Sai CHEN
Attorney-at-Law
Wei Chixue Law Firm
Chinese intellectual property laws mainly consist of patent, trademark, copyright, and Anti-unfair Competition Law. Anti-unfair Competition Law regulates those unfair acts that the other three categories of law can not efficiently govern. Presently, the intellectual property articles stipulated by the Anti-unfair Competition Law include Articles: 5, 9 and 10. Article 5(2) (particular package and decoration of well-known commodity) and Article 10 (protection of business secrecy) are used extensively.
Through introducing two cases, this paper discusses the package and decoration protection of well-known commodity as well as the protection of business secrecy. The analysis of the current application of laws and the courts’ viewpoints can ideally be both a reference as well as a suggestion for the intellectual property protection outside of patent and trademark for enterprises.
Linda Liu & Partners represented both of the cases introduced herein. As it involves the business secrecy of our clients, this paper will not disclose the information of the parties concerned and the specific contents of the written judgments.
I. Case 1: Infringement of Packaging or Decoration of a Well-known Commodity
A. Brief introduction to this Case
The sale products of Company Y, a Japanese enterprise, in China are increasing year by year and are extensively recognized by the consumers. With the growth of well-known recognition of the products by consumers, there is a simultaneous increase in a group of products with packaging similar to that of Y Company’s products in the market. Among them, the packaging of the products of Company X, a Chinese enterprise, is relatively similar to that of Y Company’s packaging.
Based on the packaging similarities, consumers could easily purchase the wrong products due to confusion. Thus, Company Y filed a lawsuit against Company X with the cause of violation of Article 5(2) of the Anti-unfair Competition Law. During the proceeding, Company X modified the package and decoration of its products, and also promised to recall all the products involved with infringement from the market within a certain time limit, and also paid damages to Company Y. Finally, this case was settled through the reconciliation between both parties.
B. Disputed Points of this Case
The three core issues raised in the dispute prior to settlement were based on Article 5(2) of the Anti-unfair Competition Law. These issues included the determination of: well-known commodity, particular package and decoration, and the constitution of the unfair competition act. Although this case was settled through reconciliation, this result basically reflected that the judge determined this case constituted unfair competition. Moreover, the judge expressed some opinions during the trial and reconciliation process that will be analyzed in the following paragraphs:
1. Determination of a Well-known Commodity
The determination of a well-known commodity is an important issue when applying Article 5(2) of the Anti-unfair Competition Law. The Supreme People’s Court’s Interpretation on Several Issues Concerning the Application of the Law in Trials of Civil Unfair Competition Cases promulgated and implemented in early 2007 (hereinafter referred to as Interpretation on Anti-unfair Competition) explicitly stipulates the concept of well-known commodity and the standard for determination in Article 1.
It is important to note that, the unfair competition cases are based on the existence of competition. Thus, during the proceeding, the sales scope of defendant’s products and the well-known degree of plaintiff’s products among the sales scope of defendant’s products shall be taken into consideration. In this case, defendant’s products were sold in the Beijing area, while Company Y’s products were more famous in Shanghai and Guangdong areas and their sales in Beijing had not been fully extended yet. Thus, most of the evidence Company Y submitted was to prove the sales and publicity of their products in Shanghai and Guangdong. The defendant presented a counterplea and the judge also raised doubts in this regard. Plaintiff claimed that the region covered by the mass media includes the Beijing area and supplemented the evidence that could prove the sales in Beijing area. Through this extensive and varied support, Plaintiff convinced the judge.
Thus, it is advised that the plaintiff provide evidence to prove the extensive sales area of its products, and it is also required to prove that its products enjoy high reputation in the sales area of defendant’s products.
2. Determination of Particular Package and Decoration
Article 2 of the Interpretation on Anti-unfair Competition explicitly states a stipulation on the concept of “particular name, package, and decoration” as well as its standard for determination. In general, as long as the package or decoration is not too simple or ordinary, there is no need for the plaintiff to prove the particularity of the package and decoration. However, if defendant puts forward a counterplea, then he must prove that the package and decoration concerned have already existed abundantly and thus bear no particularity.
