The Development of Punitive Damages in China
In contrast to compensatory damages, punitive damages, are a remedy devised for punishing acts of serious infringement. In other words, when punitive damages are applied, the court might order the infringer to bear liability in excess of compensatory damages.
In the traditional Chinese legal system, the amount of compensation obtained by the infringed shall be limited to the damage suffered. The same rule was normally applied in IP cases as the IP laws are a part of the civil laws.
The application of punitive damages have previously been limited in only a few areas, such as the Consumer Rights and Interests Protection Law and the Interpretation of Disputes on Contracts for the Purchase and Sale of Commodity Housing. The reason for that is punitive damages are considered as being equivalent to private fine, and the application of which is against Chinese legal tradition.
Prior to the official implementation of the Civil Code of the People's Republic of China (hereinafter referred to as "the China Civil Code"), Article 63 of the Chinese Trademark Law stipulates that: "For seriously malicious infringement of the exclusive right to use the trademark, the amount of compensation may be one time – three times of the aforesaid amount determined in light of the foregoing regulations." That multiple was later amended and moved up to five times in 2019. However, in practice, there have been very few cases in which the clause is invoked to apply punitive damages. There are many reasons behind this, for example, there is no such "evidence disclosure" mechanism as it is in the UK courts, to discover the defendant's profits, and the Chinese Judges were reluctance to overcome the traditional thought of granting damages more than the infringed suffered, etc.
In recent years, in order to more accurately reflect the corresponding market value of the infringed intellectual property rights and strengthen the protection of IPR, the application of punitive damages in the IPR field has become a basic policy in China. It is also effectively reflected in the newly effective China Civil Code (effective on January 1, 2021) which provides that "In case of an intentional infringement of another person's intellectual property rights, where the circumstances are serious, the infringed person has the right to request for corresponding punitive damages". From the legal perspective, it is self-explanatory that the protection of intellectual property rights has been greatly enhanced.
Some Key Points of Application of Punitive Damages
- Applicable objects: Repeated infringement, intentional infringement of the perpetrator, i.e. the subjective state of malicious infringement by the perpetrator of the infringement should be taken in to consideration.
- Applicable acts: Direct and intentional infringement upon intellectual property rights. In practice, it generally includes repeated infringement, large-scale infringement, professional infringement, infringement as a career, or other serious circumstances.
- Applicable calculation method: The base amount of damages shall be calculated on the basis of the actual loss of the right holder or the infringement profit of the infringer. The amount of punitive damages shall be calculated on the basis of the calculable (or discretionary) damages of the right holder, the infringer's profits, and the royalties, and then calculated on the basis of such losses to multiply one to five times thereof. In particular, it is especially worth noting that, in the same case, punitive damages may be applied to the identified part of the infringement profit, if the conditions for the application of punitive damages are met; for the loss of the unidentified part, statutory damages shall be applied. In other words, the punitive and statutory damages may work hand in hand in the same case.
Current Features of Cases Applying Punitive Damages
- Geographical region: The mechanism of punitive damages are mainly applied by courts in Beijing, Shanghai, Guangdong, Jiangsu, Zhejiang, and coastal areas of China. The regional distribution of such application is closely related to economic trends, and the judgements are mainly made by the intermediate and higher courts of eastern coastal areas and developed regions.
- Types of disputes: The types of disputes are mainly concentrated in trademark, trade secret and copyright cases. In patent cases, there has not been a single case which punitive damages have been applied. The main reason may be that the judges consider that such dispute is primarily due to the discrepancy between the parties' understanding of the technical solution/method, which make it difficult to ascertain the subjective malicious intent of one party.
- Compensation amount: There is a significant increase in the amount of compensation, which reflects stronger judicial policy for IP protection for rights holders.
Case I: The MOTR case
Balanced Body INC. is the registrant of the "MOTR" trademark (i.e. the trademark involved in the case) approved for use on fitness equipment and other goods. It is also a US based world-renowned manufacturer engaged in the production and sale of sports equipment and owns multiple invention patents and registered trademarks in China. At an exhibition, Yongkang Elina Sports Equipment Co., Ltd. (hereinafter referred to as "Yongkang Elina") promoted fitness equipment bearing the trademark involved in the case and made actual sales through its WeChat Mall and various other means. Balanced Body INC. filed a lawsuit against Yongkang Elina for trademark infringement and claimed that punitive damages should apply.
Prior to this dispute, another batch of fitness equipment sold in Europe by the defendant's foreign sole shareholder infringed the plaintiff's European patents and trademarks. Under a settlement agreement reached, the defendant's shareholder promised to stop infringing the plaintiff's intellectual property rights in the future. The plaintiff later launched the successful MOTR fitness equipment, which was then copied by the defendant in China.
In view of Yongkang Elina's repeated infringement, the court held that the triple punitive compensation standard should apply and determined that Yongkang Elina should bear liability for damages of RMB 3 million. After the case was adjudicated, neither side appealed.
However, it is note-worthy in another IPR infringement dispute between the plaintiff and defendant, another court did not support the plaintiff's claim for punitive damages under nearly the same conditions. This shows that different courts may not have consistent understandings for how punitive damages should be applied. In light of that, choosing a right jurisdiction needs to be considered as part of the litigation strategy.
Case II: The Wyeth case
The "Wyeth" brand is a famous US brand in the infant formula industry. The plaintiff Wyeth Corporation is the trademark holder of "惠氏" and "Wyeth" trademarks. The defendant Guangzhou Wyeth, founded in 2010, conducted long-term and large-scale production, sales of mother and child care products bearing logos such as "惠氏", "Wyeth", "Wyeth baby lion ", and obtained "惠氏", "Wyeth" trademarks in the category of toiletries by squatting and assignment etc. Guangzhou Wyeth also implied in the promotion activities that it has some extent of association with the U.S. based Wyeth Corporation.
On April 26, the Zhejiang High Court held a second trial and handed down the verdict and ordered the defendant to pay the punitive damages of RMB 30 million and reasonable costs of RMB 550,000.
In the trial of this case, the court further clarified the criteria for determining "intentional" and "serious" elements of punitive damages, calculated the profits from the infringement by referring to the evidence submitted by the plaintiff and the defendant, and calculated the base amount and the multiple separately, which effectively punished serious infringement of intellectual property rights.
In both the Chinese Patent Law and the Copyright Law, which will come into effect on June 1 2021, the applicable elements of punitive damages are "intentional infringement" and "aggravated circumstances" according to the China Civil Code. Although neither law is currently in force, rights holders can seek punitive damages for "intentional infringement" and "aggravated" infringement under the China Civil Code, which is already in force. Further, according to our observation, punitive damages would be more actively applied by the Chinese courts when handling IP cases in the future.