The meager damages awarded in infringement cases in China have long been a headache for intellectual property right holders. This is especially true for foreign clients used to the far higher awards in common law countries, such as the US and UK. Consequently, injunction relief is almost always the primary reason for litigating in China.
Although one of the central themes of China's IP law reform over the past decade has been to drive up the size of damage awards, it still remains a challenging issue today. This article explores the reasons behind China's low awards, and recommends tactics you can employ to increase them.
What are the principles of damage calculation in China?
The principles of damage calculation in China are essentially harmonised with international standards. In short, damages in China are calculated based on four criteria:
- The financial loss of the right holder
- The financial gains of the infringer
- Reasonable multipliers of IP licence fees (if there is such a reference)
- Statutory damages
It is worth noting that the fourth method, statutory damages, is by far the most common, with the vast majority of damages decided purely at the discretion of the judge. So much so that many plaintiffs do not even bother to provide evidence of alleged damages, but rather simply request or agree for the judge to make that determination. This brings us to the next question.
Why does the damage award tend to be lower in China?
The major reason that damages remain comparably low in China is that it is very difficult for plaintiffs to prove them (i.e. financial loss of the plaintiff or gain of the defendant). This can be attributed to two factors: (a) the difficulty of collecting evidence in China, and (b) China's high, not to mention inflexible, standard of proof for damages.
In order to prove the loss, the plaintiff must show both the loss itself and how the loss is correlated with the infringement. While neither is easy, establishing a correlation between a loss and infringement is especially complex. Indeed, since Chinese courts are reluctant to presume or infer based on the facts, proving a loss can be an extremely difficult proposition.
To ascertain the gain of an infringer, the right holder usually has to provide evidence such as the accounting books, sales contracts, manufacturing records, etc. — all of which is generally withheld and highly protected by the infringer. Without a US type of discovery procedure, it is very difficult for the right holder to obtain this sort of evidence. What's more, without the "contempt of court" sanction in civil proceedings, even if ordered by a judge to surrender such evidence the infringer might provide false evidence, or simply no evidence at all.
In view of the above difficulties regarding evidence or proof, it is not surprising that statutory damages, which are usually regarded as a last resort in other jurisdictions, have become the norm. Although China has increased the upper limit of statutory damages in almost every major IP law reform — with the current upper limit around RMB 3 million (USD $440,000) depending on the type of rights — damages still remain low when compared with US and European practices.
Are there any ways to increase damage awards when litigating in China for intellectual property infringement?
Despite the challenges outlined above, right holders can still find ways to increase damage awards. While it would be nice to be able to prove loss or gain, or find a reference of license fee levels recognised by the court, the majority of damage awards are still statutory. As such, most of the tactics below focus on ways to influence the judge's discretion so a higher damage award — nearer the upper limit — can be obtained:
- Comb public information thoroughly to collect information that speaks to the extent of the infringement. Such information could include the scale of the infringer's business, the level of marketing and promotion, the unit price, the period of sales, the number of stores, the territory of sales, and written statements detailing the amount of sales and marketing materials, etc. With dedicated effort, a good quantity of information can be gathered through public channels, and can paint a better picture of the seriousness of the infringement.
- Gather information to show the infringement is blatant, such as the fact that the defendant knowingly infringes, or takes a free ride on the reputation of the right holder.
- Provide enough information about the use and reputation of the right holder and the product in question. Such evidence is within the control of the right holder and should be easy to gather to show the potential financial loss of the right holder.
- Always ask the court to conduct an evidence preservation order or asset preservation order if possible. If accounting information is seized during a court-organised raid of the infringer, it is admissible and the judge will be happy to calculate damages based on the seized accounting information.
- Ask the court to order the defendant to provide the relevant accounting books and information about the infringing product. If the infringer does not cooperate, which is common in China, it is another factor of bad faith, and the court will be more amenable to increase damages as a result.
- Request that the court award a large part of, or full, legal fees as incurred. Traditionally Chinese courts only grant nominal cost recovery for legal fees. However, this trend is changing;in a 2016 patent infringement case, the Beijing IP court granted full legal fees of RMB 1 million (USD $150,000).