China: Intellectual Property Rights Protection In China: Trends In Litigation And Economic Damages - Part 2 of 2

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Damage Awards

Table 6 provides summary statistics on IPR damage awards in our sample, while Table 7 provides more detail on the five largest awards. By far the largest award was that made to a Chinese company, Chint, in a case that was brought against a French company, Schneider Electric.⁴⁴ In that case the Wenzhou Intermediate People's Court handed down an award of $44.3 million in September 2007.⁴⁵ That award is so much higher than those awarded in other cases that it distorts the average award in our sample. Some other relatively high awards also tend to skew the average reward. To avoid these effects, we report medians instead of averages to summarize the data. The median is the midpoint in the range of outcomes, where half the outcomes are higher and half are lower. Table 6 shows the median damage award for all IPR cases. It also shows the median amount awarded as a percentage of the amount claimed in cases for which we have both figures.

While damage awards appear to be relatively modest, it also appears that in our sample the plaintiffs' damages claims have also been relatively low. This may be because plaintiffs are aware that they will not receive large awards and avoid asking for sums that may predispose the court to rule against them. It may also be because plaintiffs are more interested in the possibility of getting injunctive relief with an order to the defendant to stop production.

Damages awarded across all types of IP ranged from $0 to $2.8 million, excluding the Chint/Schneider case. There were seven cases in which no damages award was made. In six of these zero-damage-award cases we have an indication that damages were sought. The median amount being sought in those cases—which include one case with a damage claim of $12.4 million—was $997,500. In all cases in which there was a zero award of damages, at least one defendant was a Chinese firm.

Table 6. Median Damage Claims And Awards For All IPR*

* Based only on cases for which both the amount claimed and the amount awarded are known.

Table 7. Cases Resulting in Five Largest Awards for IPR Infringement in China

Sources:

http://english.sina.com/business/1/2007/0929/127052.html, accessed 27 October 2008.

http://www.chinalawandbusiness.com/2008/02/27/20-million-yuan-damages-for-trademark-infringment-yikes/, accessed 27 October 2008.

http://www.lawyersweekly.com.au/articles/Pirates-or-partners_z67655.htm, accessed 27 October 2008.

http://thekneeslider.com/archives/2007/06/13/china-builds-and-sells-fake-yamaha-scooters/, accessed 27 October 2008.

http://www.tmsj.jp/2007/11/en/, accessed 27 October 2008.

The pattern of results in Table 6 for cases involving all categories of IPR is roughly consistent with the results when the cases are broken out by the type of IPR asserted. For example, the upper panel of Table 8 shows the total and median damages claimed for all the patent cases compiled in our sample. Median damages claimed are a modest $77,677, while awards are scaled back from plaintiff's request to a median amount of just $34,722.

The lower panel displays results for cases in which we have information for both the award claimed by the plaintiff and the amount actually awarded by the court.⁴⁶ These results are consistent with the results for the larger number of observations that we report in the upper panel of the table.

Table 8. Damages Claimed And Damages Awarded In Patent Cases In China

Median damage awards for patent infringement are lower in China than in the United States. For example, according to a PricewaterhouseCoopers report, "Adjusting for inflation using the Consumer Price Index (CPI), the median annual damages award has remained fairly stable over the last 13 years. The median was $3.9 million from 1995 through 2000, and $3.8 million from 2001 through 2007." ^47,48

Table 9 shows the equivalent figures for copyright and trademark cases. In copyright cases, claims appear to be significantly higher than in patent cases. On the other hand, damage awards tend to be smaller in copyright cases than in patent cases. In trademark cases, damages claimed appear to be about the same as in patent cases, though actual awards tend to be much lower. Put another way, plaintiffs receive a much smaller proportion of their claimed damages in copyright and trademark cases than in patent cases.

Damage awards for trademark infringement appear to be about half the amount of the damage awards made for patent infringement in China. Lower awards for trademark infringement are consistent with those awarded in the United States, though the difference appears to be smaller in China. For instance, the 2006 version of the PricewaterhouseCoopers report, cited above, reports that the median jury award for trademark infringement in the US was $1.16 million from 2000 through 2005. The median jury award for patent damages during each of those years ranged from $0.7 million to $24.0 million. The average of these annual median patent damages awards was $9.4 million.⁴⁹

We also examined the data to determine whether there was any clear difference in the patterns of awards being made to Chinese companies and foreign companies. The data in Table 10 indicate that Chinese plaintiffs tend to claim much higher damages; over four times more than foreign plaintiffs. However, Chinese plaintiffs are actually awarded much smaller amounts, approximately 50 percent of the awards made to foreign plaintiffs. Thus, Chinese companies appear to be awarded a much smaller percentage of their claims than foreign companies. Chinese plaintiffs may win a higher proportion of cases when suing a foreign firm, but any such result could be due to the facts of the cases being tried.

