Article source: Official website of Business School magazine, a think tank of China Economic Media.

In modern society, trade secrets play an increasingly important role in the survival and development of a company. In cases of infringement of trade secrets, the concepts of "secret point" and "secret point separation" continue to emerge. This article examines relevant provisions in legislative documents, starting from cases of trade secret infringement litigation to explore the concept of secret point, clarify the scope of secret point, and then analyze its application in judicial practice, mainly to help rights holders clarify the scope of trade secret protection to support their litigation claims, and consider the factor of secret point separation when determining the amount of damages.

1、 Problem posing

In the context of the new round of technological revolution and economic globalization, trade secrets, as intangible assets of enterprises, are one of their core competitiveness. The signing of the China US trade agreement has brought more attention to the protection of intellectual property rights, especially trade secrets. The protection of trade secrets is particularly important in terms of compensation for damages, which is also a difficult point in practice. The main function of tort liability is restoration, with the aim of putting the victim back in the same position as if the damage had not occurred. This also determines that the basic principle of compensation for damages is the principle of comprehensive compensation, which means that the scope of compensation is based on the victim's loss. However, due to the unclear nature of trade secrets, the secrecy of their usage, and the difficulty in identifying the consequences of infringement, the failure rate of lawsuits involving infringement of trade secrets is high, and the amount of damages is very difficult to determine. In practice, the concepts of "secret points" and "secret points" are increasingly appearing in cases to clarify the scope of protection for trade secrets, and to use the theory of secret point segmentation to increase certainty in compensation for trade secret infringement damages.

2、 Investigation of the current legislative situation

At present, the concept of confidentiality and confidentiality separation has not been clearly defined in China's legislation. Article 32 of the Anti Unfair Competition Law stipulates that in civil litigation for infringement of trade secrets, the holder of trade secret rights needs to provide preliminary evidence to prove the existence of trade secrets and their identity with the commercial information used by the infringer. Article 2.3 of the "Guidelines for the Trial of Disputes over Infringement of Trade Secrets by Jiangsu Provincial High People's Court (2010)" states: "The determination of the scope of trade secrets. In the trial of trade secret cases, the right holder must first clarify the scope of their trade secrets - that is, clarify the secret point." This guideline equates the scope of trade secrets to the secret point.   However, in the latest Judicial Interpretation on Disputes over Infringement of Trade Secrets released by the Supreme People's Court in August 2020, this provision was deleted. Therefore, currently only local documents explicitly use the concept of secret points, and there is no unified normative document at the national level to make provisions.

The author believes that the deletion is partly due to the fact that the inherent nature of trade secrets still needs to be debated and clarified. If the Supreme People's Court directly stipulates that the scope of trade secrets must be clarified first, it may be suspected of classifying trade secrets as absolute rights. Secondly, the definition and division of secret points in practice mainly consider the factor of secret point division when determining the amount of damages [4]. This is only a specific application of the limitation of causal relationship on damages compensation in civil cases of infringement of trade secrets. Therefore, it should be considered in practice, and not all cases will involve secret point division. If infringement profits or statutory compensation are applied, the factor of secret point division does not need to be considered. Finally, the Anti Unfair Competition Law has stipulated that after the holder of trade secret rights provides preliminary evidence, the infringer shall prove that the trade secret claimed by the holder does not meet the constitutive conditions or that there is no infringement of trade secrets. The provision of transferring the burden of proof in this way is sufficient to remedy the rights holder and effectively respond to the previous plaintiff's failure to prove the establishment of trade secrets and clarify their scope. So currently, the author also agrees that confidentiality points and related issues can be temporarily excluded from judicial interpretations. However, with further discussion and development in practice and theory, they can be considered for inclusion in the future when they become more mature.

