Written by: Ni Zhenhua (Ben), Huang Qijie, Intellectual Property Group, King & Wood Mallesons
China’s punitive damages system in the field of intellectual property was first embodied in the revised Trademark Law in 2013, and was incorporated into the revised Anti-Unfair Competition Law in 2019. In recent years, with China gradually strengthening the protection of intellectual property rights, a consensus has been reached in the industry to establish a punitive damages system in the field of intellectual property comprehensively. In the Civil Code of the People’s Republic of China enacted in 2020, the punitive damages system in the field of intellectual property is generally stipulated. Correspondingly, both the Copyright Law and the Patent Law revised in 2020 stipulate a system of punitive damages ranging from one to five times, which is consistent with the Trademark Law and the Anti-Unfair Competition Law revised in 2019. The punitive damages system in the field of intellectual property in China has been basically established as such. However, the provisions on punitive damages in the Civil Code and various laws on intellectual property rights are silent about specific and explicit guidelines for application, and are different form each other in terms of wording and content to some extent, which leads to certain difficulties in practical application. In order to better implement the punitive damages system for intellectual property rights, the Judicial Committee of the Supreme People’s Court passed the Interpretation on the Application of Punitive Damages in the Trial of Civil Cases of Infringement of Intellectual Property Rights (hereinafter referred to as the “Interpretation”) on February 7, 2021, which came into force on March 3, 2021. The Interpretation, consisting of seven articles, specifies the applicable scope, content and timing of claims, determination of “intentional” and “serious circumstances”, as well as determination of the calculation base and fold to calculate the punitive damages in civil cases of intellectual property rights. The key articles of the Interpretation are hereby commented on as follows for readers’ reference.
1. Clarification of the applicable conditions of punitive damages and the relationship between “intentional” and “bad faith”
Paragraph 1, Article 1 of the Interpretation first specifies the conditions for the application of punitive damages, that is, the defendant intentionally infringes upon intellectual property rights and the circumstances are serious. The term “bad faith” is used in both the currently effective Trademark Law (revised in 2019) and the Anti-unfair Competition Law (revised in 2019). However, the Civil Code passed in 2020 and implemented on January 1, 2021 adopts the term “intentional”. Consistent with the wording in the Civil Code, the term “intentional” is used in the Copyright Law (effective as of June 1, 2021) and the Patent Law (effective as of June 1, 2021) as subsequently amended. Paragraph 2, Article 1 of the Interpretation stipulates that the term “intentional” includes the case of “bad faith” as prescribed in the Trademark Law and the Anti-Unfair Competition Law. These provisions have aligned different wordings in various laws of intellectual property rights. According to the reply of the head of the Third Civil Tribunal of the Supreme People’s Court when answering the reporter’s question about the Interpretation, the meanings of “intentional” and “bad faith” should be consistent, and a consistent interpretation should be made without such a misunderstanding that “bad faith” applies to the fields of trademark and unfair competition while “intentional” applies to other fields of intellectual property rights. We expect that in the next revision to the Trademark Law and the Anti-unfair Competition Law, the wording thereof will be technically consistent with that of the Civil Code to avoid ambiguity.
2. Clarification of the content and timing of claims for punitive damages
Paragraph 1, Article 2 of the Interpretation specifies the content and timing of a claim for punitive damages in such a manner that in terms of the timing, the plaintiff shall raise the claim “when filing a lawsuit”; and in terms of the content, the plaintiff shall specify the amount of damages, the calculation method, the facts and reasons on which the claim is based. However, in connection with the provisions of Paragraph 2, Article 2 of the Interpretation, the above provision on timing shall be deemed as an advocating provision rather than mandatory one. According to the provisions of Paragraph 2 of this Article, the plaintiff may also add the punitive damages claim before the end of the court debate in the first-instance court proceeding; however, if the plaintiff raises a new claim for punitive damages in the second instance, the court shall conduct mediation first, and then inform the claiming party to file a separate lawsuit in case of failure of mediation. These provisions are substantially consistent with the relevant provisions of prevailing laws governing the addition or change of claims in civil lawsuits. Under China’s “two-instance trial system”, these provisions can prevent the plaintiff from suddenly raising a claim for punitive damages in the second instance, which causes damages to the interests of the defendant’s and loss of procedural relief.
