Damages Awards for Trade Secrets Increasing in China

In February 2021, China’s Supreme People’s Court (“SPC”) awarded the country’s largest damages in a trade secrets case, RMB 159 million, or close to $25 MILLION.

This ruling was an appellate decision in Zhonghua Chemical et al v. Wanglong Group et al, a trade secrets case that concerned the manufacture of vanillin. This decision, along with other recent decisions in China, indicate the potential for holders of trade secrets and other intellectual property (“IP”) rights to win larger damages.

The main plaintiff Jiaxing Zhonghua Chemical Co., Ltd. (“Zhonghua”) was China’s largest vanillin supplier. In a 2018 lawsuit filed at the Zhejiang High People’s Court, plaintiffs alleged that the main defendant Wanglong Group Co., Ltd. (“Wanglong”), in 2010, used improper means to obtain plaintiffs’ technical secrets concerning the production of vanillin. Further, plaintiffs alleged that Wanglong used these technical secrets to construct an almost identical production line with large capacity and began production in 2011. Following Wanglong’s entry into the vanillin market, Zhonghua’s market share dropped, and it lowered its prices to compete with Wanglong’s lower prices. Plaintiffs requested that Wanglong and other defendants stop infringement and pay damages. The Court issued an injunction order and the maximum statutory damages of RMB 3 million plus expenses. Both sides appealed.

In their appellate arguments, plaintiffs proposed three different damages amounts: (1) the defendants’ illegal profits from selling infringing products calculated based on Zhonghua’s operating profit margin; (2) the defendants’ illegal profits from selling infringing products calculated based on Zhonghua’s sales profit margin; and (3) plaintiffs’ loss due to price erosion. The SPC’s decision supported the second damages amount proposed by plaintiffs. The SPC indicated that the use of Zhonghua’s sales profit margin is justified mainly for the following reasons: the defendants’ refusal to turn over their vanillin sales records and the seriousness of the defendants’ infringement. Additionally, the SPC noted the loss to the plaintiffs could be significantly larger due to price erosion.

The SPC’s decision follows an earlier decision by the SPC that awarded punitive damages in another trade secrets case (Guangzhou Tinci Materials Technology Co., Ltd. and Jiujiang Tinci Materials Technology Co., Ltd. v. Anhui Newman Fine Chemicals et al). These recent developments in China indicate the potential for rights holders to obtain larger damages awards in IP infringement cases. Solid damages analyses and effective testimony in trial from economic experts may provide useful evidence for the Chinese courts to consider in such cases.

Managing Director Dr. Su Sun has testified before various Chinese courts in IP infringement cases. Dr. Sun submitted an economic report on behalf of the plaintiffs and testified in the first instance of the vanillin trade secrets case discussed in the article.