Focus on trade secret-GE vs. Jiuxiang(I)

Issue24 By Liu Rong, China IP,[Trade Secrets]

Introduction

“Trade secret” was first statutorily mentioned in China when the Civil Procedure was revised in 1991.Its conceptual framework and the legislation were not enacted until the promulgation of the Unfair Competition Law in 1993. Between 1991 and now, IP cases heard by courts across China increased from 15,543 of the 1991-1995 period to 64,625 in the 2003-2007 period, most of which involve trademark or patent infringement. By contrast, trade secret litigation resulted in 2,141 cases between 1991 and 1995, and during the ten years from 1995 to 2005 there were only 6,547 cases filed in courts, showing a moderate increase.1

Yet, the surface tranquility does not mean there is no undercurrent in the marketplace. The Employment Contract Law of 2007 explicitly legalized non-compete agreements, and the haunting shadow of industrial espionage flashed in the Foxconn vs. BYD case has brought the attention to trade secret protection. In this issue’s Special Report, we wish to unveil the mystery around trade secret litigation by introducing a typical case, GE vs. Jiuxiang Co. of Xi’an, recognized as the best case for IPR protection for 2007-2008 by the Quality Brands Protection Committee (QBPC).

Introduction – GE vs. Jiuxiang

Facts of the case

In the summer of 2002, Wang Xiaohui, a young and promising CT engineer left General Electric (China) Co., Ltd. The 34 year old Wang had been a maintenance engineer at GE for three and a half years where he was in charge of the after-sale service of CT equipment sold by GE Healthcare (Shanghai). He had been cited as the “Best Engineer” in GE China and worked as the head of the CT team in the Hangzhou Office. When he left, the company might have regretted, or perhaps not, after all, the free flow of talent is commonplace in this industry.

A few years later, GE found Wang’s name popped up in the aftermarket. He was now a corporate officer at Xi’an Jiuxiang Electrical Technology Co., Ltd. (Jiuxiang), whose main business was maintenance and repair of medical appliances. In the company’s introduction, Jiuxiang claimed that they used to be a maintenance agent for GE Medical Systems and offered maintenance services at a price 40% to 70% lower than the manufacturer’s price; the price of service is from several thousands to hundreds of thousands of yuan. On the website hosted by Jiuxiang, “China Medical Service Online,” GE found an advertisement for “Training Courses on the Servicing Techniques of GE’s CT Equipment.” According to the advertisement, the training courses covered topics such as principle analysis, procedure introduction, function inspection, maintenance, and fault diagnosis with respect to GE’s several CT series; the lecturer at these courses was Wang Xiaohui, “the experienced maintenance engineer for GE CT.”

GE did not consider these to be ordinary training courses. In November 2006, GE sent two of its employees to attend the fourth maintenance training course held by Jiuxiang in Hangzhou and simultaneously filed a complaint with the Hangzhou Administration for Industry and Commerce (Hangzhou AIC). On November 12, the Hangzhou AIC sent its enforcement staff to inspect the training site and seized a large amount of training materials, including text and image materials bearing GE’s internal logo and copyright marking. Concurrently, the case was put on record for investigation and prosecution by the Hangzhou AIC for suspected violations of the relevant provisions of the Unfair Competition Law.

On January 5, 2007, complaints were brought in the Intermediate People’s Court of Xi’an by General Electric (China) Co., Ltd. and GE Medical Systems Trade and Development (Shanghai) Co., Ltd. against both Jiuxiang and Wang Xiaohui for misappropriation of trade secrets and copyright infringement.

On March 28, the US General Electric Company joined the plaintiffs as the owner of the alleged trade secrets and copyright. On May 15, the Xi’an Intermediate People’s Court heard the case in private session. In an August 13 decision, the court found the trade secrets and copyright were valid and infringed, ordering an injunction and compensatory damages in the amount of RMB900,000, including 500,000 for trade secrets misappropriation and 400,000 for copyright infringement.

It was reported that on the first instance judgment, the plaintiffs appealed, and the defendants cross appealed, but both later withdrew. The judgment has since taken effect and been enforced.

The judgment

Whether an exiting employee might have taken confidential documents with him is hard to prove several years after the employee left the company. And it also has to be established as to whether confidentiality exists and was breached. The plaintiffs’ effort focused on the text and graphic materials seized by the Hangzhou AIC. GE argued that documents such as the Principles on GE’s Single-detector Row CT and Lectures on GE’s Multi-detector Row CT Techniques were derived from GE’s “RED SERVICE DISC,” internally referred to as the “Red Disc,” which was for GE’s after-sale maintenance engineers’ use only.

GE alleged that the red disc recorded the core technical information of GE’s independent R&D, which was the most important trade secret in the after-sale service. Above all, GE identified the above-mentioned materials as confidential information by putting confidentiality marks on each and every page of the internal training materials, such as “For Internal Use Only” and “No Duplication.” GE believed that Wang, as an internal engineer of GE, had access to the confidential materials, and presented it to the participants of his training courses. The confidential technical information contained in the red disc and the internal training materials. Wang then, according to GE, copied for the participants such electronic data materials as the complete red disc, which had a 4G memory capacity, the internal training materials, and the publicity film on CT products, all of which infringed on GE’s trade secrets and copyright.

Wang and Jiuxiang argued that the alleged technical information involved in the plaintiffs’ Red Disc and the internal training materials did not constitute trade secrets because it was the “Service Manual” and accompanying materials that GE promised to offer to its clients for their service needs. Moreover, Wang and Jiuxiang argued that the plaintiffs failed to take any protective measures. With respect to the alleged infringement of GE’s copyright, Jiuxiang was of the view that the plaintiffs’ claims lacked factual basis in that these materials were Wang’s independent works without the aid of any materials provided by the plaintiffs.

The court found that the evidence produced by GE was sufficient to establish that the internal information in dispute was the technical information developed by GE through independent R&D, was of great economic value to GE, subject to GE’s confidentiality measures, and could not be obtained through public channels, which conformed to the constituting elements of a trade secret prescribed by China’s law and should be deemed as GE’s trade secrets. Jiuxiang and Wang admitted that the training materials they used and the technical information in Wang’s computer, which was detained by the administration for industry and commerce, were identical to the contents of the internal information claimed by GE; Wang breached his confidentiality agreement with GE by giving lectures and distributing the materials to the participants of the training courses. Jiuxiang, knowing the illegality of its legal representative Wang, continued the training courses on GE’s CT maintenance techniques, used, disclosed and allowed others to use GE’s trade secrets; additionally, Jiuxiang and Wang offered commercial maintenance of GE’s CT equipment to many domestic hospitals and medical institutions by using GE’s trade secrets for profit. The above facts were sufficient to prove that the acts of Jiuxiang and Wang belonged to the infringing acts prohibited by Article 10 of the Unfair Competition Law. The court held that Jiuxiang’s and Wang’s acts constituted joint infringement.


       Endnote:
       1. The above figures are from the judicial statistics issued by China’s Supreme People’s Court.

                                                                            (Translated by Zhang Meichang)


 

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