Supreme People’s Court clarifies jurisdiction for online disputes and how to determine commercial value amid stronger focus on trade secret protection 

Over the last three years, the courts have placed a greater emphasis on trade secret protection in China. In Shenzhen Huaer v Zhejiang Panxing, the Supreme People’s Court made a second-instance judgment, determining that technical secrets were infringed and awarding damages of 5 million yuan (approximately US$700,000). The effects of this ruling on trade secret strategy in China are still being felt today.

Case background 

The plaintiff, Shenzhen Huaer, licensed technical secrets to Zhejiang Panxing for use in a contract signed on 18 October 2018, through which the defendant obtained the source code of the software. On 19 April 2019, the plaintiff learned through customer complaints that this source code had been publicly disclosed by user Luxin212121 on GitHub on 31 December 2018. The plaintiff subsequently launched a series of enforcement actions and ultimately succeeded.

Impact of this case on China’s trade secret landscape

From a high-level perspective, the significance of trade secrets cases is reflected in three aspects of this dispute.

First, plaintiffs can choose to file a lawsuit at their home court in certain trade secret infringement cases. The court accepted that, in cases where trade secret infringement occurs online, the plaintiff has the right to bring the case to its home court and there is no need to go to the infringer’s home court. 

Second, the rules for evidence in trade secret cases are optimised for infringing behaviour, and can be determined based on strength of evidence and common sense. Since the illegal disclosure of the software’s source code occurred on GitHub, there was no direct evidence to prove that the user was an employee of the defendant. The defendant itself had no motive for disclosing this information, so it was difficult to attribute liability to Zhejiang Panxing.

For this reason, the plaintiff provided substantive evidence to prove that the disclosed source code contained a large amount of information indicating the defendant, such as its domain name, official website link, office address and customer service phone number. At the same time, the plaintiff also proved that the code contained a lot of parameter information that was only controlled by the defendant. The defendant failed to provide a reasonable explanation for these claims. 

Third, the court awarded damages of 5 million yuan, which is much higher than average. Since there is not yet a commonly accepted approach to evaluating trade secrets, the Supreme Court decided that a commercial value appraisal – made by an appraisal agency – is one way to determine the commercial value of intellectual property. If it is inappropriate to directly determine the technical secret’s commercial value with the appraisal, based on evidence provided, it could instead be determined by comprehensively considering factors such as the R&D cost of the secret, the benefits of implementing it, the available benefits and the timeframe within which the party can maintain a competitive advantage. This can be used to determine damages.

The plaintiff's R&D expenses for developing the software included those from 2017 to 2018. According to the audit report, the R&D expenses from January to the end of October 2018 alone were nearly 3.6 million yuan. The plaintiff obtained operating profits from the software through licensing. The sales revenue of the software in 2017 was over 510,000 yuan, and by 2018 the sales revenue had increased to over 11.4 million yuan. After some of the source code was disclosed on GitHub, the sales revenue of the software declined to 5.3 million yuan in 2019. 

It has not been ruled out that factors such as commercial operation, technological changes and peer competition could have an impact. However, the public disclosure of the software’s source code will inevitably lead to a depreciation of its commercial value, causing serious losses for the rights holders. At the same time, there are multiple types of similar software in the market – especially after the official WeChat app-development channel was provided by WeChat in 2020. Therefore, the timeframe during which the software can maintain a competitive advantage and the expected licensing revenue will inevitably be affected.

Key findings

In summary, the Supreme People’s Court has determined that the commercial value of the trade secrets in this case should be higher than the maximum statutory compensation limit of 3 million yuan that was stipulated in 2017. The court has set the value at 5 million yuan.