The Supreme People’s Court concluded an appeal concerning trade secret infringement, affirming that contractual confidentiality clauses may exempt the right holder from proving constitutive elements of trade secrets and may shift the burden of proof to the disclosing party in infringement cases.
Taiwan A Company filed a lawsuit claiming that during the execution of its Mold Procurement Contract with Henan B Factory (operated by Natural Person X), it disclosed to X a technical solution titled "a method for simultaneously adjusting the length and width of roller skates", which was protected as trade secrets (hereinafter referred to as the "disputed technical information"). X allegedly violated both statutory and contractual confidentiality obligations by disclosing the disputed technical information to Dongguan C Company, which subsequently used this information to file a utility model patent application (hereinafter referred to as the "disputed patent"). Taiwan A Company contended that X and Dongguan C Company jointly infringed its trade secrets and sought a court judgment declaring Taiwan A Company the rightful owner of the disputed patent, along with an order requiring X and Dongguan C Company to jointly compensate economic losses amounting to 960,000 CNY.
After trial, the court found that the Mold Order involved in this case stated: "The mold must be produced strictly in accordance with the design drawings provided by Taiwan A Company." The confidentiality clause of the Mold Procurement Contract stipulated: "Party B (Henan B Factory) shall keep the contents of this contract confidential and shall not disclose them to any third party without authorization. All materials provided by Party A (Taiwan A Company) to Party B shall be kept confidential and used solely for the purposes of this contract. Party B shall not reproduce, retain, or use Party A’s data without Party A’s written consent and shall return all materials to Party A upon contract completion, without disclosure to any other party." On March 28, 2016, Dongguan C Company filed a utility model patent application titled "Adjustable Roller Skates" with the CNIPA, which explicitly disclosed and utilized the disputed technical information.
The first-instance court held that: Regarding the disputed technical information, Taiwan A Company did not submit technical materials such as complete technical drawings, process documentation, or detailed explanations regarding the R&D process, technical background, distinctions from publicly known technologies, or any advancements. Thus, it could not be determined that the disputed technical information was not publicly known at the time of the accused infringement, and the information could not qualify as a trade secret. Accordingly, the court dismissed all claims of Taiwan A Company.
In the second instance, the Supreme People’s Court determined that the accused infringement date is the filing date of the disputed patent, i.e. March 28, 2016. In this regard, this case should, in principle, be governed by the Anti-Unfair Competition Law of the People's Republic of China enacted in 1993 (hereinafter referred to as the "1993 AUCL"). However, compared to the 1993 AUCL, the current Anti-Unfair Competition Law introduced rules for shifting the burden of proof in Article 32 in its "Legal Responsibility" Chapter, which specifies the circumstances under which the alleged infringer shall bear the burden of proving that the disputed information claimed by the right holder is not qualified as a trade secret, and that they committed no act of trade secret infringement. Article 32 combines substantive and procedural legal norms. The allocation of the burden of proof falls under procedural law. Following the principle that procedural provisions of the new law shall prevail, this provision may be applied to ongoing civil cases. Additionally, one of constitutive elements of a trade secret is "not publicly known", which is a negative fact, and trade secret infringements are often concealed, making both elements difficult to be proven. In adjudicating trade secret infringement cases, courts may - based on the specific circumstances of each case - appropriately determine the evidentiary standards for establishing secrecy and improper means, while flexibly shifting the burden of proof as appropriate to strengthen judicial protection of trade secrets, alleviate rights holders' evidentiary burdens, and reduce legal defense costs. Therefore, in trade secret infringement cases arising from acts predating the current Anti-Unfair Competition Law, Article 32 may be legally applied to allocate the burden of proof related to the trade secret.
In practice, many trade secret infringement cases arise from breaches of contractual confidentiality obligations, where confidentiality clauses typically define the parties’ duties. Regarding the burden of proof for whether the confidential information corresponding to the confidentiality obligation constitutes a trade secret, based on party autonomy and Article 32 of the current Anti-Unfair Competition Law, it can be further clarified that in trade secret infringement disputes arising from breaches of contractual confidentiality obligations, the parties' agreement on confidentiality clauses during contract execution may be deemed as mutual recognition that the protected information constitutes trade secrets. Where one party claims that the aforementioned confidential information does not constitute a trade secret as defined under the Anti-Unfair Competition Law, such party shall bear the burden of proof. Where the confidential information provider provides evidence demonstrating that the information used by the counterparty is substantially identical to its protected confidential information, the counterparty shall bear the burden of proving the absence of trade secret infringement.
This trade secret infringement dispute arose from the Mold Procurement Contract in this case, which is substantively a processing contract. The confidentiality provisions of the contract reflected Taiwan A Company's intent to maintain secrecy, Henan B Factory's confidentiality obligations, and the corresponding scope of protected information. By signing this contract, X is deemed to have acknowledged that the information provided by Taiwan A Company during contract execution constituted Taiwan A Company's trade secrets. In this case, X and Dongguan C Company shall bore the burden of proving that the disputed technical information did not qualify as a trade secret under the Anti-Unfair Competition Law. However, they did not submit evidence proving either that the roller skate products incorporating the disputed technical information had been publicly marketed at the time of the accused infringement, or the said information had been publicly disclosed at that time. That is, no evidence was presented to show that the disputed technical information had been known by the public when the infringement occurred. X and Dongguan C Company therefore shall bear the legal consequences of their failure to meet the burden of proof, and the disputed technical information hereby meets the definition of trade secrets under the 1993 Anti-Unfair Competition Law. During the execution of the contract, Taiwan A Company provided the disputed technical information to X, and the disputed patented technical solution incorporated this information. Therefore, X and Dongguan C Company shall provide evidence to prove that they did not infringe upon Taiwan A Company's technical secrets, but they failed to submit any legitimate sources or research and development evidence for the disputed patented technical solution. X violated the confidentiality clauses of the contract by disclosing the trade secrets of another party, which he had acquired during the fulfillment of the processing contract, to Dongguan C Company. Subsequently, Dongguan C Company, as the applicant, and X, as the inventor, filed a patent application for the technical solution containing the disputed technical information, resulting in the public disclosure of the disputed trade secrets. Their actions jointly constituted an infringement upon the trade secrets of Taiwan A Company. The Supreme People’s Court ultimately ruled that the disputed patent belonged to Taiwan A Company, and ordered X and Dongguan C Company to jointly compensate Taiwan A Company for economic losses and reasonable expenses totaling 320,000 CNY.
This second-instance judgment clarifies that contractual confidentiality clauses can exempt the need to prove trade secret elements and shift the burden of proof in infringement cases. It reflects a judicial policy of strengthening trade secret protection, reducing the rights holder’s evidentiary burden, and lowering legal defense costs, serving as a valuable reference for future trade secret infringement cases.
(2022) Zui Gao Fa Zhi Min Zhong No. 1981
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