Beijing Wei Chixue Law Firm-- Assumption of Civil Liability of Compensation for Damages in IP Litigation

Sai CHEN

Chinese Attorney-at-Law

Wei Chixue Law Firm

Foreword

In the impression of a large number of foreign companies, China is not a country where intellectual properties, especially patents, can be enforced. This impression may come from the fact that foreign patent infringement litigations are sometimes time and effort consuming, while favorable outcomes, especially a relatively high amount of compensation for damages, are not achieved as expected. However, in fact, this impression is one-sided. Currently, there are nearly 100,000 lawsuits related to IP infringement every year in China and therein the patent infringement lawsuits have nearly reached 10,000. The number of lawsuits with a high amount of compensation for damages is also increasing.

As known to all, ceasing infringement and compensation for damages are two main methods of bearing civil liabilities in IP litigation. Except for the cases expressly stipulated by laws where no liability of compensation for damages shall be born, e.g. selling in good faith, using where the registrant fails to prove the actual use of the trademark in the previous three years and other losses he suffered from the infringement, the accused infringer shall still bear the tort liability of compensation for damages.

In the 2013 Annual Report of Linda Liu & Partners, we introduced the juridical practice of the method of bearing the civil liability of ceasing infringement in IP litigation. In this article, based on several cases and our practical experience of representation in litigation, we will further introduce compensation for damages, the method of bearing civil liability in IP infringement litigation, in current juridical practice in China. Meanwhile, we will propose some advice on how to adduce evidence in litigation in order to obtain relatively high damages. We hope this article will be of assistance to you.

I. Methods of Calculating Damages

Besides relevant provisions in the General Principles of the Civil Law, the main laws special to IP rights and main relevant judicial interpretations all expressly stipulate the civil liability of compensation for damages and specify the methods of calculating the amount of compensation for damages, including Article 65 of the Patent Law, Article 63 of the Trademark Law and Article 49 of the Copyright Law. Moreover, the ways of calculating the amount of compensation for damages as stipulated therein are roughly the same, which are as follows:

1. Actual losses of the right owner

The amount of compensation for damages shall be determined according to the actual losses suffered by the right owner as a result of the infringement.

To be specific, the losses suffered by the right owner as a result of the infringement may be calculated by the total number of the right owner’s products of which the sales volume is reduced as a result of the infringement multiplied by a reasonable amount of profit for each product. Where the total number of the right owner’s products of which the sales volume is reduced is difficult to be determined, the amount of the total number of infringing products sold on the market multiplied by a reasonable amount of profit for each product may be deemed as the actual losses suffered by the right owner as a result of the infringement.

2. Profits earned by the infringer as a result of the infringement

Where the actual losses of the right owner are difficult to determine, the amount of compensation may be determined based on the profits that the infringer has obtained through the infringement.

To be specific, the profits obtained by the infringer as a result of the infringement may be calculated by the total number of infringing products sold on the market multiplied by a reasonable amount of profit for each infringing product. The profits obtained by the infringer as a result of the infringement are generally calculated based on the operating profits of the infringer, or may be calculated based on the sales profits for any infringer that totally depends on infringements for a living.

It also shall be noted that the profits obtained by the infringer as a result of infringement shall be limited to the profits obtained by the infringer as a result of the activities infringing the right concerned; the profits arose from other rights shall be duly deducted. Where the product infringing the patent for invention or utility model is a component of another product, the people’s court shall reasonably determine the amount of compensation based on factors including the value of the component per se and its role in achieving profits of the product. Where the product infringing the patent for design is a package, the people’s court shall reasonably determine the amount of compensation based on factors including the value of the package per se and its role in achieving profits of the product within the package.

3. Reference to the royalty

Where losses suffered by the right owner or profits obtained by the infringer are difficult to determine, the amount of compensation may be determined by reference to multiples of the amount of the royalty.

To be specific, the people’s court may reasonably determine the amount of compensation as 1 to 3 times of the royalty according to the type of the right concerned, the nature and circumstances of the infringing act of the infringer, the amount of the royalty, the nature, scope and period of validity of the license, and other factors.

4. Statutory compensation

Where the compensation is difficult to determine in aforementioned ways, the people’s court may determine the amount of compensation on the basis of the type of the right concerned and nature and circumstances of the infringement.

With respect to the statutory compensation, provisions of various laws are different due to different schedules of amendment.

In trademark infringement cases, in accordance with the provisions of the Trademark Law of China (third revision, 2013), where the exclusive right to use a registered trademark is infringed maliciously and the circumstance is serious, the amount of compensation may be determined within 1 to 3 times of the amount determined according to the aforementioned ways. As for the high limit of the statutory amount, it increased from 500,000 yuan set forth in the Trademark Law (second revision, 2001) to 3,000, 000 yuan.

