Practical Perspectives of Determining “Lost Profits” in Trade Secret Infringement (Taiwan)

In trade secret infringement litigation, victims often face evidentiary challenges when seeking damages. This is primarily due to two factors: first, the subject matter is intangible property; second, much of the relevant evidence tends to be in the hands of the infringer. These characteristics make it substantially difficult to prove the extent of damages. In light of these challenges, Article 13 of the Trade Secrets Act provides victims with two methods for claiming damages:

1. Primarily, claims are made according to Article 216 of the Civil Code. However, if the victim cannot prove actual damages, they may claim based on the expected profits that could have been anticipated under normal circumstances from using the trade secret, minus any profits obtained from using the same trade secret after it was infringed.

2. The victim can request that the infringer return any profits gained from their infringing actions. In this case, the infringer bears the burden of proof regarding their costs and necessary expenses; if they fail to provide such proof, all income derived from their infringing activities is considered their profit.

Regarding Article 216 of the Civil Code, “damages” include both “actual damages” and “loss of profits.” According to the 2018 decision No. 2 by the Intellectual Property and Commercial Court, loss of profits can be categorized into three types: (1) benefits that could have been obtained but were not; (2) benefits that could be expected under normal circumstances; and (3) benefits that could be anticipated based on established plans or other special circumstances. In practice, courts adopt a stringent approach in determining the causal relationship between infringing acts and loss of profits in trade secret infringement cases. Representative judgments include the 2018 decision No. 2 by the Intellectual Property and Commercial Court, the 2017 decision No. 1 by the same court, and the 2018 decision No. 12 by the same court.

The following will analyze two cases involving the infringement of “technical trade secrets” (such as methods, techniques, processes, formulas, etc.) where the court positively acknowledged the existence of “loss of profits,” and explore their commonalities.

1. Taiwan High Court 2008 Reappeal Case No. 167

(1) Case Facts:
This judgment was made following the intent of the Supreme Court’s 2008 Tai Shang Zi No. 2237 judgment. The facts are briefly as follows: Appellant A was formerly an engineer at Respondent B Company and had signed a confidentiality agreement during his employment, promising not to disclose B Company’s trade secrets during his employment and for three months after leaving the company. However, shortly after leaving, A disclosed Company B’s technology for manufacturing impregnation treatment machines to Company C, for which he was responsible, to manufacture and sell machines with the same functionality as those produced by Company B (hereinafter referred to as the disputed machines), targeting Company B’s existing customers. Among these actions, A sold two machines to existing customer X Company, and this judgment recognized that such behavior led to a loss of profits for Company B.

(2) Loss of Profits: [Profits obtainable from contracts with existing customers]
The court first learned from another case’s indictment that before A leaked and used the trade secret, B Company was the only domestic manufacturer of the disputed machines. Further investigation revealed that the machines manufactured and sold by Company C using B Company’s trade secrets were substitutable in the market with those originally produced by B Company’s “impregnation treatment machine.” Additionally, X Company’s vice president testified in another case that their company had always dealt with Company B (as evidenced by unified invoices from transactions between X Company and B Company since 1996), stating that if not for the emergence of Company C, X Company would still purchase machines from Company B. Finally, although A argued that Company C had mutually agreed with X Company to cancel the contract for the two disputed machines and thus no illegal profit existed, the court held that “compensation for damages is related to compensating for losses suffered by victims and lost profits, regardless of whether or not perpetrators gain any benefit,” affirming that profits from the two disputed machines were foreseeable benefits belonging to Company B and recognizing a substantial causal relationship between A’s actions and the loss of profits suffered by Company B.

