by Zhang Xiaoxia KING & WOOD MALLESONS
Preview:
On 27 February 2018, the General Office of the Central Committee of the Communist Party of China (CCCPC) and the General Office of the State Council issued the Opinions on Several Issues Concerning Heightening Reform and Innovation in Intellectual Property Right Trial Field. The second part of Article 2 specifically stresses two points: “First, adhering to the value orientation that intellectual property rights create value, and right holders deserve interests in return. A judicial determination mechanism for damages, with compensation as the principal means and punishment as the supporting means, shall be established, and the problem of “low-value compensation” in action against infringements on intellectual property rights shall be resolved first. Second, tightening punishment for infringements on intellectual property rights and reducing enforcement costs. For repetitive infringements, infringements in bad faith, or other serious infringements, more compensation shall be awarded according to the law, and the amount of compensation shall be raised.” Chinese judicial policy documents have kept raising the amount of compensation over the past few years. The author selected 15 Chinese cases with the highest compensation and figured out the way courts awarded damages and the principles for determining damages. The author expects to, accordingly, provide some guidelines for legislation strategies and evidence collection in future intellectual property infringement cases.
The 15 typical cases with high damages include 7 patent cases, 5 trademark cases, 1 copyright case and 2 trade secret cases.
The courts handling those cases cover different levels of jurisdictions, including Beijing Higher People’s Court, Higher People’s Court of Shandong Province, Higher People’s Court of Fujian Province, Higher People’s Court of Zhejiang Province, Beijing Intellectual Property Court, Shanghai Intellectual Property Court and Suzhou Intermediate People’s Court. Among those 15 cases, there are several cases still under the review of appellate courts, few cases dismissed by appellate courts as the alleged infringed patents were invalidated via patent invalidation procedures during litigations. Except for them, most cases are done. The damages awarded by courts all exceed the highest amount of statutory compensation in each category.[1] In most cases, the court supported the full amount of compensation claimed by the plaintiffs.
Article 65 of the Chinese Patent Law provides four methods to calculate damages in patent infringement cases: (1) the losses of patentees, (2) the profits of infringers, (3) the multiplier of patent royalty and (4) the statutory damages. There are similar provisions in the PRC Copyright Law, the PRC Trademark Law and the Anti-Unfair Competition Law. The Anti-Unfair Competition Law, however, does not include the third method. Furthermore, Article 63 of PRC Trademark Law specifically provides punitive damages for bad faith cases.
On 21 April 2009, the Supreme People’s Court issued the Opinions on Several Issues concerning Intellectual Property Trials Serving the Overall Objective under the Current Economic Situation. The Article 16 provides that “where the specific amount of losses incurred due to the infringement or profits derived from infringement is difficult to prove, but there is evidence that the aforesaid amount is obviously greater than the upper limit of statutory compensation, the court shall reasonably determine the amount of compensation over the statutory upper limit by considering all the evidences in the case.” This is always called discretionary damages, in order to be distinguished from the other four methods.
Among the 15 cases above, all trademark cases, copyright cases, trade secret cases and most patent cases adopted discretionary damages. In one patent case, the damages were calculated based on the losses of patentees, and in two other patent cases, the damages were calculated based on the multiplier of royalty. Thus, the author would analyze the three calculating methods one by one.
1.The losses incurred due to the infringement
There is a “principle of compensating for actual losses” under PRC Tort Law, which determines the damages based on the losses of right holders and compensates the right holders by filling their losses. From an economic perspective, this method seems to be perfect. It could provide full compensation to right holders and avoid either lack of compensation or excessive compensation.[2] The first paragraph of Article 20, Several Provisions of the Supreme People’s Court on Issues concerning the Application of Law in the Trial of Cases on Patent Disputes, provides that “The actual loss of the patentee due to the infringement may be calculated by multiplying the total amount of the decreased sales of the patentee’s patented products due to the infringement by the reasonable profit of each patented product. Where it is difficult to determine the total amount of the decreased sales of the patentee, the product of multiplying the total amount of the infringing products sold on the market by the reasonable profit of each patented product may be deemed as the actual loss of the patentee due to the infringement.”