It is currently stipulated in the Patent Law of China (third revision, 2008) that the statutory compensation ranges from 10,000 yuan to 1,000,000 yuan, increasing from the range of 5,000 yuan to 500,000 yuan set forth in the Patent Law (second revision, 2000). Moreover, in the Draft for Comment of the Fourth Amendment of the Patent Law of China published recently, the range of compensation is planned to be further increased to 3,000,000 yuan, keeping up with the Trademark Law.

By contrast, the Copyright Law of China has a slow progress in amendment. The statutory compensation specified therein still doesn’t exceed 500,000 yuan.

Although the provisions of laws prescribe the range of the statutory compensation so as to prevent excessive judicial discretion, it is stipulated in Article 16 of the Opinions of the Supreme People’s Court on the Overall Situation of Intellectual Property Trial Service under the Current Economic Situation that where the specific amount of losses or profits as a result of infringement is difficult to determine, yet there is evidence proving that the aforementioned amount apparently exceeds the high limit of the statutory compensation, the amount of compensation shall be reasonably determined over the high limit of the statutory compensation under comprehensively consideration of evidence of the whole case. Therefore, the high limit of statutory compensation is possible to be exceeded in specific cases based on the evidence.

5. Reasonable expenses

In addition to the compensation for damages calculated in aforementioned ways, the amount of compensation shall also include reasonable expenses incurred to the right owner for ceasing the infringing acts.

Moreover, it is mentioned in Article 16 of the Opinions of the Supreme People’s Court on Several Issues concerning Intellectual Property Trials Serving the Overall Objective under the Current Economic Situation that unless otherwise stipulated, when the statutory compensation is applied, reasonable expenses in enforcement of the right shall be calculated additionally. Article 22 of the Several Provisions of the Supreme People's Court on Issues concerning the Application of Law in the Trial of Cases on Patent Disputes further provides that where the right owner claims reasonable expenses for ceasing the infringing act, the people’s court shall separately calculate the same in addition to the amount of compensation determined in accordance with Article 65 of the Patent Law.

Therefore, besides the compensation for damages calculated in aforementioned ways, the right owner can additionally request the infringer to compensate for the reasonable expenses incurred for enforcement of the right concerned.

II. Ways to Adduce Evidence for Compensation for Damages

As shown by the contents of provisions, the foresaid ways of calculating the compensation for damages seem to be applied in sequence. That is, the compensation for damages shall be calculated according to the actual losses suffered by the right owner as a result of infringement; where the actual losses are difficult to determine, it shall be calculated according to the profits obtained by the infringer; where both the actual losses of the right owner and the profits of the infringer as a result of the infringement are difficult to determine, the royalty shall be the reference; and where in all the above ways the compensation is difficult to determine, the statutory compensation shall be applied. However in practice, as the burden of proof for the claim of compensation for damages is on the right owner, he/she usually chooses a way of calculation according to evidence that may be adduced. Hereinafter, this article will specify the contents and ways of adducing evidence under each way of calculation.

1. Actual losses of the right owner

As mentioned previously, the actual losses of the right owner = total number of the right owner’s products of which the sales volume is reduced as a result of the infringement OR the total number of infringing products sold on the market × a reasonable amount of profit for each product. Therefore, when the right owner claims this way of calculation, he/she is required to adduce evidence of the total number of the right owner’s products of which the sales volume is reduced as a result of the infringement or the total number of infringing products sold on the market as well as the reasonable amount of profit for each product.

In juridical practice, it is very difficult to adduce evidence of the total number of the right owner’s products of which the sales volume is reduced as a result of infringement. Firstly, the number is usually counted by the right owner on his/her own, thus the authenticity thereof may hardly be recognized; secondly, even if the number of the right owner’s products of which the sales volume is reduced can be proved, yet whether or not the reduction is the result of infringement is difficult to prove; furthermore, in most cases, due to the expansion of the whole sales volume of the market, the reduction of sales volume of the right owner’s products is not remarkable even if the infringement does exist. Therefore, even if the right owner chooses this way of calculation, he/she usually calculates the compensation for damages based on the total number of the infringing products sold on the market.

The total number of the infringing products sold on the market is also difficult to be obtained by the right owner under the normal circumstances. In practice, the data of sales volume of the infringing products of the accused infringer can normally be obtained only through the evidence preservation by court or other institutions.

As for the reasonable profits of the right owner’s products, as the evidence is held in the hand of the right owner, the evidence is not difficult to adduce if the right owner is willing to provide it. But it is necessary to note that a simple number claimed by the right owner without specific basis is difficult to be recognized. Normally it is necessary to provide financial statements of relevant products, which are obtained through the audit of reasonable profits of the products carried out by audit institutions.

