China: Value of Damages Awards Rockets Since Fourth Amendment to China’s Patent Law

In summary

Since the fourth amendment to the Patent Law in June 2021, the value of damages awards in patent infringement cases in China has substantially increased. This article first presents statistics illustrating this upwards trend and highlights factors that may influence whether large damages are awarded. It then discusses steps that can be taken to increase the amount of damages before concluding with examples of cases in which large damages awards were granted.

Discussion points

• Increase in the amount of damages
• Keeping a balanced perspective towards increasing damages
• Practical measures to increase damages
• Recent patent cases with high damages

Referenced in this article

• Spin Master v Guangzhou Lingdong
• Jin Minhai v Baijia Hardware Electromechanical
• Shenzhen Shenglida v Shenzhen Jingsheng
• Babyzen v Hebei New Speed
• Ningbo Lubao v Hebei Jitong

Exactly two years have passed since the fourth amendment of the Patent Law became effective on 1 June 2021. The amendment officially introduced punitive damages into the patent infringement system. Since then, the damages awarded in patent infringement cases have substantially increased.

Increase in the amount of damages

The Supreme People’s Court’s annual report on IP protection,^[1] published in April 2023, encouraged the intensification of efforts to increase the damages awarded from infringements. Across the Chinese judicial system, it has been recognised that the intangibility of intellectual property and the concealment of infringement are the factors that give rise to the great uncertainties and insufficiencies when calculating damages; however, given the promotion of an innovation-driven economy in China, the Supreme People’s Court believes, despite the challenges in calculating damages, IP rights holders should be awarded sufficient and adequate damages, demonstrating the market-value orientation of IP rights.

The statistics for 2022 from major IP specialised courts and tribunals have shown great progress in damages awards. According to statistics released by the Beijing IP Court, which is a landmark pioneering IP specialised court in China, the average damages awarded in technical cases in Beijing increased from US$80,000 in 2018 to US$450,000 in 2022.^[2] Statistics released by the Shanghai IP Court, another pioneering IP court, show that 1,182 cases had damages claims of between US$140,000 and US$1.4 million, and 119 cases had damages claims of over US$1.4 million in 2022,^[3] which demonstrates the confidence that IP rights holders have in the Shanghai IP Court to award high damages. Among those cases, 22 cases involve the plaintiff requesting punitive damages.^[4] The Shanghai IP Court has demonstrated a practice geared towards higher levels of application of punitive damages and the harsh adjudication of intentional infringements that give rise to serious consequences.

The courts in Jiangsu province, including the Jiangsu High Court, the Suzhou IP Tribunal and the Nanjing IP Tribunal, are also venues that are experienced in handling IP infringement cases and that are favourable to IP rights holders. In 2022, 97 cases were awarded punitive damages at the provincial level.^[5] The amount of damages increased for inventions demonstrating high levels of innovation. In 2022, for IP infringement, 278 cases were awarded damages of US$100,000 to US$450000, 27 cases were awarded damages of US$450,000 to US$720,000, and 35 cases were awarded damages of over US$720,000.^[6] These amounts are higher than those awarded in some other highly developed provinces, such as the Zhejiang courts, which awarded damages of US$140,000 on average,^[7] and the Guangzhou courts, which awarded damages of US$70,000 on average.^[8]

There are some courts that, despite being somewhat conservative about damages in previous years, demonstrate significant potential in actively applying punitive damages in high-profile cases. For example, the Tianjin IP Tribunal has awarded treble punitive damages of US$220,000 in a toy structure invention infringement case launched by the French company Babyzen.^[9] In the Xiamen IP Tribunal, 136 cases have been awarded damages of over US$140,000 since 2019, and the amounts of damages awarded have been increasing annually.

