In a second instance ruling, China’s Supreme People’s Court (SPC) has ordered electric vehicle (EV) manufacturer WM Motor Technology Group Co., Ltd (WM Motor) to pay Zhejiang Geely Holding Group Co., Ltd (Geely) RMB640 million (~USD90 million) for malicious theft of trade secrets. This decision marks the largest compensation ever awarded for an IP infringement lawsuit in China.
Sparks fly in the world of EVs
Tensions arose between WM Motor and Geely when nearly 40 of Geely’s senior management began departing Geely to work for WM Motor between 2016 and 2018.
Geely accused WM Motor of using chassis technology, drawings and digital models, acquired by their previous employees in the course of their employment, as the basis for 12 applications for Chinese utility model patents. These applications featured several of Geely’s previous employees as inventors. Geely also alleged that WM Motors used their IP as a springboard to accelerate WM Motor’s entry into the lucrative EV market, thereby diluting Geely’s market share.
In the first instance, the Shanghai High People’s Court ordered WM Motor to pay RMB5 million (~USD700 thousand) in economic losses and RMB2 million (~USD280 thousand) in reasonable expenses. Both parties appealed this first instance decision to the SPC.
In their second instance ruling, the SPC found that WM Motor had engaged in an organised and planned effort, using improper means, to systematically poach talent and technological resources from Geely, which eventually lead to the misappropriation of Geely’s trade secrets.
Importantly, in arriving at the compensation, which represents approximately 9 times the compensation awarded at first instance, the SPC took into account two factors that the Shanghai High People’s Court did not.
Firstly, the SPC calculated the time period over which the punitive damages should be calculated based on China’s newly amended Anti-Unfair Competition Law, which came into force in April 2019. Prior to these amendments, punitive damages could not be applied, only compensatory damages. However, after April 2019, profit derived from the infringing activities could be used as both the basis for compensatory damage amount and for calculating punitive damages. This allowed the SPC to issue substantially higher damages compared to the court at first instance.
Secondly, the SPC calculated the compensation using data from WM Motor’s prospectus, which indicated that WM Motor had earned RMB200 million (~USD28 million) as a result of their misappropriation of Geely’s IP. In contrast, these earnings were not considered by the Shanghai High People’s Court in the first instance.
According to Chapter IV, Article 17 of China’s anti-unfair competition law, “[t]he amount of damages to a business entity caused by an act of unfair competition of another shall be determined based on its actual loss caused by the infringement” and “[i]f the business entity has maliciously infringed upon the trade secret with flagrant circumstances, the amount of damages shall be no less than one time but no more than five times of the amount determined by the aforementioned method“. The SPC elected to multiply the damages by a factor of 2 in this instance.
Ultimately, it seems that the alleged malicious intent behind WM Motor’s actions, combined with the sizeable monetary benefit accrued after April 2019, lead to the historic award of compensation.
What does this signal for infringement proceedings in China?
This decision, in combination with the recent amendments to China’s Anti-Unfair Competition Law, is a strong indication that China may be taking a tougher stance on misuse of IP within its borders.
Takeaways
Those conducting business in China should consider the following.
- Ensuring that your trade secrets are properly protected, including controlling access to them and confirming they meet the criteria to be considered trade secrets under Chinese law.
- Strengthening contracts with employees to clearly define the handling of trade secrets and to outline their post-employment obligations.
- Conducting regular surveillance of known competitors to monitor and track their formal IP protection activities.
- Integrating administrative and civil infringement proceedings in China into your overall IP strategy.
If you would like any further information regarding this decision, or advice on protecting your intellectual property or bringing an IP enforcement action in China, please contact Jack Shan (JShan@dcc.com) or Rory Campbell (RCampbell@dcc.com).