In the case of breach of trade secret by Wuxi Sensong Mechanic Co., Ltd., etc., in determining the losses of the right owner of the trade secret, the court adopted the way of calculation of multiplying the total number of the infringing products sold on the market by the reasonable profit of each product. During the investigation of the case, the public security organization discovered and seized various materials of the defendants and thus managed to find out the total sales amount of four types of filtering machines related to the right owner’s trade secret sold by the defendants. Furthermore, the audit institution conducted the audit of the sales materials of the right owner’s products and calculated the reasonable profits of the right owner’s products. The public prosecution organization found the amount of the right owner’s losses being nearly 7,000,000 yuan by multiplying the data. The court of the first instance and the second instance both supported this way of calculation and the claim thereof and finally made the judgment that the defendants were guilty of breaching trade secret. In addition to the sentence of a term of imprisonment, the court imposed a fine of nearly 10,000,000 yuan on the defendants.

2. Profits obtained by the infringer as a result of the infringement

The profits obtained by the infringer as a result of the infringement = the total number of infringing products sold on the market × a reasonable amount of profits for each infringing product.

Compared with the aforementioned way of calculation of the actual losses of the right owner, the difference lies in whether the reasonable profits are profits of the rightful products or profits of the infringing products. Generally, as the profits of the rightful products are higher than those of the infringing products, the defendant may counterplead to calculate based on the profits of the infringing products in some cases. This was the case in aforementioned case of breach of trade secret by Wuxi Sensong Mechanic Co., Ltd., etc. However, the court held that in accordance with relevant laws and regulations the profits obtained by the infringer shall be applied as the basis of calculation only when it is difficult to determine the actual losses of the right owner. This point of view specified the sequence of application of the four ways of calculation for compensation for damages.

But in most cases, as the profits of the rightful products relates to the trade secret of a company, many right owners are not willing for the disclosure thereof; under such circumstance, the right owner may voluntarily choose the way of calculation by reasonable profits of the infringing products. However, the evidence of profits of the infringing products is also difficult to be obtained by the right owner. Besides evidence preservation, it is also a commonly adopted way to calculate the profits of the infringing products based on the data obtained through published reports or other methods. In addition, as mentioned above, when calculating the profits obtained as a result of infringement, the factors contributed by other rights shall be eliminated.

For example, in the dispute over infringement of the design patent between Honda Technology Research & Development Co., Ltd. etc. and Beijing Xuyang Hengxing Economy and Trade Co., Ltd., etc. , the concerned patent was the design patent of a bumper and the concerned infringing product was the front bumper installed on the Laibao vehicle manufactured by Shuanghuan Co., Ltd. On the grounds that the evidence on record could not prove the market share of the infringing front bumper in the sales profits of the whole vehicle concerned, or the losses suffered by Honda Technology Research & Development Co., Ltd., or the profits obtained by Shuanghuan Co., Ltd. and Jiangsu Kawei Company as a result of infringement, the court of the first instance determined a compensation of 50,000 yuan within the range of statutory compensation at its discretion by combining the factors including type and difficulty of the concerned design patent, nature and circumstances of the infringing acts by Shuanghuan Co., Ltd. and Jiangsu Kawei Company, and duration of the infringement. In the second instance, Beijing Higher People’s Court held that according to the Audit Report and the Consultation Report submitted by Shuanghuan Co., Ltd. in another case, the sales cost and the whole profit of of each Laibao vehicle and the sales volume can be confirmed; and according to the invoice issued by Baoding Dexin Company to Shuanghuan Co., Ltd. submitted by Shuanghuan Co., Ltd., the unit-price of the front bumper was 286.32 yuan, from which the portion of the front bumper in the whole vehicle can be confirmed. In view of the above, the court of the second instance determined that the profits obtained by Shuanghuan Co., Ltd. for manufacture and selling and by Jiangsu Kawei Company for manufacture of the infringing products was 1,720,000 yuan, and thus amended the judgment to impose the compensation for damages of 1,720,000 yuan on the defendants.

3. Reference to the royalty

For the right owner, if he/she has licensed a third party to use relevant rights, it is not difficult to prove the existence and amount of the royalty. In practice, however, the royalty often relates to the trade secret of the right owner, and the right owner is unwilling to disclose such information to the accused infringer who is his/her competitor in the same industry. Furthermore, under most circumstances, the licensee of the right owner is the associated company thereof, and the setting of royalty is not only by reference to the value of the technology. Thus, even though there is relevant evidence, the right owner is often unwilling to choose this way of calculation.

