Written By: Jiao Hongbin, Intellectual Property Group, King & Wood Mallesons
Supreme People’s Court’s Interpretation of the Application of Punitive Damages in Hearing Civil Cases Regarding Infringement upon Intellectual Property Rights (The “Interpretation”) came into effect on March 3rd, 2021. Later on March 15th, the SPC reported The Application of Punitive Damages in Civil Cases Regarding IPR Infringement: Typical Cases (The “Typical Cases”) to assist in understanding and applying the Interpretation and Punitive Damages in judicial practice.
Table of Contents (one trade secret infringement case and five trademark infringement cases in total):
I. Guangzhou Tianci Co., Ltd. v. XXX Company over Trade Secret (Technical Information) Disputes, (2019) Zuigaofa Zhi Min Zhong No. 562.
II. Erdos Corp. v. XXX Company over Trademark Infringement Disputes, (2015) Jing Zhi Min Chu Zi No.1677.
III. Xiaomi Technology Co., Ltd. v. XXX Company over Trademark Infringement and Unfair Competition Disputes, (2019) Su Min Zhong No. 1316.
IV. Wuliangye Corp. v. XXX over Trademark Infringement Disputes, (2020) Zhe 01 Min Zhong No. 5872.
V. Adidas AG v. XXX over Trademark Infringement Disputes, (2020) Zhe 03 Min Zhong No. 161.
VI. Opple Lighting Corp. v. XXX Company over Trademark Infringement Disputes, (2019) Yue Min Zai No. 147.
I. Guangzhou Tianci Co., Ltd. v. XXX Company over Trade Secret (Technical Information) Disputes
(2019) Zuigaofa Zhi Min Zhong No. 562.
Facts: Defendants infringed on Plaintiffs’ “Carbomer” manufacturing technical secrets. The trial court entered the first instance judgment, applying the punitive damages (2.5 times the profits).
Issue: What are the factors to be considered when deciding punitive damages in trade secret cases?
Rule: Article 17, Section 3 of the Unfair Competition Law of the PRC (Revised in 2019) provides that the compensation for Plaintiff who suffers damages due to unfair competition shall be determined by the actual losses caused by the infringement; where it is difficult to ascertain the actual losses, the compensation shall be determined by Plaintiff’s profits from the said infringement. If Defendant maliciously infringes upon Plaintiff’s trade secrets in a serious manner, the compensation may be determined in accordance with one to five times the amount calculated using the aforesaid method.
Analysis: In cases involving technical secrets, the court should fully consider the contribution of the involved technical secrets when determining the amount of compensation; when determining the punitive damages, courts should fully consider the malice of the infringer and the serious circumstances, for instance, commitment to infringement as a business, the huge scale of infringement, long duration, obstruction of evidence discovery, etc. In this case, Defendants maliciously infringed on Plaintiff’s technical secrets in a very serious manner. Its infringement scale was huge and lasted for a long time. Its refusal to provide the lawfully requested information constituted an obstruction to evidence discovery.
Conclusion: The court held that the punitive damages borne by Defendants shall be RMB 30 million (other damages omitted in this briefing).
When deciding punitive damages in trade secret cases, courts should fully consider Defendant’s malice and the severity of the case, including the commitment to the infringement, the duration of the infringement, the scale of the infringement, and obstruction of evidence discovery.
Note: the issue and the rule of the following cases are the same and will only be summarized in the Erdos case for clarity and conciseness.
II. Erdos Corp. v. XXX Company over Trademark Infringement Disputes
(2015) Jing Zhi Min Chu Zi No.1677.
Facts: Erdos registered the trademark “鄂尔多斯 Erdos” on February 14th, 2004, which was designated on goods in class 25 (scarves, clothing, gloves, etc.). In June 2015, Erdos discovered that Defendant had prominently used the distinctive element of the said trademark, namely, “鄂尔多斯” in Chinese characters on the cashmere products sold on its “Apparel Shop” on Tmall.com.
Issue: What are the factors to be considered when deciding punitive damages in trademark infringement cases?
