A pair of close cross-border business partners has unexpectedly come to blows at court even though last month they had shown up a cooperation ceremony together.

On 21 March, INEOS, the world’s fourth largest chemicals company, announced that it had lodged a suit against Sinopec, China’s largest oil and petrochemical company, and its subsidiaries Sinopec Ningbo Engineering Company Limited ("SNEC") and Sinopec Anqing Company Limited, as well as other relevant companies, for breach of agreements and misuse of trade secrets.

Tom Crotty, the executive director of INEOS, commented to the 21st Century Business Herald that INEOS had signed patent technology agreements with SNEC as early as 1984, and the agreements were updated in 2007 to require, among other things, SNEC to obtain the consent of INEOS before it starts the construction of every project. "Now we know that SNEC had started the construction of other projects without authorization", he said.

He said that the problem had gradually surfaced in the past six to nine months when they noticed several large acrylonitrile production projects in China, all of which seemed to be linked with SNEC in some way, particularly the public announcement of the Anqing Phase II Project, which prompted INEOS to "immediately realize the seriousness of the problem".

He explained that INEOS only licensed SNEC to use its technology for the construction of the Anqing Phase I Project, and SNEC had never mentioned the Anqing Phase II Project. "Without our permission, SNEC started the construction of the Anqing Phase II Project just as they did the Anqing Phase I Project", he said. "The Phase II Project produces products which are the same as under the Phase I Project, and the capacity is also 130,000 tonnes. Our agreements with SNEC make it clear that SNEC is not allowed to conduct the construction of acrylonitrile projects alone."

INEOS has filed a suit in the Beijing Higher People’s Court, and also lodged a complaint to the Arbitration Institute of the Stockholm Chamber of Commerce, which deals with international economic disputes.

INEOS is concerned that the above activities would cause potential damage to its global acrylonitrile business valued at USD3 billion, or affect its cooperation with Tianjin Bohai Chemical Industry Group Co., Ltd. on a joint venture project for a acrylonitrile plant with an annual capacity of 260,000 tonnes, which is now under construction and will be operational by the end of 2016.

Acrylonitrile can be used widely for various purposes as an important raw material of synthetic fibre, synthetic rubber and plastics. Due to a higher market demand, its price has stayed firm since this year.

The Swiss-based company INEOS almost dominates the global acrylonitrile business. It claimed that its patent technology for acrylonitrile is used by more than 90% of acrylonitrile plants worldwide. INEOS is the largest acrylonitrile producer, with production bases in the United States, Britain and Germany.

INEOS chairman Jim Ratcliffe stresses that although Sinopec has built a "value cooperation relationship" in the Chinese market, "we have no option but to defend our hard-won intellectual property."

INEOS on 18 February signed an agreement with Sinopec Yangzi Petrochemical Company Ltd. to jointly invest CNY3.15 billion to build a proposed largest phenol and cumene production plant with an annual capacity of 650,000 tonnes in Nanjing. They have also signed an agreement for the transfer of phenol and cumene technology. INEOS is the world’s largest phenol and cumene producer and supplier.

Journalists of the 21st Century Business Herald have tried to contact the general manager of SNEC and other directors for confirmation, but all responded that they were not clear about the matter.

Sinopec responded that it received the complaint filed by INEOS in the Beijing Higher People’s Court about the violation of its acrylonitrile technical know-how by Sinopec and Sinopec Shanghai Research Institute of Petrochemical Technology on 17 March. It is in fact Shanghai Research Institute of Petrochemical that successfully developed an acrylonitrile catalyst and its associated technology, which is Sinopec’s core proprietary technology after 50 years of research. Sinopec has full proprietary intellectual property rights over such technology. There is no ground for the infringement alleged by INEOS.

(Source: www.21cbh.com)

[Comments]

Mike J. Chen: It is a case involving misuse of trade secrets and breach of agreements due to technology licensing or transfer. Therefore, the owner of the technology, INEOS, has chosen to resort to two remedies: 1. Filing a suit for misuse of trade secrets in the Beijing Higher People’s Court; and 2. Applying for arbitration to the Arbitration Institute of the Stockholm Chamber of Commerce for breach of agreements.

For the claim of misuse of trade secrets filed in Beijing, I believe that the key issues will revolve around the following:

1. INEOS’ definition of the relevant technical know-how and its evidence for its ownership of such technical know-how, e.g. what is the content of the technical know-how to which it has applied for protection? Is there any specific evidence and media to prove such technical know-how? Have the parties expressly agreed on this in any agreement?; 2. Does the technical know-how comply with the legal requirements for secrecy, confidentiality and utility? The defendant Sinopec may defend itself by arguing that the technology has been made public or INEOS has failed to take reasonable measures to ensure confidentiality; 3. Basis for claiming damages. How much the plaintiff will claim is currently unknown. However, as the suit has been directly lodged to the Beijing Higher People’s Court, it is presumed that INEOS will claim damages of over CNY100 million. It won’t be easy for INEOS to prove its loss and have its claims upheld by the court. On the part of the defendant, it could defend itself to have the damages reduced as the plaintiff has filed an infringement suit and arbitration respectively, which involve concurrence of breach of agreements and infringement.