Where the right owner chooses this way of calculation, he/she shall submit evidence to prove the actual existence and amount of the royalty. In some cases, the right owner submits the licensing contract specifying a high amount of royalty as evidence and hopes the court may take the royalty for reference, yet other than the contract, the right owner fails to submit the evidence of recordation of the license with the competent authority or certificates that the licensee has paid the royalty so as to prove the authenticity and performance of the contract. Under such circumstance, the court may not take the contract for reference on the ground that the evidence of royalty is not enough. This was the case in the dispute over infringement of utility model patent between Zhongshan Zhongmingliang Electronic Co., Ltd. and Zhongshan Keshun Analysis and Test Technology Co., Ltd.

For another example, in the dispute over patent infringement between Zhongshan Deli Sanitary Appliance Co., Ltd. and Zhongshan Dima Sanitary Appliance Co., Ltd. , Guangdong Higher People’s Court specified that taking reasonable multiples of the royalty for reference was one way to determine the amount of compensation for damages for patent infringement. When the above provision is applied, in addition to the requirements including “losses of the infringed or the profits obtained by the infringer are difficult to determine” and that “there is royalty to be referred to” shall be satisfied, other factors including type of the patent, nature and circumstances of the infringer’s infringement, amount of the royalty, and nature, scope and period of the patent license shall also be considered, rather than simply applying 1 to 3 times the amount of the royalty. In this case, the court didn’t support the way of calculation by reference to the royalty in determining the compensation, either.

In the dispute over infringement of invention patent between Shandong Joyoung Household Appliances Co., Ltd. and Shanghai Shuaijia Electronic Science and Technology Co., Ltd., etc. , the evidence submitted by the plaintiffs proved that Xuning WANG licensed the concerned patent solely to Joyoung Company for nationwide exploitation, with the license term being as long as the valid term of the patent and the royalty of 3,000,000 yuan. Both parties had recorded the licensing contract at the State Intellectual Property Office (SIPO). Moreover, in the first instance, Joyoung Company and Xuning WANG applied for evidence preservation of the account books related to manufacture and sales of the accused infringing products of Shuaijia Company and Xibeile Company. The court of the first instance ruled to approve the application, yet when the court of the first instance served the ruling on the two defendants and to execute the same, the two defendants refused to provide relevant documents. Therefore, the court of the first instance and the second instance held that, according to the publicity of the annual sales volume on the defendants’ websites, the profits obtained as a result of the infringement can be reckoned to be huge. Meanwhile, although the defendants had objections to the patent licensing contract between the two plaintiffs, they failed to adduce evidence to prove that the patent licensing contract and the amount of royalty were non-objective. Furthermore, when the court of the first instance ordered the defendants to provide relevant account books the defendants refused. Thus their claim that they had not earned any profits could not be proved. After overall consideration of the above factors, the courts of the first instance and the second instance both supported the claims of the right owner and ordered the defendants to pay a compensation of 3,000,000 yuan.

It is thus clear that it may not be difficult to submit the royalty contract only, but in order to persuade the court to take the royalty for reference, relevant evidence shall also be submitted so as to further prove the actual existence and performance of the royalty. Meanwhile, the right owner shall also try to submit other evidence to prove the value of the patent and the circumstances of the infringement, etc.

4. Statutory compensation

As mentioned above, in juridical practice, adducing evidence in the above ways of calculation is relatively difficult for the right owner. Therefore, the court may apply the statutory compensation in most cases. However, even by applying the statutory compensation, factors including type of the right and nature and circumstances of the infringement may have significant effects on the amount of compensation determined at its discretion.

For example, in the series cases between Shenzhen Mindray Bio-Med Electronic Co., Ltd. (hereinafter referred to as “Mindray”) and Shenzhen Edan Instruments Co., Ltd. (hereinafter referred to as “Edan”), the plaintiff Mindray initiated lawsuits for patent infringement and breach of trade secret against the defendant Edan regarding various multi-parameter monitor products. The court of the first instance respectively ordered the defendant to compensate 15,000,000 yuan and 20,000,000 yuan to the plaintiff for economic losses and reasonable expenses for safeguarding the rights.