3、 Clarifying and Defining the Scope of Trade Secrets

1. The concept of dense points

In civil infringement disputes involving the infringement of trade secrets, the current consensus in judicial practice is to require the plaintiff, that is, the holder of trade secret rights, to first provide preliminary evidence to delineate the scope of the trade secret object they are seeking protection for, also known as the secret point or secret point. In fact, the concept of "secret point" is not a legal concept, but a common name in practice. The Anti Unfair Competition Law mainly stipulates three elements for the composition of trade secrets: secrecy, value, and confidentiality. Confidentiality refers to the fact that relevant technical and business information is "not widely known and easily accessible to relevant personnel in the field", that is, "not known to the public". The secret point is the information mentioned above that is not known to the public. Specifically, the secret points of technical secret cases refer to specific technical solutions or technical information; The secret point of a business secret case refers to special customer depth information and other business information that is different from relevant public knowledge information. Taking technical secrets as an example, technical secrets include product formulas, process flows, technical secrets, designs, drawings (including sketches), experimental data and records, computer programs, etc. After removing the publicly known and patented technologies from the above technical information, what remains is the technical information that trade secrets need to protect [7].

The so-called "secret point segmentation" refers to the situation where the perpetrator illegally uses part of the secret point technology in the trade secret in the crime of infringing on trade secrets, resulting in the partial or complete loss of the value of the entire trade secret. In real commercial production, the development and formation of trade secrets are also phased and step-by-step, and the various components that make up trade secrets may be completely independent of each other. Sometimes infringers only illegally use some secret points, and in real production, they complete their entire production chain through independent research and development; Alternatively, the infringer may have only borrowed a portion of the secret points to complete market transactions that compete with the rights holder. So in practice, more and more cases are adopting a "secret point division" when determining the amount of damages, in order to reasonably determine the amount of "actual losses" and maximize fairness and justice.

2. Confidential points must meet the constitutive requirements of trade secrets

(1) Confidentiality

The process of defining the scope of confidential points is also a process of judging the confidentiality requirements, and the main task is to select the non-public part from all relevant information as the basis for claiming rights. When the court makes a determination, in addition to the appraisal opinion issued by the appraisal institution on whether the technical information is "known to the public", it also examines whether the technical information is generally known and easily accessible to the relevant public, and whether the relevant public can directly obtain the technical information in the product by observing its appearance. In the "Dispute over Infringement of Trade Secrets between Gangdong Technology Company and Rui'an Technology Company", the court held that the technical information involved in the main board circuit board dynamic mirror closed-loop control drive circuit of an "infrared spectrometer" developed by Gangdong Technology Company has certain technical complexity and concealment. After appraisal, the technical information has not been disclosed through other literature materials. Although a certain company in the United States also produces similar "infrared spectrometers", external observation and non-destructive disassembly based solely on product appearance cannot and cannot obtain relevant technical information. Obtaining technical information from products already sold in the market still requires extensive technical testing and parameter analysis, which does not belong to the situation where the relevant public can directly obtain it by observing the product. Taking into account the appraisal conclusion of the appraisal institution and the difficulty of obtaining technical information through observing the products of outsiders in the case, it is determined that the technical information in the "infrared spectrometer" developed by Gangdong Technology Company is not known to the public.

(2) Value and Confidentiality

For the argument of value and confidentiality, the accuracy requirement is not so high, and it is not necessary to only focus on the claimed secret point itself. On the one hand, the carrier of the secret point can be the object. For example, in the case of (2012) Shen Fa Zhi Min Chu Zi No. 687, the plaintiff claimed that the secret point was a part of the protocol, algorithm, and certain files claimed by the algorithm in a certain software. The court believed that the evidence provided by the plaintiff "showed that the involved software was practical, and the sale of the involved software brought economic benefits to the plaintiff, which met the value requirement". For example, in the case of (2018) Hu 73 Min Chu 199, the court considered the important factor of "the technical information involved in the case is reflected in the (bidding) PPT, which is stored on the plaintiff's Nut Cloud server and is controlled by the confidentiality and security of the server, making it difficult for unauthorized members of the public to access the PPT involved", and believed that the plaintiff had taken reasonable and appropriate confidentiality measures. On the other hand, the argument is based on the overall information where the secret point is located as a component. In the case of (2017) Chuan 01 Min Chu 1005, the plaintiff claimed and was recognized by the court as the secret point of "the technical features and combinations of the assembly, external dimensions, tolerances, material selection, heat treatment, and non-destructive testing of several (not all) components and parts of the mechanical and hydraulic systems of the 40 top drive production technology scheme, as well as the external dimensions, tolerance fit, material selection, and other technical features and combinations of individual components and parts of the motor part". Therefore, when the claimed secret point is a specific technical feature, the commercial value and confidentiality of the technical feature itself can be demonstrated, and the value and confidentiality of the claimed secret point can also be demonstrated by explaining the overall value and confidentiality of the technical solution containing the technical feature, or by taking reasonable confidentiality measures for the drawings carrying the technical solution.