The Wuhan IP Tribunal is also actively applying punitive damages to increase the punishments for repetitive infringements, destruction or concealment of infringing evidence and refusal to enforce judgments. In a trade secret infringement case, the Wuhan IP Tribunal found that commercial spies had been used to steal core technology from the plaintiff, which constituted serious intentional infringement. Further, the defendant was considered to have impeded evidence production to the court by not submitting accounting books or financial materials, despite the tribunal’s request for them to do so. Considering these factors, the tribunal awarded treble punitive damages of US$1.5 million.

Keeping a balanced perspective towards increasing damages

Although damages have increased in recent three years, the figures are still not as high as those in the United States; however, attorneys in China still feel encouraged by these increases, given that a report from 10 years ago showed that the average damages awarded for an invention infringement case used to be only around US$15,000.^[10] Furthermore, whether damages are appropriate should not be assessed simply with the mindset of arriving at an impressively high number; rather, in-depth and detailed factors from various perspectives should be considered without bias when considering the elements involved in awarding damages.

One relevant factor is that in over 60 per cent of IP infringement cases, the defendants are small companies or start-ups.^[11] This means that the accused infringing products do not have large sales figures, and given that those figures form the basis for calculating damages, the damages awarded are low; however, in cases where the sales figures are robustly proved to be large, high damages awards of over US$500,000 are not difficult to obtain, especially in patent infringement cases between two big brand companies.

Another relevant factor to consider is the quality of the patent as a basis for litigation. Recent years have seen an improvement in the quality of patent drafting; even just five years ago, quantity was seen as more important than quality, which resulted in several ‘junk’ patents, especially utility model patents, which are not subject to substantive examination. In some unusual patents, the claims are almost the same as the embodiments in the description, and the whole patent document may only be four to five pages. This makes ‘design around’ very easy, and the presence of technical concepts in those patents are not welcome surprises but rather uncreative clichés. In this regard, it is difficult to envision how judges can arrive at a determination of high damages when faced with low-quality, uninspired patents, and given that they are often overwhelmed with a workload of around 200 cases annually.^[12]

Consequently, it is not possible for all cases to be awarded high damages. A reasonable approach towards damages should correspond to solid sales evidence. This principle also applies to punitive damages, which should be supported by evidence on subjective intent and the seriousness of the infringement.

Practical measures to increase damages

Increases in damages can be practically achieved under the judicial system by taking advantage of evidence rule enhancement, accurate calculation methods and punitive damages, among other measures.

Evidence rule enhancement is the foremost element since ensuring an accurate calculation method should be based on data supported by evidence (eg, sales figures, prices and the profit rates of infringing products). In the Chinese judicial system, the burden of proof is on the plaintiff when filing an infringement lawsuit; however, in practice, sales figures and profit rates are in the hands of the defendant and cannot be obtained by the plaintiff. Evidence rule enhancement provides a solution whereby if the plaintiff can provide preliminary evidence obtained through public channels about the sales figures and profit rates, the court will order the burden of proof to be shifted to the defendant. If the defendant still refuses to submit related evidence upon request, the evidence collected by the plaintiff, which is highly likely to be unfavourable to the defendant, would be used to calculate the damages. This Chinese style of discovery may act as a leverage to force the defendant to submit evidence about damages. In the absence of sales figures, an economic analytical report would also be accepted by the courts as a basis for awarding high damages.

The judicial trend is that more and more courts are actively using accurate calculation methods to avoid criticism regarding discretion and low damages. When detailed numbers about sales figures and profit rate are obtained, it is possible for courts to calculate damages in a relatively accurate manner by multiplying together the sales figures, the price and the profit rate. For more objective purposes, the patent contribution rate may sometimes be used as a multiplier to adjust the damages in accordance with the extent to which the patent contributed to the profits.

The licensing fee constitutes the next component in calculating damages; however, relatively few patents in China are licensed and performed, so use of licensing fee in calculating damages is rare.

If none of the above can be relied on, and no solid evidence is presented, the last resort is statutory damages, which range from US$4,500 to US$715,000 and are completely at the court’s discretion; however, if the case entails statutory damages, the figures awarded will not be high because a high damages amount cannot be established without robust justification. This is why use of an accurate calculation method is currently being promoted; if an accurate calculation method is used, the damages awarded can be practically increased.

