Practical issues regarding punitive damages

By Chen Zhixing and Lan Manfeng, AnJie Law Firm
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In recent years, the protection of intellectual property rights (IPR) in China has been continually strengthened, and the situation of “low compensation” has improved to some extent. China is gradually introducing a punitive damages system, in particular for various kinds of malicious infringements and repeated infringements, of which the public have high expectations.

Q: What progress has been made in the punitive damages system from the perspective of legislative trends?

punitive damages
Chen Zhixing
AnJie Law Firm
Partner

A: For the first time, the Trademark Law, revised in 2013, provides punitive damages, “for malicious infringement of the exclusive right to use a trademark, if the circumstances are serious, the amount of compensation can be determined between one and three times of the amount determined in accordance with the above methods”.

The Trademark Law revised in 2019 further intensified the punitive damages, raising three times to five times the amount determined. The Anti-Unfair Competition Law, revised in 2019, also introduces a punitive damages system, under which paragraph 3 of article 17 provides that, “where a business operator maliciously commits an act of infringing trade secrets, if the circumstances are serious, the amount of compensation can be determined between one and five times the amount determined in accordance with the above-mentioned methods”.

punitive damages
Lan Manfeng
AnJie Law Firm
Paralegal

In addition to the above-mentioned legislative provisions, there are also specific provisions on punitive damages in the revised draft of the Patent Law and the Copyright Law. For example, article 72 of the Patent Law (Revised Draft) provides that, “in case of intentional infringement of the patent right, if the circumstances are serious, the amount of compensation can be determined between one and five times of the amount determined in accordance with the above methods”.

Article 53 of the Copyright Law (Revised Draft for Examination) provides that “for intentional violations of copyright or related rights, if the circumstances are serious, the amount of compensation can be determined between one and five times of the amount determined in accordance with the above methods”. It is especially worth mentioning that article 1185 of the Civil Code (Draft), which is being formulated, provides that “in case of intentional infringement of another’s intellectual property right, if the circumstances are serious, the infringed has the right to claim corresponding punitive damages”.

From the perspective of legislative dynamics, the relevant legal provisions of the punitive damages system are constantly improving, which means the gradual upgrading of the legal system of IP protection, and also shows China’s position and determination to protect IP in accordance with the law.

Q: What are the typical cases of punitive damages in judicial practice?

A: At present, there are more and more cases in this area. For example, the case of “MOTR” trademark infringement, tried by the People’s Court of Pudong New Area of Shanghai, is the first punitive damages case for IP infringement in Shanghai. The court held that the defendant’s behaviour met the applicable requirements of punitive damages for “malice” and “serious circumstances”, and finally determined three times of punitive damages, with a penalty of RMB3 million (US$422,000).

Jiangsu Higher People’s court held in the case of MI trademark infringement that the court of second instance “in order to give full play to the role of civil damages in the sanctions of infringement and relief of rights, to effectively curb the recurrence of infringement, and to ensure that the infringed obtains sufficient damages, took the profit from infringement as the compensation base, determined the amount of damages in this case at the three times standard, and appropriately adjusted the two times standard determined in the first instance judgment”, and finally awarded RMB50 million in compensation and RMB41,4198 in reasonable expenditure.

Q:What is the difference between punitive damages and punitive damage factors?

A: In practice, some articles and media reports use punitive damage factors to refer to punitive damages. In the authors’ opinion, this is not appropriate. Punitive damage factors mainly refer to the subjective intention of the infringer and the circumstances of the infringement, especially when statutory compensation or discretionary compensation is applied. In other words, through consideration of these two factors, a higher compensation amount is given.

Although punitive damages will also take into account the infringer’s subjective intention, and the circumstances of the infringement, “punitive damages” is a legal concept, which refers to specific provisions, such as the provisions of article 63 of the Trademark Law, which “for malicious infringement of the exclusive right to use a trademark, if the circumstances are serious, the amount of compensation can be determined between one time and three times the amount determined in accordance with the above methods”. In other words, the application of punitive damages includes two elements: “base” and “coefficient”.

Q: How is the “base” of punitive damages determined?

A: Theoretically speaking, punitive damages include two parts: The actual amount of damages of a compensatory nature; and the amount of compensation of a punitive nature. The actual amount of damages is the “base” of the punitive damages system. For example, in accordance with article 63 of the Trademark Law, the amount of compensation can be determined by “loss of the infringed”, “profit from the infringement” or “multiple of the licence fee”. After the amount is determined, it also constitutes the “base” of punitive damages.

Q: How is the “coefficient” of punitive damages determined?

A: “Coefficient” is determined mainly by considering the “subjective malice” and “infringement circumstances” of the infringer. As for the element of “malice”, in the case of “MOTR” trademark infringement, the court held that the defendant imitated the plaintiff’s trademark in an all-round way, with obvious intention to cling to it. After receiving a warning letter and signing a settlement agreement, the defendant promised not to commit any infringement, but then repeated the infringement, which violated the principle of good faith.

The infringement was malicious and serious. As for the element of “serious circumstances”, as in the case of the “MOTR” trademark infringement, the court held that the defendant’s infringement had a wide range of influence, and there were quality problems in the infringing products, which seriously affected the plaintiff’s goodwill.

Chen Zhixing is a partner andLan Manfeng is a paralegal at AnJie Law Firm

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