Background

The Supreme People's Court of China (SPC) recently handed down a final judgment upholding the first-instance judgment issued by the Guangzhou Intellectual Property Court (Guangzhou IP Court), which highlighted the impact of the contribution rate of a patent on the amount of damages.

In November 2020, the Guangzhou IP Court handed down a first-instance judgment in relation to an invention patent infringement case initiated by TCL Air-Conditioner (Zhongshan) Co., Ltd. (TCL) against Guangdong MBO Refrigeration Equipment Co. Ltd. (Guangdong MBO). The Guangzhou IP Court held that, after comparison, the alleged infringing technical solution had all the same essential technical features as the patent in question and thus the patent infringement should be found.

As for the compensation, the Guangzhou IP Court held that TCL did not provide a specific amount of its losses or the illegitimate profits gained by Guangdong MBO as a result of the infringement, nor did it provide the amount of royalty which could be used as a reference.

The Guangzhou IP court, as the first step, determined the annual volume of production of the infringing products at its discretion, taking into consideration the annual planning data of TCL's patented products, the use of moulds for replacement, the scale of production, and certain market share of the infringing products.

On this basis, the Court adopted the 10% industry profit margin and 3%-5% patent contribution rate as the basis for calculation. After weighing the type of patent involved, the nature and circumstances of Guangdong MBO's infringement, and the profit it might obtain as a result of the infringement, the Court awarded Guangdong MBO RMB 1.68 million in damages for TCL's economic losses.

Both parties subsequently appealed to the SPC.

The SPC discussed in its ruling that Guangdong MBO's refusal to submit evidence of its infringement profits should be subject to the adverse consequences of its inability to provide proof, and the determination of patent infringement and the amount of damages awarded by the Guangzhou IP Court was not improper.

Key takeaways

As a common electrical appliance, air conditioners contain quite a variety of patented technologies and it is not rare for intellectual property rights (IPR) frictions to arise between manufacturers over a particular technical solution in a product.

The facts of this case are not complicated, but they shed light on the following implications with regard to the determination of damages in patent infringement cases:

1. Chinese courts have been dedicated in recent years to solving the challenges of calculating IPR damages

In recent years, courts at all levels have been actively applying the principle of obstruction of evidence/proof, whereby the defendant would be subject to possible adverse consequences due to its refusal to submit infringement profits data where it is capable of doing so.

A number of recent IP cases have shown that it is becoming common for courts to accept plaintiffs' claims because the defendant refuses to submit relevant evidence regarding its infringing profits.

In view of the above, the message to the defendant is that even as a defendant, one should be vigorous in providing evidence rather than waiting for a stroke of luck.

2. The patent contribution rate is an indispensable consideration in determining damages in patent infringement cases

The total profit of the infringing product is not entirely brought by the patented technology; rather, many factors contribute to the profit of the product, including brand effect, technology level, sales strategies, etc. Therefore, the amount of infringement damages to be compensated by the defendant should be calculated in proportion to the technical contribution rate of the patent, namely, the ratio of the contribution of the technology found to be infringing to the total profits of the infringing product.

It can be observed that the amount of damages granted in a patent infringement case, to a large extent, depends on the level of litigation skill and the ability of the parties to produce evidence.

In addition, it also relies heavily on the ability of the parties to explain to the court and to assist the judge (and sometimes the technical investigator) to fully understand the patent and the industry in order to arrive at a certain patent contribution rate in their favour.

3. An extension question: the formula used for calculating damages (on the basis of the defendant's profits gained from the infringement)

A fair number of cases suggest that in patent infringement cases similar to the present one, the formula for the court's discretionary damages can be summarised as:

'(Total amount of infringing products) x (unit price of products) x (reasonable profit margin, i.e. the average operating profit margin of the company) x (the contribution rate of the patent in question)'.

The contribution rate of the patent is weighed as described in the second point above and is generally left to the discretion of the judge on a case-by-case basis.