A perspective on the trade secret case of GE vs. Jiuxiang

Issue20 By Sun Hailong & Yao Jianjun,[Trade Secrets]

In 2007, General Electric Company (GE) and others brought an action in Xi’an Intermediate People’s Court, against Wang Xiaohui (Wang) and Xi’an Jiuxiang Electronic Technology Co., Ltd. (Jiuxiang), for misappropriation of a trade secret. Though the case has been decided, the legal issues involved are still worth further discussion.

1. The legal aspect of trade secrets and examination of the litigant status

       Prohibition against the “stealing” of information is an old legal concept.1 The 1994 Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) both define a trade secret as “undisclosed information,” and require its member states to protect such secrets. A trade secret, as a kind of knowledge information, is the result of human intellectual activities. Being a unique form of intellectual property, a trade secret is premised on being protected as a secret by its owner in order to be recognized in law. “Ordinary licensed use” of a trade secret refers to a situation where the trade secret owner permits others to use the trade secret during a certain time period, in a certain geographic area, or in other agreed upon ways. In the ordinary licensed use of a trade secret, the trade secret owner may use the trade secret himself or license others to use it.

In the GE case, GE claimed that it was the owner of the trade secret in question; GE China and GE Shanghai had a direct interest in the case due both to their status as GE’s associated companies and because of an existing contract allowing their ordinary licensed use of the trade secret. The employment contract signed between Wang and GE expressly stipulates that Wang was obliged to keep secrets related to technical information belonging to GE China, and the other GE companies, which he acquired during his employment with GE China. GE believed that Wang breached that contract and that Jiuxiang infringed upon GE’s IPR by using GE’s trade secrets illegally. GE subsequently instituted a civil proceeding against both Jiuxiang and Wang as co-defendants. The lawsuit was filed in accordance with Article 108 of China’s Civil Procedure, Article 20 (2) of Unfair Competition Law and Article 15 of the Interpretation of the People’s Supreme Court on Several Issues Relating to the Application of Laws in the Civil Trial of Unfair Competition Cases (Interpretation). Therefore, GE, Jiuxiang, and Wang are the qualified parties to the litigation.

2. Criteria for the determination of trade secrets

       In the trial of a trade secret misappropriation case, the first step is to examine the legal definition of a trade secret. Article 39 of TRIPS explicitly provides that for information to be deemed a trade secret, it must be a secret in the sense that it is not generally known among or readily accessible to persons within the pertinent area of endeavor that normally deal with the kind of information in question; it must have commercial value because it is secret; and the person legally in control of the information must take reasonable measures to control the dissemination of that information. Similarly, the Unfair Competition Law of China provides that “trade secret” means technical or business information that is unknown to the public, is capable of bringing economic benefits to the rights owner, has practical utility, and requires that the rights owner take measures to keep that information secret. Thus, it can be seen that a trade secret must meet the following requirements: (1) It is not known to the public, which means that the information cannot be directly acquired from public channels and should meet two conditions: the information is “not known to the public” and is “not readily accessible.” In other words, to be considered a trade secret, the information must be in fact a secret. Knowledge that is known among persons in the industry cannot be appropriated as a trade secret. (2) It can bring economic benefits to the rights owner and has practical utility. This means that the information has certain applicability and can bring about practical or potential economic interests or a competitive edge to the rights holder. Whether an item of information has potential commercial value depends on market demand. (3) The rights holder takes measures to keep the information secret, including signing confidentiality agreements, establishing confidentiality systems, and taking other reasonable measures to maintain the confidentiality of the information. As to what measures constitute “confidentiality measures,” Article 11 (3) of the Interpretation expressly enumerates some examples including: “control of the scope of recipients of a trade secret where only those whose knowledge thereof is necessary are allowed access thereto” in item 1; “adoption of a confidentiality mark on the media which contain a trade secret” in item 3; and “execution of a confidentiality agreement” in item 5.

3. Allocation of burden of proof in the trial of trade secret misappropriation cases

       In a case of trade secret, a plaintiff must first establish what is being protected as the trade secret that he claims and prove that he is the rights holder, user, or interested party of the trade secret. The defendant, on the other hand, must prove whether the technical information is known by the general public and whether the information has been acquired through lawful means.

