Hebi Reflective Material Co., Ltd. V. Song Junchao, Hebi Ruimingte Technology Co., Ltd., and Li Jianfa( 2016) YMZ No. 347, Henan Higher People’s Court
Cause of action: Disputes over infringement of trade Secrets
Collegial panel members: Zhao Zheng | Zhao Yanbin | Jiao Xinhui
Keywords: application of injunction, client list, infringement of trade secrets
Relevant legal provisions: Law of the People’s Republic of China against Unfair Competition (as published in 1993), article 10 Interpretation of the Supreme People’s Court on Some Issues Concerning the Application of Law in the Trial of Civil Cases Involving Unfair Competition, article 16
Basic facts: In a case involving disputes over infringement of trade secrets between the claimant Hebi Reflective Material Co., Ltd. (hereinafter “Reflective Material Company”) and respondents Song Junchao, Hebi Ruimingte Technology Co., Ltd. (hereinafter “Ruimingte”) and Li Jianfa, the facts were that Reflective Material Company had been established on April 4, 1996, and its business scope covered the processing and sales of reflective materials, as well as applications of reflective materials and coated products. Reflective Material Company submitted 18 pages of records of its transactions with clients in Northeast China, including 5 pages from 2010, 4 pages from 2011, 4 pages from 2012, 3 pages from 2013 and 2 pages from 2014. Those transaction records contained such information as “date”, “client name”, “variety”, “specification”, “quantity”, “unit price”, “income”, “address”, “contact person”, “contact number” and “remarks”. Song Junchao had been a sales representative at Reflective Material Company since 2006, responsible for sales and customer development in Heilongjiang Province, Jilin Province, Liaoning Province and Inner Mongolia Autonomous Region. Reflective Material Company had entered into two employment contracts with Song Junchao, both of which included confidentiality clauses and non-competition clauses. Reflective Material Company had established a confidentiality system for its business information, had taken necessary confidentiality measures to secure information relating to clients and potential clients, and had paid confidentiality fees to Song Junchao and other sales staff. After noticing that Song Junchao had purchased reflective cloth on his own behalf, Reflective Material Company filed a lawsuit and asked for a preliminary injunction whereby it asked the court to seize the 14 pieces of reflective fabric stored by Song Junchao, which were to be sent to a “Song Xiang”, to prohibit Song Junchao, Ruimingte and Li Jianfa from conducting the infringing act, and to request that they compensate Reflective Material Company for reasonable expenses and losses in the sum of RMB500,000.
Hebi Shancheng Ruixin Reflective Material Business Department (hereinafter “Ruixin Business Department”) was established on April 3, 2006. The name of its operator was Li Jianfa and the contact number was 130xxxxxxx9. Hebi Ruixin Trading Co., Ltd. (hereinafter “Ruixin Company”) was established on June 22, 2011. Its business scope covered steel, building materials, hardware, electrical appliances, coated panels and reflective fences. The contact number of the legal representative, upon two changes, was 130xxxxxxx9. On November 12, 2011, a “Song Xiang” applied for a change of the company’s business scope. The expanded scope encompassed reflective material products, clothing, textiles, sanitary products and rubber products, among other things. On August 27, 2013, Song Xiang handled the procedures for changing Ruixin Company’s legal representative. In addition, during the operation of Ruixin Company, Song Xiang also participated in work related to the business registration procedures of the company, such as applying for a business license, changing the company’s business scope and submitting annual inspection reports. Ruixin Company changed its name to Ruimingte Company on January 19, 2015. Song Junchao’s ID number was 4106xxxxxxxxxx1537; Song Xiang’s ID number was 4106xxxxxxxxxx7510. These two names referred to the same person. Song Junchao used a SIM card with the number 130xxxxxxx9. Song Junchao had sent goods to Northeast China in the name of “Song Xiang” through Zhengzhou Debon Logistics Limited, Hebi Branch, more than 10 times. The goods sent included, among other things, “reflective cloth, 3 fibers” and “reflective strips, 2 fibers”, and “cloth, 5 fibers”. On February 8, 2014, Song Junchao delivered goods to Northeast China through Hebi Business Department of China Railway Corporation. Song Junchao had sent goods to Northeast China through Shanghai Jiaji Express Co., Ltd., Hebi Branch, seven times. The goods included, among other things, “cloth, 3”, “cloth, 4” and “cloth, 9”. Some of the clients listed were the same as those on Reflective Material Company’s client list. The current account of Ruixin Company/ Ruimingte showed that, between August 1, 2011, and July 31, 2015, among its clients in Northeast China were 10 clients who were the trading clients of Reflective Material Company and that there were 38 supply transactions, amounting to RMB830,512.50. Song Junchao, in his own capacity, withdrew the money from the accounts of Ruixin Company some 27 times, totaling RMB1,270,603.42.