(3) The secret points should be clear and specific

To achieve a certain degree of expansion, the argument for confidentiality points also needs to have corresponding specific and clear confidentiality points when expanding to the carrier of trade secrets. For example, in practice, the right holder usually uses the confidentiality agreement and internal confidentiality system signed with the counterparty to demonstrate the confidentiality requirements. However, if the right holder's confidentiality system and agreement are only general and do not specify the specific confidential information and scope, it generally cannot be considered that the right holder has taken reasonable confidentiality measures. In the case of (2016) Zhe 0110 Min Chu No. 17163, the court held that the confidentiality scope in the "Technical Confidentiality Agreement" formulated and implemented by the plaintiff and the confidentiality agreement signed with the defendant only includes the general provisions of the plaintiff's "new projects, new designs, special production processes and patented technologies; production processes, process drawings, operating methods...", which cannot form a clear correspondence with the confidential points claimed by the plaintiff in this case. The defendant cannot clearly recognize that the secret point claimed by the plaintiff in this case is a technical secret for which they have a confidentiality obligation due to these agreements.

How to choose secret points in litigation

In judicial practice, the concept of confidentiality was first proposed in the criminal offense of trade secrets, and later gradually came up in the field of civil infringement of trade secrets. Trial practice has shown that in most cases, plaintiffs do not clearly define the specific content, carrier, and scope of their trade secrets when filing lawsuits, nor do they actively separate trade secrets from related public information. The trade secrets are too broad, non-specific, and even ambiguous, making it difficult to fix the focus of disputes in the case, making it difficult for the defendant to organize effective defenses, making it difficult to clarify the appraisal content, and making it difficult for the trial to proceed smoothly. For example, in the Supreme People's Court (2020) case of Supreme People's Court Zhimin Zhong No. 385, the original court rejected Shantou Ocean Company's lawsuit because it failed to clarify and fix the specific secret points of the technology it claimed to be involved in the case, and found that the facts and reasons on which Shantou Ocean Company filed the lawsuit were not clear and specific, which did not meet the conditions for prosecution. Shantou Ocean Company should further clarify and fix the creativity and secret points of the part of the complete process involved in the technology it claims to be involved in, which is different from publicly known technology. The creativity and secret points of proprietary equipment that distinguishes it from general equipment also need to be clarified and fixed. Secret points are actually non-public information (i.e. trade secrets), which are concretized in judicial practice as related formulas, processes, equipment, and other parts. They are the basis for the rights holder to claim their rights. Only by clarifying the content and scope of the secret points can it be determined whether they are "substantially similar" to the infringing object and thus judge the existence of infringement. Therefore, the selection and division of confidential points are crucial for the rights holder of trade secrets. If the claimed confidential points are too small and each small step is treated as a confidential point, ignoring the overall relevance, it may affect the efficiency of litigation and be a significant burden of proof for oneself; However, if the classification of the secret points is too large, it may be difficult to obtain the support of the court in the determination of "substantial similarity", and it is likely to lose the lawsuit. Therefore, the plaintiff can reasonably choose to claim or abandon some secret points in the lawsuit. In the "Vanillin Case", Jiaxing Zhonghua Chemical Company and Shanghai Xinchen Company explicitly waived their claims regarding the process part of the secret points. 3. Separation process and equipment for crude vanillin