Rule: Article 63, Section 1 of the Trademark Law of the People’s Republic of China (Revised in 2013) provides that “[t]he compensation amount for infringement of exclusive rights to use trademarks shall be determined in accordance with the actual losses suffered by the rights holder due to the infringement; where it is difficult to determine the actual losses, the compensation amount may be determined in accordance with the gains derived by the infringer from the infringement; where it is difficult to determine the losses of the rights holder or the gains derived by the infringer, the compensation amount shall be determined reasonably with reference to the multiples of the licensing fee[s] of the said trademark. For malicious infringement of exclusive rights to use trademarks, in serious cases, the compensation amount shall be determined in accordance with the aforesaid method based on one to three times the determined amount. The compensation amount shall include reasonable expenses incurred by the right holders to curb the infringement.” (Translation by Wolters Kluwer) (Note: the applicable rule was changed by the 2019 amendment of the Trademark Law. The current rule is “one to five times of the determined amount.”)
Analysis: Erdos’ series trademarks enjoyed a high reputation and “Tmall” stores provided a huge profit margin. Thus, the infringement caused more serious damages to the trademark owner. Defendant, as an insider of the “wool, scarf, cashmere” industry, which was closely related to the clothing industry, should have known the reputation of the said trademark. Defendant also highlighted the use of the almost same mark in its online stores in a long time period, which could prove obvious malice and serious infringement circumstances.
Conclusion: The court held that the compensation amount is twice the amount of Defendant’s gains derived from the infringement.
When deciding punitive damages in trademark infringement cases, courts should weigh on the profit/gains derived from the infringement, the malice of the infringer, the duration of the infringement. (Note: this is the “oldest” case in this series; other cases are very recently decided.)
III. Xiaomi Technology Co., Ltd. v. XXX Company over Trademark Infringement and Unfair Competition Disputes
(2019) Su Min Zhong No. 1316.
Facts: In April 2011, Xiaomi Technology Co., Ltd. registered the “Xiaomi” trademark, the designated goods included mobile phones and videophones. Later, Xiaomi acquired the registration of “MI”, “Zhimi”, and other related trademarks. Xiaomi and its associated entities won many national honors since 2010. Major media continuously and extensively publicized Xiaomi entities and Xiaomi phones. In November 2011, Defendants applied for the trademark “Xiaomi Life”, which was approved for registration in 2015. The designated goods included electronic cookers and other electronic devices. In 2018, the said trademark “Xiaomi Life” was declared null and void for “obtaining registration through improper means”. In addition, among the other 90 pieces of trademarks held by Defendants, there were not only trademarks similar to Xiaomi’s “Xiaomi”, “Zhimi” marks, but also many that are the same as or similar to well-known trademarks or famous brands such as “Pepsi-Cola PAPSIPAPNE”.
Analysis: 1. Until the appellate court hearing, Defendants continued to publicize and sell the infringing goods, which proves their obviously malicious intent. 2. Defendants sold various and numerous infringing goods on huge scales online through many e-commerce platforms and shops, which should also be taken as a factor in determining the number of punitive damages. 3. “Xiaomi” trademark was a “famous mark” with high popularity, reputation, and market influence. 4. The infringing goods were identified as unqualified products by Shanghai Administration for Market Regulation and some consumers reported that the infringing goods had certain quality problems. The infringing acts committed by Defendants have damaged the good reputation of Xiaomi. Thus, the punishment should be more severe.
Conclusion: The compensation amount shall be determined based on the gains derived from the infringement and should be triple the gains. Plaintiff’s claim for compensation of RMB 50 million yuan was fully supported.
The factors to be considered when deciding punitive damages in trademark infringement cases include malice of the infringer, the severity of the circumstances, and the severity of the consequences of infringement.
IV. Wuliangye Corp. v. XXX over Trademark Infringement Disputes
(2020) Zhe 01 Min Zhong No. 5872.
Facts: Wuliangye Corp. was the exclusive licensee of the trademark “五粮液”. The stores actually controlled by Defendants once received administrative punishment for selling counterfeit Wuliangye liquor and for using the “Wuliangye” word as shop signs without authorization. Defendants were found guilty of the Crime of Selling Commodities Bearing Counterfeited Registered Trademarks for selling counterfeit Wuliangye liquor, and were sentenced to fixed-term imprisonment and other penalties.