With respect to the calculation of the amount of compensation in the above cases, during the trial, the plaintiff applied for audit of the average operating profits of the eight concerned types of multi-parameter monitor products of the defendant. As the defendant refused to provide the account book materials needed for the audit, the audit organization conducted the audit according to the defendant’s prospectus, the defendant’s information disclosed on the notarized web pages submitted by the plaintiff, the 2011 Annual Report of the defendant disclosed on the official website of the defendant, and the information of the infringing products published on the defendant’s website, etc., and established accordingly that from April 2009 to April 2011, the total gross profits of 11 types of monitor products (including the eight concerned types of infringing products) of the defendant was 105,933,300 yuan with the average gross profit of each type being 9,630,300 yuan, and the total operating profit was 38,578,000 yuan with the average operating profit of each type being 3,507,100 yuan. Furthermore, through inspecting the information of the infringing products published on the defendant’s website, the court established that there were 12 types of monitors (including the eight concerned types of infringing products) manufactured and sold by the defendant. Combining the appraisal opinion of the audit organization, the court reckoned that the operating profits of the eight concerned types of infringing products of the defendant was RMB 25,718,400 Yuan according to the average operating profit of each type, and considered that three years had passed from the expiration date of the audit to the trial, during which period illegal profits of the defendant due to the infringement kept increasing.

In consideration of the above circumstances, the technical proportion of the patented technology and the trade secret technology in the product, the degree of subject fault of the defendant’s infringement, the duration and outcome of the infringement and profits obtained by the defendant thereof, and as the plaintiff claimed patent infringement and breach of trade secret on the concerned products at the same time, the court made a judgment at its discretion, ordering the defendant to pay a compensation of 15,000,000 yuan in the dispute over patent infringement and 20,000,000 yuan in the dispute over breach of trade secret.

The amount of compensation determined in this case far exceeded the high limit of the statutory compensation, and the reason lies in that the right owner did his/her best to adduce evidence and conduct calculation of the profits obtained by the defendant from infringement. Although the calculated amount was not precise and was not fully recognized by the court, yet it had significant influences on the statutory compensation determined by the court at its discretion.

5. Reasonable expenses

As mentioned above, it is specified in the directive opinion and judicial interpretation related to disputes over patent by the Supreme People’s Court that the reasonable costs for safeguarding the right shall be calculated separately. In juridical practice, however, cases where the compensation and the reasonable costs for safeguarding the right are considered together and a total amount is determined are in the majority. For example, in the aforementioned disputes between Mindray and Edan, the amounts of 15,000,000 yuan and 20,000,000 yuan determined by the court both included the amount of reasonable costs for safeguarding the right.

Nevertheless, in more and more cases, the court determines the amount of compensation for damages and the reasonable expenses separately. But when determining the reasonable expenses, the court may determine an amount at its discretion rather than fully support claims of the right owner. Generally, the reasonable costs for safeguarding the right determined by the court are not high. However, there are cases where relatively high reasonable expenses are recognized.

For example, in the disputes over trademark infringement and unfair competition between Foshan Haitian Co., Ltd. and Gaoming Weiji Co., Ltd. , the court calculated the approximate losses of the Haitian Company as a result of damages to the trade reputation thereof according to the reasonable profit amounts of Haitian Company should obtain within 16 days and the reduced rate of the amounts of reasonable profits, and determined the losses of the profits from reduction of the sales volume of the Haitian Company as 3,500,000 yuan at its discretion in combination of factors including the nature, duration and outcome of the infringement of the exclusive right to the use of a registered trademark and the unfair competition of the Weiji Company. For the advertisement fees claimed by the Haitian Company, as the Haitian Company made public statements to clarify the facts and eliminate the effects of the infringement, the court held that the part of the public statement in the advertisement was to clarify the facts and eliminate the effects of the infringement, thus should be supported; for the part of the publicity of the products in the advertisement, although the Haitian Company could publicize the products thereof appropriately so as to recover the trade reputation, the necessary limit shall not be exceeded. Thus, the court supported 3,000,000 yuan within the advertisement fees paid by the Haitian Company at its discretion. The court also supported the attorney fees of 50,000 yuan paid by the Haitian Company for the lawsuit of this case.

As for which expenses can be supported as reasonable costs for safeguarding the right, in the dispute over patent infringement between Honda Technology Research & Development Co., Ltd., etc. and Lifan Industry (Group) Co., Ltd. , the determination of the court of the first instance was relatively explicit and clear in details. As for the reasonable expenses, the plaintiff in this case claimed the fees for attorneys, house rent, security, telephone, electricity, purchase of vehicles, notarization, etc. The court of the first instance held after the trial that: the fees for purchase of vehicles and notarization were necessary expenses for ceasing the infringement of the defendant incurred to the plaintiffs and shall be supported. The subtotal of those fees was 19,800 yuan. The fees for house rent, etc. were necessary, but according to the survey on the spot, the storehouse of 360 square meters was apparently too large for the concerned motor bikes. Even as stated by the plaintiff, all the four types of concerned motor bikes were taken into consideration and the relevant expenses would be shared, there were still irrationalities. Therefore, according to the actual situation, the court supported the relevant fees of 20,000 yuan at its discretion. As for the attorney fees, the court supported 150,000 yuan at its discretion according to factors including the details of the case, relevant standard of charge and the actual effective work conducted by the plaintiff’s attorneys. Especially, the court considered the following factors: 1. the case took a long period and many hearings were held; 2. the case was foreign-related, and the plaintiff’s attorneys needed to conduct more work to push up the procedures and to submit the evidence materials; 3. The plaintiff’s attorneys had devoted great efforts to establish the details of the case, and in particular the profits obtained by the defendant as a result of infringement, and positively and effectively collected clues and provided evidence through various methods.

