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Trade Secret Case Study

Abstract

I. Basic case details

The right holder is Shandong Blue Spring Science and Technology Development Co., Ltd., a Sino-foreign joint venture (Chinese-French joint venture) incorporated on November 14, 2000 and approved by Jinan AIC with a registered capital of USD 2.2 million. Its domicile is at Huaiyin District, Jinan City and its legal representative is
Christophe TORRES. In April 2008, it entered into the  Technical Development Contract  with Jincheng Blue Flame Coal Industry Co., Ltd. for the R&D on polyurethane solid tire. The utility model patent of “polyurethane sidewall enhanced and filled tire” and the invention patent of “polyurethane composite tire and manufacturing method”have been obtained.

When it was incorporated, the right-holding enterprise developed  the Corporate Confidentiality Management System  and entered into the  Confidentiality Contract , the
Letter of Commitment  and the  Letter of Guarantee  with employees respectively, with a view to protecting independently researched and developed business information.

The infringer’s full name is Jinan Ruide Polyurethane Co., Ltd., a company incorporated on May 16, 2011 and approved by Jinan AIC Pingyin Branch with a registered capital of FIVE HUNDRED THOUSAND YUAN and a paid-in capital of ONE HUNDRED THOUSAND YUAN. Its domicile is at Renhe Village, Dong’e Town, Pingyin County and its legal representative is Zhang Shoujun. The type of the company is limited liability company (invested or controlled by natural person) and the business scope includes production and sale of engineering machinery accessories, sealing elements, hydraulic parts and wear-resistant parts as well as wholesale and retail of polyurethane products, insulation materials and rubber products.
 

The legal representative of the infringer, Zhang Shoujun, worked in Shandong Blue Spring Science and Technology Development Co., Ltd.from May 2006 to May 2010, serving as the chief of the Production Department and the Equipment Department of the right holder, and quitted office in May 2010. During his service with the right holder, Zhang Shoujun mastered the polyurethane tire manufacturing craft, process and technology due to the advantage of his position. After resigning in 2010, he invested and established Jinan Ruide Polyurethane Co., Ltd. together with Yan Xinghong and other people, without the right holder being aware, produced the same type of polyurethane tire using the right holder’s business information.

II. Difficulties of evidence collection:

I. Whether or not the formula, craft and operating process of the right holder constitute trade secrets, i.e. affirmation of trade secrets;
II. Whether or not the infringer has infringed upon the right holder’s trade secrets, i.e. affirmation of infringer and right holder;

III. How did the infringer infringe upon the right holder’s trade secrets, i.e. affirmation of the illegal trade secrets infringing behaviors;

IV. Whether or not the infringer has made commercial profits from the
involved trade secrets.

Components of trade secrets

Trade secrets refer to practical technical information and business information unknown to the public, with promising economic benefits for the right holder and under the protection of the right holder’s confidentiality measures.

  • Unknown to the public
  • Economically beneficial to the right holder and practical
  • confidentiality measures protected

Unknown to the public

The polyurethane tire manufacturing technology of the informer, Shandong Blue Spring Science and Technology Development Co., Ltd., which has been researched and developed jointly with relevant entities, has not been disclosed in public media and on public occasions and confidentiality measures have been taken so that others cannot obtain such technology through other channels. As such, investigating officers hold that the said polyurethane tire production technology is unknown to the public.

Economically beneficial to the right holder and practical

Being economically beneficial to the right holder and practical means that such information has definite applicability and promises actual or potential economic benefits or competitive edge for the right holder.

Investigating officers are of the opinion that the proof, sales invoices and  Profit Statement  of 2011 and 2012 provided by the right holder Shandong Blue Spring Science and Technology Development Co., Ltd. can demonstrate that the right holder has been undertaking production and sales utilizing the polyurethanetire manufacturing technology and gained profit as well as reputation in this process. As such, it can be determined that such technology is economically beneficial to the right holder and practical .


To  sum  up,  as  technical  information  -  above-mentioned polyurethane tire manufacturing technology, craft and process - owned by Shandong Blue Spring Science and Technology Development Co., Ltd. is unknown to the public, and the Company is using the technology which brings profits. Besides, the Company has taken confidentiality measures. Hence, the technology shall be affirmed as trade secret.

The legal representative of the infringer has obtained polyurethane tire manufacturing technology, craft and operational process by improper means and established a company of the same trade for polyurethane tire production by using such confidential technology. Therefore, he has breached the regulations under Item (Ⅰ),
Paragraph 1, Article 10 of the  Anti-unfair Competition Law of the People’s Republic of China , i.e. “an operator shall not infringe upon trade secrets by the following means: (III) disclose, use or allow others to use trade secrets in his/her control in violation of the agreement or the right holder’s requirements on safeguarding trade secrets”, and hence is a behaviour of trade secrets infringement.

Qualitative treatment

In accordance with the regulations of the  Anti-unfair Competition Law of the People’s Republic of China , it was decided that the infringing party terminate the behaviour of infringing upon the trade secrets of Shandong Blue Spring Science and Technology Development Co., Ltd., that the infringer be imposed a fine of one
hundred and fifty thousand Yuan which is to be turned in to the State Treasury and that the involved technical information and business information be taken over by Jinan AIC and returned to the right holder . The infringer was supervised during the destruction of involved infringing goods.

