative protection of trade secrets will continue to be strengthened in the future. Rights holders should pay attention to taking confidentiality measures as well as actively seeking safeguard of the legal rights.