4、 Determination of Compensation Amount for Infringement of Trade Secrets

1. The choice of "dense point segmentation" theory

Secret points play a certain role in determining the amount of compensation for trade secret infringement in judicial practice, mainly involving the "secret point segmentation" theory mentioned earlier. However, judicial practice has never formed a systematic and comprehensive trial logic for the issue of secret point segmentation. In practice, it is common for defendants or defense lawyers to argue that the perpetrator did not infringe upon all trade secrets and should not use the full amount of sales losses suffered by the rights holder as a defense for the amount involved in the case. However, the vast majority of courts do not recognize this. In practice, there is also controversy over whether to consider the segmentation of secret points. Some argue that it should not be separated because there are connections between secret points, and trade secrets play a role as a whole; The opposite viewpoint holds that the factors of dense point segmentation should be considered, and the elements of infringement should take into account causal relationships; The compromise viewpoint holds that it is necessary to consider the division of confidential points based on different calculation criteria for damages. If it is calculated based on profit loss, it needs to be considered, but not based on infringement profit. Even if it is deemed acceptable, the determination of the division ratio is not uniform. In practice, there are mainly three methods: profit method, value method, and quantity method. The profit method refers to the proportion of profits generated by the secret points involved in the entire trade secret, while the value method is based on the proportion of the value of each secret point to the entire trade secret, and the quantity method is based on the proportion of the secret points involved in the case to the number of secret points in the entire trade secret. The author believes that the segmentation of secret points is actually a way to seek a more accurate determination of the amount of compensation for damages, which is certainly valid within the theoretical framework of tort law, because in terms of the requirement of causality, tort liability law and criminal law are consistent: people are only responsible for the consequences caused by their actions. Dense point segmentation is beneficial for analyzing the behavior patterns of individuals in detail, and considering the value of each dense point and the contribution rate of the behavior that infringes on each dense point to the damage consequences, in order to scientifically and reasonably determine the amount of compensation. The Tort Liability Law is based on the principle of compensatory damages, and when determining the amount of damages, the limitation of the scope of damages should be adhered to based on the causal relationship. Therefore, the use of point separation should also serve to better clarify the causal relationship between the behavior and the consequences of the damage. The value of the point itself should not replace the consequences caused by the behavior, and point separation should not be used as a prerequisite for argumentation and reasoning.

2. Practical application of "dense point segmentation"

In real commercial production, in addition to completely copying and using the trade secret technology of the rights holder for production, there are also cases where the perpetrator violates confidentiality agreements or illegally obtains the technical secrets of others, and conducts self research and development, reverse engineering, or utilizes publicly known technical information, and uses and discloses the combined technology. If the technical requirements of the rights holder meet the requirements of trade secrets, they can be classified into technology obtained through infringement and technology obtained through legitimate sources (such as self-developed, reverse engineering, etc.) based on the different ways in which the actor obtained the technical information. For example, in the case of infringement of trade secrets by companies such as Yitesi and Guo, the involved technical information is a combination of publicly known and non-public technology components. If the loss of a secret point segmentation case should also be calculated as the full economic loss of the rights holder? Or is it determined based on the value of each secret point that has been violated? There was a disagreement between the first and second trials in this case. The court believes that it cannot be generalized whether the defendant's profit from infringement can be calculated based on the profit of the entire production line when the defendant unit and defendant have infringed on the technical secrets of two components. In this case, the first instance judgment calculated the losses of the rights holder based on the profits of the entire production line, while the second instance court focused on examining whether the two components protected as trade secrets had independent value. Due to the fact that the above two components can be priced separately, the second instance court ultimately decided to use them as the calculation objects and calculate the infringer's profit by multiplying their profit by the number of production lines.

  Firstly, the trade secrets involved in the case are database files, which are only a part of the software and their value is also only a part of the software value. Secondly, database files play a certain role in management system software, and database design is of great significance for meeting the requirements of management system software. Fourthly, the database tables in the trade secrets involved account for a relatively high proportion in the software of a certain legitimate company, while the stored procedures and functions account for a relatively low proportion in the software of a certain legitimate company, and the trade secrets involved account for a relatively low proportion in the software sold by a certain company.

5、 Conclusion

Trade secrets are a product of market competition. In the increasingly fierce business war, the trade secrets that merchants invest a lot of energy and financial resources in developing often determine their survival and are crucial. So we also see that there are more and more cases of infringement of trade secrets in practice, and the behavior is becoming more and more complex. The infringement litigation of trade secrets has its own characteristics. The first and foremost is the clarification and definition of the scope of trade secrets, which also brings difficulties in determining the amount of damages. The emergence of "secret points" and "secret point division" also demonstrates the active efforts made by plaintiffs and defendants in practice to protect their own rights and interests. For the plaintiff, it is reasonable to choose and divide the burden of proof and compensation for the relationship between the secret points. For the defendant, the division of the secret points also helps them avoid bearing excessive compensation amounts. At the same time, the court seems to be inclined to apply secret points to reduce the burden of reasoning and argumentation. However, the attention and reflection on the concept of secret points have just begun. It is necessary to further explore whether it is necessary to add the concept of secret points, the rationality behind it, and whether it is necessary to consider how to determine the standard for dividing secret points when determining the amount of compensation for damages.

