Is the second-instance judgment award higher than the first-instance judgment? — A brief discussion on determining the amount of compensation in trade secret infringement cases.

Foreword

In trade secret infringement lawsuits, when the first instance court finds infringement established and awards damages, the defendant often appeals, hoping to avoid or reduce their liability for damages. However, in recent years, in some cases, the appellate courts have not only not reduced the amount of damages but have actually increased them. This author believes that this sends a clear signal that the crackdown on trade secret infringement is intensifying.

In civil litigation, trade secrets are a civil right, a type of intellectual property, typically including technical secrets and business secrets. The Civil Code stipulates the main ways of assuming civil liability. In trade secret infringement cases, the infringer usually bears civil liability such as ceasing infringement and compensating for losses. Furthermore, trade secret infringement cases fall under the category of punitive damages stipulated by law, potentially resulting in punitive damage liability. Ceasing infringement is usually relatively straightforward, but determining the amount of compensation for losses becomes one of the key issues in the case.

I. Determining the Amount of Compensation

Unlike patent rights, trademark rights, and other types of intellectual property, trade secret rights do not require grants from state administrative agencies; rather, the right holder takes confidentiality measures to ensure the protection of a trade secret. In the civil law system, the regulation of trade secret infringement is stipulated in the *Anti-Unfair Competition Law*. Article 9 of the *Anti-Unfair Competition Law* lists the acts that business operators are prohibited from committing to infringe trade secrets and provides a definition of trade secrets.

Article 17 of the *Anti-Unfair Competition Law* stipulates the liability for trade secret infringement. The first paragraph stipulates the consequences of the violation, stating that those who cause damage due to the violation shall bear civil liability. The second paragraph stipulates the remedies; the person whose rights have been infringed may file a civil lawsuit. It is important to note that the second paragraph uses “may” rather than “shall,” because according to the *Civil Code*, the rights holder may exercise civil rights according to their own will. The rights holder may sue or not; they may file a civil lawsuit or apply for administrative investigation; for serious cases of trade secret infringement, they may also report the case to the public security organs. The third paragraph stipulates the determination of the amount of compensation. The basis for determining the amount of compensation is hierarchical; according to the principle of full compensation in civil damages, the first priority is the actual loss suffered by the infringed party. When the actual losses cannot be determined, the second priority—the profits gained by the infringer from the infringement—is used to determine the amount of compensation. The third paragraph also stipulates two special cases: one specifically for malicious infringement of trade secrets, which stipulates punitive damages; the other for general cases, stipulating that the amount of compensation includes reasonable expenses incurred in stopping the infringement. The fourth paragraph stipulates the third priority in determining the amount of compensation, namely, the people’s court determines the amount of compensation at its discretion, and the discretionary amount cannot exceed 5 million yuan.

Regarding the third priority and the discretionary circumstances of the people’s court, the judicial interpretation provides supplementary provisions. Article 19 of the “Provisions of the Supreme People’s Court on Several Issues Concerning the Application of Law in the Trial of Civil Cases of Infringement of Trade Secrets” stipulates that when the infringement causes the trade secret to be known to the public, the people’s court may consider the commercial value of the trade secret when determining the amount of compensation according to law. When determining the commercial value mentioned in the preceding paragraph, the people’s court shall consider factors such as research and development costs, the revenue from implementing the trade secret, the expected profits, and the time during which a competitive advantage can be maintained.

II. Reasons for Increasing the Amount of Compensation in the Second Instance

The above legal provisions clarify the methods for determining the amount of compensation for infringement of trade secrets. Based on the legally prescribed logic for determining compensation amounts, cases where the compensation amount in the second instance judgment is higher than that in the first instance can be divided into two types.

The first type occurs when the first instance court believes that the compensation amount cannot be determined through the first and second priorities mentioned above, and makes a discretionary determination based on the third priority. The second instance court, however, believes that the compensation amount can be determined through the first and second priorities mentioned above.

For example, in the well-known “vanillin” case, the plaintiff in the first instance argued that the compensation amount should be determined based on the losses caused by the infringement of the trade secrets involved, and provided three calculation methods: operating profit, sales profit, and price erosion. The first instance court found the infringement established, but in determining the compensation amount, it considered that the evidence submitted by the plaintiff was insufficient to prove the actual losses suffered due to the infringement, and ordered the defendant to pay a total of 3.5 million yuan in compensation, including reasonable expenses, based on statutory damages. The second instance court held that the plaintiff’s first and second calculation methods were supported by evidence and were reliable, while the third calculation method was subject to more factors affecting its accuracy and was only for reference. The second-instance court ultimately applied the first-priority principle of actual losses suffered by the infringed party, and determined the damages amount to be RMB 155,829,455.20 plus the aforementioned reasonable expenses of RMB 3,492,216, totaling approximately RMB 159 million [1]. This case was later selected as one of the top ten cases of the People’s Courts in 2021. In the “melamine” case, the plaintiff in the first instance claimed that the losses suffered by the plaintiff due to the infringement should be calculated based on the profits of the defendant in the first instance from using the trade secrets involved. In fact, the plaintiff claimed the second-priority principle, that when the actual losses are difficult to calculate, the amount of compensation should be determined by the profits obtained by the infringer from the infringement. The plaintiff proposed two methods to calculate the amount of compensation: one is to calculate it by referring to the gross profit margin of the defendant’s organic amines, and the other is to calculate it by referring to the gross profit margin of melamine sold by enterprises of the same scale. The court of first instance held that the actual losses suffered by the plaintiff due to the infringement and the actual profits obtained by the defendant due to the infringement were difficult to ascertain, so statutory damages were applied in this case. However, the court of first instance held that the evidence submitted by the plaintiff could determine the profit range, which was far greater than the statutory damages of RMB 5 million. Therefore, the discretionary amount of damages also exceeded the statutory damages, and the court of first instance awarded RMB 50 million. The court of second instance held that, in the absence of contrary evidence submitted by the defendant in the first instance, the infringement profits could only be determined based on the evidence submitted by the plaintiff in the first instance. Both calculation methods exceeded the plaintiff’s claims in the first instance. Therefore, the court of second instance fully supported the plaintiff’s claim for damages of RMB 98 million [2]. In the case of “microbial oil and gas exploration”, the plaintiff in the first instance also argued that the amount of damages should be determined based on the profits obtained by the defendant in the first instance due to the infringement. The court of first instance held that the plaintiff only submitted audit reports for two projects, and the profits calculated were sales profits. It was difficult to determine that the profits claimed by the plaintiff were the reasonable profits of its projects. The court of first instance determined the amount of damages to be RMB 500,000. The court of second instance held that, considering that the field of application of the technical information involved in the case was not a normal commercial field with sufficient market competition, it could be presumed that the defendant in the first instance improperly seized the transaction opportunities that originally belonged to the plaintiff in the first instance. In this case, whether the defendant in the first instance engaged in malicious low-price bidding, whether it used other proprietary technologies in the project, and the size of the technological contribution rate of the trade secrets used, do not affect the calculation of the compensation amount. The second-instance court confirmed that the plaintiff’s calculated profit from the infringement was higher than the amount claimed, and therefore fully supported the plaintiff’s claim amount, determining the compensation amount to be RMB 2 million plus reasonable expenses of RMB 507,000 [3].

