This article illustrates how one can prevent knockoff brands from infringing upon technical secrets. It is based on the actual experiences of Lifang & Partners.

Case study

Our client (company) was involved in the research, development and manufacture of hightech products. The company’s products were launched on the open market and attracted much attention, along with a significant market share. Several of the company’s employees resigned (former employees) and embarked upon research, development and the manufacture high-tech products similar to those of the company. In other words, they started to make knockoffs.

The former employees had taken technical secrets with them, when they left the company. Those technical secrets included:

1. Software source codes;

2. Objective programs;

3. Hardware schematics;

4. Design documents; 

5. Drawings; and

6. Other miscellaneous things.

With all of the information that the former employees had taken, they were able to rapidly complete research and development and proceed to prototype build production. They would quickly be able to begin mass production.

The company wanted the infringement to cease immediately, so as to protect their technical secrets, their general business interests and to avoid disturbances to the market order. In the hope of protecting their business, they consulted a number of professionals, all of whom failed to provide them with bespoke solutions that matched their requirements. A major problem that most professionals could not overcome was that the knockoff products had not been publically launched. This meant that it was impossible to purchase infringing devices.

Eventually, they were introduced to Lifang & Partners. We were able to provide them with a bespoke solution and assist them with obtaining the evidence that they required in order to prove infringement.

Because of their business needs and the types of evidence required, time was a priority for the company and normal litigation practices would not fulfil their specific needs. Because of this, Lifang & Partners was forced to abandoned traditional litigation strategies and adopt a new one, involving the expeditious preservation of evidence. Consequently, through our careful preparation efforts, the case was settled in just 3 months. The parties reconciled their differences and reached a settlement agreement. Lifang & Partners fulfilled the client’s litigation needs perfectly.

Actions taken

Being at the cutting edge of technology is necessary to ensure the survival and growth of a high-tech enterprise. Because of this, protecting technical secrets is an absolute necessity. The resignation of key employees would not only shake the foundations of many companies, but would also create data security concerns regarding the unlawful disclosure of the technical secrets.

Lawyers who represent high-tech clients during technical secret disputes have to fully consider the nature of the technical secrets at issue, including an appropriate litigation strategy, ways of maximizing the client’s interests, methods for reaching an expeditious resolution to matters, how to reduce client costs and in gather relevant evidence.

In China, there is an old saying that prior to shooting an arrow, a bowman should aim at the target center. In respect of this case, we had a number of targets to hit.

Our first target was to obtain an evidence preservation order. At present, Chinese government policy focuses on strengthening intellectual property protection, encouraging entrepreneurship and developing innovation. In conformity with government policy and due to their inherently conservative nature, Chinese courts require preliminary proof relating to the present case before granting an order for the preservation of evidence. Under such circumstances, Lifang & Partners’ would have to include an argument that would provide clear-cut answers to legal issues to persuade the court. To fulfill the client’s litigation needs, Lifang & Partners successfully created and implemented solutions to these issues. We obtained an evidence preservation order, despite the fact that the allegedly infringing products were not yet on the market and no substantive hearings had taken place in the course of proceedings.

A traditional method of establishing the chain of infringement evidence is to purchase the allegedly infringing products and test them. The fact that the allegedly infringing products had not been launched created a difficult issue to resolve as there were no means to buy them through normal channels, followed by judicial testing and preservation. Accordingly, in preparation for a hearing to obtain an order for the preservation of evidence, it was necessary to plan detailed and persuasive answers to the following questions in advance:

• If there was strong face value evidence of infringing activities? 

• Whether the preservation of evidence was necessary in the circumstances? 

To solve the above-mentioned issues, Lifang & Partners rigorously conducted preparations to provide the best answers possible, based on the case facts and our rich practical experience. 

1. Firstly, we ensured that a lawyer with a background in technology was assigned to work with R&D staff at the company. This allowed them to review the technical facts, reasonably summarize the technical secrets and ensure the key points of secrets are included, unrepeated and bias. 

2. Secondly, we selected technical secrets, which were then classified and divided into several categories. For instance, categories consisted of software algorithm secrets, hardware design secrets, chipset designs/selection secrets and many others. 

3. Thirdly, we worked with investigators to obtain preliminary infringement evidence in order to build a chain of evidence.

