Trade Secrets - Celgard, LLC v Shenzhen Senior Technology Material Co Ltd
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| By Tkarcher - Own work, CC BY-SA 3.0, https://commons.wikimedia.org/w/index.php?curid=21882537 |
Chancery Division (Mr Justice Trower) Celgard, LLC v Shenzhen Senior Technology Material Co Ltd [2020] EWHC 2072 (Ch) (30 July 2020)
This was an application by Celgard LLC ("Celgard") for an interim injunction to restrain Shenzhen Senior Technology Material Co Ltd ("Senior") from placing its battery separators onto the UK market or importing them into the United Kingdom on the ground that such marketing and importation would infringe Celgard's rights under the Trade Secrets Directive (Directive (EU) 2016/943 of the European Parliament and of the Council of 8 June 2016 on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use and disclosure (Text with EEA relevance) OJ L 157, 15.6.2016, p. 1–18) and at common law. Celgard also applied for permission to serve the proceedings out of the jurisdiction pursuant to CPR 6.36 by an alternative method in accordance with CPR 6.15 (1). The applications were heard by Mr Justice Trower on 2 and 3 July 2020. His lordship delivered his judgment in Celgard, LLC v Shenzhen Senior Technology Material Co Ltd [2020] EWHC 2072 (Ch) on 30 July 2020.
At paragraph [2] of his judgment, Mr Justice Trower said:
"Battery separators are used in lithium-ion batteries to separate the anode and the cathode of the battery. They can be classified as wet separators or dry separators, depending on the way in which they are made. Dry battery separators, being the product with which these proceedings are concerned, are highly engineered sheets of microporous polymer which may be coated on one or both sides. They are critical to the performance, product life and safety of batteries, because they allow ions to flow between the electrodes, but prevent the electrodes coming into contact, which can cause the cell to short circuit and overheat."
"Battery separators are used in lithium-ion batteries to separate the anode and the cathode of the battery. They can be classified as wet separators or dry separators, depending on the way in which they are made. Dry battery separators, being the product with which these proceedings are concerned, are highly engineered sheets of microporous polymer which may be coated on one or both sides. They are critical to the performance, product life and safety of batteries, because they allow ions to flow between the electrodes, but prevent the electrodes coming into contact, which can cause the cell to short circuit and overheat."
It was Celgard's case that Senior was producing battery separators using Celgard's confidential information and trade secrets and that those separators (or at least some of them) were being marketed in the United Kingdom. It said that Senior had acquired those trade secrets through Dr Xiaomin (Steven) Zhang ("Dr Zhang"), a former Celgard scientist, who is now Senior's Chief Technology Officer. Celgard said that Senior's misuse of its trade secrets had enabled Senior to develop a product which competes with Celgard's at a much lower price. It contended that it had two kinds of claim against Senior: direct claims against Senior for offering in the UK market, battery separators that benefit significantly from the unlawful use by Senior and/or Dr Zhang of Celgard's trade secrets and vicarious claims against Senior in respect of Dr Zhang's own breaches of confidence.
Celgard's particular concern was that a consignment of battery separators could be used by a UK manufacturer of lithium-ion batteries to assess the Senior separator against its specification in competition with a battery separator produced by Celgard. The UK customer makes batteries for a well-known manufacturer of electric vehicles. Such an assessment might lead to Senior's becoming "qualified" for the purpose of supplying what Celgard contended was its unlawfully made separator to the UK customer. Celgard was concerned that qualification would only be achievable by Senior with the assistance of Celgard's trade secrets, the misuse of which would have facilitated the ability of Senior to enter the UK market by undercutting Celgard. Its case was that, if it then loses the contract with the UK customer, it will have suffered damage that would be very difficult to quantify as a direct result of Senior's unlawful use in England of its trade secrets.
The judge directed himself at [17] that three issues arose on the application for permission to serve out of the jurisdiction:
- Whether Celgard's claim had a reasonable prospect of success (CPR 6.37 (1) (b)), which both parties agreed was the same as asking whether there was a serious question to be tried: VTB Capital Plc v Nutritek International Corp [2013] 2 AC 337 at [164].
- Whether there was a good arguable case that any of the grounds set out in paragraph 3.1 of PD 6B applied; and
- Whether England and Wales was the "proper place" to bring the claim (CPR 6.37 (3)) that is to say, was that jurisdiction the forum conveniens?
He also directed himself at [19] that the questions that arose when determining whether or not to grant an interim injunction were those set out by Lord Diplock in American Cyanamid v. Ethicon Ltd [1975] AC 396, 407-409:
- Was there a serious question to be tried? That is the same as the first question which arises on the application for permission to serve out.
- Would damages be an adequate remedy for either party?
- Where does the balance of convenience lie?
Mr Justice Trower considered first whether there was a serious question to be tried. Celgard advanced a three-stage argument that his lordship summarized at [43]:
"The first stage was that Senior's share of the dry separator market went up sharply after Dr Zhang`s arrival from Celgard. The second stage in the argument was that this increase was due to an improvement in the range and quality of Senior`s product. The third stage in the argument was that the improvement in quality was as a result of Senior`s acquisition and use of Celgard's trade secrets through Dr Zhang."