In this case, the defendant provided evidence of various products with package and decoration of slight similarity sold in the market. That evidence was refuted because the existence of similar products can only be proved in the present market. If the package of these similar products is enough to cause confusion among consumers, these products will also constitute infringement and the plaintiff will take legal action separately. Moreover, the proportion of similar products in the same category of commodity is still small, which can not indicate that the package and decoration concerned have become common package and decoration. The judge also identified that proposition.
3. Constitutional Determination Regarding the Unfair Competition Act
Seen from the stipulation of the Anti-unfair Competition Law as well as the Interpretation on Anti-unfair Competition, causing confusion and misidentification among consumers is the precondition of applying Article 5(2) of the Anti-unfair Competition Law. Thus, before determining whether the use of a product or packaging constitutes unfair competition, it is required to examine whether confusion and misidentification exist or such possibility exist. With regard to the determination of confusion and misidentification, Article 4 of the Interpretation on Anti-unfair Competition has made corresponding stipulations.
In judicial practice, if there is no evidence that can prove the actual occurrence of confusion, such as the consumer’s complaint, etc., the judge will usually decide whether they constitute similarity and cause confusion by comparing the samples. Thus, the judge has some discretion on the judgment of this issue. In this case, we provided our product sample and defendant’s product sample during the court hearing, which conveyed a direct impression to the judge who raised no doubt in respect of the issue of similarity later.
C. Evidentiary Complexities of the Case
For the plaintiff, the fundamental burden of proof regarding the determination of the constitution of similarity is to prove its products are well-known commodity, which often requires a large amount of evidence. Furthermore, during the proceedings in China, the requirements of the form of evidence are relatively strict, for instance, originals shall be presented as documentary or material evidence. The evidence formed abroad needs to be notarized and legalized abroad. In addition, when examining evidence, the judge will usually pay attention to the relevance of evidence. For instance, when examining the evidence of a contract, the judge will usually inquire whether there is evidence that can prove the fulfillment of the contract. Thus, as plaintiff, in order to claim that its products are well-known products, it has to bear very heavy burden of proof, which will become tough in this type of case. In order to avoid unfavorable results due to the lack of evidence, much attention shall be paid to the following several issues during the production of evidence.
1. Evidence to Prove a Product is Well-Known
Heavily weighted evidence used for the purposes of proving that a product is well-known includes: a) evidence that proves the sales of products, e.g. the sales invoice (must bear the name of commodity), and b) evidence to prove publicity, e.g. advertisement (must have photo of real products and indicate package and decoration thereof), the collection of which should be paid special attention to. In addition to newspapers and magazines with advertisement on them, the corresponding advertisement, contracts, and invoices are also relevant evidence of importance. If these documents can be submitted together, the probative force will be strengthened.
2. Evidence Supporting Sales and Publicity
As mentioned previously, the areas that are covered by sales and advertisement should also be paid attention to when submitting the evidence of sales and advertisement. It is advisable to provide evidence of sales and publicity in as extensive areas as possible and the sales areas of defendant’s products.
3. Proper Evidentiary Forms
It is imperative that the original is provided. If it is difficult to provide the original, the original can be copied through the procedure of notarization. Then, the original and the copy can be notarized together for their consistency. In addition, the evidence of a web page shall be notarized so as to guarantee its evidentiary effect.
D. Enlightenment from this Case
1. Preservation of Materials
Paying attention to the daily preservation and collection of materials will make providing evidentiary support much less difficult. Although some enterprises have done plenty of advertisements, they fail to pay attention to the preservation of materials. Once a dispute occurs, it is very difficult for them to find the evidence of advertisements or sales that were formed many years ago. This reality is very unfavorable for the protection of the enterprise’s rights. Thus, paying attention to the preservation of evidence to support that a product is well-known through tracking of the daily activity related to the product will be extremely beneficial to the resolution of a dispute or the enforcement of rights that may occur in the future.
