As AI technology continues to grow, protecting trade secrets has become more important than ever. A recent ruling by the Guangzhou Intellectual Property Court involving a virtual digital human technology dispute resulted in ¥4.95 million in punitive damages, highlighting that trade secret theft can lead to serious legal and financial consequences. This case offers valuable lessons for businesses seeking to protect their intellectual property.
(I) Case Overview: From Mass Employee Departure to 90% Code Similarity
1. A Pre-Planned “Emptying-Out” Talent Exit
The plaintiff, Company A, is a leading enterprise in AI-based virtual digital human technology, widely used in both government and commercial applications.
The dispute began in 2024:
Initial negotiations: Company B previously engaged in procurement discussions with Company A but failed to reach an agreement.
Mass departure: In September 2024, five core R&D personnel and executives simultaneously left Company A and joined Company B.
Rapid commercialization: Only two months later (November 2024), Company B launched an interactive platform highly similar to Company A’s product.
2. Key Evidence: 90% “Digital Fingerprint” Similarity
After detecting suspicious activity, Company A conducted a technical comparison. The results showed that source code similarity exceeded 90% and database schema structure was nearly identical. This strongly suggested unauthorized acquisition of proprietary technical information, including possible illegal internal network intrusion methods.
(II) Legal Analysis: Trade Secrets and Punitive Damages
The core legal questions were: Whether the information qualifies as a trade secret and Whether punitive damages should apply.
1. Three Requirements for Trade Secret Protection (China)
According to Article 9 of China's Anti-Unfair Competition Law, a protected trade secret (including technical secrets) must satisfy three requirements:
Secrecy: The source code and database were not publicly available.
Commercial Value: The technology generated economic value through commercial use.
Reasonable Confidentiality Measures: The company implemented safeguards such as tiered access controls, encrypted transmission, and private deployment to protect its confidential information.
2. Comparative Legal Perspective
Different jurisdictions handle similar disputes in comparable ways:
Hong Kong: No standalone trade secrets statute. Protection is primarily through the common law doctrine of breach of confidence, relying on contractual and implied duties of good faith.
United States: Under the Defend Trade Secrets Act (DTSA) and Uniform Trade Secrets Act (UTSA), courts may award enhanced or punitive damages in cases of willful and malicious misappropriation, sometimes up to double damages.
3. How the ¥4.95 Million Was Calculated
The court used Company A’s expected profit loss of ¥1.65 million as the base amount. Given the defendant’s:
Clear malicious intent (mass recruitment + unauthorized access)
Severe misconduct (direct market substitution)
High degree of similarity and replication
The court applied a triple punitive multiplier ( i.e.¥1.65 million × 3 = ¥4.95 million). This reflects a broader judicial shift from compensatory damages toward deterrence-based enforcement in intellectual property cases.
(III) Expert Takeaways: How Startups Can Build a “Technology Firewall”
1. Three-Layer Confidentiality System
Companies should not rely on a single NDA. Instead, employment confidentiality clauses, dedicated trade secret agreements and non-compete agreements for key personnel should be included.
Important: Non-compete clauses are only enforceable if legally required compensation is provided.
2. Technical and Digital Controls
Minimum Access: Limit employees' access to only the source code of their assigned modules.
Activity Logging: Monitor internal systems and set up alerts for unusual code exports or unauthorized access.
3. Exit Compliance Audits
When key employees leave the company, an audit of their computer equipment should be conducted before it is returned.
Employees should be informed of the legal consequences of trade secret misappropriation and required to provide a written undertaking confirming that they have not taken any technical materials. This may serve as evidence of subjective malicious intent should litigation arise in the future.
4. Anti-Poaching Clauses in B2B Negotiations
Before entering into business negotiations with a potential partner (such as the defendant in this case), the parties should sign a Non-Disclosure Agreement (NDA).
The NDA should clearly provide that, during the negotiations and for a specified period thereafter, neither party may solicit or recruit the other party's employees.
Conclusion
The ruling in this virtual digital human case reinforces a key principle for the AI era: Innovation is costly—but legal protection is enforceable. In today’s technology-driven economy, “copying” is no longer a low-risk shortcut. Strong intellectual property protection and compliance frameworks are now essential foundations for sustainable growth.
Legal Note
Article 17 of China’s Anti-Unfair Competition Law allows courts to award 1 to 5 times damages in cases of serious, malicious trade secret infringement, based on losses or illegal gains.