Addition of punitive damage system in Trademark Law a breakthrough

Article 63 of the new Trademark Law expressly adds the punitive damage system, namely, where the exclusive right to use a trademark is infringed in bad faith and the circumstances are serious, the measure of damages may be determined at not less than the amount of, and not more than three times, the loss incurred by the rights holder as a result of the infringement, the benefit derived by the infringer as a result of the infringement or the licensing fee for the registered trademark, and the measure of damages should also include the reasonable expenditures incurred by the rights holder in halting the infringement.

Furthermore, where the above-mentioned three bases cannot be ascertained, the upper limit on the statutory measure of damages that the court can decide at its discretion has also been increased from RMB500,000 (US$81,000) to RMB3 million.

Punitive damages

The term “punitive damages”, also called “exemplary damages” or “vindictive damages”, are the damages assessed by the court over and above the actual amount of damage incurred, that is to say that the damages are not only compensation for the rights holder, but also penalisation of the perpetrator, who acted wilfully.

The punitive damage system, as a basic system of legal remedies, is widely applied by common law countries. The punitive damage system and the actual loss compensation principle followed in infringement law in the civil law system are of completely different character. That China, as a traditional civil law country, has introduced from the common law system the system of imposing punitive damages for infringement committed in bad faith has a historical reason. For a long time, the actual loss principle adopted in China’s current Trademark Law has left the courts shackled when faced with particularly egregious cases of trademark infringement.

First, for the trademark infringer, the cost of infringement is too small. As the amount of damages is relatively low, certain infringers can lightly restart their infringing ways after being penalised by the Administration for Industry and Commerce, or a judgment of damages by the court, resulting in a continuing spiral of infringement. Second, for the trademark rights holder, the cost of protecting its rights is overly high, with the phenomenon of winning the case but losing money often occurring. With respect to numerous recurrent localised acts of infringement, many trademark rights holders have no option other than selective cracking down, which indirectly provides certain fake goods with the space in which to thrive.

The system of applying punitive damages for acts of trademark infringement done in bad faith arose in order to further resolve these problems. On the one hand, this system contains the principles for making damages heavier, not only to compensate the trademark rights holder for the reasonable expenditures incurred in halting the infringement, but also to punish and deter trademark infringers so that they do not commit infringement again. On the other hand, China has placed the intellectual property strategy, as a national strategy, in a prominent position in socio-economic development. The protection of intellectual property, and the imposition of punitive damages for infringement in bad faith, are of great significance to safeguarding a fair competition market order and creating a fine climate of respect for intellectual property.

Application of provisions

When applying punitive damages in legal practice, the principles of lawfulness, reasonableness and impartiality are to be followed to avoid the occurrence of a situation where a trademark rights holder uses punitive damages to obtain improper benefits. The new Trademark Law specifies two key conditions for the application of punitive damages: 1) the infringer having subjectively acted in bad faith and the circumstances of the infringement being serious; and 2) where the circumstances of the infringement are serious and punitive damages are to be applied, the trademark rights holder is additionally required to show that the infringement committed by the infringer caused it to incur material harm.

There are two types of infringement in bad faith: 1) when committing the trademark infringement, the trademark infringer was fully aware that he or she did not have rights in the relevant trademark but nevertheless wilfully committed the trademark infringement; and 2) when committing the trademark infringement, the infringer ought to have been aware that he or she did not have rights in the relevant trademark, but failed to perform a minimum duty of care and, thereby, subjectively, was grossly negligent and committed the trademark infringement.

Accordingly, when determining whether application of punitive damages is required, not only is it necessary to consider the subjective bad faith of the infringer, but it is also necessary to comprehensively consider such factors as the business situation of the infringer, the duration of the infringement, the social impact caused, etc., to determine a reasonable measure of punitive damages.

Legislative breakthrough

The punitive damage system, as a basic system, is an invention and innovation of the common law system, manifesting the legal principle of the person being central. China, as a civil law country, generally gravitates to the compensatory – namely equalisation – principle, whether in terms of liquidated damages or damages for infringement, emphasising that the measure of damages should be equivalent to the actual loss and that damages should not exceed the scope of the actual loss, so as to guard against anyone deliberately seeking large damage amounts exceeding the actual losses.

The stipulation of a punitive damage system in the intellectual property field on this occasion is without doubt a major breakthrough and experiment in the legislation of China. This breakthrough is a major step forward in safeguarding the fair competition market order and protecting the lawful rights and interests of trademark rights holders, and also has real practical significance for the future amendment of the Copyright Law and Patent Law.