Table 9. Damages Claimed And Damages Awarded In Trademark And Copyright Cases In China

Table 10. Damages Claimed By And Damages Awarded To Chinese And Foreign Companies (All Types Of IPR)

We further examined this question through an econometric analysis to determine whether there was a difference in the size of awards when the plaintiff was Chinese or foreign.⁵⁰ While we have only limited information on the characteristics of the cases in our sample, econometrics does allow us to examine the effects of the location of the plaintiff and defendant companies while controlling for those characteristics for which we do have data. To do this, we estimated the coefficients (the ßs) of the following equation using median regression: ⁵¹

Damages Awarded = ß1 + ß2 ×TM + ß3 ×C + ß4 ×PDC + ß5 ×PCDF.

All the variables on the right hand side are "dummy variables" indicating a characteristic of the case in which each award was given.⁵² TM indicates whether the case was a trademark case and C whether it was a copyright case. The last two variables are indicators of the nationalities of the parties involved. PDC indicates that both the plaintiff and defendant were Chinese entities. PCDF indicates that the plaintiff was Chinese and the defendant was foreign.

The equation attempts to show the damages awarded as a function of these explanatory variables.⁵³ The constant of the equation, ß1, is the median of damages in the "base case," which is a patent case in which the plaintiff is foreign and the defendant is Chinese.⁵⁴ The remaining variables capture how the median damage award varies compared to this base case. For example, the coefficient on the trademark dummy variable, ß2, indicates the difference in awards in trademark cases relative to patent cases, holding constant the nationalities of the parties.⁵⁵ The coefficient ß4 represents the effect when the both the plaintiff and defendant are Chinese relative to the base case, holding constant the type of IP. The last coefficient, ß5, indicates the additional effect on cases in which the plaintiff is Chinese but the defendant is not, relative to the base case, holding constant the type of IP.

The results of the regression are shown below:

Damages Awarded =

37,311 – 17,311×TM – 16,063×C – 13,480×PDC + 1,528×PCDF

(5.55)** (-2.49)** (-2.07)** (-2.66)** (0.17)

N= 122

The numbers in parentheses are t-statistics used to test whether the corresponding coefficient is statistically significantly different from zero. A double star indicates that the corresponding coefficient is statistically significant at the 5 percent level.⁵⁶

The constant, ß1, indicates that the median award for a patent case in which the plaintiff is foreign is $37,311. This is statistically significant from zero. The coefficient on the trademark dummy, ß2, indicates that if the case is a trademark matter, the damages awarded will generally be $17,311 less than the award for a patent case. Similarly, if the case is a copyright matter, the coefficient ß3 indicates that damages awarded will be $16,063 less than in a patent case. Both of these effects are statistically significantly different from a finding of no difference from those in patent cases. However, we caution on extrapolating from our sample to the entire universe of cases due to the manner in which the data have been collected and the limited number of variables that are included.

The coefficients on the remaining dummy variables provide further insight into our earlier observation that Chinese plaintiffs tend to receive lower damage awards than foreign plaintiffs. In fact, the regression suggests that while Chinese plaintiffs receive lower median damage awards, this effect is only significant if the defendant is also Chinese. In cases involving a Chinese plaintiff and a Chinese defendant, the plaintiff receives a median award that is $13,480 lower than when the plaintiff is foreign. On the other hand, the coefficient on the variable that indicates a Chinese plaintiff and a foreign defendant is not statistically different from zero. This indicates that the amount of the median award is not different when a Chinese firm is adverse to a foreign firm, regardless of which firm is the plaintiff.

Conclusion

IPR violations could have negative effects on the broader Chinese economy by discouraging investment and imposing costs upon those companies attempting to offer goods and services. As China becomes a major player in the world economy, it is strengthening its commitment to upholding and enforcing IPR. Chinese laws and regulations are converging with international standards. Patent, trademark, and copyright applications are being filed in growing numbers and damages and fines are increasing.