With respect to the allocation of the burden of proof in trade secret misappropriation cases, Article 14 of the Interpretation stipulates that a plaintiff bears the burden of proving that the trade secret in question complies with the statutory requirements. It also provides that the scope of evidence submitted by the plaintiff to satisfy these “statutory requirements” should be expressly enumerated, including “the carrier of a trade secret, specific content, commercial value, and protection measures for this trade secret.” However, the “unknown to the public” requirement is not included in this enumerated list. Thus, under the general principle that “the burden of proof lies upon him who affirms” as established in Article 64 of the Civil Procedure and Article 2 of Some Provisions of the Supreme People’s Court on Evidence in Civil Procedures, if the alleged infringer raises the defense of “publicly known technique,” the technical information demonstrated in his evidence should be the same as that in the plaintiff’s claims, or if there are  some differences, these differences should be obvious, that is, such differences can be achieved without going through any creative labor. In cases where the alleged infringer is unable to sufficiently prove that the relevant information is known to the public, the court should affirm that the technical information claimed by the rights holder is a secret. In other words, in terms of the aforesaid three requirements for trade secret infringement, the plaintiff should, in proving that he has a trade secret that meets the statutory requirements, provide evidence of the carrier of the trade secret, its specific content, source, commercial value (when necessary, the expenses for producing the trade secret should be included) and the protection measures for this trade secret. After that, it is deemed that the plaintiff has satisfied the burden of proof that he possesses a trade secret which meets the statutory requirements. If, after the plaintiff satisfies this burden of proof, the defendant still denies the specific constituting elements concerning the plaintiff’s trade secret, the burden of proof then falls upon the defendant.

4. Judicial authentication in trade secret misappropriation trials

       The courts often encounter the issue of judicial authentication in trying cases relating to trade secrets. The focus of judicial authentication is often a factual issue, rather than a legal issue. As stated above, the law already includes provisions addressing whether an item of information can be deemed a trade secret and the analysis to be used when reviewing the constituting elements of a trade secret, i.e., “unknown to the public,” “practical utility” and “security measures taken by the rights holder.” Based on these provisions, “whether an item of information constitutes a trade secret” has become a “legal issue” rather than a “factual issue”, which is thus not a matter that can be entrusted to judicial authentication.

Do the three constituting elements belong to a trade secret “factual issues” that can be entrusted to a judicial authentication institution for authentication? The Interpretation lays down provisions with regard to one of the elements, i.e. “unknown to the public,” and also enumerates its different representative forms2. That is to say, “whether an item of information is known to the public” also becomes a “legal issue.” But there is no provision in the law as to the circumstances in which information “is known to the public” as enumerated in the Interpretation, including whether “the information is the general knowledge or business practice in the relative technical or economic field.” Thus, this matter is a “factual issue,” which can be entrusted for authentication. However, the matters before it, i.e. “whether it is known to the public” and “whether it is a trade secret,” fall into “legal issues,” which cannot be directly entrusted to authentication. It should be noted that not all “factual issues” can be entrusted to authentication. Only those that cannot be decided by judges independently based on their own abilities, but can instead be understood by means of science, technology, or other professional knowledge can be entrusted for authentication. For example, the law provides that the judging criterion for a particular pending matter is “common consumers” or “general public,” which does not require professional knowledge by professionals and belongs instead to the scope of an ordinary person’s consciousness. Thus, this matter should be judged by the judge himself. If the judging criterion is “an ordinary technician within a particular technical field”, then the judgment of the matter will involve the general knowledge or common sense of the professional within a certain field, and therefore should be entrusted for authentication.

       5. Determination of trade secret misappropriation

       Trade secret infringement cases are generally complicated and frequently involve such diverse fields as law, science and technology, as well as economics. Thus, how to grasp the determining criteria of misappropriation becomes the core issue in the trial of such cases. Trade secret infringement refers to an act on the part of a person to illegally obtain, disclose, use, or allow others to use the trade secret. The actors include the party to a contract who has an obligation to maintain confidentiality and the third person who committed the infringing act. The constituting requirements for trade secret infringement are as follows: (1) The trade secret meets the statutory requirements; (2) the defendant’s allegedly infringing information is identical or substantially identical to the plaintiff’s; and (3) the defendant takes unfair means or breaches his obligation to maintain secrecy. In other words, when adjudicating such cases, as long as the rights holder can prove that the information used by the defendant is consistent with or identical to his own trade secret, and that the defendant has access to the trade secret, while the defendant cannot or refuses to produce evidence that the information used by him was acquired or used legally, the court can then conclude that the defendant committed infringing acts on the basis of the evidence.

       In the trade secret infringement case filed by GE against Jiuxiang and Wang, the court, after the investigation, found that: (1) the internal information claimed by GE satisfied the statutory requirements of a trade secret; (2) Jiuxiang and Wang acknowledged that the training materials they used were identical to the internal information claimed by GE; (3) Wang violated the confidentiality agreement by presenting and distributing materials concerning GE’s trade secrets to the participants of the training courses, which Wang acquired by illegal means; (4) Jiuxiang held maintenance training courses for GE’s CT technology many times and used, disclosed, and allowed others to use GE’s trade secrets with the knowledge that Wang’s acts were illegal; and (5) for purpose of profit, Jiuxiang and Wang provided commercial maintenance services for GE’s CT equipment to many domestic companies by using GE’s trade secrets. Thus, the acts of Wang and Jiuxiang infringed on GE’s trade secrets.

