Author: Jiang Xiaoliang, partner, Brighten Law Firm

This article, taking a typical contract dispute over non-patent technology transfer for example, analyzes and approaches legal problems on non-patent technology protection such as non-patent technology being the object of legal protection, confirmation of tort, legal protection of non-patent technology as one of the trade secrets, etc.　

In May 1993, the plaintiffs, Engineers J and L brought a suit against Medicament Materials Factory in T County, claiming that the defendant pay off the debt, Licensing fee of CNY 540,000 and continue to fulfil the technology transfer contract (this means to continue to pay the technology transfer fee). The total object of action adds up to CNY 1,000,000 . The accepting court, the People's Court of L District in Shanghai opened and heard this case on June 8, 1993 and continued in 1996. On June 7 1996 the first verdict was made out. But the defendant, Medicament Materials Factory disobeyed and appealed to the Intermediate People's Court in Shanghai. At the same time, third party who also has right to claim the object in this case, World Pharmacy Factory in Shanghai City, brought a suit to People's Court in T County against both the above plaintiffs and defendant as the common parties of tort. By application of World Pharmacy Factory, the Intermediate People's Court in Shanghai ceased hearing the appealed case by Medicament Materials Factory according to law. The People's Court in T County firmly believed that Engineers L and J, the former employees in World Pharmacy Factory, committed the tort by revealing the right party's commercial secrets without permission. And decided that the defendants L and J compensate to World Pharmacy Factory for pecuniary loss and the defendant Medicament Materials Factory cease manufacturing the tort products.

Non-patent technology transfer points to the tech transfer in which one party who owns the use and assignment right of this tech which interferes neither the right of patent nor the right of application for patent, transfers the tech to the other party. In practice, lots of enterprises need to obtain all kinds of tech which haven't been applied for patent or achieved the right of patent and disclosed tech which are not protected by Patent Law such as variety of living beings, software, management methods, systematic analysis methods, traditional skills, know-how and so on. In the present TT contract, quite a few belong to non-patent non-patent TT contract. The writer holds that it is necessary to go further into legal issues on protection of non-patent tech related to tech trade.

Seeing legal protection of non-patent tech is a practical problem. Meanwhile, the right and obligation involved in Intellectual Property cases has a characteristic of multi-facet: often one case includes another case, or one concerned another, or one links with another; Several subjects can have the same right or one subject also can have several rights; One conduct may violate several rights, also several conducts may violate one right and several acts may violate several rights, compound causality often present between tort and resulting damage. However, each IP Law adjusts each right of Intellectual Property. Through analyzing a case of interlocking tech disputes, that is, the TT contract dispute and the violation of right of non-patent tech, this article approaches some legal issues on protection of non-patent tech.

The parties concerned in the TT contract dispute:

The plaintiff: Engineers J and L, former employees World Pharmacy Factory (the following calls J and L for short)

The defendant: Medicament Material Factory (the following calls MMF)

The parties concerned in the tech tort dispute:

The plaintiff: World Pharmacy Factory (the following calls WPF for short)

The defendant: Engineers J and L, former employees in WPF (the following calls J and L for short)

The defendant: Medicament Material Factory (the following calls MMF)

In June 1989, two engineers J and L (licensor) in Shanghai and MMF signed a licensing contract, stipulating the licensor should transfer their non-job-related tech to the licensee. Their price term is as follows:

A. Initial payment (fixed price): CNY 70,000 Yuan

B. Royalty price:

B1. If annual output of dehydration production reaches 120 tons, then pay CNY 200,000 Yuan as loyalty

B2. If below 120 tons, then pay 1,670 Yuan per ton as loyalty.

The contract also provides that if failing to pay the initial payment and royalty on time the licensee shall bear 5% of damages for breach of contract per day. The contract keeps valid for 5 years. In case any dispute occurs, the People Court in L district of Shanghai accept and hear it.