It is thus clear that for the claim of costs of safeguarding the right to be supported by the court, on the one hand evidence shall be submitted to prove that the costs are incurred, on the other hand the reasonability and necessity of the incurrence of the costs shall be explained to the court.

III. Advice on Adducing Evidence Regarding Compensation for Damages

1. Evidence collection by the right owner

In infringement litigation, even if the right owner fails to adduce any evidence regarding compensation for damages, the court may comprehensively consider the details of the case and determine the compensation for damages at its discretion within the range of statutory compensation. Nevertheless, if the following evidence can be adduced, it will be factors taken for reference by the judge to make the judgment and help to achieve a higher amount of compensation, which may even exceed the high limit of the statutory compensation.

(1) Duration and scope of the infringement of the defendant

The duration and scope of infringement of the defendant can not only explain the circumstances of the infringement but also reflect the sales situation of the infringing products.

The duration and scope of the infringement can be proved in the following ways. On one hand, it can be explained by the publicity on web pages of the defendant. For example, the homepage of the defendant usually contains introduction of the sales area of the product, and introduction of the product may include the release time of the product to the market. Therefore, it is recommended to have the publicity information on the homepage of the defendant or other websites fully notarized. On the other hand, it can be explained by purchasing infringing products at different times, in different places and through different ways. Of course, in view of costs, it is not necessary to purchase the products through notarization every time. The infringing product should be purchased through notarization in the place where the court preferred by the right owner has the jurisdiction. After the jurisdiction and the infringement of the product are confirmed, when the infringing product is purchased in other places or through other ways, it is recommended to preserve the complete certificates of the purchase if the notarization is not conducted, including the invoice indicating the model number, quantity and cost of the product, or the sealed receipt, purchase order/delivery order, voucher of remittance, etc.

(2) Product information and financial information of the defendant

The information such as the sales volume of the accused infringing products is normally difficult to obtain so it is necessary to reckon through other information. In the aforementioned case of Mindray v. Edan, for example, the total profits of the monitors were audited and calculated according to the information of profits recorded in the Annual Report published by the defendant, and the average profits of each type of monitor were calculated by dividing the above total profits by the number of types of the monitors. Therefore, it is recommended to preserve the published product information and financial information of the defendant through notarization.

The product information of the defendant is often published on their website, and if the defendant is a listed company, they may publish the annual financial information on the internet. Therefore, the needed information can be preserved through webpage notarization. However, if the defendant is not a listed company, the financial information may be difficult to obtain. Previously, the internal files of companies managed by the industry and commerce bureaus included the materials of the annual survey, which contained the financial information submitted by the companies every year, thus the financial information of the defendant could be obtained through extracting the internal files of the company in some places. However, as the State Administration for Industry and Commerce of China has cancelled the annual survey system, the annual financial information will be no longer included in the internal files of companies in the future. For future cases, it is not advisable to extract the internal files of companies any more.

For some special industries, the manufacture of products is required to be recorded at relevant departments of the government, and the yearbook of the industry may contain reports of statistics of the annual sales situation of main companies. For example, in the vehicle industry, it is required in the Notification regarding Regulating the Management of the Qualification Certificate of the Vehicles Leaving the Factory by National Development and Reform Commission and Ministry of Public Security that since July 1, 2005, where the motor bikes listed in the Notification regarding the Vehicle Production Enterprises and Products are sold domestically, the vehicle production enterprises shall issue the same with a certificate of qualification; since October 1, 2005, the vehicle production enterprises shall submit the basic information of all the issued certificates of qualification to the regulatory institutions of the information of qualification certificates designated by the National Development and Reform Commission (NDRC), the relevant information of the qualification certificates shall then be uploaded to the data center, and NDRC is in charge of the supervision and administration of the manufacture, use and information transmission of the qualification certificates. Therefore, the data from the data center can reflect the amount of manufacture of the vehicle production enterprises, and the industry yearbooks such as China Automobile Industry Yearbook also publish the manufacturing volume and the incomes and profits of sales of the enterprises. In the aforementioned dispute over patent infringement between Honda Technology Research & Development Co., Ltd., etc. and Lifan Industry (Group) Co., Ltd., the data from the data center and contents in the China Automobile Industry Yearbook and other industry yearbooks adduced by the plaintiff were supported by the court of the first instance.

