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1.1 An overview of the case of Jiaxing Zhonghua Chemical & Shanghai Xinchen New Technology vs. Wanglong Group

On February 19, 2021, China's Supreme People's Court (SPC) awarded CNY 159 million (equal to more than USD 20 million) in a trade secrets lawsuit, the biggest trade secret infringement damages ever granted in China.

Defendant Fu Xianggen ("Fu") began working for Zhonghua Chemical in 1991 and had been the deputy director of the vanillin workshop since 2008, primarily responsible for the repair and maintenance of vanillin production equipment. Defendant Wang Guojun ("Wang") is the true controller of Wanglong Company. Fu approached Wang in early 2010 and offered the vanillin production technology that he had mastered to Wang and Wanglong Company. Fu joined Wanglong Company in May 2010. Wanglong Company then began purchasing equipment and constructing factories to make vanillin.

Zhonghua Chemical and Shanghai Company filed a lawsuit in Zhejiang High People's Court in 2018, claiming that Wanglong Company, Fu, and Wang violated its vanillin technical secret and requesting that the court order the defendants to stop committing acts of infringement and compensate CNY 502 million. The court of first instance ruled that Wanglong Company and Fu had infringed on a portion of the claimed technical secret and ordered the defendants to cease infringement, pay CNY 3 million in economic losses, and pay CNY 500,000 in fair rights maintenance fees (approximately USD 500,000 in total). However, the court of first instance did not order Wang, the actual controller of Wanglong Company, to incur compensatory liability.

The court of second instance ruled that Wanglong Company, Fu, and Wang all infringed on the asserted technical secrets. As a result, the court of second instance overturned the first-instance ruling and ordered the above-mentioned infringers (including Wang) to pay CNY 159 million in compensation to the holders of technical secret rights (including CNY 3.49 million for reasonable rights maintenance costs).

China has steadily created an infrastructure to preserve IPR during the last two decades in pursuit of its own objectives at its current stage of development and in order to meet its international commitments. China has signed various international treaties to safeguard intellectual property and has established and implemented domestic intellectual property legislation. It has developed dedicated intellectual property departments in several courts^[1], as well as enforcement mechanisms and training programs. China joined the World Trade Organization (WTO) in November 2001. Moreover, it has strengthened its legal framework and changed its intellectual property laws and regulations since entering the WTO, in accordance with the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). The TRIPS Agreement is especially important because it establishes rigorous minimum requirements for the protection and enforcement of many types of IPR, such as copyright, patents, and trade secrets. The TRIPS agreement, signed in 1994, was designed to harmonize WTO countries' intellectual property laws by establishing minimal, common criteria^[2]. The ensuing IPR infrastructure in China has been characterised as extensive, if not total, alignment with the IPR regimes in other WTO member nations^[3].

Furthermore, China has built and upgraded its IPR customs enforcement mechanism. As a country transitions from a manufacturing-based economy to one based on the usage and exploitation of information and advanced technology, IPR protection often follows a predictable set of steps^[4]. For instance, it has created a centralized filing system for IPR customs protection. Port customs has the authority to hold imported or exported items that infringe on the filed IPR as long as the IPR proprietors have filed their IPR with the General Administration of Customs. To combat rights infringements and piracy in import and export connections, port customs around China prioritize law enforcement on the import and export of counterfeit and pirated goods. Between 1996 and 2004, Chinese customs uncovered 4,361 cases of right violation in import and export, totalling 630 million yuan^[5].

2.1 Current situation of intellectual property rights protection

China has steadily created an infrastructure to preserve IPR during the last two decades in pursuit of its own objectives at its current stage of development and in order to meet its international commitments. China has signed various international treaties to safeguard intellectual property and has established and implemented domestic intellectual property legislation. It has developed dedicated intellectual property departments in several courts^[1], as well as enforcement mechanisms and training programs. China joined the World Trade Organization (WTO) in November 2001. Moreover, it has strengthened its legal framework and changed its intellectual property laws and regulations since entering the WTO, in accordance with the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). The TRIPS Agreement is especially important because it establishes rigorous minimum requirements for the protection and enforcement of many types of IPR, such as copyright, patents, and trade secrets. The TRIPS agreement, signed in 1994, was designed to harmonize WTO countries' intellectual property laws by establishing minimal, common criteria^[2]. The ensuing IPR infrastructure in China has been characterised as extensive, if not total, alignment with the IPR regimes in other WTO member nations^[3].

Furthermore, China has built and upgraded its IPR customs enforcement mechanism. As a country transitions from a manufacturing-based economy to one based on the usage and exploitation of information and advanced technology, IPR protection often follows a predictable set of steps^[4]. For instance, it has created a centralized filing system for IPR customs protection. Port customs has the authority to hold imported or exported items that infringe on the filed IPR as long as the IPR proprietors have filed their IPR with the General Administration of Customs. To combat rights infringements and piracy in import and export connections, port customs around China prioritize law enforcement on the import and export of counterfeit and pirated goods. Between 1996 and 2004, Chinese customs uncovered 4,361 cases of right violation in import and export, totalling 630 million yuan^[5].

2.2 Challenges faced by intellectual property rights protection

Significant advancements in the protection and enforcement of intellectual property rights provide an incentive for corporations to conduct business in China. However, issues are still remained as the country strives to tighten its regulatory IPR structure.

