Beijing Wei Chixue Law Firm--Application of Punitive Damages for Intellectual Property Infringement

Jie CHEN
Attorney-at-Law

Punitive damages refer to the damages awarded by the court that exceed the actual amount of loss incurred. In China, damages for intellectual property infringement have always been based on the principle of compensatory damages, which aims to make up for the “actual loss” suffered by the right holder due to the infringement. Nevertheless, in recent years, the system of punitive damages has been progressively adopted to strengthen the protection of intellectual property rights and deter infringers. The system’s significance lies in its ability to effectively raise the costs of infringement for the infringer through punitive damages, thereby eliminating any potential profits from the infringement. Additionally, in cases of bad faith and repeated infringement, which are often harder to detect, the application of punitive damages helps to compensate the right holder for their losses to some extent. This paper will explain the legal application of punitive damages, the application of the legal elements, calculation method, combined with the provisions and relevant cases.

I. Legal provisions and application

The punitive damages system was first introduced in the 2013 Trademark Law, which stipulates in Article 63 that “for infringement of the exclusive right to use a trademark in bad faith, where the circumstances are severe, the amount of damages may be determined at more than one times but less than three times the amount determined by the specified method.” Subsequently, the fourth amendment to the Trademark Law in 2019 raised the multiplier for punitive damages from previous range of “more than one times but less than three times” to a new range of “more than one times but less than five times.”

Article 1185 of the Tort Liability Chapter of the Civil Code, which came into force on January 1, 2021, also provides for punitive damages in cases of intellectual property infringement: “where the infringement of intellectual property rights is committed willfully, and the circumstances are severe, the infringed party shall have the right to request for corresponding punitive damages.” As the basic law of civil legal relations, it can be said that this article has an overarching effect on the provisions of punitive damages in the field of intellectual property.

The newly amended Patent Law and Copyright Law, effective from June 1, 2021, also introduced punitive damages, specifying that the multiplier for punitive damages shall range from one times to five times, with the conditions for application aligned with those stated in the Civil Code.

In 2019 when amending the Anti-Unfair Competition Law, the provision “where an operator willfully engages in trade secret infringement and the circumstances are severe, the amount of damages may be set at more than one times and less than five times the amount determined by the aforementioned method” was introduced. This amendment explicitly establishes punitive damages for trade secret infringement.

In addition, on March 3, 2021, the Supreme People’s Court (hereinafter referred to as “the SPC”) issued the Interpretation of the Supreme People's Court on the Application of Punitive Damages in Trial of Civil Cases of Infringement of Intellectual Property Rights (hereinafter referred to as the “Interpretation”). The Interpretation includes specific provisions on the application scope of punitive damages, and the determination of willfulness and severe circumstances in civil cases involving intellectual property rights.

The aforementioned laws and judicial interpretations have established a comprehensive system for applying punitive damages in cases of intellectual property infringement, encompassing the basic law, sectoral laws, and the application of these laws.

It is important to note that the Civil Code, as the superior law to sectoral laws such as the Patent Law and the Copyright Law, has clearly stipulated the punitive damages system, and there are no legal barriers to determining punitive damages under the Civil Code. Thus, despite the fact that punitive damages were introduced later in the Patent Law and the Copyright Law than in the Civil Code, and that the Anti-Unfair Competition Law does not currently include provisions for punitive damages in cases of unfair competition other than trade secret infringement, punitive damages can still be determined based on the relevant provisions of the Civil Code following its implementation.

In addition, except for the Trademark Law, the effective time of laws such as the Civil Code is still short. In judicial practice, there are also a large number of infringement cases across the implementation date of the aforementioned laws. In theory, based on the general principle of non-retroactivity, punitive damages should not be applied to the acts that took place prior to the amendment of the law. The calculation of damages should be done in segments based on the date of implementation or amendment of the law. However, according to Article 1(3) of the SPC’s Provisions on the Application of the Civil Code of the People’s Republic of China on the Effect of Time(Law Interpretation 2020 No.15) (hereinafter referred to as the “Judicial Interpretation on the Effect of Time”), “The civil disputes arising from the legal facts that took place prior to the implementation of the Civil Code but still persists at the time of implementation shall be subject to the provisions of the Civil Code, unless otherwise provided by law or judicial interpretation.” Article 2 stipulates that “In cases of civil disputes arising from legal facts that took place prior to the implementation of the Civil Code but still persists at the time of implementation, the laws and judicial interpretations in effect at the time shall be applied, unless the application of the provisions of the Civil Code is more conducive to the protection of the lawful rights and interests of the civil party, the maintenance of the social and economic order, or the promotion of the core socialist values.” Article 3 stipulates that “In cases of civil disputes arising from legal facts that took place prior to the implementation of the Civil Code but still persists at the time of implementation, where the laws and judicial interpretations in effect at the time do not provide for it but the Civil Code does, the provisions of the Civil Code may be applied. However, such application of the Civil Code is not applicable if it clearly undermines the legal rights and interests of the involved parties, imposes greater legal obligations on them, or is beyond their reasonable expectations.”

