Insight – litigation strategy for medical giants

Part I: how to prevail in litigation

Job-hopping leading to a breach of trade secrets is not rare in China. As indicated in a widely cited statistical result from unconfirmed sources, over 90% of trade secret cases relate to the flow of talents. The role of technical personnel has caused people’s concern. The Shenzhen Police in a 2006 new conference pointed its figure particular to the fact that the suspects of many trade secret cases were corporate R&D engineers. Some R&D-based large corporations, such as the plaintiff GE Healthcare in this case, are particularly prone to risks of confidentiality breach.

Even so, in cases where the disclosure of a trade secret may occur, an enterprise may not necessarily resort to litigation immediately. Ms. Dong Ying, an in-house IP lawyer at GE Healthcare (China), expressed in an interview with the China IP that there was no way to ascertain whether an employee had taken the internal materials away when leaving because of the large number of employees at GE Healthcare (China) and the high flow rate of employees. But she also said that “it is possible that the risk exists.” Actually the current case was the first trade secret case since the establishment of GE’s IPR department in 2003. When asked why there were so few lawsuits, Ms. Dong said, “the legal department chooses litigation only when there is a good chance of success; otherwise we will not do it if the evidence is insufficient, or for other reasons we cannot guarantee success.”

GE’s attitude is reasonable. Compared with other IP cases, the plaintiff’s success is low in trade secret cases. During a symposium of IP judges and high and new enterprises’ representatives of 2004, Mr. Su Chi, Deputy Director of the Beijing No.1 Intermediate People’s Court, was quoted as saying that the inadequate confidentiality measures beforehand explained why the plaintiff in a trade secret case had difficulty in winning the case. Hurdles are high both in China and abroad to establish a trade secret. Failing preemptive measures, a plaintiff would find it hard to vindicate without insufficient evidence. In the present, Ms. Dong Ying believed, GE spent of its effort on the collection of evidence.

First, according to the information provided by its service & sales department, GE discovered Jiuxiang’s website and had the relevant contents notarized for the case. Subsequently, GE sent its staff, who were familiar with CT techniques, to attend Jiuxiang’s latest training course. They managed to keep the receipt, kinescope the lectures, keep the materials used in the training, and at the same time, GE contacted the local AIC. The local AIC seized Wang’s computer on the spot while Wang was giving a lecture and found information that was deemed to be identical with GE’s trade secrets. “All these are the key evidence.” Ms. Dong said.

The fact that the above evidence could play a critical role in the litigation also attributes to the Interpretation of the Supreme People’s Court on Several Issues Relating to the Application of Laws in the Civil Trial of Unfair Competition Cases (Interpretation), effective as of Feb. 2007. Article 11 (3) of the Interpretation enumerates seven security measures and states that “the following methods, if they are adequate for preventing the disclosure of trade secrets under normal circumstances”, will be held as confidentiality measures under the Law. Among them, item 3 and item 5 are respectively “adoption of a confidentiality mark on the media which contain a trade secret” and “execution of a confidentiality agreement”. GE gave clear indication of confidentiality marks on its important discs, manuals and each page of its internal training materials and also wrote the confidentiality terms into the employment agreements signed by GE and its staff including Wang. Thus, the provisions of the Interpretation are obviously favorable to GE.

“For example, there are both general principles and content of advanced maintenance in our service manual. Actually we were also wondering at that time whether the judge, in determining a trade secret, would pick out a line or a page from the documents and said that this was a trade secret and that was not, just like people do in technical authentication. You cannot say that all the contents involving basic principles are trade secrets. If the judge did so, that would be troublesome.” “However, after the promulgation of the Interpretation, as long as certain confidentiality measures are taken, the court will deem them sufficient. So we think that the red disc will suffice.” Ms. Dong said.