During the hearing for the evidence preservation order, the judge challenged the application, and raised the possibility of the accused infringers' own R&D activities and reverse engineering. (1) However, according to the characteristics of the technical secrets, Lifang & Partners argued that:

1. The specific hardware processor (2) inevitably used in the allegedly infringing products had not been launched on the open market. The design, manufacturing and 

techniques used for this type of processor were all technical secrets that could not have been reverse engineered; 

2. The allegedly infringing products could only run normally, if and only if they used parameters that were also the technical secrets; 

3. The company and the former employees had entered into "Confidentiality and Non-Disclosure Agreement[s]" to assure the strict confidentiality of such information and to prevent it from being copied, revealed or used after the employment relationship ended; and

4. The investigation results established that the former employees were soon going to launch the allegedly infringing products on the open market. 

Moreover, much of the evidence included electronic data, such as software codes, objective programs, hardware schematics, design documents, drawings and other documents. This evidence was stored electronically on the former employees’ computers and devices. 

Electronic data is intangible, easy to modify, hide or destroy at the click of a button. Thus, the preservation of electronic evidence was not only necessary but also urgent. If the former employees were tipped off about the investigations or litigation, electronic evidence could easily have been transferred, hidden or destroyed. This would make the company’s case very hard to prove.

After the hearing, Lifang & Partners remained in close contact with the judge to provide clear and exact explanations in respect of relevant technological issues. In the end, the judge supported the arguments of Lifang & Partners and made an evidence preservation order.

Because Lifang & Partners was able to anticipate the relevant issues and plan answers for them in advance of the hearing with the judge, we were able to obtain the preservation order. We hit a bulls-eye on the first target!

The execution of the evidence preservation order presented a significant challenge and was our second target. The former employees each held some technical secrets and each had different working hours in different places. These factors caused difficulties to the enforcement process, because if one former employee was able to tip off the others, then evidence could easily have been lost. Accordingly, simultaneous execution of the evidence preservation order was required.

Due to the circumstances of the former employees, Lifang & Partners arranged for investigators to conduct long-term investigations on them and coordinated their activities. Because of the careful plans that were made, the evidence preservation orders were executed while all of the former employees were in the field and away from their computers, which resulted in all of the required evidence being preserved successfully. 

One unexpected bonus for the company was that in the course of evidence preservation Lifang & Partners found that the R&D equipment used by the accused infringers was manufactured by the company and that the equipment was not available on the open market. Accordingly, the former employees were suspected of embezzlement. In this instance, not only was infringement evidence preserved, but sufficient evidence was also obtained to support a criminal prosecution. We scored another bulls-eye!

As a result of the efforts of Lifang & Partners, this particular dispute was resolved within a period of 3 months. During that time, we avoided the need for litigation, minimized the use of public resources and kept our client's legal costs to a minimum.

Practical Advice

Nowadays, the flow of talent has become a significant source of leakage in respect of the secrets of high-tech enterprises. Facing such a situation, high-tech enterprises need effective means to protect their core assets, which often consist of knowledge. 

There is an old Chinese saying that prevention is better than cure. Accordingly, the following preventative measures should be taken by those who wish to protect themselves:

1. High-tech enterprises should make key employees sign:

a. Confidentiality and Non-Disclosure Agreements;

b. Non-Circumvention Agreements; and 

c. Non-Competition Agreements.

2. Ensure that R&D data is accurate and safely stored; 

3. Ensure that accurate inventory systems are in place;

4. Establish effective internal work policies and procedures; and

5. Take special precautions to protect electronic data, such as software source codes, objective programs, hardware scheme, design documents, drawings and so on.

With the above measures in place, high-tech companies will be better able to avoid the leakage of business secrets and will find it easier to obtain judicial protection after a leakage event occurs. Additionally, with an accurate inventory system, the option to pursue criminal liability becomes more feasible, if company assets are found in the possession of an employee. 

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(1) Article 12 in Supreme People's Court, Several Issues Concerning the Applicable Laws in the Trial of Unfair Competition Civil Cases Interpretation, "Commercial secrets acquired through a party's own research and development or reverse engineering, etc., shall not be deemed as an act of infringement of commercial secrets as specified in Article 10(1) and (2) of the Anti-unfair Competition Law.

The "reverse engineering" referred to in the preceding paragraph means the acquisition of relevant technical information of a product by technical means through disassembly, mapping and analysis of a product obtained from public channels. If a party who has obtained any commercial secret of another party by improper means then claims validity of such acquisition in the name of reverse engineering, such claim shall not be supported."

(2) Specific hardware processor is a customized microprocessor (CPU) for a specific application environment.