Specialist Chapter: China’s New Punitive Damages System Bolsters Protection Against Trademark Infringement

In summary

Recently, China has been fighting trademark infringements and counterfeits through implementing a punitive damages system. As relevant laws and regulations on punitive damages improve, courts have reached decisions in more typical cases after conducting precise calculations on the base amounts, and cautious consideration regarding multiples, of punitive damages.

Discussion points

• Base amount of punitive damages is determined with more precision
• Multiples of punitive damages are determined more cautiously
• Punitive and statutory damages are carefully selected and balanced
• Punitive damages can be determined based on agreed compensation

Referenced in this article

• Court guidelines on punitive damages
• Vans v Zhilong Gao
• Hangzhou Robam v Shenzhen High-End Kitchenware Lao Ban
• Shanghai Saiyi v Changzhou Yishui and Shanghai Wanneng
• JUKI v Zhejiang Jukai
• Opple v Huasheng
• Carl Zeiss AG v Yiwu Hanke and Wang Xiao
• Shenzhen Xiaoerduo v Wenzhou Cricket

The Civil Code adopted in May 2020 anchors the overall establishment of the punitive damages system for the protection of intellectual property. This system was incorporated into the Trademark Law (revised in 2013), the Anti-Unfair Competition Law (revised in 2019), the Patent Law (revised in 2020) and the Copyright Law (revised in 2020). In 2021, the Supreme Court issued its Interpretation on the Application of Punitive Damages in the Trial of Civil IP Infringement Cases (the Supreme Court Interpretation),^[1] which outlines the scope of application of punitive damages, the criteria for determining intentional infringement and serious circumstances, and the method for calculation of the base amounts and multiples of punitive damages. Following this, courts in Beijing, Shandong and other areas have specified standards of punitive damages applicable to their jurisdictions. This article summarises recent trends in punitive damages for trademark infringements, defines the main points of relevance for calculating punitive damages based on typical cases and provides a strategic view of how rights holders can claim punitive damages in trademark infringement litigation.

Determination of base amount of punitive damages

Article 63 of the Trademark Law stipulates that damages for trademark infringement shall be assessed on the basis of the actual losses suffered by the rights holder, the infringer’s profits or reasonable multiples of royalties. The base amount of punitive damages is also determined on this basis. In 2020, the Supreme Court released its ‘Several Provisions on Evidence in Civil Procedures Involving IP Rights’ document, which provides clearer guidelines on the evidence required to support damages claims. Financial audits, evaluation reports, market research reports, transaction data stored in equipment and systems, statistical data from third-party platforms, and records maintained by market regulation, taxation and financial departments are commonly used as evidence to prove the amount of damages. As relevant laws and regulations on punitive damages improve, courts have reached decisions in more typical cases after conducting precise calculations to find sales volume or relevant financial data, assessing profit margins and determining profit contribution.

In cases where punitive damages are calculated based on the actual losses suffered by the rights holder or the infringer’s profits from infringement, courts generally adopt the calculation method of multiplying the sales volume of infringing products, or the reduced sales volume due to infringement, by the profit per unit of product. When determining these factors, courts refer to various facts, such as sales volume of infringing products that the infringer admits to, the sales volume of infringing products displayed on e-commerce platforms, the sales channels, the franchisees and the number of infringing products seized by administrative authorities.

In Vans v Zhilong Gao,^[2] the plaintiff requested the court to retrieve the defendant’s sales data from e-commerce platforms. Based on the data provided by the platforms, the court selected the orders related to infringing products, excluded the refunded orders and retained only the orders with ‘successful transactions’. The court then determined the total sales volume based on the selected number of successful transactions. In Hangzhou Robam v Shenzhen High-End Kitchenware Lao Ban,^[3] the plaintiff submitted the defendant’s product catalogue as evidence, claiming that the sales volume of infringing products shall be calculated based on the number shown in the catalogue. The defendant argued that the number shown in the catalogue, which served as external publicity data, was exaggerated; even if the number in the catalog were accurate, there was no evidence to prove that the products that had already been sold infringed upon the plaintiff’s trademark. The court requested the defendant to submit its financial and shipment records or other evidence to prove the quantity and price of the infringing products, but the defendant failed to do so. The court found that, in view of the fact that the plaintiff had purchased infringing products in several provinces through notarised purchases, and that the defendant had promoted and sold infringing products through its website, WeChat and TikTok, it was legitimate to refer to the plaintiff’s claims and evidence submitted in determining the damages. The court decided that the product catalogue could also be used as evidence to calculate the quantity of infringing products.