2. Focus on the Product and Package Decoration
The importance of the package and decoration of products shall never be neglected because these elements have become an important commercial mark. Once there are a large number of imitated commodities appearing in the market, the package and decoration will be very likely to lose its particularity and at last do great harm to the right owner’s interests. Thus, it is advisable to monitor imitated commodity in the market and take action promptly if the imitated commodity appears.
II. Case 2: Business Secrecy Infringement
A. Brief Introduction to the Case
Japanese enterprise, Company N, established a subsidiary in China. Company N recruited a Chinese employee, D, in Japan. D was later sent to the Chinese subsidiary to work in the management capacity as a factory director. D resigned and then established his own enterprise, S, that manufactured the same products as Company N. The product performance data indicated in the product catalogues publicized by Company S is completely identical with that of Company N’s product catalogues. Company N suspected D as the source of technique and production for Company S. Therefore, Company N entrusted our firm to take action against D and Company S. In order to obtain evidence, we applied for preservation of evidence to the court with the filing of a lawsuit. Before the service of litigation materials, including a petition, we succeeded in immediately preserving several: production drawings, design drawings and programs in the computers of Company S, and financial statements from the Company S factory. After multiple court hearings and the comparison of drawings and programs between both parties, the court finally decided that the evidence against D and Company S constituted infringement of business secrecy. The court determined that D and Company S must cease the infringement, destroy infringing drawings, and pay damages.
B. Disputed Points of This Case
This case involves business secrecy infringement. The most crucial element of dispute within the case included: whether the production technique and customer list of Company N constituted infringement. In addition, D provided the evidence of a copy of a memo with the seal of Company N on it, so another disputed point was whether this memo constituted Company N’s permission to D.
1. Whether the Use of the Production Technique and Customer
List of Company N Constituted Business Secrecy Infringement
Article 10 of the Anti-unfair Competition Law stipulates that: "Business secrecy", in this Article, means the utilized technical information and business information which is unknown by the public, which may create business interests or profit for its legal owners, and also is maintained secrecy by its legal owners.
There are three constitutive requirements of business secrecy: 1) non-disclosure, 2) practicability and 3) adoption of security measures. Among the above three requirements, non-disclosure will usually be refuted by the defendant, and practicability is usually easily proved. Thus, plaintiff must emphasize the proof of security measures that have been taken.
During the proceedings of this case, the counterpart claims that “As the technique information and operation information of your company had already been disclosed to the public, and your company took no security measure, and therefore the information concerned do not belong to business secrecy.” Additionally, to demonstrate lack of security measures, the counterpart also provided the evidence including witness testimony, patent certificate, the materials sent by Company N to other companies, results of internet searches, etc.
To counter that evidence, Plaintiff provided the license contract, internal company regulation and the confidentiality agreement with employees, etc. To further support the security measures of Company N, the management system with passwords for its technical and operation information was presented.
Finally, the court determined that Company N’s techniques and methods demonstrated practicability and value. Moreover, Company N adopted security measures that met the requirements of “business secrecy” stipulated by the Anti-unfair Competition Law.
However, as for the operation information, including: supplier and customer lists, and the location of the management system, was provided. The court’s determination on whether a customer list constitutes business secrecy is relatively strict. The court often requires proof that great effort was needed to form of a list and that the list shall not contain the information that can be obtained through other available means. Thus, in this case, as the court couldn’t decide whether the operation information including supplier list and customer list met the requirements of business secrecy, the court denied its evidential effect.
2. Whether the Production Technique and Customer List Used by Company S Constituted Infringement of Company N
The determination of infringement is a key point in the litigation of business secrecy infringement. For such cases, it is very difficult to provide evidence to prove this point. In this case, we applied for preservation of evidence to the court at the beginning of trial, the court immediately preserved the documents and programs saved in defendant’s computer and the computers in the factory. Such evidence played a very important role in the trial. The judge was convinced of infringement based on a comparison of the preserved materials with those of Company N.
