Punitive damages in China
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The new Patent Law entered into effect on 1 June 2021, after nearly eight years of discussion since the initial amendment proposal in 2012 drafted by the State Intellectual Property Office (the China National Intellectual Property Administration’s predecessor). Various amendments, reflecting the need for strengthening IP protection, are incorporated into this new version of the Patent Law, which is the fourth since 1984. Among those amendments, punitive damages are undoubtedly a focus of attention.
History of punitive damages in China
Punitive damages were first introduced into the Trademark Law in 2013. Later, the Seed Law (revised in 2015), the Anti-unfair Competition Law (amended in 2019) and the Copyright Law (amended in 2020) all added clauses regarding punitive damages. In addition, on 1 January 2021, the Civil Code established a punitive damages system in the IP field, providing that the infringed person has the right to request punitive damages if the infringement was made intentionally and the circumstances are serious. As the Patent Law entered effect on 1 June 2021, one of the final pieces of the puzzle of punitive damages in the IP field slots into place, introducing punitive damages of up to five times the damages caused by the infringement.
As with many of China’s laws, the Patent Law sometimes simply provides only a general principle, while the interpretation of the law issued by the Supreme People’s Court offers more detailed ways to understand and apply the law. For example, punitive damages can be raised between one and five times the damages caused by intentional infringements according to the Patent Law. However, the law does not say how to determine the base, nor does it indicate timeframes for calculating the punitive damages or what the term ‘intentional infringement’ means in practice.
Fortunately, we now have an official interpretation of the Patent Law on how to apply the punitive damages, The Interpretation of the Supreme People’s Court on the Application of Punitive Damages to the Trial of Civil Cases of Infringement of Intellectual Property Rights (effective 3 March 2021), which is the focus of this chapter.
New interpretation of law about punitive damages
Legal requirements of applying punitive damages
There are two hurdles to overcome when applying punitive damages. According to the Patent Law, the legal requirements include:
- intentional infringement; and
- serious circumstances.
Article 3 of the interpretation highlights that when determining whether the infringement was intentional, various factors should be considered, such as:
- the type of IP rights infringed;
- the status of the rights and the reputation of related products; and
- the relationship between the defendant and the plaintiff or interested parties.
To guide practice, the interpretation has listed several typical situations, which should preliminarily be deemed as ‘intentional infringement’, including the following:
- the defendant continues to commit the infringing acts after being notified or warned by the plaintiff or interested party;
- the defendant or legal representative or manager thereof is the legal representative, manager or actual controller of the plaintiff or interested party;
- the defendant and the plaintiff or the interested parties have relationships in terms of labour, service, cooperation, licensing, distribution, agency and representation, among other things, and have access to the infringed IP rights;
- the defendant has business with the plaintiff or interested parties or has negotiated a contract, among other things, and has access to the infringed IP rights;
- the defendant has committed acts of pirating or counterfeiting of registered trademarks; and
- other circumstances that can be determined as intent.
A defendant continuing to commit the infringing acts after being notified or warned is one of the most common occurrences in applications for punitive damages. In fact, it is unlikely that anyone would stop their business immediately just because of one warning letter. However, ignoring the warning will leave the patent owner with a good chance of receiving additional damages. Sending a warning letter to a potential infringer becomes a much more powerful weapon for the rights holder in practice, as it is relatively easy and cheap to do, but the revenue gained as a result has the potential to be huge. On the other hand, a response to a warning letter must be considered carefully because simply ignoring it, which is common, may lead to a higher risk of triggering additional damages at a later point. The response is also important because the interpretation now states that continuous infringement after receiving a warning is preliminarily determined as intentional infringement. On the other hand, although not explicitly stipulated in the interpretation, if the defendant has a good reason (eg, a non-infringement report or a validity report provided by a respectable law firm), the risk of additional damage is reduced.
For a defendant that once had access to the plaintiff’s IP rights through an employment relationship or other cooperation and later infringes the IP rights, such situations would be considered preliminarily as intentional infringement unless the defendant can prove otherwise during the trial.
In addition to the requirements that the infringement is intentional, another necessary precondition to trigger punitive damages is that the circumstance of the infringement must be serious. A normal or slight infringement that does not result in a serious outcome cannot be the basis for claiming punitive damages.
Article 4 of the interpretation indicates that the court should consider:
- the means of infringement;
- geographical scope;
- consequences; and
- the infringer’s behaviour in the lawsuit.
Again, some typical cases have been identified by the interpretation as ‘serious’, including the following:
- committing the same or similar infringement again after being punished in an administrative penalty or court decision for infringement;
- committing infringement of IP rights as its primary business;
- forging, destroying or concealing evidence of infringement;
- refusing to abide by the preservation ruling;
- acquiring significant infringement gains or the rights holder suffering huge losses;
- endangering national security, public interests or personal health; and
- other circumstances that can be determined as serious.
Forging, destroying or concealing evidence of infringement and refusing to abide by a preservation ruling are not only legal requirements of punitive damages, but are also likely to be linked with the calculation of damages.