Regarding assessment of profit margins, the main difference in practice lies in the choice between operating profits and sales profits. The specific profit margins to be adopted should be considered comprehensively based on the facts of the case. Relevant evidence to consider includes:

• profit margins of identical or similar products publicly disclosed or acknowledged by the infringer;
• statistics or industry reports issued by competent authorities, industry associations or third-party platforms; and
• the infringer’s financial, annual audit and tax records.

In Shanghai Saiyi v Changzhou Yishui and Shanghai Wanneng,^[4] the plaintiff calculated the profits based on operating profits found in a third party’s annual report; however, the court differentiated between operating profits and sales profits, and found that the third party’s profit margin was higher than the market average by taking into account the popularity of the third party and other factors. Accordingly, the court exercised its discretion to establish a lower profit margin.

Some courts also take the contribution of intellectual property into consideration when determining the base amount of damages. According to current judicial practice, there is no established standard for determining contribution, and courts typically make determinations based on the merits of each case. The reference factors include popularity and reputation of the trademark being infringed, the infringer’s use of the trademark and industry features, among other things. In Huawei v Shenzhen Shangpai,^[5] the court held that Huawei’s contribution to Shangpai should be considered when calculating punitive damages to establish a causal relationship between a finding that punitive damages should be awarded and Shangpai’s infringing acts. The court comprehensively considered the high popularity and reputation of Huawei’s trademarks and held that Shangpai’s high sales volume was largely associated with Huawei’s trademarks. However, given that the evidence also showed that Shangpai’s own business management had contributed a certain amount to its product sales, the court concluded that Huawei’s trademarks contributed to 80 per cent of Shangpai’s profits.

In cases where punitive damages are calculated based on royalties or multiples thereof, the courts tend to adopt a more precise calculation of royalties and determination of multiples. Judging from the legislative intent, multiples of royalties as the base for punitive damages are factors in a compensatory damages calculation and the amount of damages ordered should be closer to the rights holder’s actual losses. In Opple v Huasheng,^[6] the court found that the terms of the licence agreement provided by the plaintiff were limited to the use and promotion of the trademark involved in distributors’ business premises and the sales channels were only limited to distributors’ locations. The alleged infringement, however, involved the manufacture, sale and offering for sale of infringing products on both online and offline platforms within China and worldwide. Therefore, the court doubled the royalties as the base amount for punitive damages.

Determination of multiples of punitive damages

Regarding multiples of punitive damages, the Trademark Law defines a range of one to five times the base. According to the Supreme Court Interpretation, when determining multiples of punitive damages, courts should take into consideration of various factors, such as the defendant’s subjective fault and the severity of the infringement. Additional factors, such as the degree of intentionality, duration and repetition of the infringement, are set out in trial guidelines issued by local courts.

In theoretical research and judicial practice, quantifying multiples of punitive damages has also been discussed. Some practitioners hold that quantifying multiples of punitive damages could help to unify the standards of adjudication and establish a general correlation between multiples of punitive damages and the degree of bad faith and severity of infringement. However, quantifying multiples of punitive damages still remains a theoretical discussion and, in practice, courts tend to apply a more cautious approach when determining multiples of punitive damages.

Selection and balance of punitive and statutory damages

Although there are multiple factors to be considered in determining punitive damages, in some cases, it is still difficult to prove the total losses suffered by the rights holder or profits gained by the infringer. There may be situations where the amount involved in the infringing acts or the resulting damage cannot be proven. In response to this dilemma, some courts have applied punitive damages on identifiable losses and statutory damages on hard-to-identify losses.

Article 5.8 of the Guidelines on the Application of Punitive Damages in the Trial of Civil IP Infringement Cases issued by the Beijing High Court (the Beijing Court Guidelines)^[7] stipulates that ‘if part of the damage caused by the same infringing acts can be determined, punitive damages may be applied to that part at the plaintiff’s request. For the part of the damage that cannot be determined, statutory damages should be applied separately’. Article 21(3) of the Guidelines on the Application of Punitive Damages in the Trial of Civil IP Infringement Cases issued by the Shandong High Court stipulates that ‘where there are multiple facts involved in the defendant’s infringement, courts can apply punitive damages to the part where the base amount of calculation can be determined, and apply statutory damages to the part where the base amount of calculation cannot be determined’.