Besides, if the accused infringing products are sold through the internet, the sales data of the electronic business can also be taken as a significant reference. Here, it is also advisable to preserve the sales data of the electronic business by notarization.

(3) Profit margin

In order to reckon the actual losses or profits obtained from infringement, in addition to the sales amount of the products, the sales price and profit margin of the products are also necessary to be clarified. The sales price of the products can be confirmed when purchased by notarization, thus the proof of profit margin is essential.

In juridical practice, proof methods of profit margin include: calculating the profit margin of the right owner by adducing the annual report of the right owner, adducing the average profit margin of the industry, and adducing the total profit margin of the defendant by the defendant’s annual report. Based on the actual situation of the case, any of the above three ways may be chosen to calculate the profit margin. The ways of adducing evidence can include submitting the plaintiff’s annual report or the abstract or notarization of contents of newspaper or magazines reporting the average profit margin of the industry, and extracting the defendant’s annual report, etc.

(4) Bad faith of the defendant

Whether or not the defendant has demonstrated bad faith in the infringement doesn’t influence the determination as to whether the infringement is tenable or not, or the calculation of actual losses or profits obtained from infringement. However, when the actual losses or the profits obtained from infringement are difficult to determine and the statutory compensation is applied in determining the amount of compensation for damages, whether or not the defendant has demonstrated bad faith relates to the nature of the infringement and is also a factor considered by the court in determining the statutory compensation. Therefore, adducing evidence to prove that the defendant has demonstrated bad faith and the degree of bad faith may influence the judge’s evaluation of the evidence and thus influence the amount of compensation determined in the end.

Bad faith of the defendant can be proved by the fact that the defendant was fully aware of the existence of the infringement. For example, whether or not the right owner sent the warning of infringement to the defendant, whether or not the defendant had made any action showing full awareness of the existence of the plaintiff’s right, or whether or not the defendant had other infringing acts or acts of unfair competition in order to confuse the public.

(5) Value of the right

Value of the right is another factor that may influence the determination of the judge regarding the statutory compensation. In trademark infringement cases, it is very important to prove the reputation of the trademark and the value of the brand. In patent infringement cases, the innovation degree, awards given and popularity of the patented products may somehow influence the judge’s evaluation, and the costs for the development of patented technology and royalty may also be taken for reference.

(6) Costs for safeguard of the right

In juridical practice, fees including expenses of products purchased by notarization, fees of various evidence preservations by notarization and fees for translation of the litigation documents can normally be fully supported by the court if the valid invoice can be provided. Therefore, it is recommended to adduce the invoices for those fees as evidence to prove the reasonable costs for safeguard of the right.

As for the attorney fee, in view of details of the case and common charging standard of attorney fee, the court supports a part of it. Under such circumstance, in addition to the invoice of the attorney fee, the entrustment contract, standard and detailed rules of the charge of the attorney fee can be meanwhile submitted to fully explain the authenticity and reasonability of the incurred attorney fee, in which way the attorney fee can be better supported.

For other fees, such as fees for entrusting the investigation company to conduct investigations, as investigation companies are not officially recognized in China, the court normally doesn’t recognize the fees thereof. Therefore, it is recommended to entrust a law firm with the investigation as a part of the work of evidence collection. In this way, the investigation fee is included in the attorney fee and can be partly supported during the litigation.

Moreover, if fees of storage and transportation, etc. are incurred, there is high possibility for the court to support the fees if relevant invoices and certificates related to the products can be submitted.

2. Applying for evidence collection or preservation with the court

The aforementioned evidence collected by the right owner on his/her own can be used to calculate the profits obtained by the defendant from infringement, to prove the circumstances and nature of the infringement, and thus to influence the amount of statutory compensation determined by the court at its discretion. However, in order to conclusively prove the actual losses or profits obtained from infringement, obtaining the evidence of the total number of sales and profits of the accused infringing products would be crucial. Such evidence is usually held in the hand of the defendant and is not easy to get disclosed, and for the right owner, applying for evidence preservation with the court may be the only way to obtain such evidence.

According to the provisions of laws, evidence preservation means the investigation, collection, preservation and conservation activities of the court regarding the evidence that may be lost or be difficult to obtain prior to the litigation or the investigation on evidence, as per the applicant’s or the party’s requests or ex officio actions. Although it is indicated in the annual reports of IP protection situation issued by the Supreme People’s Court that the rate of approval of the application for evidence preservation prior to the litigation by ruling is higher than 90%, even higher than 95%, yet in juridical practice, unless in cases concerning infringement of method patents or breach of trade secret, the rate of approved applications for evidence preservation, especially those regarding the financial materials of the defendant, is not as high as indicated in the reports. The reason for the rate of approval by ruling to be that high is that in most cases, for the application of evidence preservation filed by the parties, the court may refuse directly or issue oral notifications of not approving instead of issuing written rulings rejecting the applications.