Held: Henan Hebi Intermediate People’s Court delivered its judgment ((2015) HMCZ No. 96) on December 25, 2015, in which its ordered Song Junchao and Ruimingte to cease infringement of Reflective Material Company’s trade secrets, not to use Reflective Material Company’s trade secret in the next two years and to pay the damages of RMB350,000.
Dissatisfied, Song Junchao and Ruimingte appealed to the Henan Higher People’s Court, seeking revocation of the first-instance decision and dismissal of Reflective Material Company’s claims. On August 2, 2017, Henan Higher People’s Court issued its judgment dismissing the appeal and affirming the first-instance judgment.
Reasoning: In its final judgment, Henan Higher People’s Court held as follows.
I. On whether the client list claimed by Reflective Material Company constitutes a trade secret
Article 10 of the Law of the People’s Republic of China against Unfair Competition stipulates that, “for the purpose of this Law, commercial secrets refer to any technical information or operational information which is not known to the public, may create commercial value for the obligee, may have practical uses and for which its obligee has adopted measures to ensure its confidentiality”. In this case, Reflective Material Company collected and recorded the client information stated in its VAT invoices issued to clients in Northeast China, the delivery list, the remittance vouchers for payment transfers with clients, notices of goods requisitioned, the parcel bills, and the travel schedules and travel plans, to form a client list with detailed business information, and it spent a lot of time, money and effort in doing so. Among these details, “transaction date” can reflect the regular pattern of a client’s demand for goods; “variety”, “specification” and “quantity” can explain a client’s unique needs; “unit price” can explain a client’s budget and its bottom line when it comes to price; “remarks” reflect special information relating to a client. All of these items constitute Reflective Material Company’s “trade secret”, because they reflect unique client information that cannot be found in the public domain. All of this evidence matches the requirement under article 10 that the information be “not known to the public”. Reflective Material Company’s transaction records and client transaction bills cover a long period of time and a large number of clients. Such business information has real or potential business value. Some clients had established long-term business dealings with Reflective Material Company. Some clients had not established business relationships with Reflective Material Company, but were important resources with which Reflective Material Company may seek to obtain trading opportunities. The clients designated in the business information had formed stable supply channels and maintained good trading relationships with Reflective Material Company. Therefore, such information had practical utility in the operation of the business, and could deliver economic benefits and competitive advantages to Reflective Material Company. All of this evidence met the requirement under article 10 that the information “create commercial value for the obligee [and] have practical uses”. Reflective Material Company had established a specific system of confidentiality for these businesses’ information, and had taken the necessary measures to preserve the confidentiality of its clients and potential clients. The employment contract that Reflective Material Company entered into with Song Junchao clearly included a confidentiality clause and a competition restriction clause. Reflective Material Company also paid the corresponding confidentiality fees to Song Junchao and other sales staff. All of this evidence proved that Reflective Material Company took reasonable “confidential measures” to secure its business information and, in summary, the court found that Reflective Material Company’s client list produced constituted a trade secret.
