China: Effective Way For Collecting Evidence To Show Monetary Damage

Article 27 Where it is hard to determine a right owner's actual loss caused by infringement, the People's Court shall request the right owner to provide evidence regarding benefit that the infringer has obtained from the infringement according to Article 65, Paragraph 1 of the Patent Law; under a situation that the right owner has provided preliminary evidence of benefit obtained by the infringer, while the account book or material relevant to the patent infringing action are mainly owned by the infringer, the People's Court may order the infringer to provide the account book, material; where the infringer refuses to provide the account book, material without justified reasons, or provides fake account book, material, the Peoples' Court may determine the benefit obtained by the infringer due to the infringement with reference to assertion and evidence provided by the right owner.

According to Article 27, in a condition that an infringement of an infringer upon a patent right has been established but a monetary damage cannot be ascertained based on an actual loss of a patentee, if 1) the patentee is able to provide a prima facie evidence to show profits earned by the infringer and 2) the infringer is in possession of relevant materials showing actual profits earned, the People's Court may order the infringer to submit the materials; if the infringer fails to submit the materials without justified reasons and/or falsifies the materials, the Peoples' Court may ascertain the monetary damage with determination of the infringer's earned profit by referring to assertion and the prima facie evidence provided by the patentee.

I.  Legislation History

Article 27 applies, in adjudication of a patent dispute, a procedural remedy against obstruction of production of evidence in civil procedure. This provides an effective way for collecting evidence to show monetary damage, which used to be a big problem when patentee enforces patent right in China.

Specifically, according to Article 75 of Several Provisions of the Supreme People's Court on Evidence in Civil Procedures, as the procedural remedy against obstruction of production of evidence, "where there are evidences to prove that a party possesses the evidence but refuses to provide it without good reasons and if the other party claims that the evidence is unfavourable to the possessor of the evidence, it may be deduced that the claim stands."

As a judicial policy in intellectual property area of China, the Supreme People's Court observed early in 2013 that, "the procedural remedy against obstruction of production of evidence shall be reenforced. If the patentee is able to prove that the alleged infringer infringes the patent right and is responsible for monetary damage, and the infringer who possesses the evidence refuses to provide it without good reasons, the People's Court may affirm the claim of the patentee on the monetary damage."

After announcement of the above judicial policy for adjudicating the IP disputes, in 2015, the draft amendment to Patent Law of China (version for approval of the People's Congress) stipulates in Article 68 that: "after the People's Court decided that there is a patent infringement, the court may order the accused infringer to provide the account books and materials related to the infringement for determining the amount of compensation where the patent right holder has exhausted all possibilities to provide evidence, and the account books, materials related to the infringement are mainly controlled by the accused infringer. Where the accused infringer fails to provide the account books and materials or provides fake account books and materials, the People's Court may determine the amount of compensation referring to the claim of the patent right holder and the provided evidence."

Finally, in 2016, the Supreme People's Court issued the judicial interpretation, which contains the above Article 27.

II. Relevant Precedents

In a patent infringement dispute between plaintiff GREE and defendant MIDEA, there were four different models of infringing air conditioners involved. In a situation that the profit of RMB 500,000 of one infringing air conditioner had been determined and the defendant who possesses the profit-related materials of the other three models refused to submit those materials upon judge's order, the judge held that the profit of each of the other three models should be deduced as not lower than that of the determined one by applying the procedural remedy against obstruction of production of evidence, rendering a total monetary damage of RMB 2 million.

In another patent infringement dispute between plaintiff JOYOUNG and defendant SHUAIJIA, upon a request for evidence preservation from the plaintiff, the judge ordered the defendant to submit account books with record of sale of the alleged product. The defendant, however, refused to submit. The judge held that because the defendant, who is in possession of the account books, fails to submit it, the account book is deemed as an evidence containing content unfavourable to the defendant. The judge therefore upheld the claim of the plaintiff for the monetary damage of RMB 3 million.

Also, in a patent infringement dispute between plaintiff WYNCA and defendant JFD, the judge held that the defendant failed to comply with the order from the court for submitting the possessed evidences that are related to infringing product made from the infringing method, including production and sales volume, time period of infringement, and the profit. Therefore the court is unable to determine the profit the defendant earned. The judge held that the defendant was in possession of the evidence but failed to turn it in with no good cause, therefore the defendant shall bear the unfavourable responsibility. The judge rendered in total monetary damage of RMB 20 million by considering the innovation level and market value of the subject patent, and the duration and severity of the infringing activities.

III. Application of Article 27

1. Scope of Application

It should be noted that, the scope of application of Article 27 is limited, which means it can be applied for determination of monetary damage, but cannot be applied for establishment of infringement.

That is, only when the infringement has been successfully established by the patentee, Article 27 applies to determine the monetary damage. Put it differently, the patentee is not entitled to rely on Article 27 to request the alleged infringer to submit materials for establishment of infringement. Only after the patentee submits evidence proving infringement, would the patentee seek remedy according to Article 27 to determine the monetary damage.

By the way, for establishment of infringement, the patentee is entitled to seek remedy according to Article 75 of Several Provisions of the Supreme People's Court on Evidence in Civil Procedures.

2. Condition for Application

The condition for application of Article 27 shall also be noted. The patentee is entitled to seek remedy according to Article 27 only after the prima facie evidence is provided to show profits the alleged infringer earned.

Specifically, in GREE v. MIDEA case, in addition to providing evidence for showing infringement, the patent provided an annual report and sales data to show its profit loss due to infringement, and an asset evaluation report to show the market value of its patent right. Additionally, during the trial, upon request of the patentee, the people's court ordered the alleged infringer to submit sales volume, price, and profit of all the related infringing air conditioners. At last the sales data of one model was obtained, which was used to determine the monetary damage.

Also, in JOYOUNG v. SHUAIJIA case, the patentee provided a relevant patent licensing agreement with royalty fee recorded, a purchasing evidence showing the sales price of the infringing product, and an internet webpage of the infringer showing production and sales volume of the infringer. Additionally, the patentee requested the people's court to preserve the account book with sales record of the infringer as the evidence.

Notably, in WYNCA v. JFD case, for the harm caused by the infringing activities  of the infringer during 2003 to 2007, the patentee claimed monetary damage of RMB 54.8 million, which is equal to the profit calculated based on sale income and cost.

To support the claim, the patentee submitted to the people's court a bunch of evidences, including audit reports of the infringer of year 2005-2007, VAT invoices, annual financial reports, calculation method and recycling rate related to infringing products, list of profit loss, etc. Additionally, the people's court, upon request of the patentee, collected evidences from the infringer, an audit body of the infringer, and an industry association governing the infringer, and finally obtained the production and sales data of the infringing products from the audit body and the the industry association.

According to the above precedents, after showing evidence to prove infringement, the patentee is required to provide the prima facie evidence and even applies for evidence preservation to show profit earned by the infringer. Only when the burden of proof is satisfied upon submission of the prima facie evidence showing profit the infringer earned, would the patentee seek remedy according to Article 27.

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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