Part II: why litigation

With sufficient evidence and thanks to the promulgation of the Interpretation, GE’s success seems sealed. But the court did not sustain all of its claims, because “the evidence produced by GE’s was insufficient to support the specific amount of loss incurred from and the profit gained from such infringement; nor was there specific amount of licensing fees as the basis for calculating.” The judgment of RMB 500,000, the maximum statutory damage under Article 21 of Several Provisions of the Supreme People’s Court on Issues Concerning Applicable Laws to the Trial of Patent Controversies, plus 400,000 for copyright infringement, is already an exceptional result compared to other similar cases. But it is still far below GE’s claim of RMB2.21 million.

 “We calculated all our losses and their profits at that time, and then submitted it as evidence to the court. The calculation of the figures for damages is always the hardest part, and for that we have done our best.” Ms. Dong further added, “All we had hoped for was a vindication, and that we got, for our ultimate goal is to squash the acts of unjust enrichment in the service market through unfair competition.”

 For the medical equipment giant, GE Healthcare, the aftermarket used to be a peaceful place shared by the big three. According to a 2005 report on medical equipment, 70% of China’s medical equipment market was dominated by foreign enterprises, i.e., GE, Siemens and Phillips. Among them, GE Healthcare, being the first multinational medical corporation in China, had the lion’s share in China’s medical equipment market for many years. In 2005, the sales of GE Healthcare exceeded US$700 million, accounting for 5% of its total in the world.
 
       Due to the expensiveness and frequent use of medical equipment, the cost that the third class hospitals spent in maintaining the large-scale equipment is 1% to 3% of the total value of the equipment. 60% to 90% of the hospitals allowed the maintenance work of the large-scale medical equipment to be contracted out, thus generating a large secondary market, the medical equipment maintenance services market. The force contrast in this secondary market is generally similar to that in the medical equipment market because the after-sales service by the original manufacturer is the first option in medical maintenance. However, presently a lot of aftermarket maintenance providers enter into the market and compete with the three giants by offering competitive prices much lower than that of the after-sales service by the original manufacturer. The quality of their services varies with the good and bad being intermingled, from engineers like Wang, who established businesses after leaving large related enterprises, to those making a profit in troubled situations, i.e., “those who repair air-conditioners come to repair CT,” as described by some newspapers. Though the maintenance quality of the original manufacturers cannot be matched by the small service providers, price strategy is still an important competitive means for a newly-born market. The market share of the three medical groups was challenged.

 However, these small service providers are vulnerable. Most of them do not possess a qualified service aptitude and cannot provide timely the normal and original manufacturers parts and accessories. Also, there is no guarantee for their maintenance quality, and thus may bring accident risk to the hospitals. Meanwhile, due to intense competition in the low end, it is easy for them to gain advantage through illegal means. This current case is a typical example. The plaintiffs, via litigation, succeeded in cracking down on the competitors who used unfair competitive means. Did GE achieve its goal?
   
     “Our initial purpose is to crack down the illegal competitors in the maintenance services market. This goal has been achieved.” Ms. Dong confirmed, “However, later we think that it will be good publicity for our employees if we win the case.”

 Ms. Dong expressed that, GE Healthcare attached great importance to its internal training on IPRs, and had been strengthening relevant trainings in response to the more and more complicated market environment. “However, it is this case that serves as the best training.”

 In 2006, GE Healthcare revealed that it would research and develop middle and low-end products in light of the medical demand in rural areas so as to expand its market share in China. According to the 2007-2008 research report on medical equipment and instrument market, in 2005, China’s medical device market had reached RMB 54.8 billion with the annual increasing rate of 14%. Among them, the low-end medical device accounted for about 75%, with the annual increasing rate of 15%. With this market as its target, there will be a lot of room for profit improvement for GE Healthcare and it will also face more fierce competition from the domestic enterprises and service providers, and the future IPR issues will become more complicated.

“We are making overall arrangements.” Ms. Dong told us.

 

                                                                            (Translated by Zhang Meichang)