Punitive damages in IP infringement cases

Evolution of punitive damages clauses in ­Chinese IP law

The provision of punitive damages in China’s IP law first appeared in the Trademark Law, as amended in 2013, which preluded the application of punitive damages in IP infringement cases in China.

After six years of judicial practice, the punitive damages clause in the Trademark Law was revised to one to five times the actual damages in 2019 from one to three times the actual damages in 2013. In the same year, the Anti-Unfair Competition Law was also introduced for the first time, with the same range of one to five times.

In the Trademark Law and the Anti-Unfair Competition Law, the conditions for applying punitive damages are the same: malicious infringement and serious circumstances.

In 2020, the concept of punitive damages was introduced into the Civil Code, the Patent Law and the Copyright Law. The range of punitive damages in all those laws is one to five times the actual damages, like in the Trademark Law; however, the applicable conditions in those laws are expressed as being wilful infringement and serious circumstances, which differs from the conditions expressed in the Trademark Law.

In 2021, the Supreme People’s Court issued the Interpretation on the Application of Punitive Damages in the Trial of Civil Cases Infringing IP Rights (the Interpretation). The Interpretation adopts the expression of ‘wilful infringement’ in the applicable conditions and points out that the term ‘wilful’ in this interpretation includes the concept of ‘malicious’ stipulated in the Trademark Law and the Anti-Unfair Competition Law.

In addition to the stipulation of punitive damages in the main laws in the field of intellectual property in China, the differences between the applicable conditions in different IP laws have also been coordinated to an extent: as prescribed in the Interpretation, ‘wilful infringement’ is adopted as the expression of the applicable conditions, and when judging whether wilful infringement has occurred, the term also includes the concept of ‘malicious infringement’ for cases based on trademark law and anti-unfair competition law.

Table 1 illustrates the evolution of punitive damages clauses in Chinese IP law.

Analysis of the applicable conditions of the punitive damages clause

Article 71 of the Patent Law stipulates that for:

wilful infringement of patent rights, if the circumstances are serious, the amount of compensation may be determined at more than one time but not more than five times the amount determined according to the above method.

When applying punitive clauses, two questions should be answered.

Should punitive damages be applied?

According to the provisions of the Patent Law, to apply punitive damages, there must be wilful infringement and serious circumstances.

Wilful infringement is a subjective element. Since it is difficult to directly prove the infringer’s exact intentions, it is usually determined through objective behaviour.

The Interpretation provides examples that can be preliminarily determined to constitute wilful infringement. For example:

• the defendant continues to commit the infringement after being notified or warned by the plaintiff or interested party; or
• the defendant has a business or cooperation relationship with the rights holder and knows of and infringes the IP rights.

In the field of patents, there is currently no court decision in which punitive damages have been applied. A large number of cases in which punitive damages have been applied are trademark infringement cases, which can be analysed for reference.

In trademark cases, malicious or wilful infringement is determined by a comprehensive analysis based on facts and evidence. If wilful infringement is determined, the subjective status of the infringer, as derived from objective evidence, is usually regarded as being a certainty rather than a possibility.

In FILA, the defendant’s trademark application for ‘GFLA’ was rejected by the Trademark Office because the mark GFLA is similar to FILA. The court found that the defendant still used the GFLA logo on the same goods, and because the infringer’s intentions could be deduced with certainty, malicious infringement was found.

In Guinness, the plaintiff sent a warning letter requesting the defendant to stop the infringement; however, the defendant did not exercise reasonable duty of care and continued to carry out the infringement, which was found by the court to constitute malicious infringement.

It is common to send warning letters in patent infringement disputes. Consider the following scenario: Enterprise A receives a warning letter from the patentee; however, it neither believes nor agrees that its product constitutes patent infringement and continues to produce and sell it. If it is finally determined there is an infringement, will Enterprise A’s continued production and sale after being warned trigger punitive damages?

From the literal meaning of the judicial interpretation, there is such a risk. On the other hand, if Enterprise A stops manufacture and sale once a warning letter has been received, its business operations will be greatly disrupted. Consequently, the response to warning letters is of relevance to both infringement and punitive damages.

What is a serious circumstance? The literal meaning seems clear, but there are ambiguities in the applicable standards. The boundaries must be constantly evaluated through judicial interpretations and precedents.

In judicial practice, the court’s consideration of serious circumstances focuses on the consequences of infringement. Serious circumstances are considered to be an objective assessment; however, this does not mean that it does not involve consideration of the infringer’s intentions, which is a subjective assessment.

The Interpretation provides several examples that may constitute serious circumstances, including the following two scenarios:

1. The infringer’s intentions are inferred from its behaviour (eg, continuing to infringe after being punished and hindering the litigation process by forging, destroying or concealing evidence). In Adidas, the court found there to be both malicious infringement and serious circumstances as the defendant had previously been punished several times (December 2015, May 2016, December 2016 and May 2017) by the local administrative authority for infringing the plaintiff’s trademark rights.
2. The infringer’s intentions cannot be inferred, but the serious circumstances (eg, the infringer’s profits from the infringement or the patentee’s losses) are large.

The application of punitive damages to the circumstances in point (1) does not seem to be very controversial. In contrast, the application of punitive damages in point (2) is controversial, and the possibility of applying punitive damage brings great risks to the enterprises.

The two conditions for the application of punitive damages are interrelated to a certain extent:

• If the wilful infringement is extremely obvious or the degree is very high, the serious circumstances may not need to be extremely severe to apply punitive damage.
• If the objective consequences of the serious circumstances are severe, such as large profits from the infringement or large losses of the patentee, it may not be necessary to demonstrate that the infringer had a subjective intention to infringe (ie, wilful infringement) to apply punitive damages.