3. Clarification of the determination of “intentional”
Article 3 of the Interpretation involves the determination of the first element of punitive damages — “intentional”. Paragraph 1, Article 3 first briefly lists the factors such as the type of the infringed intellectual property rights, the status of the rights and the popularity of the relevant products, as well as the relationship between the defendant and the plaintiff or interested parties that should be considered comprehensively in the determination of “intentional”.
Paragraph 2, Article 3 separately lists several circumstances that may be preliminarily determined as “intentional”. Section (1) of Paragraph 2 involves circumstances where the infringement continues after receipt of notice or warning. This provision affirms the role of the notification letter, warning letter, etc. in proving the intentional infringement of intellectual property rights. In practice, the infringer usually ignores the warning letter issued by the right holder. In accordance with this provision, punitive damages may be applicable if the infringer continues to commit infringement after receiving corresponding notice and warning, which can draw more attention from the infringer about the warning letters sent by the right holder. Section (2) of Paragraph 2 involves such a circumstance that the defendant is the legal representative, administrator or actual controller of the plaintiff or its interested parties, and in this case, it can be inferred that the defendant should have known the existence of relevant intellectual property rights based on the management or control position of the defendant in the plaintiff or its interested parties. Although this provision does not explicitly limit the duration for the defendant to hold the corresponding post in the plaintiff, we opine that if the intellectual property right involved in the case has not been formed during the term of office of the defendant, it is not appropriate to simply determine that the defendant is “intentional”. The circumstances under Sections (3) and (4) of Paragraph 2 are quite similar, i.e. the defendant has labor relationship, cooperation or business contacts with the plaintiff or its interested parties and has ever been in contact with the intellectual property right concerned. Under such circumstances, as the defendant should have known the existence of such intellectual property right, it can be preliminarily determined that the defendant has an intent to conduct infringement. On the other hand, this conclusion cannot be reached if the defendant did not access to the infringed intellectual property right in the business or partnership between the plaintiff and the defendant. Section (5) of Paragraph 2 identifies the two types of most direct and obvious infringements upon copyright and trademark as the defendant has the intention to infringe upon intellectual property rights, that is, piracy and counterfeiting of registered trademarks. In view of the nature of such acts, the perpetrator can be presumed to have an intention to conduct infringement.
Of course, the above merely enumerates several relatively typical circumstances. When the miscellaneous clause in Paragraph 2 of Article 3 is applied to judge whether other circumstances may be deemed as “intentional”, it shall be judged in combination with factors such as whether the defendant is aware of the intellectual property rights of others and the related specific behaviors. For example, if, after the defendant is determined by the Court to have constituted infringement upon intellectual property rights by an effective judgment, its legal representative, shareholder or actual controller registers another company to continue to commit the same infringement, or if the new infringer and the old infringer do not overlap with or relate to each other on the face of it but they can be preliminarily inferred to have cooperation or actual control relationship with each other from such aspects as company name, employee composition and trademark, it shall be determined that the new infringer has the intention to infringe upon intellectual property rights. It is noteworthy that this article is only about a preliminary determination of the defendant’s intentional infringement of intellectual property rights, and the defendant should be able to prove otherwise through corresponding rebuttal evidence, which shall be taken into consideration by the Court.
4. Clarification of the determination of “serious circumstances”
Article 4 of the Interpretation involves the determination of the other element of punitive damages — “serious circumstances”. Paragraph 1, Article 4 stipulates that the determination of “serious circumstances” shall be based on a comprehensive consideration of the means and times of the infringement, the duration, geographical scope, scale, consequences of the infringement, and the actions of the infringer in the lawsuit. These factors are all measured from the objective perspective of the infringement and the infringer, rather than the subjective state of the infringer. Paragraph 2， Article 4 enumerates several circumstances that can be cognized as “serious circumstances”, for example, when infringers commit the same or similar infringement activities again after being imposed of administrative penalties or held liable by the Courts or take the infringement as its regular business.