Analysis: Defendants’ infringing acts and the duration proved in the related criminal case can be construed as their commitment to infringement as a business.
Conclusion: The court held that Defendants shall bear the punitive damages twice the amount of the gains derived from the infringement.
Factors to be considered when deciding punitive damages in trademark infringement cases include malice and severity; commitment to infringement is a factor of severity; duration of the infringement and relapse of infringement after administrative punishment could prove commitment to infringement.
V. Adidas AG v. XXX over Trademark Infringement Disputes
(2020) Zhe 03 Min Zhong No. 161.
Facts: Adidas owned the “Adidas” trademarks and enjoyed high popularity. From 2015 to 2017, Defendant (a company), invested and registered by other Defendants, was seized by the administrative department three times for infringing Adidas’ trademarks on shoe uppers, and was imposed with administrative punishment. The cumulative quantity of the infringing products reached over 17,000 pairs. Adidas filed a civil lawsuit, claimed punitive damages based on its economic losses of RMB 2,641,695.89.
Analysis: The malice of Defendants was very obvious. The infringement lasted for a long duration and caused severe consequences, which satisfies the severity requirement. The court fixed the unit price of 189 RMB/pair of genuine shoes as the calculation basis, adopted the gross profit margin of 50.4% shown in the 2017 accounting statement provided by Plaintiff, and calculated the 6,050 pairs of shoe uppers seized from Defendants in the third seizure as sales volume. The court also considered a 40% cut because the infringing products were all uppers, not finished shoes, and could not be directly sold to customers.
Conclusion: The punitive damages of RMB 1,037,337.84 were finally determined based on three times Adidas’ economic loss of RMB 345,779.28.
Accurately calculating the base of punitive damages is an important prerequisite for applying punitive damages. Using “preponderance of evidence”, the appellate court reasonably determined the basis of punitive damages. (Note: The above “preponderance of evidence” in this context may carry different legal significance compared to Preponderance of Evidence in jurisdictions like the United States. It could be literally rendered into Standard of Superior Evidence.)
VI. Opple Lighting Corp. v. XXX over Trademark Infringement Disputes
(2019) Yue Min Zai No. 147.
Facts: Opple Lighting Corp. was the holder of the registered “欧普OPPEL” and “欧普” trademarks, which were designated on goods of lamps, fluorescent tubes, etc. Among them, the trademark “欧普OPPEL” had been recognized as a famous mark in Guangdong Province many times and was recognized as China’s famous mark in 2007. Defendant used the alleged infringing marks on its lamp products and on its related publicity websites. It also sold and promised to sell on major physical supermarkets and Tmall websites. Defendants were punished by the administrative department for the unqualified quality of the said infringing lamp products.
Analysis: The trademark rights that Plaintiff sought relief were famous marks and were very distinctive in nature. The sued marks used by Defendants on lighting products were similar to those of Plaintiff, which easily constituted a likelihood of confusion and should be deemed to constitute an infringement upon trademarks. Defendants, in the same industry as the Plaintiff, were well aware of the reputation of Plaintiff’s marks. Defendants registered the alleged infringing marks in classes other than that of the lamp products after its trademark application on lamp products was rejected. Defendants then used the similar marks that were not designated on lamps products on its lighting products and manufactured and sold them in large quantity, whose quality was not up to standard. The malice was obvious and the circumstances were serious.
Conclusion: Punitive damages thus should be applied. The compensation basis was determined to be RMB 1,277,500 according to the license fees. Considering the malice, the nature, circumstances, and consequences of the infringement, the punitive damages were determined according to three times the compensation basis.
The retrial judgment clarified the rule boundary and proof standard of “according to the principle of request”, “malice” and “serious circumstances” in the application of punitive damages in intellectual property cases, and proposed the method of fine calculation to determine the “base” and “multiples” of punitive damages, which is of great guiding value in the application of laws.
Thanks to intern He Chengen for his input to this article.