China’s No. 3 Intermediate People’s Court of Tianjin Municipality in March ruled in favor of IHC Dredging Technology (Tianjin) Co., Ltd. (艾曲西疏浚技术装备（天津）有限公司), Royal IHC’s Chinese unit, in an action brought by it against its ex-employee Zhao for misappropriating its trade secrets. The defendant was sentenced to 10 months in prison and a criminal fine of 60,000 yuan ($9,400), an amount the court determined to equal a royalty payment due to the plaintiff if and when the misappropriated confidential information is legally licensed.
The methodology underpinning the court’s award of damages in this case has set a precedent for damages assessment in trade secret misappropriation lawsuits in China. This adopted practice has long been commonplace in many other jurisdictions worldwide. China’s Supreme People's Court on September 12, 2020 issued the Judicial Interpretation (JI) of the Supreme People’s Court and Supreme People's Procuratorate on Certain Issues Concerning the Specific Application of Law in Handling Criminal Cases of Infringement of Intellectual Property Rights (III) (《最高人民法院、最高人民检察院关于办理侵犯知识产权刑事案件具体应用法律若干问题的解释（三）》), which came into effect two days later. Article 5 Paragraph 1 of the JI provides that the amount of a trade secrete owner’s actual loss can be computed to equal a reasonable license fee of the trade secret if a defendant illegally obtains, uses, or enables others to use the trade secret that has not been disclosed.
With the JI in place, this case has become China’s first one ever where this method of assessing economic values of trade secrets and calculating monetary damages to award has applied. This method, defined as relief from royalty, is among the most common ones to value trade secrets using a market approach. This method relies on guideline license transaction data of trade secrets. The royalty rate is generally applied to the trade secret owner’s revenue or financial metric to estimate the trade secret value. This method is considered a hybrid market and income approach.
Royal IHC is a Dutch shipbuilding company with headquarters in Kinderdijk. It focuses on the development, design, and construction of ships for the dredging and offshore industries. Royal IHC is one of the major stakeholders in global dredging equipment industry, with competitors being American Marine & Machinery Co. (AMMCO), CCCC Tianjin Dredging Co., Ltd. (TDC), Dredging International N.V., and Jan De Nul Group. The company established its Tianjin municipality, China-based subsidiary in 1998.
The complaint said Zhao, as a former employee working in IHC Tianjin’s sales department, secretively downloaded the company’s critical technical data like highly valued tolerance parameters remaining confidential and unpublished to an external hard disk and took it with him when quitting the job. The company reported the discovery of his trade secrets theft and accused him of breaching the non-disclosure agreement (NDA) by which he was bound.Zhao was charged with both civil and criminal liability.