It is noteworthy that Section (4) of Paragraph 2 provides that a defendant who refuses to perform a preservation ruling may also be deemed as having serious infringement. From the perspective of the plaintiff, it is obvious that the plaintiff has more grounds to apply to the Court for evidence preservation in the future litigation, and once the defendant refuses to follow the preservation ruling, the Court may determine that “the circumstance is serious” based thereon. For example, in the case (2019) SPC Zhi Min Zhong No. 562, the Intellectual Property Tribunal of the Supreme People’s Court took the defendant’s refusal to provide evidence of compensation as a factor to take into account the seriousness of the case. Admittedly, such provisions are extremely beneficial to the plaintiff’s claim for punitive damages. However, in consideration of the protection of the defendant’s trade secrets and the reasonable distribution of burden of proof, and in order to prevent the abuse of the preservation system, it is recommended that the Courts may, in the future, issue preservation rulings of evidence for damage compensation after preliminary determination of infringement, which can not only make an effective use of litigation resources but also relieve the parties’ unnecessary burden of proof and cross-examination.
5. Clarification of the calculation method of punitive damages
Article 5 and Article 6 of the Interpretation respectively involve the methods for determining the calculation base and times of punitive damages. With regard to the determination of the calculation base, Article 5 of the Interpretation provides that “the calculation base shall be based on the amount of the plaintiff’s actual losses, the amount of the defendant’s illegal gains or the benefits obtained from the infringement in accordance with the relevant laws, respectively”. The main reason for the provision of “in accordance with the relevant laws, respectively” in this Article is that the provisions on the sequence in the application of various calculation methods for damages are inconsistent in the current laws of intellectual property rights. In the Trademark Law and the Anti-Unfair Competition Law revised in 2019, the rule that the two calculation methods, namely, the actual amount of the plaintiff’s losses, and the amount of the defendant’s illegal gains or the benefits obtained from the infringement, are still retained in a sequence of priority. On the other hand, in the Copyright Law and the Patent Law revised in 2020, the two calculation methods have been adjusted to the same priority. Therefore, when calculating punitive damages, the corresponding provisions in different laws of intellectual property rights shall be applied respectively. In addition, the Interpretation stipulates that “the calculation base for punitive damages shall not include the reasonable expenses paid by the plaintiff to stop the infringement; where the law provides otherwise, such provisions shall prevail.” In fact, in accordance with the currently effective Trademark Law and the Anti-Unfair Competition Law, as well as the Copyright Law and the Patent Law revised in 2020, reasonable expenses shall not be included in the calculation base for the punitive damages. The exception “where the law provides otherwise” shall refer to Article 73 of the Seed Law revised in 2015 and effective as of January 1, 2016. According to said Article, reasonable expenses shall be included in the calculation base for punitive damages. It is expected that in future revisions, adjustments will also be made to this article of the Seed Law.
With regard to the determination of times, Article 6 of the Interpretation stipulates that factors such as the degree of the defendant’s subjective fault and the seriousness of the infringement shall be taken into comprehensive consideration. If the administrative fine or criminal fine has been imposed on the defendant for the same infringement, and the execution thereof has been completed, the Court may take it into comprehensive consideration when determining the times to avoid excessive aggravation of the burden of the defendant. However, the administrative liability and criminal liability already borne by the defendant cannot be the reason for the defendant to claim exemption of punitive damages liability.
Generally speaking, the Interpretation stipulates the punitive damages system in a relatively comprehensive and clear manner, including the scope of application, the content and timing of claims, the subjective and objective elements, the method of calculating the amount, etc., which provides a clear guidance for the application of punitive damages system and is conducive to curbing the serious infringement of intellectual property rights and strengthening the protection of intellectual property rights. However, we also notice that due to the different dates of enactment, different laws of intellectual property rights still need a period of time to get harmonized. In the future practice, how to prevent the abuse of punitive damages on the one hand and not to put them on the shelf on the other hand while adhering to the general principle of compensatory damages still needs further guidance through judicial cases.