Punitive damages should only be applied based on specific circumstances. The basic principle of damages is still the ‘filling-in’ principle or the compensatory principle (ie, “compensation is the mainstay and punishment is secondary”). For example, the Outline of Judicial Protection of IP Rights in Chinese Courts (2016–2020), issued by the Supreme People’s Court in 2016, pointed out that there should be a “mechanism for identifying infringement damages with compensation as the mainstay and punishment as a supplement”, and the amount of compensation should be adjusted accordingly; therefore, caution should be taken when applying punitive damages.

How should punitive damages be calculated?

Calculation of the amount of punitive damages involves three steps:

1. determination of the basis for calculating the damages;
2. determination of the multiplication factor of the damages; and
3. multiplication of the basis by the multiplication factor to obtain the amount of damages.

Regarding point (1), according to the Interpretation, Article 65 of the Patent Law lists three ways of determining the calculation basis: the patentee’s loss of profit, the infringer’s profit owing to the infringement and reasonable multiplication of the previous royalty. The amount of compensation determined by statutory damages cannot be used as the calculation basis for punitive damages.

In practice, in patent infringement cases involving damages, the three calculation methods listed in Article 6 of the Patent Law are used in a small proportion of cases, while statutory damages are used in a very large proportion of cases; therefore, whether the calculation basis can be determined constitutes a big challenge to the application of punitive damage.

In this regard, the courts are becoming more flexible in determining the amount of compensation. For example, the courts may separate infringing acts into two categories for which the compensation can or cannot be calculated. Even if there is a category for which compensation cannot be calculated but statutory damages apply, if there is another category in which compensation can be calculated, punitive damages may still be applied, such as in the patent infringement case of Guowei Company v Linzhi Company.

In addition, in Adidas, the court further specified its understanding of the rule of using statutory damages when the first three calculation methods are “difficult to determine”: “the people’s court should accurately understand and grasp the true meaning of ‘difficult to determine’ when applying this clause and such standard should not simply require precise calculation.”

In some cases, the courts have adopted discretionary damages as the basis for punitive damages or have taken punitive factors into account when adopting statutory damages; in other words, punitive damages can be replaced by statutory damages in some cases.

For example, in the 2017 Guangdong IP First Instance No. 15519 judgment, the court held that the infringement was malicious and punitive damages should be awarded. The court decided the amount using statutory damages by considering the specific factors of the case.

In the 2015 Huicheng IP First Instance No. 15 judgment, the court awarded statutory damages of Rmb30,000, of which the compensatory portion amounted to Rmb10,000, and the punitive portion amounted to Rmb20,000.

Regarding point (2), determination of the multiplication factor of punitive damages, the court will comprehensively consider factors such as the degree of the infringer’s fault and the severity of the infringing act. According to judicial practice and previous precedent, there is currently no clear, unified standard for determining the multiplication factor of punitive damages. According to some previous trademark cases, the multiplication factor of punitive damages mainly depends on the judge’s subjective judgment, which is mostly a factor of two to three.

Application of punitive damages clause in ­relation to warning letters

Consider the following scenario: Enterprise A develops, produces and sells a product, and since business is very good, there is a large sales volume and the profit is high. Enterprise A later receives a warning letter from the patentee. Although Enterprise A believes that there is a difference between its product and the patent (or at least there is no literal infringement), it cannot be 100% sure that the lawsuit, if any, will be successful (eg, whether it constitutes an equivalent infringement). Should Enterprise A stop production and sales or continue to produce and sell?

In this scenario, Enterprise A should not only consider the risk of infringement but also the risk of punitive damages. According to the Interpretation’s examples of behaviour that can be determined or preliminarily determined to constitute wilful infringement and serious circumstances, there may be a finding of wilful infringement and serious circumstances if Enterprise A continues to produce and sell after receiving the warning letter. This is because the continuation of manufacture and sale will be preliminarily determined as wilful infringement, and given that infringement has been found, Enterprise A’s profit from the infringement is also very high, which is determined as serious circumstances; therefore, there is a large risk of Enterprise A being faced with punitive damages.

In this regard, the suggested solution is to seek and entrust a qualified patent attorney to issue a non-infringement analysis report. At the same time, Enterprise A should not ignore the warning letter: it should pay attention to the time and negotiation requirements in the letter and keep in touch with the patentee to avoid direct litigation owing to lack of response.

Enterprise A should state the reason for non-­infringement based on the report to the patentee against the charge in the warning letter. The non-­infringement analysis report should be drafted by a competent patent attorney with appropriate technical background and litigation experience, and the grounds and conclusions of the report should be reasonable. The report should also meet the formality requirements, including clear subject matter, clear facts and the wet signature of the patent attorney.

If a qualified patent attorney issues a reasonable non-infringement analysis report and finds there to be no infringement, punitive damages should not be applied, even if the court finds there to be an infringement. This is because according to the Interpretation, that “the defendant continues to commit the infringement after being notified and warned by the plaintiff or interested party” is only preliminary proof of wilful infringement, not determinative proof of wilful infringement.

At this stage, with the preliminary proof, the burden of proof shifts from the plaintiff to the defendant, and the defendant can rely on a reasonable non-infringement analysis report as counter-e­vidence to show that there is no wilful infringement; therefore, in cases where the condition of wilful infringement has not been established, punitive damages should not be applied, even if the circumstances are serious owing to high profits from the infringement.