Enforcement of IPRs in China is often soft and irregular. One cultural contributor to this could come from the Confucist belief that knowledge is not generally considered a form of private property. As Yu (2014)^[1] pointed out, commentators often trace the root of IP-protection issues in China to factors such as Confucian culture, Marxist ideology, censorship, and lack of rule of law (Alford, 1995; Berrell and Wrathall, 2007)^[2] , which are not sufficient to help us understand the rapid development of IP landscape in contemporary China.

Administrative, civil, criminal, and customs layers of intellectual property enforcement exist in China today. Punishments and fines at the most basic levels of enforcement (administrative and civil) are frequently insufficient to deter IPR violations. The burden of proof in criminal trials is extremely high. The grounds for criminal infringements may be vague, and a lack of legal expertise can make enforcing intellectual property infringements in China challenging.

3.2.1 Whether or not the defendants infringed the technical secrets

(A) The technological information provided by the Claimant comprised technology secrets.

Technical secrets, according to Zhonghua Chemical and Shanghai Company, were recorded on device images and flowcharts. First, the knowledge cannot be gathered through public sources or by viewing vanillin products directly. Second, these technologies have the potential to dramatically improve product production efficiency, making them incredibly valuable commercially. Third, for these technologies, Zhonghua Chemical and Shanghai Company have implemented secrecy measures. As a result, the court of second instance determined that the technical data complies with the legislative standards for technological secrets.

(B) The Defendants have made use of the Claimants' technology.

The defendants got blueprints from Zhonghua Chemical and Shanghai Company, constructed the vanillin manufacturing line, carried out large-scale production, and refused to produce evidence that they devised the production method on their own. According to the court of second instance, the defendant had used the Claimants' technology as a result.

3.2.2 How should the defendants compensate?

Based on the amount of vanillin produced and sold by Wanglong Company multiplied by the price of Zhonghua Chemical's vanillin products and profit rate^[1], the court determined that compensatory damages should be calculated using Zhonghua Chemical's vanillin products' sales profit rate, which was CNY 155 million. Furthermore, Zhonghua Chemical's compensatory damages were calculated only from 2011 to the end of 2017, ignoring losses incurred after that date due to the continuous infringement. Punitive damages were not available in Chinese law at the time. As a result, the court rejected the Claimants' request for punitive damages in this case.

In China, the following two statutes largely involve punitive damages. According to the 2019 Anti-Unfair Competition Law, which went into effect on April 23, 2019, punitive damages can be sought in cases of trade secret infringement. According to the Civil Code of the People's Republic of China, which takes effect on January 1, 2021, punitive damages may be sought in cases of IP rights infringement.

In other words, punitive damages apply to any case of trade secret violation after April 23, 2019, and any case of infringement of intellectual property rights after January 1, 2021. After 2018, the right holder may file another case or seek alternative relief for the defendants' continued infringement, according to the court of second instance. As a result, if the defendants continue to infringe after 2018, punitive damages may be levied.^[4]

3.2.3 The punishment of IP rights infringement

The SPC noted that the ruling protected the essential technology of vital businesses, and that it reflected the SPC's increased efforts to combat intentional infringement. This demonstrates the determination of Chinese courts to increase judicial protection for IP rights and to prosecute malicious infringements. Furthermore, the legal representative is made liable for compensation, constituting a direct deterrence to the company's main responsible person.

In 2020, the SPC released a record-breaking nine documents related to intellectual property rights. In the past seven years, it has released eleven documents in this sector. This could demonstrate the SPC's proactive approach.

In March 2021, the SPC issued the Interpretation on the Application of Punitive Damages in the Trial of Civil Cases of IP rights Infringement (), which outlines how the court assesses intentional where the circumstances are serious compensation amount and the multiple of compensation.^[5]

The first element of punitive damages "intentional" is determined in Article 3 of the Interpretation. In paragraph 1, Article 3, the factors that should be considered comprehensively in the determination of "intentional" include the type of infringed intellectual property rights, the status of the rights, and the popularity of the relevant products, as well as the relationship between the defendant and the plaintiff or interested parties.

The other element of punitive damages, "serious circumstances," is determined in Article 4 of the Interpretation. According to paragraph 1 of Article 4, "serious circumstances" must be determined after a thorough examination of the means and times of the infringement, the duration, geographical breadth, scale, and consequences of the infringement, as well as the infringer's activities in the litigation.

3.2.4 Chinese Court view upon the IP rights infringement cases

The Intellectual Property Court of the SPC, which was officially inaugurated on January 1, 2019, was the court of second instance in this case. It is a unified second-instance (appeal) trial institution for issues involving technology-related intellectual property rights. The SPC has established jurisdiction over second-instance proceedings, sometimes known as "leapfrog appeal" cases, which bypass the regular trial stage. The Court was founded by the SPC with the goal of unifying the application of law across the country, i.e., a single adjudicative authority accepts the second instance of connected matters across the country uniformly. The goal of this agreement is to make the SPC's policy of imposing restrictions on infringements of intellectual property rights more effectively applied to cases in local courts, thus assisting China's present trend of strengthening IP protection. By the end of 2020, the SPC's Intellectual Property Court will have received 5,121 cases and resolved 4,220, for an 82 percent closing rate. In 2020, 2,787 cases were completed, an increase of 1,354 cases over 2019 and an almost 95 percent year-over-year increase.