The second type is where both the first-instance and second-instance courts determined the compensation amount through third-priority consideration, but the second-instance court, based on the aforementioned judicial interpretation, comprehensively considered various factors and re-determined the compensation amount.

For example, in the “web crawler platform” case, the first-instance court, considering the nature of the trade secrets involved, research and development costs, degree of innovation, and competitive advantages that could be brought about, as well as the defendant’s subjective fault, the nature and circumstances of the infringement, determined the compensation to be RMB 50,000, including reasonable expenses paid to stop the infringement. The second-instance court held that the defendant in the first instance and the plaintiff in the first instance had signed a confidentiality agreement, which stipulated the compensation amount. Therefore, when the defendant violates the relevant agreement in the first instance, the amount of infringement compensation agreed upon by both parties can be used as an important reference factor in determining the infringement damages. The second instance court changed the judgment to award economic losses of RMB 250,000 and reasonable expenses of RMB 15,000[4].

III. Application of Punitive Damages

In the context of the country’s increasing emphasis on protecting intellectual property rights and severely punishing infringement, the punitive damages system has been introduced into my country. Punitive damages are the compensation determined according to the principle of full compensation. It means that in order to increase the crackdown on serious infringement, in addition to making up for the rights holder’s losses, the infringer with serious circumstances shall also bear compensation liability several times that of making up for the losses, so as to deter and prevent the occurrence of infringement. For infringement of trade secrets, the Anti-Unfair Competition Law amended in 2019 clearly stipulates that if the infringement of trade secrets is serious, punitive damages of one to five times may be imposed on the basis of the compensation amount determined by other methods. The Civil Code implemented in 2021 clearly stipulates that punitive damages can be claimed in cases of infringement of intellectual property rights. In the aforementioned “vanillin” case, the second-instance court held that the infringing act could have been subject to punitive damages, but during the period when the plaintiff in the first instance was calculating the amount of damages, the punitive damages system had not yet been implemented, and the plaintiff in the first instance did not claim it. Therefore, punitive damages were not applied in this case [2]. In the Supreme People’s Court Guiding Case No. 219: “Kapo” case, the Supreme People’s Court held that if an operator has maliciously infringed upon the trade secrets of others, and the circumstances are serious, the right holder may request the infringer to bear punitive damages liability. This indicates that the conditions for the application of punitive damages are that there is malicious intent and the circumstances are serious. In addition, it also implies the principle of request, that is, the right holder may request the court to decide whether to support the right holder’s litigation claim. In this case, the legal representative of the accused infringing company, even after being held criminally liable for infringing trade secrets, still did not stop selling the infringing products and also obstructed the collection of evidence, which showed obvious malicious intent. Objectively, its sales scope reached more than 20 countries and regions, which was a serious circumstance. Therefore, punitive damages were applied in this case. The second instance determined the base amount of compensation to be 6 million yuan, and after applying punitive damages, the compensation was 30 million yuan [5]. In the second instance of this case, the method of determining the amount of compensation was different from that in the first instance. The base amount and the multiple of compensation were adjusted, but the total amount of compensation did not change fundamentally. Due to space limitations, a detailed analysis will not be conducted.

IV. Summary and Outlook

In civil litigation, it is not common for the second instance to change the infringer to bear a higher amount of compensation. Such cases send a clear signal that my country is continuously strengthening the judicial protection of trade secrets. Here we will not comment on the facts and fairness of individual cases, but from the perspective of the whole society, effectively protecting intellectual property rights, severely cracking down on infringement, warning all legitimate business operators, and deterring and preventing the occurrence of infringement are obviously conducive to encouraging the innovative development of various innovative entities, stimulating social innovation vitality, and making innovation the driving force of economic and social development.

References (scroll up and down to read)

[1] Supreme People’s Court, Civil Judgment No. 1667 of 2020.

[2] Supreme People’s Court, Civil Judgment No. 541 of 2022.

[3] Supreme People’s Court, Civil Judgment No. 1363 of 2021.

[4] Supreme People’s Court, Civil Judgment No. 1687 of 2021.

[5] Supreme People’s Court, Civil Judgment No. 562 of 2019.