In practice, to prove damage caused by infringement, the plaintiff may request a court order to preserve financial evidence or order the defendant to submit its sales data (eg, sale records, account books and profit margin) after the plaintiff has demonstrated to the court that they have exerted their best effort to provide evidence. Such records are confidential to most companies and few defendants will choose to submit financial data during a trial. It has even been known for some defendants to provide false data to the court. The consequence of such behaviour may result in the court turning to support the plaintiff’s claimed damages amount.
This behaviour is considered serious and is likely to trigger punitive damages. It is possible that IP rights holders will increasingly choose to request court orders in the future because it leaves limited room for the accused infringer (ie, disclosing its confidential information to the plaintiff or facing a much higher risk of additional damages).
Where infringement gains are significant or the rights holder’s losses are huge, this should encourage owners to collect and submit more evidence.
Regarding national security, public interests or personal health, an example from one case recently saw the judge successfully convinced that intentional infringement of a design patent for a milk powder could mislead the public into purchasing false milk powder, resulting in a threat to personal health. Patentees should take public interest and health into account when seeking higher damages.
Calculation of punitive damages
The equation to calculate punitive damages is: punitive damages = basis of punitive damage x [a number up to five].
According to the interpretation, the actual loss suffered by the plaintiff, the amount of the defendant’s illegal gains or the profits obtained due to infringement may be used as the basis for calculating punitive damages. If none of these can be determined, a reasonable multiple of the licence fee may also be used as the basis for calculation.
The basis here does not include attorney fees or other expenses incurred by the plaintiff for the lawsuit. The plaintiff may request the defendant to pay the attorney fees and any reasonable expenses if they win the case. However, these expenses cannot be included when calculating punitive damages.
If the plaintiff cannot provide a calculable number for the basis of punitive damages (ie, the actual loss, illegal gains, profits obtained through infringement or licence fee as required by the interpretation), then they cannot claim the punitive damages.
If the plaintiff cannot provide enough evidence to support a relatively accurate sum of damages, then they can leave the damages issue to the court to order statutory damages. However, statutory damage cannot be the basis for punitive damages because statutory damage is not included in the interpretation regarding the basis of punitive damages.
In view of this, since financial evidence is increasingly important in IP infringement litigation, IP rights holders should spend more time and effort on evidence collection to prove to the court the actual loss suffered, the illegal gains gathered by the accused infringer or the profits made as a result of the infringement. Expert witnesses, audit reports and comparable approaches are increasingly observed in IP litigation.
According to the interpretation, timeframes should be determined by considering factors such as the degree of the defendant’s subjective fault and the severity of the infringement.
Factors regarding the defendant’s subjective fault and the severity of the infringement can be well understood with reference to a recent know-how case ruled by the Supreme People’s Court. In this case, the plaintiffs were finally awarded punitive damages of five times the losses caused by the infringement. This case is typical for understanding how the court applies the factors in determining the multiples considered to calculate punitive damages.
The plaintiff successfully proved that one of the defendants was a former employee of the plaintiff and had access to the confidential information owned by the plaintiff. Later this person quit their job and shortly thereafter joined another company that developed highly similar technologies.
First, the former employee was found guilty in a criminal litigation of infringing the plaintiff’s know-how. However, the defendants did not stop using the confidential information obtained from the plaintiff to make a profit, even after the first-instance court ruled in the plaintiff’s favour and issued an injunction to stop the use. The continuous infringements comply with Article 4(1).
Second, the plaintiff successfully proved that the company was founded only for infringing the know-how. During the trial, the court ordered the accused company to submit evidence demonstrating that it conducts business other than the manufacture of products similar to those of the plaintiff. However, the company failed to submit the evidence, simply arguing that its business licence included a broader scope of business. The Supreme People’s Court therefore found that the company committed the IP rights infringement as its primary business, as required by Article 4(2).
Third, the accused company refused to follow the court’s order of submitting sales records and account books and failed to submit the requested data even during the second-instance trial. The Supreme People’s Court found that this behaviour met Article 4(3) regarding concealing evidence of infringement, and Article 4(4) regarding the refusal to abide by the preservation ruling.
Finally, the Supreme People’s Court found that the sale scope of the infringing products reached more than 20 countries and regions and the plaintiff suffered a huge loss according to the audit report and expert witness report submitted by the plaintiff, which fell within the scope of Article 4(5) regarding infringement gains or the rights holder’s losses being huge.
After comprehensive consideration of these factors, the Supreme People’s Court awarded the plaintiff the highest multiple of punitive damages – the total amount of damages reached Rmb30 million.
Trends and advice
As yet there have been no punitive damages in patent infringement litigation, but it is only a matter of time. Increased effort should be made to gather evidence relating to damages because it relates not only to the damages but could also form the basis for additional damages. An increasing number of expert witnesses are appearing in IP infringement litigation and are bringing complicated damages calculations to trial.