1. Patent Infringement Compensation Legislation in China

Article 65 of the 2008 P.R.C. Patent Law provides that, “The amount of compensation for infringement of a patent right shall be determined on the basis of the actual losses suffered by the patentee. Where it is difficult to ascertain such actual losses, the amount may be determined on the basis of profits gained by the infringing party. Where it is difficult to ascertain either the losses suffered by the patentee or the profits enjoyed by the infringer, the amount shall be determined by reference to appropriate multiples of the amount of patent royalties. Where it is difficult to ascertain either the losses to the patentee, the profits gained by the infringer or the amount of patent royalties, a People's Court may award an amount between RMB10,000 and RMB1,000,000 depending on the type of patent right, the nature and circumstances of the infringement and other factors.” According to this provision, compensation for patent infringement in China includes four possible approachs, and each successsive approach is applicable only if all previous approaches are inapplicable. This system is summarized in the following table:

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As the first resort, compensation for patent infringement is determined based on the actual losses of the patentee, an approach that is consistent with the basic principle for determining infringement compensation in China. The basic principle of compensation for infringement of another’s property rights and interests of any sort is “full recovery of losses”, meaning that by its very nature compensation should equal the plaintiff’s losses. This principle is designed to place the plaintiff in the same position that he would have enjoyed had the infringement never occurred. For example, Article 170 of the Civil Procedure Law provides that “If State or collective property or property belonging to another person is embezzled, it shall be returned. If such property cannot be returned, monetary compensation of an equivalent value shall be paid. If State or collective property or property belonging to another person is damaged, such property shall be restored to its original state or, alternatively, monetary compensation of equivalent value shall be paid. Should the victim sustain further serious damages as a result of infringement, the infringing party shall also compensate for such damages.” Article 19 of the Tort Liability Law provides that “Property losses due to property infringement shall be calculated according to the market price or by other applicable means at the time the losses were incurred.” The provisions for patent infringement under the Patent Law apply the same basic principles. The liability of the infringing party is usually limited to recovering the patentee’s losses and is not extended to punitive compensation.

In the event that the actual losses of the patentee cannot be calculated, liability will be calculated based on infringement profits. The principle that infringement profits are equivalent to damages compensation is based on the idea that the infringing party reaped profits that could not have been obtained but for the infringement. Since such profits are considered unjust enrichment, the rights owner is entitled to demand damages in the amount of the infringing party’s profits as compensation for unjust enrichment.

In the event that neither the patentee’s losses nor the infringer’s profits can be calculated, the third approach, compensation based on patent royalties, will apply. This approach assumes that the patentee licenses patent rights to the infringing party, in which circumstance the royalties payable by the infringer are adopted as the basis for determining compensation. In addition, since this approach allows the courts to determine the compensation by reasonable multiples of royalties, it is also to some extent punitive.

Finally, in the event that none of the foregoing three approaches is applicable, statutory compensation in the amount of RMB10,000 to RMB 1,000,000 will apply. Courts are entitled to exercise discretion based on the totality of the circumstances.

The foregoing provisions cover a number of methods for determining compensation to protect the patentee’s interests. Although the last of the four approaches, statutory compensation, should be the last resort, in practice it is most commonly used option. According to statistics, 99% of patent infringement cases between 2005 and 2010 adopted statutory compensation while only 1% adopted the patentee’s actual losses, the infringer’s profits or reasonable multiples of patent royalties.1 Moreover, the average amount awarded under the statutory compensation approach was only RMB 83,660. 2 Although a maximum statutory compensation of only RMB 500,000 was applicable before the amendment of the Patent Law in 2008, maximum statutory compensation is normally hard to obtain. In addition, statistics also show that amounts awarded by the courts in the year following the implementation of the 2008 Patent Law did not increase significantly.3

United States courts typically award high compensation in patent infringement cases. For example, in a case filed by Apple Inc. against Samsung Corporation in August 2012, the jury held Samsung liable for patent infringement and ordered Samsung to compensate Apple for infringement in the amount of USD1,050,000,000 (approximately RMB6,600,000,000). Although such high compensation might appear to be punitive, a careful study of U.S. patent law reveals this not to be the case. The U.S. Patent Law is federal legislation, and Article 284 provides for patent infringement compensation. Specifically, a plaintiff should be able to recover its losses, which should not be less than the reasonable royalties that the infringer should pay for the use of the patent plus interest and expenses as determined by the court.4 Therefore, in general, compensation for patent infringement in the United States is based primarily on losses suffered by the patentee or reasonable royalties instead of statutory compensation or punitive damages.

The methods for calculating compensation for patent infringement under P.R.C. law, by contrast, are more diversified. The last approach, statutory compensation, is applicable only if none of the first three approaches is applicable. From a legislative perspective, the Chinese legislation does not lag behind U.S. legislation in respect of compensation for patent infringement. However, various difficulties in practice have caused the first three approaches to become inapplicable in most cases, leading to the near-universal application of the statutory compensation approach.