2. Intellectual Property and Commercial Court 2018 Civil Appeal Case No. 6

(1) Case Facts:
This judgment is a final and conclusive decision. The facts are briefly as follows: Appellant A was formerly employed by Respondent B, serving as the head of the manufacturing department, and signed a confidentiality agreement promising not to disclose the company’s confidential information or use it improperly without consent after leaving employment. However, shortly after leaving, A joined Company C in the same industry and leaked B Company’s confidential information (including fiber optic switch product processes and customer transaction terms), leading Company C to quickly produce products substantially identical to those of B Company. Company C further attracted long-term customers X and Y of B Company with low prices, resulting in Company B being forced to sell its fiber optic switch products at reduced prices, causing depreciation losses.

(2) Loss of Profits: [Loss of profits from selling products at reduced prices]
The court determined the causal relationship between Appellant A’s act of leaking trade secrets and the loss of profits suffered by B Company through the following facts: It was found that an outsider employed by Company C stated that all product technology at Company C was managed by A, and that 80% to 90% of the production process for fiber optic switch products was similar between Company C and Company B. According to email records, employees of Company C claimed to customer Y that their own products could completely replace those of Respondent’s company, offering incentives such as lower prices and faster delivery times to attract customer Y. Additionally, customer X sent an email to B Company regarding price negotiations: “I am seriously considering your company’s price compared with another competitor, Company C… I request negotiations with your company on the next stage concerning the price of optical switch products.” Furthermore, shipping documents showed that four types of products sold by B Company to customers X and Y experienced successive price reductions during the first half of 2013. Although A argued that B Company’s depreciation losses were mainly due to market factors, according to industrial correlation statistics published by Taiwan’s Directorate-General of Budget, Accounting and Statistics (DGBAS), the industry in which B Company operated showed positive growth trends during the incident period; thus, based on rules of experience, there was no necessity for depreciated sales. From these connected facts, it can be inferred that if A had not leaked trade secrets to Company C, such depreciation damage would not typically occur for B Company; therefore, there is a substantial causal relationship between A’s actions and the loss of profits from selling products at reduced prices.

In Taiwan, there are limited judgments where the victim has successfully proven loss of profits in cases of trade secret infringement, making it difficult to fully summarize the court’s reasoning logic. However, through the analysis of the aforementioned two judgments, common views on this issue can still be summarized as follows:

1. Substitutability of Products: The products manufactured by the defendant using the trade secrets must be substitutable in the market for the original products developed by the plaintiff.

2. Clarity of “Existing Customers” and “Stable Business Relationships”: The evidence presented by the plaintiff, such as delivery notes and invoices, must sufficiently identify their existing customers and demonstrate a stable and regular business relationship with the customer over a considerable period. If only vague claims about “loss of orders or price reductions” are made without specifying stable trading partners, the court may consider that due to free market competition mechanisms, lost profits lack “objective certainty”.

3. Changes in Existing Customers’ Business Decisions Caused by Defendant’s Actions: There must be direct or indirect evidence proving that customer hesitations or changes in decisions, such as “switching to transactions with the defendant” or “engaging in price negotiations,” result from the defendant’s infringement of trade secrets. The plaintiff needs to provide concrete evidence. For example, in Taiwan High Court 2008 Reappeal Case No. 167, an outsider X Company’s vice president testified: “If Company C had not appeared, we would still purchase machines from Company B.” Additionally, in Intellectual Property and Commercial Court 2018 Civil Appeal Case No. 6, emails sent by employees of Company C to attract customer Y (emphasizing low product prices) and email records showing customer X negotiating prices with Company B after being solicited serve as examples.

4. Influence of Other Factors: When considering whether there is a causal relationship between infringing actions and lost profits, courts often take market mechanisms or other factors into account; therefore, efforts should be made in individual cases to provide evidence excluding external factor interference as much as possible.

In summary, although legislators have attempted to address the evidentiary challenges in proving damages in trade secret infringement lawsuits through the enactment of Article 13 of the Trade Secrets Act, courts in practice often adopt strict standards for establishing lost profits. This has resulted in a limited number of successful claims. This phenomenon reflects a conservative attitude in judicial practice regarding such disputes, and its development trend remains to be continuously observed.