[author: Lili WAN]
Punitive damage is a special form of civil liability, which could achieve the purpose of punishment while making up for losses. On 3 March 2021, the Supreme People’s Court issued the Interpretation of the Supreme People’s Court on the Application of Punitive Damages in the Trial of Civil Cases of Intellectual Property Infringement (hereinafter referred to as the “Interpretation”). Clarifying the judicial application of punitive damages will help to be more targeted when claiming punitive damages.
- Application Requirements
To claim punitive damages, two requirements must be met, namely, intent to infringe and serious circumstances.
- Determination of Intent to Infringe
The Civil Code stipulates that the subjective element of punitive damages is “intentional”, and the Trademark Law and the Anti-Unfair Competition Law stipulate that it is “bad faith”. In practice, it is difficult to strictly distinguish between “intentional” and “bad faith”, so the Interpretation has reconciled the interpretation of “intentional” and “bad faith” in order to prevent the misunderstanding that “bad faith” is applied to trademarks and unfair competition, while “intentional” is applied to other intellectual property fields.
As a subjective state, intent often needs to be determined through the objective performance of the infringer. Article 3 of the Interpretation provides guidance on the factors to be considered in the determination of “intentional” and lists six (6) situations in which intent to infringe intellectual property rights can be preliminarily determined. In short, when the defendant is clearly informed of the existence of the involved intellectual property right, or that the defendant is closely related to the plaintiff, or that the involved intellectual property right enjoys a high reputation and the defendant should have known of the existence of the intellectual property right, in the circumstance that the defendant still conducts infringing act, it will be preliminarily found to have the intent to infringe. For example, in the trademark infringement dispute between OPPLE and Hua Sheng, the court pointed out that Hua Sheng, as an operator in the same industry, it clearly knew that OPPLE and its trademark enjoyed a high popularity and reputation, and knew that its trademark application for “欧普特 (Ou Pu Te, which only differs from the Chinese for OPPLE “欧普 (Ou Pu)” in the last character “特 (Te)” which means “very, special” and is of low distinctiveness) with respect to lamps has been rejected, it still deliberately registered the trademark “欧普特 (Ou Pu Te”) in other classes and used it on lamp goods. It produced and sold the infringing products in large quantities, and the product quality was unqualified. Its subjective malice in infringing OPPLE’s trademark right was obvious and the circumstances were serious. As such, punitive damages should apply. For another example, in the case of ULTHERA, Inc. v. Ke Pai Ltd. in a trademark infringement dispute, the alleged infringer had been administratively punished by the Administration of Industry and Commerce for intentionally infringing the exclusive right to use the registered trademark of the right holder. Afterwards, the two parties reached a settlement. However, Ke Pai was again found to have committed the involved infringing act, and that the trademarks and products of the rights holder were imitated as they were. Accordingly, the court found that the defendant’s acts met the application requirements of “bad faith” for punitive damages.
- Determination of Serious Circumstances
The seriousness of the circumstances is mainly aimed at objective aspects such as the means and methods of the actor and the consequences it causes, and generally does not involve the subjective state of the actor. Article 4 of the Interpretation also provides guidance on the determination of “serious circumstances” from two aspects, i.e., general factors for consideration and common typical situations.
“Serious circumstances” is based on the consequences of infringement. On the one hand, it is necessary to consider not only the consequences of specific material damage, but also the losses caused by the wrongful act to the right holder that are abstract and difficult to calculate, such as the significant reduction of the market value of the patent due to infringement and the damage to the goodwill of the right holder; On the other hand, it is necessary to consider not only the consequences of the damage caused by the infringement to the right holder, but also the negative impact of the infringement on the relevant industry and social public order. For example, in the aforementioned case of ULTHERA, Inc. v. Ke Pai Ltd. for trademark infringement, the court, in discussing the grounds for constituting “serious circumstances” in this case, in addition to the huge amount of sales, it also considered about the fact that the infringing product may endanger human health as it is directly used on the human faces.
- Calculation of the Amount of Punitive Damages
Determining the basis for punitive damages is key to calculating the amount of punitive damages. The Interpretation provides guidance on the judicial application of punitive damages from the following aspects: First, the basis of punitive damages is the actual amount of losses of the plaintiff, the defendant’s profits from the infringement or multiples of royalties, and unless otherwise provided by law, the compensation base generally does not include reasonable expenses. Second, the specific determination of the compensation basis should be in accordance with the relevant applicable law. Third, the rule of proof of obstructive practices may apply to the determination of the compensation basis.
From a practical point of view, the difficulty in determining the compensation basis lies in its calculation and proof standard. In specific cases, there is often a lack of direct evidence in support of the number of products, the specific profit or profit margin of a single product, making it difficult to accurately quantify the calculation of the amount of compensation. Therefore, the courts actively advocates the determination of damages through the application of discretionary methods, but the application of discretionary compensation methods still requires the use of certain calculation methods. Whether calculating the loss of the right holder or the infringement profit of the infringer, it is inseparable from the consideration of the reasonable profit of the genuine intellectual property product or the infringing product. The determination of reasonable profit should consider the sales price, profit margin and intellectual property contribution rate of the product, and these elements usually require the two parties to thoroughly compete through evidence and cross-examination to determine a reasonable ratio.
For example, in the case of Adidas v. RUAN Guoqiang, etc. over a trademark infringement dispute, the court selected the unit price of CNY 89 (approx. USD 13.1) per pair of genuine shoes as the basis for calculation, accepted the gross profit margin of 50.4% shown in the 2017 accounting statements provided by Adidas, and determined the 6,050 pairs of uppers seized by Zheng Bang Company for the third time as sales volume. Considering that the allegedly infringing products were all uppers products, not finished shoes, and could not be directly used in the consumer field, the court deducted 40% as appropriate. In the end, the compensation amount of CNY 1,037,337.84 (approx. USD 152,713.56) was determined by three times of the economic loss CNY 345,779.28 (approx. USD 50,904.54) of Adidas.
With regards to the multiple of punitive damages, the law stipulates the multiple ranges of punitive damages. When the court determines the multiple of punitive damages in accordance with the law, it usually needs to comprehensively consider factors such as the degree of subjective fault of the infringer and the seriousness of the circumstances of the infringement. For example, in the case of Huawei v. LIU (an individual) over trademark infringement, the court comprehensively considered factors such as the nature, circumstances, and obvious subjective intent of LIU, and determined the amount of compensation to be CNY 565,560 (approx. USD 83,259.97) based on twice of the profits from infringement.
In addition, it should be noted that punitive damages, as a special right to claim compensation, are applied on the premise of the parties’ request.
The implementation of punitive damages is tantamount to a “tightening curse” for repeat infringers, making infringers so painful that they dare not commit again, and even causing small businesses to go directly to bankruptcy. In their business activities, enterprises should respect intellectual property rights, pay attention to improving the quality of their own products. An opportunistic attempt to take shortcuts by obtaining illegal profits by infringing on the intellectual property rights of others is never advisable.
【Case Source】
https://www.court.gov.cn/zixun-xiangqing-290651.html
https://mp.weixin.qq.com/s?__biz=MzUxMDAwNTI3OQ==&mid=2247498699&idx=2&sn=14edfaa5d1213abbfe7ccd5ab0fb4db7&chksm=f90b22bbce7cabad4b56ba304fe4e4744592557ed48299f0fce55b946d6251445092dab91b6e&scene=21
