China: Watchdata v. Hengbao: 50 million in damages and hourly rate attorney fees

Last Updated: 27 March 2017
Article by CHOFN Intellectual Property

Summary

The plaintiff, Beijing Watchdata Group (hereafter Watchdata), filed a suit with the Beijing IP Court in February of 2015, alleging the defendant, Hengbao Co., Ltd. (hereafter Hengbao) of infringing its invention Patent No. 2005101055021 titled 'A Physical Authentication Method and an Electronic Device'. Watchdata claimed damages of RMB49 million, based on its losses, plus RMB1 million in legal expenses for stopping the infringement. The Beijing IP Court fully supported Watchdata's claims. The losses were calculated as the quantity of infringing products sold by the defendant multiplying the profit margin of each piece of product. Attorney fees paid by the plaintiff for the purpose of stopping infringement were calculated on an hourly basis. In a separate infringement dispute between Watchdata and Hengbao over a Chinese Utility Model Patent, Watchdata was awarded only RMB 0.2 million, based on statutory damages, out of RMB 0.89 million claimed damages. The huge difference between the two cases' awarded damages clearly shows that Chinese courts are trying to strengthen IP protection across China.

Importance of the Case

The compensation granted to the plaintiff in this case was the highest in terms of damages ever awarded by the Beijing IP Court since its establishment in Nov. 2014. Moreover, it is the first time that a court calculated attorney fees based on an hourly rate. The State Council of China published its "Opinions on Improving the IP Protection System" in November 2016, emphasizing that "activities which infringe IP rights should be more severely punished and ceiling on damages should be raised". The Court is now exploring practical ways of strengthening IP protection following the publication of the "Opinions".

This suit was named a representative case in helping to "strengthen IP protection".

Detailed Discussion of the Case

Both Watchdata and Hengbao produce USB keys used for bank transactions. In 2014, Watchdata filed two suits with the Second Intermediate Court of Beijing, alleging Hengbao of infringing its '021 invention patent and No. 200520103147X utility model patent. The case involving the invention patent was later withdrawn and filed with the Beijing IP Court again in Feb. 2015 as the case under discussion in this article.

In March 2015, Watchdata filed a request for property preservation and evidence preservation to the Court. The Court froze RMB 1 million of Hengbao's bank deposit and seized Model EX-1, EX-12 USB keys produced by Hengbao. Moreover, the Court requested for Hengbao to submit its accounting records dated between January 2012 and January 2015 as well as any contracts relating to the USB key products as evidence.

In December 2015, Watchdata requested the Court to help to obtain evidence from Bank of China, Unit 61046 of the People's Liberation Army (PLA) and the China Financial Certification Authority. The Court issued Investigation Letters to the above entities and promptly received from them written evidence regarding the quantity of the infringing products sold.

Oral hearings were held on five occasions between October 23rd, 2015 and June 14th, 2016. Both parties hired expert witnesses who attended oral hearings, expressed their opinions on technical issues and participated in cross-examination. After that, the trial panel of one judge and two jurors submitted issues regarding the amount of compensation and attorney fees as reasonable expenses to the judicial committee of seven senior judges, including both the President and the Vice-President of the Beijing IP Court, seeking the board's opinions. The board reviewed the material and evidence submitted by the panel and made a vote on the raised issues. The trial panel decided on the case on December 8th, 2016.

The Court found that Hengbao infringed upon both the product and method claims of the '021 patent.

Evidence produced by Bank of China, Unit 61046 of PLA and the China Financial Certification Authority showed that Hengbao in totality sold about 4.8 million USB keys to twelve different banks. An auditing report by a specialized accounting firm showed that Watchdata's profit margin is about 35%. In connection with contracts signed between Watchdata and its client, it is calculated that the profit per piece was about RMB 10. In addition to that, the IPO of another company in the same industry indicates that its profit margin was between 36% and 40%, and profit per piece of its product was between RMB 11.6 and RMB 15. Based on the above, Watchdata claimed losses of about RMB 48.1 million.

Moreover, notarized web pages belonging to Hengbao showed that the company also sold infringing products to several other banks in addition to the above twelve banks. Watchdata assumed that profit made by Hengbao was more than RMB 2 million, of which Watchdata claimed about RMB 0.9 million as its losses. As Hengbao refused to submit its account books or any other evidence, the Court presumed that Watchdata's claim was valid and supported its claim of RMB 0.9 million in losses.

As for reasonable expenses, the written agreement between Watchdata and its representative firm, billing invoices, as well as the attorney's working calendar showed that Watchdata paid the firm about RMB 1 million in handling the litigation. Though Hengbao argued that the attorney fees were too high, considering that the technical complexity of the case, as well as the time and effort spent by the attorneys in collecting evidence, preparing argument, and attending court hearings, the Court found Watchdata's claim to be reasonable and supported such claim. Thus, in total, the Court awarded RMB50 million damages.

Hengbao has since appealed to the Beijing People's High Court against the Beijing IP Court's decision.

Remarks

  1. Evidence produced by the third parties according to the Investigation Letters issued by the Court played a very important role in helping to decide the RMB 48.1 million losses claimed by Watchdata. In contrast, in the infringement dispute over Chinese Utility Model Patent 200520103147.X, Watchdata claimed damages of RMB 898,000 and expenses of RMB 102,000, but due to lack of evidence, statutory damages were applied and Watchdata was awarded damages of RMB200,000 and expenses of RMB10,000. Note that the dispute over the utility model patent was decided in 2015, before the publication of the Judicial Interpretation (II) on Patent Infringement Ligations. It is likely courts at that time were relatively reserved in awarding higher damages when not enough evidence was available to support the plaintiff's claims.
  2. For the second part of awarded damages, the relevant evidence was held by Hengbao, but Hengbao refused to produce the evidence as Watchdata's claim based on the evidence was obviously harmful to Hengbao's interests. It was therefore assumed by the court that Watchdata's claim was reasonable.
  3. Watchdata requested property preservation and evidence preservation, both of which were granted.
  4. A judicial committee of 7 Chief Judges, including the president and vice-president of the Beijing IP Court, reviewed the issues of damages and expenses. The judicial committee being actively involved in the trial helps to arrive at good decisions.
  5. The IP circle in China has commended the high damages and hourly rate attorney fees, considering it a herald of stronger protection to come. However, as Hengbao appealed, we shall have to wait to see the decision by Beijing People's High Court.

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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