References and comments (slide down to view)

[1] Zeng Shixiong: "Principles of the Law on Liability for Damages", China University of Political Science and Law Press, 2001 edition, page 7.
[2] Huang Wushuang: "Theoretical Basis and Attribute Evolution of Trade Secrets", published in the 5th issue of Intellectual Property in 2021, page 4.
[3] Article 24: If technical information is part of the technical solution of the rights holder or if the product infringing on trade secrets is a component of another product, the amount of compensation for infringement shall be reasonably determined based on the proportion and function of the infringed technical information in the entire technical solution, or the value of the infringing product itself and its proportion and function in realizing the entire profit of the finished product. If trade secrets are business information, the amount of compensation for infringement shall be reasonably determined based on factors such as the role of the business information in the profit obtained from the infringement of trade secrets
[4] Nie Wenfeng and Jinhua Jie: "Determination of the Amount Involved in the Separation of Confidential Points in the Crime of Infringement of Trade Secrets", published in the 20th issue of "Application of Law" in 2017, page 52.
[5] Article 32 of the Anti Unfair Competition Law: "In civil trial proceedings for infringement of trade secrets, if the holder of the right to trade secrets provides preliminary evidence to prove that they have taken confidentiality measures against the claimed trade secrets and reasonably indicate that the trade secrets have been infringed, the suspected infringer shall prove that the trade secrets claimed by the right holder do not belong to the trade secrets stipulated in this Law.
If the holder of the right to trade secrets provides preliminary evidence reasonably indicating that the trade secrets have been infringed, and provides one of the following evidence, the suspected infringer shall prove that they have not engaged in any infringement of the trade secrets:
[6] In case No. 1667 of the Supreme People's Court (2020), the court divided the technical secrets claimed by the plaintiff into six secret points: "The technical secrets claimed by Jiaxing Zhonghua Chemical Company and Shanghai Xinchen Company include six secret points: 1. drawings related to the condensation tower,... 2. drawings related to the oxidation unit,... 3. crude vanillin separation process and equipment,... 4. drawings related to the distillation unit,... 5. guaiacol recovery process and corresponding equipment,... 6. process flow chart of the vanillin synthesis workshop
[7] Luo Yun: "Secret Points and Burden of Evidence in Civil Infringement Cases of Trade Secrets", published in China Lawyer, Vol. 4, 2021, p. 65.
[8] Nie Wenfeng and Jinhua Jie: "Determination of the Amount Involved in the Separation of Confidential Points in the Crime of Infringement of Trade Secrets", published in the 20th issue of "Application of Law" in 2017, page 51.
[9] Refer to the "Guidelines for the Trial of Disputes over Infringement of Trade Secrets by Jiangsu Provincial High People's Court".
[10] Same note 3.
[11] Nie Wenfeng and Jinhua Jie: "Determination of the Amount Involved in the Separation of Confidential Points in the Crime of Infringement of Trade Secrets", published in the 20th issue of "Application of Law" in 2017, page 53.
[12] According to the criminal judgment of Shanghai First Intermediate People's Court (2011) Hu Yi Zhong Xing Zhong Zi No. 552, after examination and prosecution by the procuratorate and trial by the court, the technical information ultimately protected as a trade secret only involves the relevant technical requirements of the two components of the dehydroxylation furnace and plasma burner.
[13] Refer to the Civil Judgment No. 1101 of the Supreme People's Court (2020).
[14] Zhang Beibei and Liu Yinxi, "Several Issues on Compensation for Trade Secret Infringement", published in the Journal of Inner Mongolia Normal University (Philosophy and Social Sciences Edition), Volume 48, Issue 2, March 2019, page 124.