The licensor think that during the period of fulfilling the contract, the licensee failed to fulfil the contract for delayed payment of initial payment and royalty fee. Thus, in May 1993 the licensor brought a suit against PMF, claiming that the defendant pay off the debted fee of CNY 540,000 Yuan and continue to fulfil the technology transfer contract (this is to continue to pay the technology transfer fee). The total object of this suit adds up to CNY 1,000,000 Yuan. The accepting court, the People's Court of L district of Shanghai opened and heard this case on June 8 1993 and continued in 1996. On June 7 1997 the first verdict was made out, but the defendant, PMF disobeyed and appealed to the Intermediate People's Court in Shanghai

When the defendant MMF in the above case disobeyed the judgement of first instance and appealed to the Intermediate People's Court in Shanghai, WPF found some employees in their factory, taking advantage of their positions, revealed the enterprise's commercial secrets without permission to achieve their personal interests. J and L are retired employees from WPF. Having known about J and L's possible tort, WPF carried out investigation and grasped partial facts of J and L's tort. Then, WPF brought a suit against both the plaintiffs and the defendant in the above dispute as the common defendants with the People's Court in T County where the tort took place. At the same time, the Intermediate People's Court in Shanghai ceased hearing the TT contract disputes according to the application of the plaintiff. Then, the People's Court in T county determined that the tort existed and the defendants L and J should compensate to WPF for pecuniary loss and the defendant MMF in T County stop manufacturing the tort products.

1). Engineers J and L's view:

Claims: 1. Determine that the defendant should continue to fulfil the contract;

2. Determine that the defendant should pay the TT fee of 547,060 and bear

the responsibility for delayed payment.

3. Determine that the defendant should bear the cost of proceedings.

Facts and reasons:

On June 3 1989, the plaintiffs and the defendant signed the licensing contract on dehydration product, which stipulates that the plaintiff's major duty is to provide the production tech of this dehydration product, to guarantee the yield of 69.27% with good quality and to assist the defendant with technical training. The defendant's major duty is to organize and carry out production according to the technical requirements and to pay off the royalty by contract.

After signing the contract, the defendant failed to pay the initial payment CNY 10,000 Yuan and until Nov. 25 1989 they paid off. While the plaintiffs offered the relevant tech in accordance with the contract and turned it reality that in November 1989 the defendant trial production which was up to the designing requirements and they put it into regular production in December. In fact, the defendant's total output of the three years from 1990 to 1992 was 358 tons. The royalty should be CNY 597,060 Yuan in the light of the contract. In practical performance, the defendant paid the initial payment of CNY 70,000 Yuan by 5 lots from November 1989 to February 1991 and only paid the royalty CNY 50,000 Yuan in April and September 1992. For this reason, the plaintiffs lodged a complaint, claiming the defendant pay off the royalty and continue to fulfil the contract.

J and L's pleading as the defendant:

A. Dehydration production tech is an overdue patent of foreign countries and it has already been publicized, so it has nothing to do with the issue of right and possession. Furthermore, WPF never took security measures to this tech. So WMF has no right to claim for it.

B. The dehydration product's tech that the defendants own and transfer is a dry one. Compared with the dehydration wet product's tech that the plaintiffs own, it has been improved substantively and already come into a new tech.

2).MMF's stand:

The defendant MMF's view in TT contract dispute is that the prosecutors J and L have no right to transfer and use the object. The reason is the contract's object, dehydration product's tech, is one part of the doxycycline's production tech, which was developed by S City WPF. And the tech of carrier, the technical materials that the prosecutors offered to them, also proved that the defendant couldn't develop the tech individually, so the tech is a position tech achievement instead of a non-position tech achievement as indicated in the contract both parties signed.

MMF's pleading as the defendant in the case of non-patent violation of right:

Our factory signed the contract on the condition of unawareness of the fact and well intentionally accepted this tech and organized till now, so we should not bear the responsibility of violation of right.

3).WPF's stand:

Claims: 1. Confirm the TT contract between the both parties is invalid.

2. Claim the defendants J and L should stop tort and returned their illegitimate profit 20,000 and the defendant PMF should bear joint liability.

3. Charges of this case should be born by the defendants.

The plaintiff's stand:

A). The rights of usage and transfer of the object, the dehydration product's tech, belong to WMF.

As early as in late July 1970, WMF established a trial-production panel and began trial production in August. They also cooperated with S province Antibiotic Research Institute and produced sample products for clinical experiment, which passed the tech appraisal in June 1978.

B). The tech remains unknown

WMF always has security regulations to their technological data. So the defendants can not publicly acquired this technological achievement unless by taking advantage of their positions.

C). The defendants' transferring the tech is a tort to WMF's using and transferring right of non-patent tech. Though the defendants J and L claims that they transferred the tech on the basis of great improvement, in reality the defendants did not make any improvement in it. Furthermore, the tech's carrier -the dehydration product's technological regulations, the flow chart of production facilities are completely the same as what are kept in WMF's filing room. So it's purely a reprint of WMF's tech.