But in practice, due to various kinds of reasons, patentees would not submit their financial books as evidences to prove their losses. And even if the patentee submits the financial books, it is still hard for auditing bodies to accurately calculate the losses incurred due to the infringement. Thus, the second part of the opinions provides a more feasible way to determine the losses of patentees.
In Beijing Woqi Data System Company v. Hengbao[3], the patentee asked the court to calculate the losses according to the second part of the aforementioned opinions. The Court said “First, the damages would be calculated by multiplying the actual sale of products by a reasonable profit of each product. Second, as the defendant refused to provide its profits derived from infringement, it is fair to support plaintiff’s reasonable claim. Third, the attorney fee can be calculated under the time-based billing mode adopted by law firms. As to the reasonableness of the attorney fee required by the plaintiff, the court would consider whether the case is necessary or not, whether the case is easy or hard to pursue, as well as the actual effort of lawyers.”
Accordingly, the Court issued survey letters to confirm the actual sales of infringing products, required the companies to clarify the number of products they had purchased, and by excluding the double-calculated products, the Court finally figured out the actual sales. To determine the reasonable profit of products, the Court considered the special auditor’s report and the gross profit disclosed in the prospectus issued by a third party and came up with an average number. The Court, at the same time, pointed out that as the relevant judicial interpretations used the general word “reasonable profit”, rather than specific word like “profit” or “gross profit”, it was acceptable to use the gross profit as the basis of calculating reasonable profit.
As to the reasonable expenses, the Court confirms the reasonableness of time-based billing mode adopted by most lawyers. It awarded the plaintiff both the paid and unpaid part of the attorney fee.
As a result, the Court awarded 4.9 million RMB in damages and 1 million RMB in reasonable expenses, fully supporting all claims of the plaintiff.
2.Multiplier of royalty
This is another relatively easy and direct method to calculate the damages. This method uses prior licenses and royalties already performed as references. If those licenses include patent packages, the specific patent needs to be picked out of the package.
In Zhejiang Longsheng v. Shaoxing Binhai Feixiang, the plaintiff submitted several prior licenses and some extra evidence to prove actual performances and asked the court to calculate damages in this method. We shall notice that, in this case, the defendant argued that it was a small company with a relatively small scale of operation, and it offered to submit financial documents voluntarily, asking the Court to calculate the damages according to its profits. The defendant also argued that the royalty claimed by the plaintiff was not a fair market price. The appellate court determined that the evidence submitted by the defendant cannot prove its profits and the infringed patent was licensed broadly, most licensees had already paid such a high price and the defendant was also required by contract to pay a royalty of 3 million RMB. As the losses of patentee and profits of infringer are both hard to determine, the damages can be calculated by a reasonable multiplier of royalty. The Court also considered that the defendant did not stop infringing after receiving the demand, which showed a bad faith. It finally awarded a compensation of 5 million RMB to the plaintiff. In this case, the prior licenses included only one patent, so there is no need to pick the patent out of a package.
In Xi’an Xidianjietong Wireless Network Communication Company v. Sony[4], the plaintiff alleged a standard royalty of 1 RMB per product, and it also alleged to determine the damages by tripling the royalty. The plaintiff submitted four prior licenses with third parties, which all included the standard royalty of 1 RMB per product. Those licenses are based on a patent package containing the infringed patent. The defendant argued that the royalty was not reasonable since the licenses included other patents. The Court determined that although the royalty covered a patent package, all the patents inside the package were related to WAPI and the infringed patent was the core of the package. Thus, the royalty in those prior licenses can be used to calculate damages in this case.
