The Chinese Supreme Court has lately spread a message calling on more reasonable compensation for intellectual property (IP) rights. A recent case shows how such a message can impact determination of infringement damages.
Positive Tone from Chinese Supreme Court
In January 2018, the Chinese Supreme Court issued the Notice of the Supreme People's Court on Bringing the Role of Judicial Function into Full Play to Create a Good Law Enforcement Environment for Entrepreneurs to Innovate and Start up ( "Notice" hereinafter) in which IP protection is emphasized in the fourth paragraph. The Notice listed a series of requirements and was distributed to district courts at all levels. As a directive document, the notice suggested the existence of a trend which would have a significant impact on IP enforcement in the near future.
With respect to IP protection, the notice uses the following language: "establish a mechanism for judicial determination of infringement damages, such mechanism will take the market value of intellectual property as a guide and focus mainly on compensation and subsequently on punishment; improve intellectual property infringement compensation standards; explore the establishment of a system of punitive damages for intellectual property rights; make efforts to solve problems in practice such as low infringement costs for infringers and high costs of rights protection for entrepreneurs."
For those familiar with Chinese practices, it has been commonplace to see statutory damages awards limited to RMB 1 million (about 114,000 pounds) for a patent infringement case. If damages fail to be calculated, the award for statutory damages will be decided by the court, which used to be far less than the above-mentioned limit. This less than satisfying award in practice has served to deter patentees from filing a lawsuit in China as they have actually lost much more.
From the Chint v Schneider case which was settled with a compensation of RMB 157 million (about 17.8 million pounds) in 2009, to the Goertek Acoustics v Knowles Electronics case which was settled with a compensation of RMB 37 million (about 4.2 million pounds) in 2014, until more recent lawsuits such as Sogou v Baidu seeking over RMB 200 million (about 22.7 million pounds) and Jinyi Tech v Juli Tech seeking 100 million (about 11.3 million pounds), there have been quite a number of cases claiming high compensation which was unimaginable ten years ago. The trend is clear and has been encouraging more and more patentees to consider filing lawsuits, especially since the Supreme Court has just issued the Notice using such a positive language in this regard.
The compensation can only be raised to a satisfying level if the statutory damages are avoided. In order to avoid statutory damages, according to Article 65 of the Chinese Patent Law, damages need to be calculated based on 1) actual losses suffered by the patent owner stemming from the infringement; 2) profits the infringer has gained from infringement; or 3) reasonable multiples of royalties of the patent (applied in the order). However, none of the three can be easily obtained in practice. The difficulty in obtaining such an outcome used to result in receiving damages which were considerably lower than RMB 1 million.
As the Notice emphasises the importance of punitive damages for intellectual property rights, it may be helpful to appeal to the punitive damages when it is difficult to fulfil any of the three above requirements. A recent case has provided just such an example.
Leatherman v Coteetci Case
After the Notice was issued, a first-instance judgment was made by the Shenzhen Intermediate Court with respect to a patent infringement lawsuit. The case attracted my attention because it would have normally resulted in statutory damages under previous practices - but the court awarded damages of RMB 1.2 million (about 136,000 pounds). The number is not comparable with the above-mentioned famous cases, but usually the court would not have awarded compensation above RMB 300,000 (about 34,000 pounds), for example, as the infringers were small companies and the value of a single product was low.
The plaintiff, Leatherman Tool Group Inc. owned Chinese patent ZL201510007273.3, which is implemented as a bracelet product named TREAD, each selling for about RMB 400 (about 45 pounds). A company named Coteetci in Shenzhen produced and sold a copycat product and a company named Yihao in Dongguan was responsible for the manufacturing of said copycat product, and they were both sued for patent infringement.
The copycat products were not sold through major e-commerce platforms such as Taobao and JD.com, and the scale of infringement was hard to determine for the plaintiff. Considering these difficulties, the plaintiff made some effective efforts to prove that the defendants acted in bad faith. In addition to the evidence, such as the contribution of the patent to the product in terms of value, the duration and scale of the infringement, the quantity as acknowledged by salesmen, the price difference between the plaintiff's product and the copycat product, the plaintiff also emphasised the acts of bad faith demonstrated by the defendants. For example, Coteetci refused to disclose its actual business address during the hearing and kept selling the copycat products even during the proceedings. The plaintiff claimed that these indicate that the defendants' acts were on purpose and were carried out in bad faith.
The plaintiff's claim was supported by the court. In determining a proper compensation, the court considered the factors such as the violation of the principle of good faith, the continuing infringement, the estimated profits for the defendants, and the cost in safeguarding the rights for the plaintiff.
From this case, we see that strategies proving bad faith are important for reaching higher punitive damages. In view of the Notice which is in favour of implementing a system with access to more reasonable compensation, it is expected that plaintiffs shall benefit in the future from using clever strategies.