In addition, we provided evidence to prove D had held important management positions in Company N for a long time and therefore had access to plaintiff’s business secrecy. As a result, the court decided that, “As defendant D in this case held important management positions in N Company for a long time, he had access to and were familiar with plaintiff’s technique secrets and security measures. In addition, seen from the fact ascertained by the investigation that, the manufacturing drawings used by defendant as well as the drawings and technique information saved in its computers were relatively similar to the drawings and relevant technique information. According to the judgment principle of “access plus similarity,” it can be determined that both defendants used plaintiff’s technique secrets.
3. Whether the Memo Constituted Company N’s Permission to D
The counterpart put forward the evidence the memo to prove that his company could freely use Company N’s technique information. This memo stated as follows: in view of D’s great contribution to Company N, Company N will permit D to use its technique in the circumstances that D deems it has capability in place of severance. There is no signature of representative but the seal of N Company on the memo.
We asserted that D forged the memo. However, there is the seal of Company N on the memo, which was very unfavorable for us. Moreover, the presiding judge expressed that the collegial panel held different propositions during the discussion on whether the said memo constitutes a license of the company’s technique secrets. If the memo was regarded as a license, then the counterpart did not constitute infringement. Thus, the viewpoint in respect of the memo also became one of the disputed points.
We insisted that as D held management positions and was entitled to affix the seal randomly, this memo was typed on the blank paper on which the seal had already been affixed. We also requested to identify the formation time of this memo, but the judge indicated that if the seal is genuine, such kind of identification is hard to determine. At the same time, we also provided evidence to prove that when D resigned, the company paid severance separately and was unlikely to permit D to use Company N’s technique secret freely.
Finally, after the discussion within the collegial panel, the court held that, the category and scope of the technique information licensed by plaintiff to defendant was not clearly outlined in this memo. Rather, it simply stated, “Company N will permit D to use its technique in the circumstances that D deems it has capability.” In such circumstance, the principle of good faith shall be used for interpretation. Due to the importance of drawings of technique and materials for manufacturing enterprises, such information is typically not permitted for copy and use by people outside of the company. Otherwise, companies would completely lose their competitive advantages. Thus, “Company N will permit D to use its technique in the circumstances that D deems it has capability” and “the circumstances that D deems it has capability,” was interpreted to mean that permission was still required for use.
C. The Complexities of this Case
1. Designating the Carrier of Business Secrecy
The technique or operation information is intangible, but it is required to designate a tangible carrier of the secret information during the litigation. The information includes: production technique drawings, programs, customers list, etc. The scope of business secrecy claimed by plaintiff must be ascertained through these tangible carriers.
Since the right owners are usually not able to confirm how many business secrets were obtained by the suspect of infringement, they may have concerns when providing further business secrets as evidence. Although the evidence involves business secrecy, all the evidence shall be cross-examined by both parties before they are adopted as the basis for fact ascertainment. That is to say, once plaintiff provides the evidence to a tangible carrier of secret information, defendant will get to see the secret information. Although defendant is required to keep it confidential, there risks of a second disclosure of business secrecy still exist.
Thus, when providing the evidence of business secrecy to a carrier, the plaintiff will often be thrown into a dilemma. In this case, when choosing the evidence of business secrecy carrier, Company N had great concerns and only provided several pieces of drawing paper at the very beginning of proceeding. As a result, although some drawings were supplemented, the scope of the business secrecy claim is limited. Moreover, when we studied defendant’s materials being preserved, we found Company N’s production and application programs. However, before the preservation and discovery of these programs, we didn’t provide the evidence of Company N’s production programs. If we supplement this evidence after finding the materials in computers of Company S, we will be easily refuted by defendant and it is also hard to prove the formation time of these programs.