Argument focused on the use of a binder that was different from the one that Senior had used before Dr Zhang joined it but similar to the one that he had helped to develop at Celgard. As the judge noted at [58]:
"Senior mounted a sustained attack on the way that Celgard puts its case on the binder, but it is clear to me that it raises a serious issue to be tried. On any view, it demonstrates that the binder now being used by Senior in its product is in some respects different from the binder being used before Dr Zhang's arrival and that there is a real possibility that its make-up has been facilitated by the use of Celgard's trade secrets. It may well turn out to be the case that the explanations advanced by Senior succeed at trial, but much of what it had to submit was based on the inherent improbabilities of the evidence which had been adduced by Celgard and by Dr Wensley in particular. There were even a number of detailed points in relation to which it had to say that Dr Wensley's evidence could not be taken at face value and that he was being untruthful. I am not in a position to reach that conclusion at this stage. It is plain to me that Celgard has raised relevant issues on this aspect of the case that can only be decided at a trial."
"The first stage was that Senior's share of the dry separator market went up sharply after Dr Zhang`s arrival from Celgard. The second stage in the argument was that this increase was due to an improvement in the range and quality of Senior`s product. The third stage in the argument was that the improvement in quality was as a result of Senior`s acquisition and use of Celgard's trade secrets through Dr Zhang."
Argument focused on the use of a binder that was different from the one that Senior had used before Dr Zhang joined it but similar to the one that he had helped to develop at Celgard. As the judge noted at [58]:
"Senior mounted a sustained attack on the way that Celgard puts its case on the binder, but it is clear to me that it raises a serious issue to be tried. On any view, it demonstrates that the binder now being used by Senior in its product is in some respects different from the binder being used before Dr Zhang's arrival and that there is a real possibility that its make-up has been facilitated by the use of Celgard's trade secrets. It may well turn out to be the case that the explanations advanced by Senior succeed at trial, but much of what it had to submit was based on the inherent improbabilities of the evidence which had been adduced by Celgard and by Dr Wensley in particular. There were even a number of detailed points in relation to which it had to say that Dr Wensley's evidence could not be taken at face value and that he was being untruthful. I am not in a position to reach that conclusion at this stage. It is plain to me that Celgard has raised relevant issues on this aspect of the case that can only be decided at a trial."
It followed that there was a serious question to be tried.
There was no serious dispute that at least one of the conditions of paragraph 3.1 of PD6B applied.
On the question of whether England was the appropriate forum for this litigation, his lordship referred to The Spillada [1987] AC 460, 476, Altimo Holdings and Investment Ltd v. Kyrgyz Mobil Tel Ltd [2011] UKPC 7, Lungowe v Vedanta Resources Plc [2019] UKSC 20 at [66], Huawei Technologies Co Ltd v Conversant Wireless Licensing Ltd [2019] EWCA Civ 38 and Re Harrods Buenos Aires Ltd [1992] Ch 72. He noted that there were proceedings between the parties in the USA and China and that Senior argued that Celgard could have counterclaimed in China for the relief that it had sought in England.
The learned judge decided that England was the appropriate forum. The alleged wrongdoing was the supply to an English company of battery separators that had been developed in breach of confidence and any damage to be sustained as a result of such wrongdoing would arise here. It was not clear that a Chinese court would entertain such a claim. England was the more convenient for the witnesses. The judge added at [112] that even if he had reached a different conclusion, he might still have had serious concerns as to whether Celgard could obtain substantial justice in China which would have been the second Spillada question.
He, therefore, gave permission for the proceedings to be served outside the jurisdiction.
He, therefore, gave permission for the proceedings to be served outside the jurisdiction.
However, his lordship refused to allow Celgard to serve by an alternative means. China is party to the Hague Service Convention and process is usually served within 4 to 6 months. Celgard submitted that the pandemic might delay service for anything up to 12 months which would be incompatible with the administration of justice. The judge said at [123]:
The last question that the judge considered was whether or not to grant an interim injunction. Having already found that there was a serious issue to be tried he addressed the matter of whether damages would provide an adequate remedy. He concluded at [143]:
"In my view damages on this aspect of the case would be extremely difficult to assess. Any downward pressure on the market more generally caused by the ability of Senior to contract with the UK Customer at a price that it was able to set as a result of the misuse of confidential information will be extremely difficult to quantify. If, as I consider to be the case, there is a material risk that such an eventuality may occur, I do not consider that damages will be an adequate remedy for Celgard."
Price erosion was not a factor that would affect Senior, While the grant of an injunction might give rise to some difficulties in the assessment of Senior's claim on the cross-undertaking, the judge did not think that the grant of an injunction which proves at trial to have been unjustified would have the same significant consequences as the refusal to grant an injunction to which it later transpires that Celgard was entitled. He concluded at [145]:
"While I think that there may also be difficulties for Senior in establishing its case on the cross-undertaking in damages if it were to succeed at trial, such difficulties as it may have will be outweighed by the inadequacy of a remedy in damages from Celgard's perspective."