Incorporation of punitive damages is another approach that can increase damages. As publicised by the Supreme Court in 2021, punitive damages have been awarded in 895 IP cases.^[13] The legal standard for punitive damages is strict, with consideration of the following two elements being required: subjective intent and seriousness of the infringement.

• Regarding subjective intent, a couple of factors may be considered comprehensively, including the type of patent, the validity of the IP rights, the reputation of the infringing products and the relations between the plaintiff, the defendant or the interested party.
• Regarding seriousness, factors such as the manner, the number of occurrences, the duration, the regional coverage, the scale and results of the infringement and the behaviour of the infringer during the lawsuit may be involved.

The multiplication factor for the damages is established based on subjective intent and seriousness and can range between one and five.

Recent patent cases with high damages

The past two years have seen an increase in representative patent infringement cases with high damages.

Spin Master v Guangzhou Lingdong

In Spin Master v Guangzhou Lingdong,^[14] an invention patent for a transformable toy was claimed to be infringed. The toy can be transformed from a first form to a second form, and a magnetic force acts between the various components of the toy during deformation. The infringing products were sold in large quantities through online platforms such as JD.com, Tmall and Yihaodian. Spin Master, the plaintiff, claimed damages of 15 million yuan, which were fully supported by the Supreme People’s Court.

The key point in this case is the proof of the sales profits; the Court actively applied the enhanced evidence rule to obtain the actual sales profits. First, to obtain data regarding the sales figures, the Court ordered an inquiry to collect the sales figures for 2017 to 2018 from 16 stores on JD.com and 22 stores on Tmall. The sales figures from Yihaodian for 2017 to 2018 were obtained based on the number of online post-sale comments for four stores on the Yihaodian platform.

Further, the 2018 and 2019 industry development White Papers released by the China Toy and Juvenile Products Association (recognised by the State Council to officially represent the toy industry in China) were accepted to show online and offline sales ratios in 2017 and 2018.^[15] The Guangzhou Guangzheng Hang Seng Securities Research Institute Co, Ltd, another third-party platform, also released online sales ratios similar to the above data.

The defendant’s publicity materials and nationwide offline store numbers were generally consistent with the data above; therefore, according to the collected online sales figures and the proportion of online and offline sales, the overall online and offline sales figures were estimated to be 131 million yuan. That number is also consistent with the infringer’s publicity materials about product sales exceeding 100 million yuan.

Regarding profit rate, the plaintiff chose the lowest profit rate (12.28 per cent) from the profit rates released by six publicly listed companies in the toy industry. This was confirmed by the Court to be authenticate and reasonable.

In view of the above, the Court calculated the total profits of infringer for 2017 to 2018 to be 16 million yuan. Since Spin Master’s damages claim was 15 million yuan, the Court decided to support this claim in its entirety based on the following determinations:

• the defendant impeded the evidence collection procedure by refusing to provide evidence, such as accounting books or financial materials, of its profits obtained through infringement without justifiable reason, despite the court’s clear request for it;
• the defendant’s subjective intention was obvious, and the nature of the infringement severe, as it manufactured and sold 20 accused infringing toys on a large scale, and the infringement lasted several years; and
• as the defendant was the manufacturer of all the infringing products and was the source of the infringement, it should bear the full liability for the economic losses caused by the patent infringement.

Jin Minhai v Baijia Hardware Electromechanical

In Jin Minhai v Baijia Hardware Electromechanical,^[16] punitive damages were applied and confirmed by the Supreme People’s Court on a reverse floor planer patent. The patentee had once sued the defendant, and the two parties had reached a settlement, and the defendant had compensated the patentee 30,000 yuan. Two months later, the patentee found that the defendant was still selling the infringing products, so he filed a new patent infringement lawsuit against the defendant.