In general, in a dispute over violation of trade secrets, the plaintiff is required to shoulder a heavier burden of proof. Therefore, only with well-stipulated agreements and other clear and complete evidence can INEOS have a good chance of winning the case.

Lucy H. Li: INEOS and Tianjin Bohai Chemical Industry Group Co., Ltd. are now working together on a joint venture project for a new acrylonitrile plant with an annual capacity of 260,000 tonnes. The plant is expected to be operational by the end of 2016. It will be a production base in China to meet the growing market demand for acrylonitrile, which is staying at a firm price, and meanwhile help to reduce INEOS’ cost and further improve its market competitiveness. However, Sinopec’s acrylonitrile project will leave the future price of acrylonitrile and market edges uncertain. The ending of their good cooperation is only due to Sinopec having affected INEOS’ core interests.

The key issue of this case is whether the Anqing Phase II Project has adopted INEOS’ technology. If it adopts INEOS’ technology as described in the agreements, there would be a possibility of breach of agreements on the part of Sinopec. If what Sinopec adopts is technology upgraded on the basis of INEOS’ technology and INEOS has been granted the relevant licensed patent, there would be a possibility of infringement of a patent on the part of Sinopec.

It is worth noting that the case has been filed for the reasons of "breach of agreements and misuse of trade secrets". Hence, it is worth discussing "patent infringement" as mentioned above. It is very likely that INEOS believes that Sinopec has used its trade secrets as described in the licensing agreement despite there being no direct use of INEOS’ patent protected technology in China, in its acrylonitrile catalyst technology for the Anqing Phase II Project. Therefore, the case may mainly involve trade secrets, rather than general patent infringement. Another focus of the case is that INEOS has also filed a complaint with the Arbitration Institute of the Stockholm Chamber of Commerce, which is the generally accepted arbitration institution for the resolution of economic and trade conflicts between the East and West. It may be more in the interest of INEOS in respect of the future relationship between them and the confidentiality of technical know-how.

Mary Y. Zhang: Sinopec reported that on 12 October 2007 it signed a PDP contract with Sinopec Ningbo Engineering Company Limited ("SNEC").

The report identifies SNEC as the sole engineering company in China that has mastered the engineering design skills and project construction management in the field of acrylonitrile construction, having completed the construction of China’s largest acrylonitrile facility with an annual capacity of 260,000 tonnes for Secco by way of EPC.

From the above, we can see that what SNEC and INEOS have concluded is a PDP contract. If, as stated by INEOS, the contract has made it clear that SNEC is not allowed to conduct construction of acrylonitrile projects alone, and INEOS only licensed SNEC to carry out the Anqing Phase I Project, SNEC has violated the contract by its construction of the Anqing Phase II Project without the consent of INEOS, and may have to assume the relevant liability for breach of contract.

Despite Sinopec’s response to the 21st Century Business Herald that it was in fact the Shanghai Research Institute of Petrochemical that successfully developed an acrylonitrile catalyst and its associated technology, which is Sinopec’s core proprietary technology after 50 years of research, that Sinopec has full proprietary intellectual property rights over such technology and that there is no ground for the infringement alleged by INEOS, it is still not able to rule out the possibility that Sinopec has violated the technical know-how as involved in the PDP contract between SNEC and INEOS, especially the relevant content involved in the design and construction of the complete set of facilities.

Therefore, for a period of time in the future, it will be a top priority for SNEC, Sinopec Anqing Company Limited and other relevant entities to prove with strong evidence that it has never used any trade secret involved in the PDP contract between SNEC and INEOS for the Anqing Phase II Acrylonitrile Project.

It is generally made clear in the agreements between INEOS and SNEC that SNEC is not allowed to conduct construction of acrylonitrile projects alone, and INEOS only licensed SNEC to construct the Anqing Phase I Project. Therefore, SNEC’s commencement of the construction of the Anqing Phase II Project without the consent of INEOS constitutes a breach of contract, and it may have to assume the relevant liability for breach of contract to a great extent.

As a pair of good partners, SNEC should have performed the obligation of giving prior notice even if it did not use the technology as involved in the PDF contract between SNEC and INEOS, in order to avoid being sued and the consequences that have now arisen. Even as SNEC could clear itself of agreement violation allegations in the proceedings, the complaints could at least have some adverse effect on the goodwill of SNEC, and may impact further cooperation between INEOS and SNEC, making them unable to realize win-win results.

[The comments above are just individual opinions for reference only.]