What's New on China's Punitive Damages in IP Litigation?

Linda Liu & Partners
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Punitive damages refer to the compensation determined by a court in excess of the actual loss of the right owner.

In China, in infringement cases, the principle of compensatory damages has always been adopted, which is intended to cover the "actual loss" suffered from the infringement. However, in recent years, in order to strengthen the protection of intellectual property rights and to deter infringers, punitive damages system has been gradually introduced.

Trademark Law of 2013 is the first one that introduced a punitive damages system wherein Article 63 provides: “Where the exclusive right to use a registered trademark is infringed maliciously and the circumstance is serious, the amount of damage may be more than 1 time but less than 3 times the amount determined by referring to the above calculation.”

Then, the fourth amendment to the Trademark Law in 2019 and the third amendment to the Anti-Unfair Competition Act increased the multiple of punitive damages from “more than 1 time but less than 3 times” to “more than 1 time but less than 5 times.”

The Infringement Liability section of the Civil Code, which was put into effect on January 1, 2021, also specifically stipulates punitive damages in intellectual property infringement cases, i.e. Article 1185 provides: "Where the intellectual property right is infringed intentionally and the circumstance is serious, the right owner being infringed has the right to claim the corresponding punitive damages."

In addition, the amended patent law and the copyright law, which will come into effect on June 1, 2021, also introduce punitive damages, which specify that punitive damages should be more than 1 time but less than 5 times. The applicable conditions are the same as stipulated in Civil Code.

The above-mentioned legal provisions have established a punitive damages system from the basic law to the special law. The significance of this system lies in, firstly, by establishing punitive damages, the infringement cost of infringer is effectively raised, making the infringement unprofitable; secondly, in some cases, malicious infringement and repeated infringement are often more hidden and difficult to find, so the application of punitive compensation also helps to compensate the loss of right owner.

According to the above-mentioned legal provisions, the applicable conditions for punitive damages mainly include, 1, intentional in subjective condition, 2, serious infringement circumstance in objective condition. When the right owner claims punitive damages, it is necessary to prove that the infringer's activities conform to the above-mentioned two conditions of "intentional" and "serious infringement circumstances".

On March 3rd, 2021, the Supreme People's Court issued Interpretation on the Application of Punitive Damages in the Trial of Civil Infringement Cases of Intellectual Property Rights. The Interpretation makes specific provisions on the application scope of punitive damages, and the determination of intentional infringement and serious circumstances.

Regarding the subjective conditions, the term used in Trademark Law and Anti-unfair Competition Act is “malicious”, while the term used in Civil Code, the amended Patent Law and Copyright law is ‘intentionally’. To make it clear, The Interpretation provides that the term “intentional” indicated in this interpretation includes the “malicious” stipulated in Trademark Law and Anti-Unfair Competition Act, in fact equating “malicious” and “intentional” here.

For the determination of intentional infringement, according to The Interpretation, the factors include the type of the infringed intellectual property rights, the rights status and the popularity of products, the relationship between the defendant and the plaintiff or the interested party shall be comprehensively considered.

The interpretation also provides the following situations where “intentional” shall be preliminarily determined.

1. The defendant continues to commit the infringement act after being notified or warned by the plaintiff or the interested party;
2. The defendant or its legal representative or manager is the legal representative, manager or actual controller of the plaintiff or interested party;
3. The defendant is in employment, labor, cooperation, licensing, distribution, agency, representation, etc. relationships with the plaintiff or the interested parties, and has the access to the infringed intellectual property rights;
4. The defendant has business relationships with the plaintiff or interested parties or has negotiated for reaching a contract, and has access to the infringed intellectual property rights;
5. The defendant committed acts of piracy and counterfeiting of registered trademarks;

For the determination of serious circumstances, according to the interpretation, the factors include the infringement method, frequency, the duration of the infringement, the geographical scope, the scale, the consequences, and the infringer's behavior in the lawsuit shall be comprehensively considered.

The interpretation also provides the following situations where “serious circumstances” shall be preliminarily determined.

1. Commit the same or similar infringement act again after being punished by an administrative penalty or a court decision ordering him to bear the liability;
2. Take infringement of intellectual property rights as a business;
3. Forge, destroy or conceal evidence of infringement
4. Refuse to fulfill the preservation rulings;
5. Make huge profits from infringement or cause huge losses to the right holder;
6. Infringement may endanger national security, public interest or personal health;

Currently, there are not many cases in which punitive damages are applied. One reason is that the conditions of application are strict, and another is that punitive damages equal to a multiple times the amount of the infringer's profit or rights owners' loss, which, however, as a base of calculation, is very difficult to determine because of the difficulty of proof. Therefore, in practice, the cases where the courts use statutory compensation are in the majority. In such cases, maliciousness and seriousness of infringement circumstances are also important factors for consideration.

Recently, both legislation and court have engaged in solving the problems of "difficulty in proof" and "low compensation" in IP infringement cases, trying to reduce the burden of proof borne by rights owners, and to strengthen penalties for infringer, which fuels the growth of the cases where punitive damages are applied.

Hope the above information would be helpful. Also, this content can also be found in our Podcast (https://podcasts.apple.com/cn/podcast/linda-liu-partners/id1512707257?i=1000516254263) and YouTube (https://youtu.be/_5700z4xsTE)

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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