Therefore, in the case where the infringement continues after the implementation of the Civil Code, the provisions of the Civil Code on punitive damages can also be applied to the infringement that occurred prior to its implementation. Moreover, China has consistently prioritized the enhancement of intellectual property rights protection as part of its strategy to become a leading nation in this field. As early as 2013, the punitive damages system was already introduced to the cases of intellectual property rights infringement through the amendment of the Trademark Law. It makes sense to apply the punitive damages to the patent infringement in bad faith as well, and the infringer should anticipate facing punitive damages for infringement of patent right in bad faith. Therefore the provisions of the Civil Code on punitive damages shall apply to the infringement in bad faith that took place prior to its implementation. This is not beyond the reasonable expectations of the public, and more conducive to the protection of the legitimate rights and interests of civil subjects and the maintenance of social and economic order. In fact, there have been many judicial cases, such as the judgement (2019) Jin 03 IP Civil First 1262, judgment (2020) Shanghai Civil Final No. 555, etc., where the punitive damages were granted for the patent infringement in bad faith that incurred prior to the implementation of the Civil Code.

In the Judgement SPC IP Civil Final (2019) No. 562, the SPC first stated that, according to the general principle of non-retroactivity, the calculation of compensation amount should be done in segments based on the date of the amendment of the law. But the SPC continued the analysis that, as for this specific case, firstly, the accused infringer’s refusal to provide financial books and other information constituted an obstacle to proof. The determination of the infringement profits is based on the self-confessed sales, which represents only a portion of the total gains from infringement; Secondly, the infringer had failed to present evidence regarding its specific profits before and after the law amendment, making it impossible to calculate the damages based on the date of the law amendment; furthermore, the evidence produced in the second instance trial shows that the infringer did not cease its infringing activities after the first instance judgment, and that its behavior was continuous and the scale and duration of the infringement were substantial. In view of this, the amount of compensation was objectively difficult to calculate in segments. Thus, the court finally determined the overall infringement profits as the base to determine the punitive damages. It can be seen that the need for segmented calculation also requires comprehensive consideration of the specific of the case.

II. Applicable conditions

From the perspective of the legal provisions for the application of punitive damages, there are two conditions: (1) subjectively, the presence of willfulness, (2) objectively, the severe circumstances of the infringement

1. Willfulness

Regarding the subjective state, bad faith is stipulated in the Trademark Law and the Anti-Unfair Competition Law, while willfulness is stipulated in the Civil Code and the amended Patent Law and Copyright Law. In this regard, the Interpretation explicitly states that “Willfulness includes ‘bad faith prescribed under Article 63(1) of the Trademark Law and Article 17(3) of the Anti-Unfair Competition Law.” This actually equates bad faith with willfulness.

For the determination of willfulness, the Interpretation stipulates that certain factors shall be taken into consideration comprehensively, including the type of the infringed intellectual property object, the right status, and the popularity of the relevant product, and the relationship between the defendant and the plaintiff or interested party. Furthermore, the Interpretation also specifically suggests the following circumstances could be initially determined as willfulness.

(a) Where the defendant continues to commit the infringing act despite receiving notification or warning from the plaintiff or interested party;
(b) Where the defendant or its legal representative or custodian is the legal representative, custodian or actual controller of the plaintiff or interested party;
(c) Where the defendant has a relationship of employment, labor service, cooperation, licensing, distribution, agency, or representation with the plaintiff or the interested party, and has access to the infringed intellectual property right;
(d) Where the defendant and the plaintiff or the interested party have engaged in business transactions or negotiations with the intention of reaching a contractual agreement, and the defendant has access to the infringed intellectual property right;
(e) The defendant has committed acts of piracy or counterfeiting of registered trademarks.

Judicial cases reveal that in trademark infringement disputes, if the trademark to be protected possesses a significant reputation, and the infringing mark is identical or highly similar to the trademark, demonstrating an obvious bad faith to imitate, it is more likely that the infringement would be deemed willful. For example, in the judgment (2022) Yue 03 Civil First No.723, the trademark in question is “小米(Xiaomi)”, judgment(2021) Zhe 01 Civil First No.886, the trademark in question is “华为(Huawei)”. In both cases, the extremely high popularity of the trademark played a crucial role in establishing the accused infringer’s infringement in bad faith.

In patent infringement disputes, the accused infringer may not necessarily be deemed to have committed infringement in bad faith if they continued to perform infringing acts despite being notified or warned by the right holder, due to the relative uncertainty in patent validity and the complexity involved in infringement judgment. In fact, there are almost no cases where the party is deemed to have bad faith for infringement and is subsequently awarded punitive damages simply because “it has been warned but continues to commit infringement”.

Generally, if an infringement judgment is made by the people's court or an administrative mediation decision is made by intellectual property rights enforcement agencies (either through an administrative decision establishing the infringement or through mediation paper issued by the enforcement agencies between the parties involved in the infringement dispute ), and the infringer continues to carry out patent infringement, it is highly probable that it will be determined as “willful infringement in bad faith”.

For example, in the judgment (2022) Yue Civil Final No. 876, the court held that the defendant had infringed upon the right holder’s asserted patent in this case and was ordered to compensate for the economic loss. Meanwhile the design of the accused products in the previous case was basically the same as that of the accused products in the present case, indicating that the defendant was well aware of the design of the patent in question. Despite this knowledge, the defendant continued to manufacture, sell, and offer for sale the infringing products. Consequently, the defendant’s acts were deemed to be in bad faith. In the judgement (2022) SPC IP Civil Final No. 871, the defendant had been sued for selling the accused infringing products. Then the two parties reached a settlement agreement, in which the defendant promised to cease infringement and compensate for the economic loss. Having gone through the previous litigation, the defendant had been aware of the patentee, and the fact that its sales of the accused infringing products infringed the patent in question. However, the defendant continued to sell the accused infringing product after making promise to cease infringement and compensate for the economic loss, thus the SPC ruled that the defendant had the willfulness of infringement.

In both of the aforementioned two cases, the infringers had once again infringed the same right, and the products that were infringed were either identical or highly similar to the products infringed in the previous case. This establishes the “willfulness” and indicates that the determination of “willfulness” in patent infringement cases remains cautious. In the event that the patent being infringed is not the same, even if there are other patent infringements, it is unlikely to be considered as repeated infringement or willful infringement. In cases where the same patent is infringed upon, but the accused infringing product is not identical or basically the same, which means the accused infringer may design around for the accused infringing product, but if it is still determined as infringement, it is theoretically possible to establish repeated patent infringement in this scenario. But in view of the defendant trying to avoid the scope of protection of the patent in question, the subjective willfulness is not obvious. At this point the degree of circumvention of the design and other specific circumstances would be taken into consideration and the multiplier will be reduced accordingly.

2. Severe circumstances

For the determination of the severe circumstances of infringement of intellectual property rights, the Interpretation stipulates that comprehensive consideration should be given to the means and frequency of infringement, the duration, geographical scope, scale and consequences of the infringement, and the infringer’s acts in the litigation and other factors. And the Interpretation specifically suggests the following circumstances should be initially determined as severe circumstances.

(a) Committing the same or similar infringing acts again after being administratively penalized or held liable by a court decision for the infringement;
(b) Engaging infringing intellectual property rights as a business;
(c) Falsifying, destroying, or concealing evidence of infringement;
(d) Refusing to fulfill the preservation ruling;
(e) Substantial gains from infringement or damages caused to the right holder;
(f) The infringement may jeopardize national security, public interest, or personal health;

In judicial practice, factors such as the scale of infringement, the type of infringement, the profits gained from the infringement will usually be considered to determine whether it constitutes severe circumstances. Repeated infringement with the aforementioned circumstances will be considered severe, even if the scale of the infringement is not substantial. For example, in the judgment (2022) SPC IP Civil Final No. 871, the defendant committed the infringement again in less than two months after reaching a settlement agreement in the previous case. But given the short infringement duration, limited gains from infringement, the expiration of patent in question, and the nature of right enforcement in bulk for this particular case, if the case is heard separately, the severity of the circumstances may not reach a significant level, but as it considered to be a repeated infringement, the agreed compensation amount in the Settlement Agreement could be considered as the base for calculation at the court’s discretion, and the liability for punitive damages was held.

In addition, whether or not there is a non-compliance with the ruling and obstruction of evidence during the proceedings also affect the determination of severe circumstances.

III. Calculation method

1. Determination of the base

Article 5 of the Interpretation of the Supreme People's Court on the Application of Punitive Damages in Civil Cases Involving Infringement of Intellectual Property Rights stipulates that “when determining the amount of punitive damages, the people's court shall, in accordance with the relevant laws, take the amount of the plaintiff’s actual losses, the illegal gains or the profits obtained from the infringement of intellectual property rights, respectively, as the base for calculation. This base shall not include the reasonable expenses paid by the plaintiff in order to cease the infringement; In the event that the law provides otherwise, such provisions shall prevail.”

If the actual amount of losses, illegal gains, and benefits obtained from infringement mentioned in the preceding paragraph are difficult to calculate, the people’s court shall, in accordance with the law, make a reasonable determination by reference to the multiplier of the licensing fee of the right, and apply it as the base for calculating the amount of punitive damages.

Where the people’s court orders the defendant to provide account books and information in its possession relating to the infringement in accordance with the law, and the defendant refuses to provide such books or information without justifiable reasons or provides false books or information, the people’s court may refer to the plaintiff’s claims and evidence to determine the base for calculating the amount of punitive damages. If it constitutes the situation prescribed in Article 111 of the Civil Procedure Law, legal responsibility shall be investigated in accordance with the law.”

According to the aforementioned provisions, it is clear that the calculation method of the base is the same as that adopted in calculating the damages in the principle of compensatory damages including the actual losses suffered by the right holder due to the infringement, the profits gained by the infringer due to the infringement as well as the multiplier of the licensing royalty. However, the base can neither include the reasonable expenses paid by the plaintiff to cease the infringement, nor can it be an amount of discretionary statutory compensation. For example, in the Judgment (2022) Yue Civil Final No. 876, the court of the second instance explicitly stated in the judgment that the statutory damages cannot be used as the base for calculating punitive damages. Furthermore, it pointed out that the court of the first instance made a mistake in the application of law by directly determining the amount of damages for the defendant based on the evidence in the case and using this as the base for punitive damages, which should be corrected. Thus, even if the aforementioned elements of willfulness and severity of the infringement are met, if the base cannot be determined, punitive damages still cannot be applied.

However, it is challenging in practice to prove the infringement profits or the losses of the right holder, and statutory damages at court’s discretion are adopted in majority of the cases in judicial practice. Since statutory damages cannot be used as the base for punitive damages, does it imply that the provision of punitive damages exists in name only?

In this regard, our suggestion is to make every effort to produce a prima facie evidence to prove the infringement profits and to make full use of the discovery system.

Articles 24 and 25 of the Provisions of the Supreme People's Court on Evidence in Civil Litigation concerning Intellectual Property stipulate the documents discovery system. The Patent Law, Trademark Law and other intellectual property law also have clear provisions that in the event that the right hold has made every effort to produce evidence, but the infringer has control over the relevant account books and information, the court may order the infringer to provide account books and information relating to the infringement; if the infringer fails to provide or provides false account books, information, the people’s court may refer to the claim of the right holder and evidence provided to determine the amount of damages.

Therefore, although it is really difficult to prove the exact amount of profits made from infringement, the right holder still has the opportunity to prove such profits to the best of his or her ability. Upon completing the preliminary proof and calculating the infringement profits, the right holder could apply to the court to order the alleged infringer to provide the relevant account books and materials of the infringement. If the alleged infringer fails to provide the account books, damages may be awarded with reference to the claims and evidence of the right holder.

Our firm has represented a large number of intellectual property infringement cases. In these cases, we diligently sought to prove the profits gained from the infringement and requested a discovery order. As a result, we secured a substantial sum of damages for our clients. For example, in the case of infringing products primarily sold on e-commerce platforms, the total sales of such products can be calculated based on the sales volume and price displayed on the e-commerce platforms, along with the sales period shown in the comment, and the profits from infringement deduced from the industry’s average profit margins. To determine the gains obtained from the sale of infringing products at physical stores, it is possible to calculate the average yearly profit for each product, taking into account the overall profits and product categories of the infringer, along with the duration of the infringement. In the case where the accused infringer refuses to provide account books and fails to provide corresponding counter-evidence, the court would usually examine the credibility and reasonableness of the claims and evidence of the right holder one by one, and make a determination on the sales volume, price, profit margin, etc., so as to calculate the infringement profit. This amount can also be used as the base for punitive damages. In addition, the alleged infringer’s failure to provide account books will also be considered as the aforementioned severe circumstances.

For instance, in the aforementioned judgment (2022) Yue Civil Final No. 876, the court of second instance, although denying the court of first instance’s approach of applying discretionary damages as the base for determining punitive damages, still held that punitive damages should be applicable in the case. In the second-instance trial, the court examined the method of calculating the infringement profit claimed by the right holder, and ordered the accused infringer to submit the relevant financial books for the purpose of ascertaining the fact of compensation. The court also granted the accused infringer sufficient time to produce evidence. And in the absence of justifiable reasons for the accused infringer to refuse to submit the relevant evidence, the court examined the monthly production volume of infringing products, the time period for calculating damages, the unit price of the product, the profit margin, and the extent to which the patent contributed to the product, with reference to the right holder’s claim and the evidence. The court then determined the infringer’s profits from the infringement, which served as the base for calculating the punitive damages.

In short, the base of punitive damages is calculated and proved in the same way as damages based on the principle of compensatory damages. More attention should be paid to the calculation and proof of damages including infringement profits in cases where punitive damages can be applied.

Furthermore, if the calculation base cannot be determined, the court is unable to impose punitive damages and can only resort to statutory damages. In such cases, the court may also take into account the willfulness and severity of the infringement when deciding on discretionary damages. For example, in the Judgment (2021) Yue 73 Civil Final No. 6209, the court pointed out that “Punitive damages require a specific calculation base to be applied in accordance with the law. If it is not possible to determine such base, punitive damages cannot be applied. In such cases, statutory damages should be considered instead. The determination of statutory compensation is based on the specific circumstances of the infringement, and the amount awarded can be discretionary. When applying the statutory damages, the punitive circumstances could be considered as a factor in awarding a higher amount of compensation”. The court granted CNY 5 million damages in full as claimed by the right holder. Therefore, it is important to claim and produce evidence for the infringement willfulness and the severe circumstances. Even if the punitive damages are ultimately not applicable, it would significantly contribute to the granting of higher statutory damages.

2. Determination of multiplier

Punitive damages, as stipulated by the law, range from a minimum of one times the base amount to a maximum of five times the base amount. The exact multiplier should be claimed by the petitioner, and determined by the court in the light of the specific circumstances of the case, i.e., the degree of “willfulness” and “severity”.

In judicial practice, courts apply two times for the punitive damages in a relatively large number of cases, taking into account the degree of willfulness and severity of the circumstances. Of course, in the case where the infringement in bad faith is highly evident, and the circumstances of infringement is extremely severe, the court may impose higher punitive damages, up to four or even cap five times the original amount.

For example, in the Judgment (2019) SPC IP Civil Final No. 562, the court of the second instance held that the accused infringer had been operating its business by producing infringing products since its establishment. Even when its former legal representative was held criminally liable for infringing trade secrets, and there were suspicions that the production technology, process, and equipment also infringed on the right holder’s technical secrets, the accused infringer still did not cease production. Furthermore, the defendant’s sales extended to more than 20 countries and regions. At the same time, in the stage of first-instance trial, the accused infringer’s refusal to provide the relevant accounting books and original documents without justified reasons constituted an obstruction of evidence, which demonstrates the infringer’s bad faith and severity of the circumstances. Thus the SPC ultimately granted the damages of five times the infringement gains in this case.

It should be noted that the amount of punitive damages with the range of 1 to 5 times does not include the amount of compensatory damages. In April 2021, the SPC published The Understanding and Application of the Interpretation on the Application of Punitive Damages to Trial on the Infringement of Intellectual Property Cases in Civil Cases in the People's Justice. In this publication, the third paragraph of the sixth item of the article “On the Determination of the Base Amount” states clearly that “It should be noted that the amount of compensatory damages, i.e., the base, and the amount of punitive damages, should be calculated separately. In other words, if the multiplier for punitive damages is determined to be one, the total amount of damages borne by the sued infringer shall be the sum of the amount of compensatory damages plus the amount of punitive damages, i.e., twice the base amount.” Therefore, if the court determines the punitive damages of 5 times, the liability borne by the sued infringer shall be the compensatory damages plus the punitive damages of 5 times, i.e. the total amount will be 6 times the compensatory damages. As for the aforementioned judgement (2019) SPC IP Civil Final No. 562, the court determined the amount of compensation as five times the profit from the infringement, and the multiplier of punitive damages was actually determined to be four times.

Conclusion

Recent years have witnessed a strong effort from both lawmakers and the courts to address the challenges associated with producing evidence and obtaining adequate damages, ease the burden of proof for the rights holder, and impose greater penalties on infringers. As a result, there has been a gradual increase in the number of cases where punitive damages are granted. From the standpoint of avoiding being imposed on the punitive damages, companies should conduct thorough investigations into intellectual property risks. If a company is determined by a court or administrative authority of potential infringement, it is advisable for them to make prompt corrections or design around. From the standpoint of the rights holder, it is advantageous to produce evidence for the willful infringement, the severe circumstances, and the infringer's profits in order to secure a higher amount of damages.