The Court held that after the previous lawsuit, the defendant already knew that the allegedly infringing product he sold was infringing, yet he continued to sell the infringing product in the two months after making a commitment to cease infringement and paying compensation in the previous case. The defendant, therefore, had the intention to infringe and committed repeat infringement. As punishment, it was determined that he should pay damages. Considering that the duration of the infringement was relatively short, the profits obtained from the infringement were limited, and the patent involved in the case was soon to expire, the amount of damages stipulated in the settlement agreement in the previous case was used as the basis for calculating damages. Consequently, punitive damages of twice that amount were determined, which amounted to 60,000 yuan.

Shenzhen Shenglida v Shenzhen Jingsheng

Shenzhen Shenglida v Shenzhen Jingsheng^[17] is another punitive damages case decided by the Supreme People’s Court. In this case, a multiplication factor of two was applied to award final damages of 6 million yuan. The infringing product was related to a machine that was used to polish mobile phone screens.

Regarding subjective intent, the Court believed that after the patentee sent a warning letter to the defendant, the defendant continued to sell the allegedly infringing product until the litigation, meaning that the defendant had an obvious intent to infringe.

Regarding seriousness, the large sales volume and the wide range of sales of the infringing machine were considered, with the number of infringing machines obtained in Henan, Anhui, Guangdong, Jiangxi and Fujian, among other provinces and cities, totalling 148. Based on an average price of 200,000 yuan, the sales figure was calculated to be in excess of 30 million yuan. The infringement profits were, therefore, considered to be large, resulting in the infringement reaching a serious level.

Babyzen v Hebei New Speed

In Babyzen v Hebei New Speed,^[18] the customs seizure approach was incorporated to obtain the sales figures of the infringing product (a foldable baby carriage). There is a relatively long history between the patentee and the infringer: the patentee had sued the infringer in Shanghai in 2017 and won the lawsuit. In 2019, Tianjin Customs seized 1,930 infringing baby carriages. A patent infringement lawsuit was subsequently filed in Tianjin based on those infringing carriages. Infringement was found to be established, and treble punitive damages of 1.5 million yuan were awarded.

The damages were calculated by multiplying the number of seized infringing products by the price and profit rate, as well as a patent contribution rate. The profit rate was partly taken from the 2017 Shanghai judgment, in which the profit rate of similar products in the annual reports of peer companies was found to be 20 per cent. Considering that the profit rate of peer companies in 2018 to 2019 exceeded 40 per cent, the Court decided the profit rate in the 2019 case to be 30 per cent. The patent contribution rate was decided to be at least 30 per cent since the solution protected by the patent substantially contributed to the purpose of the product, and the defendant’s infringing product was exactly the same as that described in the patent.

Regarding subjective intent, the Court held that in the Shanghai case, the defendant should have known that the baby carriages as manufactured and sold were infringing products. Since the defendant did not cease infringement and continued to manufacture and sell the infringing products, intentional infringement was deemed to be obvious.

Regarding seriousness, the Court found that (1) the scale of the manufacture and sale of the infringing products was large, (2) the single transaction volume was nearly 2,000 units, and (3) the sales coverage was wide, with online and offline sales channels, and the market being all over China and abroad.

Ningbo Lubao v Hebei Jitong

In a standard-essential patent (SEP) infringement case between Ningbo Lubao and Hebei Jitong,^[19] the patentee’s licensing rate of 20 per cent was accepted because multiple licensing contracts were provided by the plaintiff, and the court believed that those licensing contracts were robust in their objectivity. The court applied double punitive damages because despite knowing the patent was a SEP, the defendant did not actively seek to obtain a patent licence, instead directly implementing the product covered by the SEP in the Pingzan Expressway project without permission and refusing to pay the licensing fee. This was deemed to be an obvious subjective fault.

Summary

Damages are always a hot topic in patent infringement litigation. With regard to attorneys, increasing the amount obtained in damages is not wishful thinking; rather, it is a goal grounded in reality and consistent with social, economic and technical developments. Increases in damages can reasonably be supported by the judicial system. A bright future of strong IP protection can certainly be expected in China in the coming years.

Footnotes