In addition, the defendant submitted the material provided by Telecom Equipment Certification Center under the Ministry of Industry and Information Technology, which showed the sales of infringing products. According to that, the royalty should be 2,876,391 RMB. The Court further considered several factors, including that the patent was the fundamental invention in the wireless security field, was awarded relevant technical prizes, was adopted by national standard and the defendant had fault in the negotiation with the plaintiff, and the Court finally supported the plaintiff’s claim of triple royalty. Also, the Court awarded the full amount of the reasonable expenses claimed by the plaintiff. Sony appealed to Beijing High Court, and this case had been affirmed by the second instance court.
3.Discretionary damages: exceeding the upper limit of statutory compensation
In Buluke v. Beijing Diyingte, the plaintiff offered three methods to calculate the profits of the defendant: (1) calculating the profit according to the operating income disclosed on the official website of the defendant, with the rate of profit determined in a document published by the National Bureau of Statistics. (2) calculating the profit according to the capacity and selling price disclosed on the defendant’s official website and the reference profit of its industry. (3) calculating the profit according to the capacity and selling price disclosed on the defendant’s official website and its own actual profit. The defendant failed to submit evidence to prove its actual sales and profit. Thus, the Court used the third method to determine the cost of products, calculated the gross profit by official selling price and deducted the human resources cost, sales and management cost, tax and additional cost, and eventually determined that the profits of infringing products were 11,836,747 RMB. The Court awarded 6 million RMB in damages, exceeding the upper limit of statutory damages, and 150,000 RMB in reasonable expenses.
In Huawei v. Huizhou Samsung, the Court used the notarized IDC data provided by the plaintiff to determine the sales of infringing products and used the average rate of profit in the domestic cellphone manufacturing industry, investigated and published by the Minister of Industry and Information Technology, together with the sales profit disclosed on the defendant’s website to determine the defendant’s profit. The Court said the minimum profit shall be 26.451926614672 billion RMB and the maximum profit shall be 109.11419728552 billion RMB. The Court stated the Graphical User Interface claimed in this patent contributed significantly to the profit of smart mobile terminals. Also, the Court pointed out that it had required the defendant to submit relevant sales data and rate of profit for several times, but the defendant either refused or delayed to submit the evidence. Thus, it should bear the unfavorable result of failing to provide enough evidence. Eventually, the Court awarded 80 million RMB in damages, exceeding the upper limit of the statutory damages, plus 500,000 RMB in reasonable expenses.
In Panasonic v. Zhuhai Jintao, Panasonic submitted the notarized sales and average price of the infringing products on e-commerce platforms as evidence. The defendant argued that most infringing products sold on the website were fake products, which were not produced by the defendant, and merchants on e-commerce platforms always participated in self-dealings or fake dealings to improve their reputation. So, most data provided by the plaintiff do not reflect the actual sales of the products. The Court, however, determined to award a damage of 3 million RMB according to the data shown on the platforms, fully supporting the plaintiff’s claim. Also, the Court awarded 200,000 RMB in reasonable expenses.
In 3M v. Changzhou Huawei New Material, the plaintiff asked the Court to calculate the damages based on the defendant’s profit of selling car body reflective marker products. The plaintiff provided the defendant’s annual operating income of 2013, the ratio of car body reflective marker products to all products (i.e. the value of car body reflective marker/ the value of all products) and the rate of profit of car body reflective marker products. But the Court said the aforementioned three documents were all inferences without support of any corresponding evidence. As for the rate of profit of car body reflective marker products, the plaintiff failed to provide its own rate of profit or the average rate of profit in the industry. The rate of profit of reflective products produced by a third party cannot, by itself, accurately or reasonably determine the defendant’s rate of profit because costs, prices and other factors that largely influence profits vary from company to company. Also, when determining the profit derived from infringement, the contribution of the infringed trademark to the sales of the products should be considered. Thus, the damage alleged by the plaintiff, 13 million RMB, was not supported by evidence. The Court considered the sales of the defendant’s products, the relatively high rate of profit of the product, the malice, the defendant’s refusal to submit financial documents, and finally awarded 3.5 million RMB in damages. In that case, the Court adopted a relatively strict standard, refusing to consider the rate of profit of a third company while considering the contribution of the infringed trademark to the profits of the products. This is consistent with the ratio principle, proposed in the Supreme People’s Court’s instructive case of trademark “Cai Die Xuan” in 2017. In that case, the Supreme People’s Court said that “the income was closely related to its producing scale, advertisement, and product quality, rather than merely came from the usage of the infringed trademark or the reputation of the infringed trademark.”