In the absence of any countervailing factors in the balance of convenience, Mr Justice Trower made an order in the terms sought by Celgard until trial.
Perhaps the most interesting part of the judgment was paragraph [14] in which the judge considered the extent to which the Trade Secrets Directive and the Trade Secrets (Enforcement, etc) Regulations 2018 which transposes the Directive into English law has extended the protection of trade secrets in the UK:
"In a number of respects, the [Trade Secrets Directive and the Trade Secrets (Enforcement, etc) Regulations 2018] codify principles which were already established in English law. However, as Celgard submitted, the recitals to the [Trade Secrets Directive] makes clear that one of the vices it (and therefore by extension the [Trade Secrets Directive and the Trade Secrets (Enforcement, etc) Regulations 2018]) was designed to remedy was the misuse of trade secrets abroad to produce goods that are then imported into Member States from third countries:
14.1. Recital (4):
'Innovative businesses are increasingly exposed to dishonest practices aimed at misappropriating trade secrets, ... whether from within or from outside of the Union.'
14.2. Recital (9):
'Differences in legislative regimes also facilitate the importation of goods from third countries into the Union through entry points with weaker protection, when the design, production or marketing of those goods rely on stolen or otherwise unlawfully acquired trade secrets.'
14.3. Recital (28):
'It is possible that a trade secret could be used unlawfully to design, produce or market goods, or components thereof, which could be spread across the internal market, … In such cases, and when the trade secret in question has a significant impact on the quality, value or price of the goods resulting from that unlawful use or on reducing the cost of, facilitating or speeding up their production or marketing processes, it is important to empower judicial authorities to order effective and appropriate measures with a view to ensuring that those goods are not put on the market or are withdrawn from it. Considering the global nature of trade, it is also necessary that such measures include the prohibition of the importation of those goods into the Union or their storage for the purposes of offering or placing them on the market …'"
"In my view damages on this aspect of the case would be extremely difficult to assess. Any downward pressure on the market more generally caused by the ability of Senior to contract with the UK Customer at a price that it was able to set as a result of the misuse of confidential information will be extremely difficult to quantify. If, as I consider to be the case, there is a material risk that such an eventuality may occur, I do not consider that damages will be an adequate remedy for Celgard."
Price erosion was not a factor that would affect Senior, While the grant of an injunction might give rise to some difficulties in the assessment of Senior's claim on the cross-undertaking, the judge did not think that the grant of an injunction which proves at trial to have been unjustified would have the same significant consequences as the refusal to grant an injunction to which it later transpires that Celgard was entitled. He concluded at [145]:
"While I think that there may also be difficulties for Senior in establishing its case on the cross-undertaking in damages if it were to succeed at trial, such difficulties as it may have will be outweighed by the inadequacy of a remedy in damages from Celgard's perspective."
In the absence of any countervailing factors in the balance of convenience, Mr Justice Trower made an order in the terms sought by Celgard until trial.
Perhaps the most interesting part of the judgment was paragraph [14] in which the judge considered the extent to which the Trade Secrets Directive and the Trade Secrets (Enforcement, etc) Regulations 2018 which transposes the Directive into English law has extended the protection of trade secrets in the UK:
"In a number of respects, the [Trade Secrets Directive and the Trade Secrets (Enforcement, etc) Regulations 2018] codify principles which were already established in English law. However, as Celgard submitted, the recitals to the [Trade Secrets Directive] makes clear that one of the vices it (and therefore by extension the [Trade Secrets Directive and the Trade Secrets (Enforcement, etc) Regulations 2018]) was designed to remedy was the misuse of trade secrets abroad to produce goods that are then imported into Member States from third countries:
14.1. Recital (4):
'Innovative businesses are increasingly exposed to dishonest practices aimed at misappropriating trade secrets, ... whether from within or from outside of the Union.'
14.2. Recital (9):
'Differences in legislative regimes also facilitate the importation of goods from third countries into the Union through entry points with weaker protection, when the design, production or marketing of those goods rely on stolen or otherwise unlawfully acquired trade secrets.'
14.3. Recital (28):
'It is possible that a trade secret could be used unlawfully to design, produce or market goods, or components thereof, which could be spread across the internal market, … In such cases, and when the trade secret in question has a significant impact on the quality, value or price of the goods resulting from that unlawful use or on reducing the cost of, facilitating or speeding up their production or marketing processes, it is important to empower judicial authorities to order effective and appropriate measures with a view to ensuring that those goods are not put on the market or are withdrawn from it. Considering the global nature of trade, it is also necessary that such measures include the prohibition of the importation of those goods into the Union or their storage for the purposes of offering or placing them on the market …'"
For those who wish to explore this topic further, I discussed the Trade Secrets Directive on 7 July 2016 and the Trade Secrets Regulations in Transposing the Trade Secrets Directive into English Law: The Trade Secrets (Enforcement etc) Regulations 6 June 2018. Anyone wanting to discuss this article or any of the topics considered in it should call me on +44 (0)20 7404 5252 during ordinary business hours or send me a message through my contact form.
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