Analysis of Trade Secrets Cases in Taiwan: Whether the “Reverse Engineering” Defense Affects the Determination of Secrecy

April 2022

Jane Tsai, Yuki Chiang, and Lilian Hsu

In February 2022, the Intellectual Property Office selected the 110-Tai-Shang-3193 Criminal Decision of 2021 as one of the best reference decisions.[1]  This decision primarily pertains to important controversies such as the determination of the secrecy criterion and whether a defendant’s “reverse engineering” defense is sufficient to override secrecy in trade secret cases.  This article will analyze the grounds of the decisions of different instances on this case and provide relevant recommendations.

1. Introduction: What is a trade secret? What is reverse engineering?

The trial of a trade secret misappropriation case consists of two major aspects.   Firstly, it is necessary to explore “whether the subject matter of the litigation is a trade secret,” and secondly, it is essential to determine “whether the defendant’s conduct constitutes trade secret misappropriation.”  Regarding “whether the subject matter of the litigation is a trade secret,” it is necessary to examine whether the subject matter of the litigation meets the three elements of a trade secret under Article 2 of the Trade Secrets Law: (1) secrecy: not generally known to those involved in such information; (2) economy: having actual or potential economic value due to its secrecy; (3) the owner has taken reasonable confidentiality measures. 

In a trade secret lawsuit, the defendant’s assertion of the “reverse engineering defense” means the defendant contends that if the subject matter of the lawsuit can be analyzed through reverse engineering (i.e., disassembling and analyzing the product, reverse inference of the design elements such as the process flow, organizational structure, functions, performance, and specifications to understand information such as the manufacturing or research and development method of the product), such a subject matter is “known to people generally involved in such information,” lacks secrecy, and is therefore not a trade secret.  The Supreme Court’s 110-Tai-Shang-3193 Criminal Decision and the holdings of the lower courts show that there is significant controversy in practical court opinions regarding whether the reverse engineering defense can successfully override the secrecy element.

2. Case analysis: Supreme Court’s 110-Tai-Shang-3193 Criminal Decision

(1) Backgrounds and facts of the case

Previously serving as the President of the Complainant company, Defendant A was retained by a customer to design and manufacture a UV double-sided molding machine, including PDF drawings and CAD files.  Subsequently, Defendant A left the Complainant company and set up Company B.  Later, in order to carry out the business of outsourcing the manufacture of UV double-sided molding machines for Company B, the drawing files related to the UV double-sided molding machines of the Complainant company were obtained at an unknown time and in an unknown manner and sent to Company B’s customer.  Therefore, the Complainant company pressed criminal charges against Defendant A for trade secret misappropriation.

For the defensive and offensive arguments of secrecy in this case, the Complainant company asserted that the CAD file is a customized design and owned by it, and that if such a CAD file is possessed by the Defendant, people with ordinary skills in the field of machine tool manufacturing can manufacture the UV double-sided forming machine on such a basis.  The Defendant raised the reverse engineering defense, holding that the CAD file lacked secrecy.

(2) The first instance decision held that the reverse engineering defense was not established on the ground that even by taking the original machine apart to take measurements, the complete information about the CAD file at issue still cannot be obtained easily.

The first instance decision (the 107-Zhi-Su-1 Criminal Decision of the Taichung District Court of Taiwan) held that although the Complainant company had sold UV double-sided forming machines and delivered related PDF files to specific customers, the secrecy of the trade secrets was relative, not absolute.  The owner of the trade secrets had the subjective intention to keep the secrets confidential and reasonably disclosed them to the specific customers only based on the sales contracts for the business activities, which did not result in the loss of secrecy.  In addition, PDF files and CAD files are not the same.  CAD files can be drawn to the exact size of each component of the machine and placed in different layers and record information such as the “component shape, component size, surface finishing precision of some components, and the spatial configuration between components,” which cannot be easily recovered based on PDF files.  Such information also cannot be easily obtained by disassembling the original machine to take measurements.  Therefore, the CAD file still has secrecy.

(3) The second instance decision held that the reverse engineering defense was established on the ground that the values almost identical to the dimensions of the actual components can be obtained simply by disassembling a physical machine into components and taking measurements based on three-dimensional measuring instrument technologies, which have long become mature.

However, the second instance decision on this case (the 108-Xing-Zhi-Shang-37 Criminal Decision of the Intellectual Property and Commercial Court) made a very different determination.  Although it was held that the contents of the CAD drawing file still depict the precise dimensions of the various components of the UV double-sided forming machine components and placed on different layers and include information such as the “component shape, component size, surface finishing precision of some components (inverted triangle symbol) and spatial configuration between components,” still for the “component shape, spatial configuration between components, and component size,” the values almost identical to the actual component sizes can be obtained by disassembling the physical machine into components to take simple measurements based on the three-dimensional measuring instrument technologies, which have long become mature.  Therefore, the CAD drawing file has no “secrecy.”

(4) The Supreme Court reversed the second instance decision on the ground that the second instance decision overlooked the premises for the legality of reverse engineering, the cost that should be spent, and the difficulty in actual operation.

Facing diametrically different opinions in the first instance and second instance decisions, the Supreme Court rendered the 110-Tai-Shang-3193 Criminal Decision to expound its legal opinion on the reverse engineering defense under the Trade Secrets Law.  For starter, it held that the determination of the second-instance court overlooked the premises for the legality of reverse engineering, the cost that should be spent, and the difficulty in actual operation.  To be specific, if the implementation of the reverse engineering requires considerable costs (e.g., money, time, professional instruments, expertise, etc.), it is apparent that the information in the product is not readily available and that third parties who wish to learn the information must still make considerable effort to obtain it.  Therefore, this is sufficient to conclude that such information still has secrecy and should be protected as a trade secret.

In addition, if an actor obtains by improper means the object to which a trade secret is attached, even if the actor obtains the trade secret by making considerable effort in reverse engineering, the act should still be regarded as an “improper means.”  The original decision on this case only indicated that the Defendant obtained a file to which the trade secret is attached by unknown means and failed to further explore the legality of the acquisition of the file.

In summary, the Supreme Court held that whether the Defendant could obtain an identical drawing file by reverse engineering is still in doubt, given the large number of the parts and components of the UV double-sided forming machine in this case and the complicated disassembly process, which requires considerable effort, time, and costs, not to mention that margins of errors may potentially exist in the course of measurement; thus, the Supreme Court held that the CAD file still has secrecy, and whether the means of the Defendant to obtain the trade secret can be justified is still unclear.

3. The authors’ view

The authors acknowledge the opinions of the first instance court and the Supreme Court in this case, that in practice, the perpetrator should not be easily allowed to override the secrecy element with the reverse engineering defense, so as to prevent the cost of research and development of the trade secret owner from going down the drain.  In addition, the determination of the courts of different instances on the reverse engineering defense, regardless of whether it was ultimately accepted, has a high degree of uncertainty in their underlying reasoning.  This is unfavorable to the formation of a stable legal order.

The authors suggest that in addition to patent deployment, the technology industries in Taiwan should not overlook the trade secret protection strategy for process technologies, design specifications, and manufacturing parameters suitable for trade secret protection, including the establishment of a corresponding management mechanism, the adoption of reasonable confidentiality measures, and the regular compilation of relevant information on R&D costs and labor expenses to serve as favorable evidence of secrecy and economy.

[1] Exclusive trade secret section of the Intellectual Property Office: