Statutory and punitive damages
SPC judicial interpretation
Statutory and punitive damages
In China, the amount of damages awarded by a people's court to compensate the prejudice caused by the infringement of an IP right is calculated according to a method which is the same in all of the IP laws (ie, the Trademark Law, the Patent Law, the Anti-unfair Competition Law, the New Plant Varieties Law and the Copyright Law). Plaintiffs must prove the amount of prejudice by applying this calculation method. They may:
- base such a calculation on:
- their losses;
- the amount of illegal gains obtained by the infringer from the infringement; or
- a "reasonable" level of the royalties that would have been paid if the infringer had obtained authorisation to use the IP right; or
- ask the court to make an estimation, based on the circumstances of the case, and award an amount up to Rmb5 million accordingly. This is known as 'statutory damages'.
The above calculation or estimation aims only to compensate the prejudice. It cannot punish an infringer by ordering the payment of an amount higher than such prejudice. Therefore, it has been said that such a compensation system lacks the necessary deterrence in cases where infringers have acted in obvious bad faith or where the circumstances are considered serious.
This is where punitive damages become relevant.
In China, the concept of 'punitive damages' consists of increasing the damages by multiplying the amount calculated according to the law (following the aforementioned methods), by a coefficient, which is now a maximum of five.
China started introducing the concept of punitive damages into its IP legal framework in 2013 with a revision to the Trademark Law. Punitive damages were then added to the Seed Law (2015), which protects new plant varieties, the Anti-unfair Competition Law (2019), the Patent Law (2020), the Copyright Law (2020) and the Civil Code (2020).
On 3 March 2021 the Supreme People's Court (SPC) released a Judicial Interpretation on the Application of Punitive Damages in the Trial of Civil Cases Involving Infringement of Intellectual Property Rights with immediate effect. The judicial interpretation's main purpose seems to be to coordinate and unify the criteria and language used in the different IP laws.
The SPC also provides some procedural details which explain how plaintiffs can request the court to award punitive damages. For example, it is clear that punitive damages will be granted only if they have been requested by the plaintiff (Article 1 of the judicial interpretation). The plaintiff must specify, in its request, the calculation mode of the punitive damages (Article 2 of the judicial interpretation). The request should be made before the end of the first-instance debate. If the request for punitive damages is made during the second instance, the court may act as a mediator, but if no agreement is found, a new lawsuit should be filed.
Punitive damages can be awarded only to plaintiffs who can prove that the infringement is "intentional" (or "malicious") and that the circumstances are "serious". The judicial interpretation clarifies what should be considered as intentional or malicious and what constitutes a serious circumstance.
According to Article 3 of the judicial interpretation, the following circumstances, among others, constitute 'intentional' or 'malicious' infringement:
- The defendant continues to commit infringement after being warned by the rights holder or its "interested parties" (which mainly refers to licensees).
- The legal representative, manager or actual controller of the plaintiff commits infringement.
- The defendant is related to the plaintiff by way of labour, service, agency, licence, distribution, cooperation or representation and had access to the plaintiff's IP rights.
- The defendant had business dealings with the plaintiff and access to the plaintiff's IP rights.
- The defendant counterfeited the plaintiff's copyright or registered trademark.
According to Article 4 of the judicial interpretation, the following circumstances, among others, are defined as 'serious':
- The defendant commits the same or a similar act of infringement after having been found to have committed infringement by an administrative authority or a court previously.
- The defendant commits infringement by trade.
- The defendant conceals, forges or destroys evidence of infringement.
- The defendant refuses to abide by a preservation ruling.
- A significant amount of illegal profits have been gained or the rights holder's losses are significant.
- The infringing act is likely to harm national security, public interests or personal health.
In Article 5 of the judicial interpretation, the SPC reiterates the general principles established in the respective laws concerning the assessment of the damages – namely, that the court may order the defendant to disclose its accounts and, in case of refusal, the award may be based on the plaintiff's evidence and claim.
The exact multiplication coefficient is decided by the court according to the circumstances. If a defendant which has already been subject to an administrative fine or criminal punishment asks the court to reduce the punitive damages or order an exemption, such a request should not be supported. However, the court may take other punishments into consideration when deciding on the multiplication coefficient.
Many of the above circumstances come from the Guiding Opinions of Beijing Higher People's Court on the Determination of Damages in Infringement of Intellectual Property Rights and Unfair Competition Cases and Adjudication Criteria for Statutory Damages (2020). The SPC also published six exemplary cases to illustrate how punitive damages are assessed and applied.
Decisions in which punitive damages are claimed and supported by the court are becoming increasingly frequent. Such decisions follow the reasoning presented in the judicial interpretation and the exemplary cases.
In practice, the change in punitive damages might bring the following changes to IP protection in China:
- Cease and desist letters could become a more cost-effective deterrent. They can help to establish the infringer's malicious intent and trigger a claim for punitive damages.
- Infringers might be deterred from committing repeated infringement.
- It may become regular practice to:
- file a civil action following a criminal litigation and systematically claim punitive damages; and
- ask the civil court to order counterfeiters to submit accounting books and other useful evidence under their possession.
Rights holders should prepare in advance for the effective enforcement of a judgment. Obtaining a large amount of damages is of little advantage if the judgment remains unexecuted. Therefore, it is important, where possible, to seek pre-trial preservation of assets. Experience proves that measures taken early are more efficient.
For further information on this topic please contact Zhigang Zhu at Wanhuida Intellectual Property by telephone (+86 10 6892 1000) or email ([email protected]). The Wanhuida Intellectual Property website can be accessed at www.wanhuida.com.