Judicial Application of Punitive Factors in Discretionary Compensation - A Case of Malicious and Repeated Infringement of Trade Secrets by Foreign Nationals

In trade secret infringement disputes, requiring the infringer to perform a period of non-use obligations is an important measure to prevent the continuous damage to the enterprise's competitive advantages and timely stop losses, which the infringer must abide by without violation. When determining the amount of compensation, factors such as the infringer's disregard for the non-use obligations specified in the effective judgment of the previous case, continued infringement of trade secrets by changing the business entity, obvious subjective malicious intent, and serious damage to the right holder shall be considered. Even if the conditions for applying punitive damages are not met, punitive factors shall be taken into account in discretionary compensation to significantly increase the compensation amount, so as to both compensate the right holder for losses and demonstrate a judicial attitude of severely cracking down on repeated infringements that disregard previous judgments.

The defendants Matsui (foreign national) and Zhang once worked for the plaintiff Zhu Co., Ltd., and had obligations to keep confidential the plaintiff's customer lists, procurement data, and other information. While still employed by the plaintiff, the above-mentioned defendants planned to establish a new company engaging in the same business as the plaintiff. In July 2018, the defendant Zhu Co., Ltd. (note: the name may be a translation reference; the original text uses the same character "筑" as the plaintiff, and the specific distinction shall be subject to the original case) was established, with the defendant Gong as its sole shareholder and legal representative. Investigation showed that Zhu Co., Ltd. was actually controlled by Matsui, who, together with Zhang, disclosed the operating information of upstream and downstream customers they had access to during their employment with the plaintiff to Zhu Co., Ltd., and conducted transactions with customers in the name of Zhu Co., Ltd.

In April 2020, the Pudong Court made a judgment in the previous case, ordering Zhu Co., Ltd., Matsui, and Zhang to stop infringing the plaintiff's trade secrets within two years from the date of the judgment's effectiveness and compensate for economic losses of over 1.1 million yuan.

It was further found that Matsui registered YIQIYI Co., Ltd. in July 2019, having others act as nominal shareholders and legal representatives, while he, as the actual controller, instructed Zhang and Gong to continue using the previously obtained customer information to conduct transactions with upstream and downstream customers after the previous judgment took effect, in the name of YIQIYI Co., Ltd. According to the obtained details of the company's purchase and sales, the transaction volume with upstream and downstream customers from December 2019 to June 2023 reached over 11.7 million yuan and 21.7 million yuan respectively.

Based on this, the plaintiff requested the court to order the defendants to stop infringing the trade secrets and jointly compensate for economic losses of 5 million yuan and reasonable expenses of 455,278.40 yuan for rights protection.

After trial, the Pudong Court held that, in accordance with the effective judgment of the previous case, Matsui and others were obligated to stop infringing the plaintiff's trade secrets within two years. However, to evade the civil liabilities determined by the previous judgment, Matsui registered YIQIYI Co., Ltd. separately, using others as nominal shareholders and legal representatives, actually controlling the company, and instructing Zhang and Gong to continue using the previously obtained customer information to conduct transactions with the plaintiff's upstream and downstream customers (as determined in the previous judgment) in the name of YIQIYI Co., Ltd., showing obvious subjective malicious intent in infringement.

The infringing acts of Matsui and others have caused a large loss of the plaintiff's downstream customers, improperly deprived the plaintiff of the competitive advantages accumulated through legal operations, resulting in serious infringement consequences. Considering factors such as repeated infringement, obvious subjective fault, malicious conduct, serious consequences, as well as the transaction amount in this case and the industry profit rate evidenced by both parties, the court ruled that YIQIYI Co., Ltd., Matsui, Zhang, and Gong jointly compensate Zhu Co., Ltd. for economic losses of 3 million yuan and reasonable expenses of 120,000 yuan.

Neither the plaintiff nor the defendants appealed after the first-instance judgment, and the judgment has now taken effect.

This case refers to the provision in the Several Provisions of Pudong New Area on Establishing a High-Level Intellectual Property Protection System that repeated infringement of trade secrets may be subject to heavier penalties. By comprehensively considering the punitive factors in the infringer's subjective fault, the nature, circumstances, and consequences of the infringement, the compensation amount was significantly increased to punish the defendant's repeated infringement that disregarded the previous judgment.

As the first unfair competition dispute accepted by the Pudong Court involving repeated trade secret infringement by foreign nationals, the judgment demonstrates the Pudong Court's determination to actively implement the principle of "strict protection" of intellectual property, maintain an orderly competitive order, and safeguard a sound business environment. The case, tried with reference to the regulations of Pudong New Area, has accumulated experience and provided a sample for better application of Pudong New Area regulations in future judicial practice.

Source: Shanghai Pudong Court