What’s fair when calculating TM infringement damages?

The Guangdong Provincial Higher People’s Court recently rendered an appeal judgment ordering the defendant, New Balance Trading (China) (NB China) to immediately cease infringing upon Zhou Lelun’s registered Chinese trademarks “百伦” (“Balance”, as in New Balance) and “新百伦” (“New Balance”) and compensate him in the amount of RMB5 million (US$754,000). However, previously, the Intermediate People’s Court of Guangzhou Municipality had set the measure of damages in its judgment at RMB98 million. Such a large discrepancy drew the authors’ attention to the issue of how the measure of damages in trademark infringement cases is calculated.

The trademark “百伦” was registered by a company in 1996 for footwear, and was transferred to Zhou in 2004. Later in 2004, Zhou applied for the trademark “新百伦”, against which an opposition application was filed by NB China’s affiliate, New Balance Athletic Shoe (NB US). However, the Trademark Office nevertheless approved registration of the trademark “新百伦” in 2011.

NB US secured registration of the trademarks “NEW BALANCE”, “NB” and “N” for such goods as footwear, in 1983. NB China, using “新百伦” in its company name, was established in 2006. In 2007, NB US licensed the above-mentioned English trademarks to NB China.

However, NB China, fully aware of the successful registration of the trademark “新百伦”, nevertheless used the Chinese trademark, together with its English trademarks, on Tmall and other such websites. Consequently, Zhou sued NB China and one of its distributors for trademark infringement and sought compensation for economic losses of RMB98 million.

At the time the infringement in this case occurred, the 2013 Trademark Law was not in effect, and the 2001 version applied. Article 56 of the 2001 version specifies that, “the measure of damages for trademark infringement shall be the benefits derived by the infringer during the period of infringement or the losses incurred by the injured party as a result of the infringement during the period of infringement”. Based on this, the court at first instance determined that the amount of damages payable by NB China to the plaintiff should be one half of the total benefits derived by it, namely RMB98 million.

But the appeals court revised the measure of damages set by the first-instance court for the infringement. The main reason for the revision was: when calculating such measure of the exclusive right to use a trademark, weight should be placed on the direct causal relationship between the gross product profits of the infringer and the infringement. In this case, although Zhou provided evidence supporting his actual use of the registered trademarks, there was no evidence showing that they enjoyed a relatively high degree of reputation among the relevant public. NB US’s trademarks “N”, “NB” and “NEW BALANCE” had a relatively high degree of reputation, and the defendant’s use of “新百伦” was always in conjunction with these trademarks. When purchasing NB China’s goods, consumers considered the reputation of the English marks and the quality of the goods that they embodied. The profits derived by NB China from its operations were not all due to its infringement of Zhou’s registered trademarks. Therefore, Zhou was not entitled to claim from NB China the profits it made as a result of the goodwill of its own trademarks, or the inherent value of its goods.

Based on a report provided by NB China at appeal that the rate of contribution of the Chinese mark “新百伦” to NB China’s profit as at the valuation reference date was 0.76%, the appeals court calculated that the amount contributed by the Chinese mark to the footwear product profits was a little over RMB1.45 million. It ultimately determined that NB China compensate the plaintiff in the amount of RMB5 million by determining the measure of damages based on the maximum statutory amount of at least RMB50,000.

POINTS IN CALCULATION

Benefits derived during period of infringement. In practice, the plaintiffs in most infringement cases are well-known trademark rights holders and the defendants usually infringers that deliberately try to hitchhike on the goodwill of others’ trademarks. Almost all of the “benefits derived”, as specified in article 56 of the 2001 Trademark Law, by the infringers are in a direct causal relationship with the infringement. Cases in which all of the benefits derived by the defendant serve as the basis for determining the damages are not a rarity.

However, the New Balance case revealed some of the ambiguities of the 2001 Trademark Law regarding the basis for the calculation of damages. The revised judgment of the appeals court was rendered precisely on the basis of accurately distinguishing between all of the benefits derived by the infringer and the benefits derived by the infringer as a result of the infringement.

Losses incurred by the trademark rights holder should apply on a priority basis for determining the measure of damages. Under the 2001 Trademark Law, the plaintiff may opt to use the plaintiff’s losses or the defendant’s benefits to calculate the amount of damages. Theoretically, the intent of the system of damages for infringement is to restore the rights of the plaintiff to their uninjured state. The losses incurred by the rights holder should be the most accurate method of calculating the measure of damages, with the other methods only serving as a supplement.

The 2013 Trademark Law expressly specifies the priority sequence of the basis for calculating the measure of damages for infringement, namely that the measure of damages should be determined first based on the losses incurred by the rights holder and only on the basis of the benefits derived by the infringer where it is difficult to determine the same on the basis of the rights holder’s losses.

Is the amount determined in the judgment at appeal appropriate? The appeals court calculated RMB1.45 million based on the Chinese mark’s contribution rate as the basis for determining the damages, after which it came up with the figure of RMB5 million, representing quite a large gap as compared to RMB1.45 million. However, the appeals court’s explanation of, and basis for, this discrepancy seem somewhat inadequate. Whether this specific amount is appropriate is worth further discussion.

Wang Yadong is the executive partner and Lu Lei is a partner at Run Ming Law Office