In most of the cases stated above, the Court considered the evidence provided by both parties and the evidence collected by the court when calculating the profits of the defendants or the losses of the plaintiffs incurred due to the infringement. Once the court determined that the figure was above the upper limit of statutory damages, it would award damages exceeding such limit. However, there are differences among different cases. In the patent cases, the court did not consider the contribution rate of the patent to the products; while in the trademark and copyright cases, the court considered the scale and sales of the products but did not make accurate calculations based on the rate of profits. In several trademark cases, the court also considered the contribution rate of the infringed trademarks to the profits.
The current tendency for China to promote an intellectual property strategy to encourage innovation and for the courts to increase the amount of damages is definitely favorable to patentees. We can find from the aforementioned cases that the evidence submitted by the plaintiff holds the key to acquiring support from the court. The sales of infringing products can be supported by evidence such as data provided by third-party industry research institutes, information published on a defendant’s official website or disclosed in its prospectus, sales data shown on e-commerce platforms and contracts required by the court from the third-party companies or tax reports required by the court from tax departments. The profits can be supported by evidence such as average profit ratios of certain industries provided by industry associations or the National Bureau of Statistics and the profits disclosed by competitors in the same industry, or even by actually calculating on the basis of costs and selling prices. The evidence is closely related to the feature of specific industries. Patentees should take advantage of the features of their industries and try different methods to provide suitable evidence. Besides actively providing the aforementioned evidence, patentees should also request the court to require the defendant to submit relevant financial documents and materials, so as to let the defendant bear the unfavorable result if it fails to satisfy the requirements. [5]Patentees should make reasonable use of their evidence to protect their lawful rights and demonstrate the value of their intellectual property rights in litigation and to deter potential infringers.
[1] Under PRC law, the highest statutory compensation is 1 million RMB in patent cases, 3 million in trademark cases and 50 million RMB in copyright cases and trade secret cases.
[2] See Ke Jiang, vice professor of Qsinghua University, “the damages of games ŧ the game of damages”. See also Yuan Bo, “statutory compensation: a misunderstanding concept”.
[3] （2015）JingZhiminChuzi No.441
[4] （2015）Jing Zhimin Chuzi No.1194
[5] See Article 63 of the Trademark Law, “Where the right holder has made its best efforts to adduce evidence but the account books and materials related to infringement are mainly in the possession of the infringer, in order to determine the amount of damages, a people’s court may order the infringer to provide such account books and materials; and if the infringer refuses to provide the same or provide any false ones, the people’s court may determine the amount of damages by reference to the claims of and the evidence provided by the right holder.”
See also Article 27 of Interpretation (II) of the Supreme People’s Court on Several Issues concerning the Application of Law in the Trial of Patent Infringement Dispute Cases, “Where it is difficult to determine the actual losses suffered by the patentee due to the infringement, the people’ court shall, in accordance with the provisions of paragraph 1 of Article 65 of the Patent Law, request the patentee to produce evidence to prove the interests acquired by the infringer due to the infringement. Under the circumstance that the patentee has provided the preliminary evidence on the interests acquired by the infringer, and the account books or materials related to the patent infringing act are primarily controlled by the infringer, the people’s court may order the infringer to provide such account books or materials. Where the infringer refuses to provide or provides any false account books or materials without any justifiable reason, the people’s court may determine the interests acquired by the infringer due to the infringement according to the patentee’s claims and the evidence they provided.”