II. On whether Song Junchao and Ruimingte infringed upon Reflective Material Company’s trade secret
Song Junchao had been a sales representative for Reflective Material Company since 2006. He was responsible for sales and customer development in Heilongjiang Province, Jilin Province, Liaoning Province and Inner Mongolia Autonomous Region, and he knew very well the client information related to Reflective Material Company’s trade secret. Song Junchao delivered goods to Northeast China 18 times under the name of “Song Xiang”. Some of the products were named similarly to reflective materials. Some of the clients listed were also the same as those of Reflective Material Company. It could therefore be ascertained that Song Junchao had traded with Reflective Material Company’s clients without permission. Song Junchao had participated in the work relevant to the business registration of Ruimingte, such as application for a corporate business license, a change of corporate business scope and submission of annual inspection reports. The contact number of Ruimingte’s legal representative was 130xxxxxxx9 on both instances of change, as used by Song Junchao. Song Junchao also withdrew money in his personal capacity from Ruimingte’s account some 27 times, to a total of RMB1,270,603.42. It could therefore be ascertained that Song Junchao had a close relationship with Ruimingte (formerly Ruixin Company). Song Junchao entered into a non-disclosure agreement with Reflective Material Company. Reflective Material Company also paid confidentiality fees to Song Junchao. Song Junchao was obligated to keep the business information that he obtained at work confidential. Song Junchao should have been aware of the company’s relevant management regulations, and of the non-public nature and commercial value of client list, but he still conducted transactions in his personal capacity with Reflective Material Company’s clients. Thus he knowingly committed the infringement. The act of Song Junchao in breaching confidentiality, and disclosing, using and allowing others to use Reflective Material Company’s confidential business information, infringed on Reflective Material Company’s trade secret. The business scope of Ruimingte, as changed by Song Junchao on November 12, 2011, partially overlapped with the business scope of Reflective Material Company. Under circumstances in which Song Junchao and Ruimingte maintained close ties, Ruimingte initiated business transactions within a short time frame with those clients who had maintained long-term relations with Reflective Material Company. According to the current accounts of Ruimingte, some of the clients in Northeast China who traded with Ruimingte from August 1, 2011, to July 31, 2015, were also clients of Reflective Material Company and the transaction amounts were significant. It could be ascertained that client information used by Ruimingte was the same or substantially the same as the business information gathered by Reflective Material Company. It could be further ascertained that Ruimingte actually had access to that business information through Song Junchao. Because Ruimingte failed to provide evidence to prove that the clients themselves initiated the transaction, it could be presumed that Ruimingte improperly obtained Reflective Material Company’s client list, via Song Junchao, and used it to conduct transactions with Reflective Material Company’s clients. Such acts infringed on the rights of Reflective Material Company to protect its client list as a trade secret, constituting a common subjective intention. The court therefore found that Song Junchao and Ruimingte jointly infringed on Reflective Material Company’s trade secret rights.
III. On how to determine liability for damage
Because it was impossible to calculate Reflective Material Company’s loss and the profits of Song Junchao and Ruimingte, the court determined it to be appropriate that Song Junchao and Ruimingte should compensate Reflective Material Company in the sum of RMB350,000, based on the nature of their infringement, their subjective fault, the duration of trading, the number of transactions, Reflective Material Company’s previous transaction price for similar products and the efforts made by Reflective Material Company to collect client business information. To protect Reflective Material Company from damage caused by the infringement, and to prevent Song Junchao and Ruimingte from continuing to profit from the infringement, Song Junchao and Ruimingte were ordered to immediately cease infringement of Reflective Material Company’s trade secret and were prohibited from using that trade secret within the next two years, according to article 16 of Interpretation of the Supreme People’s Court on Some Issues Concerning the Application of Law in the Trial of Civil Cases Involving Unfair Competition, which provides that:
When the People’s Court imposes civil liability for infringement of trade secrets, the time frame for refraining from such infringement generally endures until the trade secret has been known to the public. If, according to the preceding provision, a judgement regarding the time frame for refraining from infringement is evidently unreasonable, the infringer may be ordered to cease infringement of the trade secret for a certain period of time or within a particular scope, provided that the competitive advantage bestowed on the Obligee by such trade secret is protected in accordance with the law.