1). The first verdict of the TT contract dispute

Extracts from written of verdict by the first trying court the People's Court of L district in S City:

It's ascertained by try that the plaintiffs and the defendant signed a TT contract on June 3 1989, which stipulates that through the introduction of an intermediary, the plaintiffs J and L transferred their dehydration product's tech to the defendant, assist to organize the necessary materials, train workers and help them with production management. The contract provides that the defendant should pay the initial payment of RMB 70,000 in four lots and the TT will be valid for five years. If the defendant can produce 120 tons per year, then pay the yearly transferring fee of 200,000; if lower than 40 tons, no pay; if between 40 and 120, then the fee will be settled at 1,670 per year; if above 120, then the fee will be fixed separately. If the defendant breaks the contract, then the compensation should be calculated by 15‰ of the sum of the initial payment and transferring fee per day; while if the plaintiffs break the contract, they should return the transferring fee. In addition, the contract also stipulates the technical indexes, fulfilling plan, schedule and each party's duties. After signing it, the plaintiff provided the tech and carried out the technical service in accordance with the appointed deadline and schedule. Having accepted the tech, the defendant successively paid off the initial payment of RMB70, 000. Within the five years from 1990 to 1994, the defendant totally produced and sold 451,649.4kg dehydration products, that is, an average of 90 tons per year calculated in the lights of the five-year contract schedule. However, the defendant only paid the transferring fee of RMB50, 000 through the intermediary. The plaintiffs required the defendant to settle the expenses many times, but the defendant refuses to pay on the pretext of loss. Failing in negotiation, the plaintiffs brought a suit.

It's ascertained separately that from Jan 1990 to Dec 1991 the defendant engaged J and L as technical advisers with the offer to pay the advising fee of RMB100, 500 to them and reimburse their expenses of call and taxi. In addition, as to who owns the tech, because the technological prescription has been carried on the collection of national medicament technology, though the plaintiffs made a further improvement when transfer, it wasn't an essential, fundamental one.

This court holds that the plaintiffs J and L, through making further improvement, provided the defendant with the dehydration product's tech which has been publicized in certain field. For its openness in certain field, the tech is of no confidentiality nor independence. The plaintiffs J and L offered their tech to the needed party-the defendant T County MMF through the consulting center whose business scope covers intermediate technical service and also provided MMF a series of service such as installment of devices, adjustment of instrument during experimentation, technical personnel training and products promotion, which attributed a lot to possibility that the defendant could acquire the tech and apply it into production. So they deserve the reward, because the tech ahs been publicized and doesn't belong to non-patent tech, the plaintiffs J and L should not gain profit from the TT. But the TT contract contains such other provisions as consulting service, moreover, the two parties did not make specific divisions to respective expense, so in the light of the principle of fair and reasonable, a certain portion of the total TT fee should be regarded as the transferring fee. This court doesn't support the plaintiffs claim for the TT profit. But the defendant should still pay the rest fee. Concerning the plaintiff's claim that the defendant should take the additional responsibility for delayed payment, because the provision of breach of contract appointed by the two parties applies to different standards and the mutual restraints are not reciprocal, there's no equity and it should be null and void. This court doesn't support the plaintiffs' plea to look into the defendant's duty of breaking the contract. But the defendant shall compensate for the plaintiffs' loss caused by the delayed payment. As for the defendant's plea that RMB10, 500 and the reimbursed expenses paid to the plaintiffs should be looked as the TT fee, because this payment wasn't effected in compliment with the appointed term and the plaintiffs J and L had an engagement relation with the defendant who was not the manufacturer of the dehydration product monomer, this court can't confirm the certain link between this payment and the fulfillment of the disputed contract and shall not accept the plea. According to the Tech Contract Law of People's Republic of China Section I Clause 17, the verdict is as follows:

1] The defendant shall pay RMB477, 978.13 to the plaintiffs J and L through the consulting center.

2] The defendant shall compensate for the plaintiff's economic loss, calculated as the sum in debt from Jan 1 1991 to the date when this verdict goes into effect at the bank's current interest rate in the same period,

The above shall be paid off within 10 days from the verdict becomes effective.

The trying charges of RMB17, 490 shall be evenly borne by the both parties.