       6. Civil liabilities of trade secret misappropriation

      Civil liability is a kind of legal liability incurred by an actor for violation of the civil code, in breach of an agreement, or as stipulated by the civil code, with the main function to preserve a party’s rights and compensate recuperate its losses. Under China’s law, the main methods of bearing civil liability for trade secret misappropriation include injunction and, compensatory damages, etc.. In the GE case, in terms of the assumption of liabilities, whether Wang and Jiuxiang should jointly assume the liability is a controversial issue, and is a problem that is frequently encountered in trade secret misappropriation cases. According to China’s jurisprudence, joint tort-feasance is an act committed jointly by two or more persons to misappropriate another person’s lawful rights and interests, thereby causing him damage. The constituting elements for a typical joint malfeasance case include: (1) with respect to the element of subject, there must be two or more actors; (2) with respect to the subjective element, there must exist a joint intent or negligence among the actors; and (3) with respect to the elements of the act and causation, the actors must jointly commit the injurious acts. These acts correlate, collaborated and interact with one another, forming an organic whole to cause the occurrence of an identical damage or injury. Meanwhile, under Article 3 of the Interpretation of the Supreme People’s Court of Some Issues Concerning the Application of Law for the Trial of Cases on Compensation for Personal Injury, “the injurious acts are directly combined and result in the same injury consequence even if there is no joint intent or joint negligence, a joint infringement shall be constituted.” That is, in addition to the typical joint infringement with joint intent or negligence, the joint act of tort “without intention liaison” has already been acknowledged by the judicial interpretation of the Supreme People’s Court.

In the GE case, Wang disclosed to and allowed Jiuxiang to use the plaintiffs’ trade secrets knowing that Jiuxiang’s acquisition of the plaintiffs’ trade secrets was to be used to provide illegal repair and maintenance services, whereas Jiuxiang acquired, used, disclosed, and allowed others to use the plaintiffs’ trade secrets with the knowledge that Wang’s acquisition of the plaintiffs’ trade secrets was illegal. The acts conducted by Wang and Jiuxiang correlated and cooperated, which jointly resulted in the same injury, i.e. the infringement of the plaintiffs’ trade secrets. Wang’s and Jiuxiang’s acts were essential to the resulting injury. Thus, Wang and Jiuxiang subjectively had joint intent and objectively jointly committed the injurious acts, leading to the occurrence of the same injury. Their acts thus satisfied the constituting elements for a joint infringement under China’s law. In accordance with Article 130 of the General Principles of the Civil Law, Wang and Jiuxiang should bear joint and several liability for their tortious acts. Moreover, the trade secrets involved in this case are GE’s core technical information, including such content as the configuration, wiring, circuit, mechanism or electric component parameters for GE’s CT equipment, as well as information regarding the error codes and maintenance methods, which are required to correctly repair and maintain GE’s CT equipment. Wang and Jiuxiang illegally provided repair services to the users of GE’s CT equipment and held training courses for unfair profit. As a result, GE lost clients who should have signed maintenance agreements with GE and thus suffered the loss of such maintenance fees. Under Article 20 of the AUCL, the loss of the maintenance fees was caused by the tortious acts of Wang and Jiuxiang, and thus Wang and Jiuxiang should pay compensation to GE. However, since the evidence provided by GE could not sufficiently prove the specific amount of profit made by the two defendants as a result of their infringing acts, the court legally determined the amount of compensation in light of the highest amount of compensation prescribed by law, after taking into account such tortious acts as the technical service provided by Jiuxiang to hospitals and instrument suppliers, Jiuxiang’s advertising and publicity, its guarantee, maintenance and repair rates for GE’s CT equipment, and the  difference in rates between Jiuxiang and GE in providing this service, while also considering the nature of the acts committed by Jiuxiang and Wang as well as the degree of their subjective fault.

       To sum up, the fundamental goal of the protection of trade secrets is to prohibit the “misappropriation” of information by unfair or commercially improper means. Though trade secret infringement disputes are not a new type of IPR case, the controversies arising from the legal issues are many. Accordingly, the Supreme People’s Court formulated and promulgated some judicial interpretations in order to further define the relevant issues. The authors are of the view that judges should, in trying such cases, correctly guide the parties to produce and confront evidence and make decisions as to whether the information at issue constitutes a trade secret based on the established facts and law, determine whether the defendant’s acts infringe the trade secret, and identify the methods of bearing civil liability. To avoid any further disclosure of trade secrets, it is appropriate to hold a closed session in such cases.
       1. Robert P. Merges, et al, translated by Qi Jun, et al, Intellectual Property in the New Technological Age, China University of Political Science and Law Press, 1st edition, October, 2003, p.29.
       2. See Article 9 of the Interpretation of the People’s Supreme Court on Several Issues Relating to the Application of Laws in the Civil Trial of Unfair Competition Cases.

About the authors:
        Sun Hailong and Yao Jianjun are judges from the Xi’an Intermediate People’s Court.

                                                                                   (Translated by Zhang Meichang)

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