2. Dilemma in the Calculation of Damages in China

  1. Actual Losses of the Patentee

To ascertain losses caused by infringement, the patentee must usually provide information such as sales profits. The main reason why it is difficult to calculate the patentee’s actual losses include: (i) due to confidentiality concerns the patentee is unwilling to disclose the profits of the patented product; this is a subjective factor; (ii) where the patented product incorporates other intellectual property in addition to the disputed patent, it is difficult to calculate the contibution to profits attributable to the patented tachnology alone due to the profit auditing limitations; (iii) although the patentee suffers losses, such losses may be jointly caused by other factors, e.g. shrinking of the market or increased costs for raw materials; therefore, it is difficult to calculate actual losses attributable to infringement alone; and (iv) since the market for the patented product might still be expanding, the patentee’s profits might not decrease despite the existence of the infringing product; leading to a determination that the plaintiff suffered no damages .

  1. Profits the Infringer Gains from the Infringement

To clalculate profits gained from infringement it is usually necessary to obtain the infringer’s financial information. The main reasons why it is difficult to calculate the infringer’s profits include: (i) it is difficult to obtain financial information such as the accounting books from the infringer because China has no “evidence discovery” procedure equivalent to the procedure available under U.S. law; and it is usually difficult for the patentee to obtain the infringer’s financial information by private investigation alone; (ii) even if the patentee obtains the infringer’s accounting books by means of court-ordered evidence preservation procedures, it is also possible that the profits of the specific infringing product are not available due to sloppy recordkeeping; and (iii) when the infringing product is only a portion of the whole and the entire product incorporates other intellectual property, it is difficult to calculate the profits attributable to the infringing product alone.

  1. Reasonable Multiple of Patent Royalties

The reasons why it is difficult to apply the “reasonable mutiple” approach are that: (i) the patent has never been licensed and therefore no royalties exist; or (ii) even if the patent has been licensed, it is usually up to the court’s discretion which “reasonable multiple” should be used.

3. Resolutions to the Delimma

  1. Appropriately reduce the burden of proof regarding “actual losses to the patentee."

Based on the basic Chinese civi procedure principle “He who asserts must prove his assertion”, the plaintiff would be expected to bear the burden of proof with respect to losses caused by infringement and should expect adverse consequences to result from failure to meet the burden of proof. In practice, the patentee usually submits a large amount of evidence proving the infringing act, while evidence proving damages is usually limited because of the above-described difficulties. Although any difficulty caused by the patentee’s unwillingness to provide information such as profits is within the patentee’s control, the other difficulties such as difficulty in profit auditing, are outside of the patentee’s control. Facing difficult evidence production hurdles and the excessively high cost of producing evidence, the patentee is left with no better approach than statutory compensation.

From a legislative perspective, legislation governing patent infringement compensation aims to allow the patentee to recover its infringement losses and to restore the patentee to the situation it would have enjoyed had no infringement ever occurred. To this end judicial authorities should encourage patentees to provide evidence proving their actual losses, the infringers’ profits or reasonable royalties. On the other hand, the standard of proof in civil litigation should be lower than that in a criminal prosecution – a high degree of probability should be applied rather than the “beyond a reasonable doubt” standard. Consequently, when evidence proving the plaintiff’s actual losses is required, if the plaintiff has already provided its financial books or auditing

information but actual losses are still difficult to calculate for other reasons, certain reasonable implications should be permitted, meaning that losses caused by infringement may be presumed to be based on current market data and profit information. Appropriate reduction of the patentee’s burden of proof in respect of actual losses will better protect the patentee’s rights and interests.

  1. Appropriately shift the burden of proof to the defendant where infringement profits must be proven.

In the event that the patentee has provided sufficient financial information and market data to prove the fact of profit losses but for objective reasons evidence of the actual amount of these losses is insufficient or nonexistent, in other words, if the “actual losses” measure of damages becomes inapplicable, then the second approach, the amount of the infringer’s profits, should be resorted to. Since evidence proving the infringer’s profits is usually controlled by the infringer, the burden of proof with respect to these profits can be shifted to the infringer provided that the plaintiff has made best efforts to prove actual losses. According to Article 75 of the Several Provisions of the Supreme People's Court on Evidence in Civil Proceedings, where evidence exists showing that one party is in possession of evidence but refuses to provide it without good cause, and the other party claims that such evidence is unfavorable to the party in possession of such evidence, an inference that the such evidence is indeed unfavorable may be drawn. If the infringer refuses to produce evidence proving its profits from infringement, it should face liability for any adverse consequence that arise from its failure to produce such evidence, e.g. maximum profits cited from the patentee’s financial books can be assumed or maximum statutory compensation can be applied.

Lastly, protection of the patentee’s rights and interests further depends on the development and improvement of the market economy. Current difficulties are partially caused by imperfections in company financial and accounting mechanisms that make it difficult to calculate profits, or by insufficient disclosure of market information resulting in difficulty calculating market share.

All these are attributable to the fact that China is still in the initial stages of developing a market economy, with many imperfections to overcome. More public market data will better assist patentees’ evidence production demands and provide a more detailed basis for the calculation of reasonable royalties if neither the patentee’s actual losses nor the infringer’s profits can be calculated, thereby better protecting the rights and interests of patentees.