In June, a technical trade secrets spat related to electrical vehicle (EV) chassis technology between Chinese veteran player Geely and a new EV brand, Weltmeister, came to an end after six years with the highest damages in China's IP enforcement history.
China's Supreme People's Court (SPC) handed down the RMB 640 million (about $95 million) judgment on 14 June, overruling the Shanghai Higher People's Court's judgment by stating that Weltmeister illicitly obtained and used Geely's whole EV chassis technical secrets rather than some parts of the secrets and increasing the award from the initial statutory damages of RMB 5 million (about $700,000). The final figure was calculated using Weltmeister's sales profits of EX series SUV plus two times punitive damages.
The ruling is indicative of the Chinese court's efforts and ambitions to further strengthen the trade secret protection, especially in the EV sector which may power China's economy growth in the coming decades.
Just last year, the SPC handed down a landmark ruling on another trade secret dispute related to the rubber antiaging agent process with then-record breaking damages of around $28 million. Taken together, the rulings send the message that trade secrets theft between competitors working in the same field, no matter whether they are foreign or local companies, may be punished by skyrocketing damages orders.
Highlights of the EV judgment
The SPC further lowers the plaintiff's burden of proof when the evidence shows it is highly possible that the defendant illicitly obtained the secrets.
The 2019 reform of China's unfair competition law set an "access and substantial similarity" rule to lower the plaintiff's burden of proof. That is, the accused infringers have to show that they do not infringe the claimed trade secrets if the right holders already submitted preliminary evidence to show the infringers have had access to the secret and the information they used is substantially the same as the secrets.
In this case, SPC further reduced the plaintiff's burden of proof. The court presumed Weltmeister infringed Geely's trade secrets contained in 12 sets of chassis drawings even though four sets of drawings of Weltmeister's chassis were not substantially similar because the evidence showed a high probability that the defendant illicitly obtained and used Geely's secrets and Weltmeister had no legal source for its chassis technology.
The SPC found that Weltmeister was likely to have illicitly obtained and used Geely's secrets based on the facts that:
- There was a well-organised and planned theft of Geely's trade secrets via the poaching of nearly 40 senior technical experts and managers over a very short period of time.
- Weltmeister had no accumulation in car chassis technology in SUV but launched its new SUV EX5 in approximately two years. This abnormally short time period obviously went beyond the time spend of at least four years for comparable R&D processes.
- Weltmeister was unable to submit any R&D documents to prove it developed the technology independently.
That some technical information was published does not cause the trade secrets to lose their confidential status.
Geely claimed its trade secrets based on 12 sets of car chassis engineering drawings, and digital models thereof.
Weltmeister argued that the shape, size and connection of the chassis could be tested from the Geely's products on the market and by using information that had been published in patent filings.
The SPC held that the technical information of the 12 sets of drawings and digital models should be protected as a whole. Although the launched products or prior patents disclosed some information, even taken together they did not disclose all technical details showed in the drawings as a whole solution. As a result, while some parts of the information could be known to a skilled person, it did not cause the whole secrets to lose their confidentiality.
The SPC doubles punitive damages to Weltmeister
The SPC awarded two times the punitive damages because Weltmeister intentionally infringed Geely's technical secrets with serious consequences:
- The founder of Weltmeister, Shen Hui, is the former vice president of Geely. Weltmeister intentionally poached nearly 40 employees of Geely to join as chassis technology experts.
- After illicitly obtaining Geely's secrets, Weltmeister filed 12 utility model patents in its own name and did not cease the infringement even after Geely filed the litigation.
- Weltmeister launched a new SUV product in a short time, which acquired obvious competitive advantages in the market and resulted in Geely's project being shut down.
The ruling is broken into several specific measures for enforcement with penalties for non-compliance.
To stop the existing infringement and prevent future damages accruing, the SPC ordered the defendant to notify the court's order to all senior managers, employees, affiliated companies and car chassis suppliers and asked all persons and suppliers who has contact with the trade secrets to sign non-disclosure agreements.
The SPC also ordered Weltmeister to hand over its 12 utility model patents based on the stolen trade secrets to Geely and prohibited Weltmeister from transferring, enforcing or withdrawing the filings.
The SPC set a penalty of 1 million RMB ($150,000) per day/per patent if the defendant fails to enforce the court's order in time.
Key takeaways for the right holders
It is vital for trade secret holders to establish a professional trade secret protection system.
- Geely's win was built on a well-established trade secret management system. It is advised that the right holders can take essential measures to protect their secrets of key technologies, including:
- Formulating internal rules and policies to manage secrets. For example, setting different security levels for different technical documents.
- Establishing an internal office IT system to transfer the trade secret documents that can be traced afterwards.
- Conducting regular inspections of trade secret leak risks. Geely became aware of breach during a regular risk inspection.
- The sensitive documents containing trade secrets should be labelled with the proprietary right holder and any contact should be approved by an authorised person.
- Providing regular trade secret management training to all staff and retaining the training records.
- Ensuring departing employees sign a confidential agreement when they quit their job.
Seeking trade secret protection is not in conflict with filing patents for complex technical innovations.
The features that can be tested or observed from the outliers of the product, such as structure and size are suitable for filing patents. Patent filings covering parts of the trade secret may not break the confidentiality of the whole trade secret.
Therefore, the innovator can use patents and trade secrets to protect different aspects of a new complex technology. For example, the structure or design of the products that can be readily obtained or tested after launching into markets are advised to be protected by patents.
The plaintiff's burden of proof may be lowered if the defendant intentionally infringes the trade secret.
If there is evidence to prove that the defendant has had access to the trade secret via an illicit approach and intentionally infringed it, the courts in China may decide they are liable even though the preliminary evidence shows the disputed technology has similarity with only parts of the claimed secrets. This is good news for the right holders seeking to enforce their trade secrets in China.
This article was first published on IAM in July 2024.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.