China: What Evidence is Needed to Obtain High Damages in IP Litigation

Last Updated: 5 May 2015
Article by Mike Chen

Calculating compensation in intellectual property litigation can be a tricky issue. Although the award of high compensation in IP cases seems to be increasing in China, in general compensation for most of IP cases remains low, which discourages right holders to safeguard their rights. The research conducted by the IP Research Center of Zhongnan University of Economics and Law shows that the legal compensation for IP infringement cases only averages to be RMB 80,000, which is 1/3 of the prosecutors' claims or even less. Due to the above reasons, research on what kind of the evidence should be submitted during the IP litigation to obtain the higher compensation is a topic of great value.

Under the regulations of present Chinese Intellectual Property Law, the methods to calculate of the compensation are: 1. based on the actual loss to the right holder due to the infringement behavior; 2. based on the profit gained by the infringer due to the infringement; 3. based on not less than the reasonable intellectual property licensing fee; 4. based on the amount discretionally decided by the Judge within the statutory amounts. The calculation is sequentially adopted, only when the aforesaid method is difficult to be determined can sequentially the next method be adopted. Instead of introducing the above methods one by one, the essay will focus on what kind of evidence will be supported by the Court- the extent of importance of the evidence to obtain the higher compensation.

The evidence related to the amount of infringing products and the profits made from the products

In practice, the compensation which is based on the actual loss of the right holder due to infringement behavior is not always supported. Even though the right holder adduces evidence to prove the obvious decrease of its sales or profit within a period of time, the Court usually deems the decrease might not directly be caused by the infringement behavior, or it might be caused by the market or other factors. The lack of authoritative and trustworthy data and third party authentication are the main reasons that this kind of evidence is not adopted by the Court.

On the contrary, the calculation normally adopted by the Plaintiff is all of the profit gained by the infringer due to the infringement behavior, the method of the calculation is that the profit per infringing product by the total sales equals to the total amount of profit due to the infringement. Expressed in formula: profit per product * total amount of infringing products = total amount of compensation. Hence, two factors which are the total amount of infringing products and the profit of the products play the vital role to the amount of compensation. In weighing the two factors, the total amount of infringing products is more important. We focus on this method because most of the high compensation cases adopt this method.

In China, the actual output and sales in many cases is hard to obtain due to the attorney's limited authority of investigation. Therefore, to apply for the evidence preservation to the Court, which is an efficient method to obtain the evidence of the Defendant's infringing amount and the product profit through the force of the Court, is a good idea to determine the basis for the calculation of compensation. Normally, the Plaintiff can apply for the evidence preservation of the infringer's output and sales, such as the recording voucher, sales invoice, contract and so on. There was a well-known highest compensation ever in the intellectual property dispute between Chint and Schneider , through the evidence preservation, the Court obtains the sales statistics of the relevant products and the profit rate of the products submitted by Schneider to the Tax Organization. Finally, the huge amount compensation of RMB 335,000,000 is ordered in the case. The same circumstance occurs in a recent unfair competition dispute case between Guangzhou Pharmaceutical Group and JDB . The Court conducted evidence preservation upon the application of the Plaintiff to obtain the Defendant's sales data and tax declaration, finally a total amount of RMB 150,000,000 is ordered for the Defendant to compensate for the Plaintiff.

In reality, not all evidence preservation applications will be approved by the Court. Under this circumstance, another acceptable method is to collect evidence such as the production and sales static through trustworthy third parties. Normally, the proof documents, publication, registration paper and so on issued by the administrative supervision, the registration authority, the industry association and so on will be a strong evidence. There is a good example of Neo Kaplan vs. Granville Bus for the infringement of the design , the right holder submits the sales statistics of buses from 2005 to 2007, which reveals more than 5,000 buses sold by the Defendant, therefore found the basis for over RMB 20,000,000 compensation.

It is accessible to obtain the amount of infringing products through the production and sales contracts between the Defendant and its upstream and downstream firms. There are examples that these kinds of evidence are adopted by the Court, such as Wuhan Jingyuan against Fushihuashui, Huanyang Corporation infringing IP rights dispute , Jiayu Company against COFCO over trademark infringement and so on, the above compensation judged by the Court are over RMB 50,000,000 and RMB 10,610,000 separately.