2). The first verdict of non-patent tech tort

Extracts from letter of verdict of T County People's Court:

Ascertained by try, on June 3 1989 J and L through the intermediary S city technology advising center signed a TT contract with T county MMF, stipulating J and L transfer their non-position tech-- (calls dehydration product for short) to MMF. After signing the contract, the transferee MMF paid off the initial payment of RMB70, 000, and in 1990 organized production till now according to the technical data and direction provided by the transferor. Meanwhile, in 1990 and 1991 the transferee issued engagement letter to J and L. Till the end of 1994, MMF totally produced and sold over 450 tons of the dehydration product, paid the TT fee of RMB50, 000 through the intermediary and directly paid RMB10, 500 to J and L, also reimbursed their expenses of taxi and call. Due to MMF's failure in settling the appointed TT fee, J and L brought a suit to the court in April 1993, claiming that T county MMF should pay off the transferring fee and penalty. In October 1996, WMF brought a suit against J, L and MMF for their tort.

It's ascertained separately that doxycycline is long-efficacious, semi-compound, four-cycle antibiotic and the dehydration product is a key link in its production process. WMF set up a doxycycline experiment panel in1970 and at the end of this year they began to cooperate with S province Antibiotic Institute. As the beginning of 1971 they made out samples for clinical experiment which passed the technical appraised in the middle of June. At the end of June, WMF formally put into production, which filled a gap in our country's medicine industry.

In 1980 National Medicine Administration Bureau compiled technological data from each medicament factory and scientific research entity into book form. The data of doxycycline produced by WMF was also included in it. This complication is a confidential-rate file. The regulations on how to use and take care of it should be executed strictly according to security regulations. In1984 the doxycycline won the National Silver Prize and in 1987 it continually won the prize after reexamination.

It's ascertained again that WMF has explicit regulations on its technological data and guide of use and care and they also took proper security measures. In September 1970 the factory dispatched to her subordinate administrative offices and workshops, requiring to strengthen the management of files, among which they made it clear that all books related to the technological data should be approved by the factory head office before being lent and the books could only be kept for three days within the factory. In August 1999 WMF made out more regulations, requiring all the technical personnel should safeguard the factory's interest, keep the secrets, place on file all kinds of testing records and brief sum-up of work in time and not lend them to others or make them their private possessions and also should not let out the secrets.

It's ascertained again that J and L were former workers in WMF. L worked in WMF from 1959 to 1985 and before retired he was a senior engineer, working as leading cadre of the workshop technology and deputy director of central testing room. J was a technician in WMF from 1962 to 1982.

During the trial, both J and L denied they obtained the dehydration product's tech by the way of transfer and they did not offer the technological data of developing record of this dry product, report of trial production, preparing process, results, data and devices that should be used.

This court holds that the dehydration product's tech in the technology of doxycycline was successfully developed by WMF. Having practicality and unknown to the public, it has brought this factory a certain economic profit since a long term ago in accordance with the legal characteristics of non-patent tech, so WMF is the legal holder of the non-patent tech; As WMF's technical personnel, L and J should has the responsibility of protecting the technological secrets of their former factory no matter whether they are in position, have resigned, or have been retired. But they two, taking the advantage of their positions, acquired the technological data of the dehydration product's tech and transferred it to T county MMF in their own names, which constitutes a tort to the non-patent tech possessed by WMF. Thus the TT contract signed by J, L and MMF through the intermediary on June 3 1989 is null and void. J and L should make an apology to WMF and compensate for their economic loss. WMF's claim is of no support. As to L and J's excuse that it lacks basis to prove the tech has been publicized, this court will not adopt and believe it. And this court also will not support their excuse hat the dry dehydration product's tech is an essential improvement of the wet one for short of facts. T county MMF shall not bear he responsibility of the tort because they obtained the tech and organized production in good will according to the TT contract they signed with J and L. In the light of the stipulation in Section 118 of ,Section 10 of , Section 21 and Section 42 of , the verdict is as follows:

1. The TT contract is invalid signed by the defendants J and L and the defendant MMF on June 1989.

2. The defendant J and L shall compensate for WMF's economic loss of RMB 220, 500 according to their gain from the tort. This compensation shall be paid to this court to forward to the plaintiff within 10 days from the verdict takes effect.

3. The defendants J and L shall make an open apology to the plaintiff WMF in Shanghai municipal rate papers (the content shall be checked by this court). This verdict shall be executed within one month from its effect.