Notwithstanding this progress, however, violations continue to be documented.⁵⁷ Some IPR infringement is effectively curtailed through administrative procedures, though these result in low financial penalties and low compensation compared to the harm that some companies experience as a result of infringement. China's court system has become increasingly sophisticated over the last 10 years. Court cases, however, are marked by little discovery, and damage claims and awards that appear to be low. Plaintiffs may receive injunctive relief but are likely to be inadequately compensated through a damages award.

Our review of data on IPR court cases in China indicate that damages both claimed and awarded tend to be very small compared to those observed in other jurisdictions. Courts in patent cases award higher damages than in trademark and copyright cases. Damage awards in patent cases also are a higher percentage of the damages claimed than in trademark and copyright cases. China-based plaintiffs appear to receive lower awards in cases in which they prevail than foreign-based plaintiffs.

Improvements in the calculation and imposition of economic damages will contribute to IPR violation deterrence and provide better compensation to owners of IPR. Such improvements are likely to be in China's best interest as research and development continue to become more important to its economy.

Footnotes

44. For further detail about this case, see David S. Bloch, Damages in Mainland Chinese IP Litigation, 19 (4), Intellectual Property Litigation 3 (Summer 2008).

45 The Chint/Schneider case is still under appeal. See http://www.chinaipmagazine.com/en/journal-show.asp?id=258, accessed 11 November 2008.

46. A large claim of $12 million also drops out of our data, since we do not know how much was awarded in that case.

47. "A Closer Look: 2008 Patent Litigation Study: Damages awards, success rates and time-to-trial," PricewaterhouseCoopers LLP Advisory Service, http://www.pwc.com/extweb/pwcpublications.nsf/docid/EBC144CF6220C1E785257424005F9A2B/$file/2008_patent_litigation_study.pdf, accessed 4 November 2008.

48. "2007 Patent and Trademark Damages Study," PricewaterhouseCoopers LLP Advisory Crisis Management, http://www.pwc.com/extweb/service.nsf/docid/3ca24a75615f03948025711e004b69a0/$file/2007_Patent_Study.pdf, accessed 4 November 2008.

49. See http://www.pwc.com/images/us/eng/about/svcs/advisory/pi/pwc_damages_final.pdf, accessed 20 November 2008.

50. Econometrics is the application of statistics to economic data. In general, econometricians model the economic relationship among variables based on available data. Such models allow economists to infer the existence, direction, and strength of the relationships of interest.

51. As we mentioned above, there are a few damage awards that are 10 and even 100 times larger than the majority of the damage awards. In a situation such as this with a few significant outliers, a median regression is preferred to a standard Ordinary Least Squares (OLS) regression, since it is more robust to such outliers. The median regression, in this case, calculates the median of the amount of the awards, (rather than the average, as would be the case in OLS), given the values on the right hand side of the equal sign. More technically, in a median regression the coefficients (the ßs) are calculated by minimizing the sum of the absolute differences between the predicted values and the actual values (the residuals) rather than minimizing the sum of the squared residuals, as would be the case in OLS.

52. Dummy variables are binary. They are equal to "1" when the condition is true and to "0" when it is not.

53. Given that information on damages awarded is not available in all cases—either because the case has not settled or because information was not available—the number of observations used is lower than the total number of cases considered in this paper.

54. In order to create a base case with a straightforward interpretation, we dropped cases involving trade secrets and trade dress from the regression. Dropping this small number of cases does not influence the substance of our results.

55. The trademark dummy variable takes on "1" when the case is a trademark case, and "0" if it is not. Similarly, the coefficient on copyright captures, relative to patent cases, the change in the damages awarded that is expected in copyright cases.

56. In a statistical hypothesis test such as this one, we calculate the probability of observing a t-statistic as large or larger than the one actually observed if the coefficient were in fact zero. If this probability is low (i.e., if it were very unlikely that we would observe a t-statistic as large as the one we observed if the coefficient were actually zero), we conclude that the coefficient is "statistically significantly different from zero." Traditionally, statisticians and economists use 5 percent as the probability for determining statistical significance. That is, if the probability of observing the t-statistic we actually observed is less than 5 percent, we say that the coefficient is statistically significant. The 5 percent significance level corresponds roughly to a t-statistic of 2.

57. According to the 2008 Special 301 Report prepared by the OUSTR, despite "positive progress...rampant counterfeiting and piracy problems have continued to plague China...indicating a need for stronger IPR regimes and enforcement."

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