Under the circumstances that the profit of the infringing products cannot be obtained by the Plaintiff, normally, the Plaintiff can submit the average profit of the same industry or the profit of its own as evidence. Besides, the Judge Jin Kesheng from the Supreme Court deems that under the circumstance that the profit of the Defendant's products is not easy to be identified, if the profit rate of the same style of product can be confirmed from the Public Listed Company (out of the case) under the evidence of the case. The profit gained by the infringer due to the infringement can be calculated by the sales income of the infringing products by the profit rate of the same product of the Public Listed Company to identify the amount of compensation.

The evidence of the Licensing fee

Normally, under the circumstances where the right holder had submitted the licensing fee, the amount of the compensation can be referred from the licensing fee. In such cases, the right holder needs to submit not only the intellectual property licensing contract between the right holder and the person other than involved in the case, but also the basic introduction of the person other than involved in the case, such as the business survey information and the actual enforcement of the contract of the person other than involved in the case, which include the evidence of the payment of the licensing fee, the tax certificate, the relevant production, sales or preparation for production of the relevant intellectual property products. Notably, if the evidence submitted reveals obviously unreasonable or obviously above the same industry licensing fee of the similar products or the existence of the interests relationship or the potentiality of backdating or virtual contract to cheat for the high compensation, under the above mentioned situation, the evidence submitted cannot be taken as reference for the standard for the calculation of the compensation. In the intellectual property disputes of Hua Jiping against Andihua company and Stine company , the Court found that there is interests relationship between the patent licensing contract since the patent holder is the shareholders and the legal representative of the licensee, even though the patent holder has transferred its stock to others and ceased to be the legal representative, which cannot exclude the reasonable doubt of the authenticity and rationality of the licensing fee, while the Plaintiff cannot prove the payment of the licensing fee and the relevant tax, thus, the authenticity and the rationality of the licensing fee are not ratified in the case.

The evidence of the circumstance of the infringement

Under the circumstances to apply for legal compensation, when discretionally identifying infringement compensation, the Judge will consider many factors concerning the extent of damages. "The circumstance of infringement" is a generic term of all of the discretional factors. There is not a term such as "circumstance" in the Tort Law and the relevant theory, the circumstance concerns with the extent of damage reflected by the infringement behavior directly or indirectly which determines the level of compensation responsibility including not only the specific infringement behaviors, but also the specific consequences of the infringement behavior. During the prosecution, the Plaintiff needs to adduce evidence to prove that the duration of the Defendant's infringement behavior is relatively long, the infringement behavior is vile, and the infringement of the Defendant is intentional, wide-spread, and mass-abundant. It is beneficial to improve the amount of compensation to submit the evidence to prove that the infringement behavior harms the reputation and the popularity of the Plaintiff. Recently, Qiong Yao (Chen Zhe) against Yu Zhen for copyright infringement , from the evidence adduced by the Plaintiff, the Court deem the compensation should be based on the overall consideration of the nature, type, influence, the condition of the copyright used by the Defendant, the time and area of the spreading of the Work, the profit gained by the Defendant accordingly and so on, therefore, judge the Defendant to compensate the Plaintiff the economic loss RMB 5,000,000.

From the above cited cases, it is observed that the high compensation examples in the Chinese intellectual property prosecution is not rare, and it is possible to obtain the higher compensation through the evidence submitted. The existing tricky problem is that the methods to obtain evidence for right holder empowered by the Law is limited, examples are that the attorneys have no right to conduct the investigation under most sites and cannot be empowered by the Court to obtain the evidence from the tax authorities and other administrative organizations. The potentiality to apply for the evidence preservation and investigation from the Court is relatively low and so on. These problems are all significant obstacle the right holder faces in its goal toward obtaininghigher compensation.

What is reassuring is that the newly implemented Trademark Law upgrades the statutory compensation to RMB 3,000,000, and the revision to upgrade the statutory compensation and the intentionally repetitive infringement punishment of the Patent Law is under review. It is believed that high compensation for the right holder is not far. As the Chief Judge Su Chi from the newly founded Beijing Intellectual Property Court stressed "a reasonably abundant compensation should be judged by the right holder, while to intimidate the infringer from infringement again." The Judge will adopt more decisive and powerful measures procedurally under the guidance of the existing Intellectual Property Law from property preservation, evidence preservation, act preservation and so on, therefore, to protect the intellectual property procedurally and to enhance the protection of the intellectual property right of the right holder.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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