Therefore, we applied for evidence collection to the court on the ground that it is hard to provide the production programs existing within the machines of Company N’s factory. The judges approved our application for evidence collection after discussion and came to the factory of Company N in person. We presented the production programs being installed within the production equipments of the factory as well as their functions to the judges, and indicated that these programs existed since the operation of these equipments. At last, in the presence of judges, we copied a production program from the control computer of the equipment. The judges finally recognized this part of technique information and ascertained that this technique information was formed prior to use by the defendant.
To sum up, as the Supreme People’s Court made an explicit judicial interpretation prescribing that all evidence shall be cross-examined by both parties, it is almost impossible to avoid the risk of second disclosure through negotiating with judges and keeping defendant away from the evidence submitted by plaintiff. Thus, the plaintiff must try to determine the scope of business secrecy stolen by defendant before filing the lawsuit. Moreover, it is advisable to communicate with the judges and come to an understanding with the judges in respect of the forms of evidence to be provided.
2. Proving Infringement
It is difficult for the plaintiff to prove what kind of production technique was adopted by suspect of infringement. In general, the standard of judgment of “access + similarity - reasonable means” is adopted in the cases of business secrecy infringement. That is to say, if plaintiff can prove that defendant once had access to plaintiff’s business secrecy, and defendant’s products are identical with or similar to plaintiff’s products, and if defendant fails to prove that there is other legal means to obtain relevant technique, then it will be determined that the infringement is constituted. Even so, plaintiff’s burden of proof is still very high. For instance, in order to prove that the products of both parties are similar or identical, expert testimony is often used.
To decide infringement in the present case, the judges considered designating relevant experts, but eventually determined that the infringement was constituted without the need for experts. The reason for this was that the evidence of the counterpart’s production drawings and production programs in the counterpart’s factory, and some drawings and programs that even bear the name of Company N were preserved. Moreover, illustrations of the preserved drawings and hundreds of drawings of Company N were compared and provided as evidence. The explicit comparison and illustration of the preserved programs and thousands of programs of Company N copied was made in the presence of judges. With respect to our comparison and illustration, the counterpart failed to give counterplea, and the judges finally determined that the defendant had used the plaintiff’s production technique secrets based on these comparisons and illustrations.
Thus, in order to overcome this tough issue, application for the preservation of evidence before the lawsuit is filed is a very effective and important measure.
D. Enlightenment from This Case
1. Adopt Security Measures
Adopting security measures is a constitutive requirement of business secrecy. In this case, there were some deficiencies in Company N’s management over business secrecy, such as misplacing production drawings, leaving relevant production materials unlocked, etc., which were challenged by the counterparty many times during the proceeding. We proved that we had adopted security measures through as series of evidence and claims, such as the drawings bearing the characters “controlled document,” some contracts containing confidentiality clauses, etc. Although our claims were finally ascertained by the court, there were twists and turns throughout the process. Thus, it is suggested that enterprises establish a set of sound internal security measures so as to avoid the disclosure of secrets.
2. Improve the Management of Staff and Sign the Non-disclosure Contract with the Employees
In this case, the person suspected of disclosure of secrets was formerly the senior management personnel. During the occupancy of his post, he took advantage of his post to obtain a great deal of secret information regarding the enterprise’s production and operation. Moreover, Company N did not clarify the confidentiality obligation with D when D resigned. Furthermore, D, as Company N’s employee, even was able to acquire a memo agreement from Company N which was nearly regarded as a license. Although this agreement was forged by D who took advantage of his post to affix the seal on it without permission, it also exposed some management problems of Company N. Thus, it is suggested that an enterprise sign a sound confidentiality contract with its employees, especially the employees who involve the secrets. As for those senior management personnel who are going to resign, for the sake of security, it is advisable to sign another confidentiality contract with regard to the confidentiality issue after resignation so as to restrict employees’ acts and keep enough evidence for the disputes which may occur in the future.