Evidence support

The legal representative of the infringer once served as the workshop director of the right holder and hence had mastered polyurethane tire manufacturing process,
formula and other core confidential technologies. Following the resignation, he got involved in horizontal competition utilizing the confidential technologies without permission by the right holder.

The infringer failed to prove that such technical information came from a public source, e.g. trade journal, magazine, Internet, etc.

During the raid to the infringer’s premises, two copies of the  Partnership Agreement was found, which contained the fact that the legal representative of the infringer
was involved in horizontal competition by establishing a partnership enterprise with the independently controlled polyurethane solid tire core manufacturing technology as a capital contribution.

The extracted sales contracts, financial account books and sales invoices confirm on the infringer’s market earnings and that the infringer has made commercial profits by making use of others’ trade secrets.

III. Coping methods

Firstly, analyze the corporate backgrounds of both parties, and collect information for analysis and study, e.g. before and after corporate establishment, scale, market share, market distribution, selling price, etc.  Secondly,  undertake  raids;  make  arrangements  among experienced law enforcement personnel prior to the raid and divide them into three groups for immediate evidence collection and preservation in the infringer’s office, workshop and finished product warehouse respectively during the raid. Practice has proved that such raids feature amazing results. Thirdly, in the case investigating and treating process, contact the municipal public security bureau and procuratorate department to exchange on the situation and analyze case details, so as to determine whether administrative liability or criminal liability shall be assumed by the infringer.

Opinions and suggestions


Amend the  Anti-unfair Competition Law  as soon as possible, strengthen sanctions against unfair competition behaviours including trade secret infringing behaviours and lower thresholds of filing and prosecuting trade secret infringement criminal cases. Moreover, facilitate the legislation progress, and with reference to trademark right protection, draft the special law of  Trade Secret Protection Law for the purpose of improving the legal system of intellectual property right protection.
 

Reading case law isn’t just for attorneys.  If you are part of the aviation manufacture, repair or overhaul industry then the recent case AvidAir Helicopter Supply, Inc. v. Rolls-Royce Corporation(8th Cir. 2011)is a must read.  Decided December 13, 2011 by the United States Court of Appeals for the Eight Circuit, AvidAir v. Rolls-Royce provides an excellent summary of several important intellectual property concepts, including the rights to proprietary documents and trade secrets contained in most OEM overhaul manuals and technical bulletins – in this instance technical documents made available to Rolls-Royce Model 250 engine Authorized Maintenance Centers (AMCs).  The brief summary below focuses on one of the key legal concepts address by the court in the appeal.

 

Background:  In the underlying actions Rolls-Royce sought damages and injunctive relief for alleged trade secret violations by AvidAir related in large part to AvidAir’s use of certain AMC Overhaul Information Letters (or “Distributor Overhaul Information Letters or DOILs” as they are referred to in the case).  AvidAir sought a declaration that the DOILs were not protected by trade secret law.  For historical reasons AvidAir was able to acquire many early versions of certain DOIL’s but not the latest revisions necessary to stay up to date with the relevant FAA approved overhaul procedures.  In more recent years Rolls-Royce limited distribution of updated DOIL’s to AMCs and included a proprietary rights legend on most of its technical information.  AvidAir was not an AMC and argued that the modifications in the latest DOILs were substantially the same as earlier, publically available versions.  The district court ruled in favor of Rolls-Royce, finding that most but not all of the information at issue was a protected trade secret.  Subsequently, a jury awarded Rolls-Royce $350,000 and ordered AvidAir to return the protected documents.  It is in part from this result that AvidAir filed the appeal which is the subject of the December 2011 ruling.

Do the technical documents constitute a trade secret? 

Under the Uniform Trade Secret Act, a trade secret is: “information, including a formula, pattern, compilation, program, device, method, technique, or process, that: (1) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and (2) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”

Regarding the first part of the test, the court found that the DOILs were compilations – compilations of both publically available information and new proprietary information.  Compilations of this type can be valuable so long as the combination affords a competitive advantage.  AvidAir argued that the DOILs cannot provide independent economic value because there is only a trivial amount of information that is not readily available in the older versions of the documents.  They argued that no new engineering advances were present in the newer revisions.  The court found that the existence of a trade secret is determined by the value of the secret not the merit of the technical improvements.  “The value of the Rolls-Royce documents is apparent when a shop is required to certify the return to service for an overhauled engine.”

Regarding the second part of the test, while Rolls-Royce’s efforts to maintain secrecy must be reasonable they need not be overly extravagant or absolute.  “It was undisputed that all the technical documents in question were labeled with proprietary rights legends.  Though AvidAir claims the documents were ‘freely available’, in the industry, it failed to present any evidence that Rolls-Royce actually distributed them to a party not bound by confidentiality agreements.”

In the final analysis the court of appeals affirmed the judgments of the district court in favor of Rolls-Royce.  Please feel free to contact me by email if you would like a copy of the decision.  It is well worth reading in its entirety.

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