Even though the application for evidence preservation may not be approved, yet to achieve better effects in litigation, it is still worth trying. When applying for evidence preservation , one shall note the following matters:

(1) Prior investigation

When applying for evidence preservation, the right owner shall explain to the court the objective condition that the evidence is held in the hand of the accused infringer and there is thus a risk of loss of the evidence, the evidence’s existence and the specific location of the storage. In some cases, the reason why the court doesn’t approve the application for preservation of the evidence of the defendant’s financial statements is that the court takes the possibility of execution and effect of the ruling of evidence preservation into consideration. For example, there are possibilities that no financial statement is found after investigation on the premises of the defendant or that the financial statements found cannot indicate the actual operational situation of the defendant. Some judges once mentioned that, effects of the evidence preservation cases they had handled were not good: either there was no financial material, or it was found after the audit that the preserved financial materials indicated the profit of the accused infringing products was negative, which was thus unfavorable to the calculation of compensation for damages of the right owner. Therefore, when considering whether or not to apply for evidence preservation with the court, it is recommended to conduct an investigation on the operational situation of the defendant in advance and to try to learn the location and details of the financial materials thereof.

(2) Full communication with the court

Even though as mentioned above, the court doesn’t support evidence preservation applications of the parties in many cases, yet under most circumstances, the court may take such application of the parties into serious consideration and conduct careful study. It is conducive for the application to be approved by fully communicating with the responsible judge, explaining details of the case and the necessity of the evidence preservation, and explaining that the infringement is of high possibility and there is high possibility for the evidence to be obtained through said preservation so as to dispel the judge’s misgivings about possible incorrect preservation. Generally, the application for evidence preservation shall be filed in writing. And then the judge will confirm the situation with the right owner via phone or face-to-face. No matter it’s in written, by phone or face-to-face, the right owner shall make preparation to fully communicate with the judge.

(3) Applying for evidence preservation

In addition to applying to the court for preservation of the financial materials kept at the defendant’s premises, the right owner may also consider to apply to the court for extraction of the evidence kept at state organs such as tax departments. Generally, enterprises are required to declare tax to the tax organs, and thus the contents of tax declaration can reflect the situation of incomes of enterprises. In practice, however, the proportion of the court recognizing this type of evidence collection is not high and the operation thereof is not easy.

(4) Judicial audit

If the financial materials of the defendant can be successfully preserved, judicial audit is necessary. Only after audit by audit organizations can the information such as profits be supported and recognized by the court. Fees of the audit are usually paid for by the right owner in advance; if the infringement is constituted in the final judgment, said fees will usually be decided to be borne by the defendant.

In fact, in addition to judicial audit, evidence collection by the right owner and application for evidence preservation with the court that suggested hereinbefore are also time and effort consuming. In consideration of costs and effects, many right owners are not willing to devote time and effort to adduce evidence for the compensation of damages, which is another reason for the final result of low compensation. Therefore, in order to ensure a good litigation result, adducing evidence of compensation for damages should not be overlooked.

Conclusion

This article introduces the difficulties and ways of adducing evidence regarding the assumption of civil liability of compensation for damages in IP litigation.

In juridical practice, most right owners attach more importance to the actual effect of ceasing infringement in comparison with compensation for damages. However, compared with the difficulties in execution and supervision of the cease of infringement, we could say that compensation for damages has more immediate effects and is easier for execution. Moreover, a large amount of compensation for damages can strike the economic strength of the infringer and frighten the infringer so as to stop the infringement from happening again.

Although the average amount of compensation for damages is not large, the environment for IP protection in China is improving. In legislation, the high limit of the statutory compensation is increasing, adducing of evidence of compensation for damages is developing toward the tendency of lightening the burden of proof for the right owner, and the opinions of the Supreme People’s Court in the recent years repeatedly appealed to strengthen the effect of frightening and sanction of the economic compensation against the infringement. Recently, cases with large amounts of compensation which exceeds the high limit of statutory compensation have sprung up at an increasing rate, and the average compensation amount is increasing as well.

The right owners can have trust in the IP protection of China. In order to protect his/her legal rights and interests to the greatest extent, the right owner may adduce evidence from all aspects and endeavor to enforce his/her own litigation rights under the present juridical system so as to push for a favorable litigation result. Such result requires the joint efforts of the right owner and attorneys, and the phenomenon of infringement should not be lightly indulged.