In JUKI v Zhejiang Jukai,^[8] the court emphasised the importance of finding facts in support of calculating the base amount of punitive damages, but it also noted that failing to apply punitive damages when the total base amount cannot be ascertained would undermine the effectiveness of the punitive damages system and allow intentional infringers to evade legal liability. Therefore, provided that part of the base amount can be determined, punitive damages will be applied. Based on this reasoning, the court found that evidence submitted could be used to verify the amount of two orders produced and exported by Zhejiang Jukai and applied punitive damages to its exports accordingly. For Zhejiang Jukai’s infringements that occurred domestically, the court comprehensively considered Zhejiang Jukai’s domestic production, sales, exhibitions, web pages and public WeChat account promotions, as well as factors such as the degree of intentionality of the infringements and the seriousness of the circumstances to determine statutory damages of 1 million yuan.

Article 3.23 of the Beijing Court Guidelines stipulates that for intentional infringement with serious circumstances, where the plaintiff requests punitive damages but the base amount thereof is difficult to determine, statutory damages should be applied and determined at a higher level, where appropriate. In Carl Zeiss AG v Yiwu Hanke and Wang Xiao,^[9] the plaintiff claimed that damages should be calculated based on the defendant’s profits gained from the infringement, but its calculation was dismissed by the court for lack of evidence. Instead, the court comprehensively considered factors such as the popularity and reputation of the plaintiff’s trademark, and the defendant’s subjective bad faith, repeated infringements, wide range of infringements and serious consequences. As a result, the court ordered relatively high statutory damages of 4 million yuan.

Determination of punitive damages

Article 3.21 of the Beijing Court Guidelines stipulates that ‘interested parties can agree on the base amount of punitive damages, the method of determining the base amount of damages, multiples of damages and the total amount of damages’, which to some extent reflects that the courts are in support of agreed compensation in determining punitive damages. No laws prohibit trademark owners and infringers from reaching an agreement in advance regarding infringement liabilities or compensation amounts, among others. Such an agreement can be considered a predetermined calculation method agreed upon by both parties, taking into account the potential losses suffered by the rights holder or the profit obtained by the infringer as a result of future infringement.

In DORCOCO v Jiangxi Xirui, the court found that the defendant had entered into a settlement agreement with the plaintiff in another case involving counterfeits, in which the defendant agreed that it would unconditionally compensate the plaintiff for damages that were 10 times the value of the infringing products (based the price of genuine products) if it infringed upon the plaintiff’s trademark again. In this case, the defendant admitted that it had manufactured and sold infringing products, and acknowledged that the sales amount of the infringing products sold on the Alibaba platform was 2 million yuan. The court affirmed the validity of the settlement agreement from the prior case and supported the plaintiff’s claim for damages of 8 million yuan based on the terms of the settlement agreement.

In Shenzhen Xiaoerduo v Wenzhou Cricket,^[10] the court held that statutory damages should be applied because it was difficult to determine the plaintiff’s actual losses resulting from the infringement, the profit obtained by the defendant from the infringement and trademark royalties. To determine the amount of statutory damages, the court considered the settlement agreement between the plaintiff and the defendant, which stated that the defendant would compensate the plaintiff with no less than 1 million yuan if it intentionally infringed upon the plaintiff’s trademark and trade name again. In light of this, the court awarded statutory damages of 1.1 million yuan.

Conclusion

As China has been strengthening its legal system and judicial enforcement measures for to protect IP rights holders, it is important for rights holders to be aware of the application and use of the punitive damages rules. When pursuing punitive damages, rights holders are advised to specify the amount of damages and the calculation methods in the complaint if the base amount of punitive damages can be clarified. If the base amount cannot be clarified, rights holders may still request the court to consider intentional infringement and serious circumstances as factors when determining statutory damages, and the amount of statutory damages will be determined at a higher level at the courts’ discretion. Additionally, rights holders may also consider reaching a settlement agreement with infringers on infringement liabilities in the event of future infringements, especially the amount of compensation. This can serve as a deterrent to infringers and reduce the burden of proof for rights holders in future infringements.

Footnotes