How to write damages into a settlement agreement in case of repeated infringement

Aside from securing damages from the infringer in a time-efficient manner, rights holders can leverage a settlement agreement to curb repeated infringement, provided that a considerable amount of damages can be written into the agreement as an insurance policy in case of repeated infringement. In some cases, courts will validate damages clauses provided that infringement is established.

Rights holders are better positioned to pursue settlement and include damages clause in case of repeated infringement if:

• the parties wish to close the case quickly, but the court proceeding is not likely to end any time soon;
• the rights holder has difficulties in obtaining evidence that would help secure decent damages and the estimated damages to be awarded by the court is quite low;
• the infringer is a repeat offender and is likely to resume infringement in the future; and/or
• the infringer would rather settle with the rights holder so that no court decision is published.

There are a few takeaways to drafting the settlement agreement and devising the damages clause.

Include entities affiliated with the infringer in the settlement agreement

Court decisions are binding for parties to the case only. In practice, an infringer whose business operation was targeted may immediately set up another corporation to resume its infringement activity. If the corporate personalities of the two corporations are not identical, chances are high that the settlement agreement, which the rights holder and the infringer entered into at an earlier date, may have little or no bearing on its later offence. Therefore, it would be prudent to include entities that are affiliated with the infringer in the settlement agreement and insure that they bear liability for damage in case of repeated infringement. Rights holders may refer to the Company Law for the definition of ‘affiliation’.

The more recent Exposure Draft of the Opinions of the Supreme People’s Court on Ramping up Sanctions on Intellectual Property Infringements, which was released on 15 June 2020, may also serve as a point of reference for rights holders.

Be thorough

China’s judicial practice requires that court actions are brought separately when multiple IP rights are involved. Different patent infringement suits and/or trademark infringement suits targeting the same offenders must be initiated separately. Where settlement is to be reached over one particular case, rights holders can maximise its efficacy by addressing IP rights other than those relevant to the case.

In a case where the infringer not only exploited the rights holder’s patent, but also used its registered trademark without authorisation, the rights holders reached a settlement agreement with the infringer in the patent infringement litigation. It settled the infringement and included a damages clause covering circumstances of repeated patent and trademark infringement, which the court agreed to include in the civil mediation statement.

Some practical tips

Determining an infringing act is an arduous task in litigation. If the settlement agreement elaborates on the circumstance to which damages clause in case of repeated infringement applies, then the rights holder’s burden of proof will be greatly alleviated.

To address continuous and repeated infringement, a reasonable grace period may be granted to infringers to ensure the destruction of all promotional materials, infringing products and moulds, among other materials. On the expiration of the grace period, if these materials are spotted again, the infringer will bear liability for damage in case of repeated infringement.

To address the repeated offering for sale in patent infringement cases, where infringing products cannot be obtained to conduct infringement analysis, it would be advisable to explicitly provide in the settlement agreement that as long as the infringer uses promotional content identical to that of the previous infringement case, the infringer bears liability for damage in case of repeated infringement.

Even after being sued for infringement, some infringers have a continued interest in a certain model of product and design around the rights holder’s patent. However, the modified product may still fall within the scope of protection of the patent claims. In this situation, Chinese courts would ascertain repeated infringement when the accused infringing product is substantially identical with the one from the previous case only. Since there is still controversy over whether modified products falling within the scope of patent protection constitutes repeated infringement, the parties may agree on whether such circumstance is subject to damages in case of repeated infringement in the settlement agreement.

Always aim high when it comes to damages

In order to manage a skyrocketing volume of caseloads in China, many have started to encourage pre-litigation mediation. Parties seeking to bring a court action are advised to negotiate with a view to reaching an amicable settlement without progressing to court. However, in practice, if this method fails, parties can proceed to litigation, with settlement remaining an alternative solution when possible.

To maximise deterrence and discourage repeated infringement, the amount of damages should be significantly higher than that of ordinary infringement cases and factors such as the actual increase in the amount of damages awarded in recent judicial practice as well as the latest trend proposed by legislators should be considered. There are two recommended ways to calculate damages in the settlement agreement:

• a fixed amount; or
• the multiple of the calculated damages, whichever is higher.

It is worth noting that the determination of repeated infringement is up to the court’s discretion. Nevertheless, a rights holder could still resort to Article 28 of the Interpretation (II) of the Supreme People’s Court on Several Issues Concerning the Application of Law in the Trial of Patent Infringement Dispute Cases to seek court approval in awarding the amount of damages determined in accordance with terms agreed by the rights holder and the infringer in a patent infringement lawsuit in respect of the amount of damages or the calculation method, as long as the court finds infringement.