Back in the 2000s, if you were an IP rights holder, damages expectable from an infringement litigation possibly did not exceed $20,000 in average. A variety of reasons led to the situation, including insufficient ways to collect evidence, limited experience in handling IP infringement actions and the depth and breadth of the IP rights.
As time goes by, the situation has changed, and recently it has reached a climax as a recent batch of typical IP cases were issued by the Supreme People's Court (the SPC) of China, RMB1.59 billion damages were awarded to the owner of trade secret of manufacturing vanillin, the most widely used spice in food industries, which is the highest damages affirmed by the SPC. The record is like to be broken soon because the RMB1.59 billion were just a part of damages suffered by the plaintiff up to the end of 2017 while the rights holder may apply for additional damages for the infringement occurred after 2017 as the Unfair Competition Law introduced punitive damages since 2018.
Larger damages have become more and more common in intellectual property infringement actions. On one hand, more and more Chinese companies have realized the importance of intellectual property when running their business. More than 149 millions of invention patent applications were filed in 2020, plus 292.7 millions of utility model applications and 0.77 millions of design patents. Meanwhile, 576.1 millions of trademarks were registered in 2020, Those IP rights provide more available options for the rights holder when enforcement of IP rights is needed.
On the other hand, the Chinese courts now are exploring new ways to strengthen the protection of IP rights and to ascertain the damages. In addition to introduction of court's technical expert to assist the judge in understanding the technologies, court order and evidence preservation have become increasingly popular in practice. In many cases, it can be seen that the objective behind petitioning the court to take or preserve evidence is not merely to obtain the defendant's financial data but is more like a litigation strategy used to seek large damages.
In practice, few defendants chose to submit financial data, like sales record or the profit margin of the accused infringing product, even when facing the court order requiring to do so. This would lead to rather favourable consequences for plaintiffs. For example, when a defendant refuses to provide financial data without good cause, the court may presume that the plaintiff's claim for damages is tenable.
When evidence preservation becomes more and more common and popular in IP litigations, the court has better chance to find out the damages caused by the infringement, resulting in increasing amount of compensation in such kind of litigations.
Moreover, some recent cases published by the SPC reveal that the owners of IP rights are using combined strategies when proving the damages in the trial. In the vanillin case, the plaintiff tried various ways to show the damages, including the damages suffered by the plaintiff, the profits obtained through infringement and the change of the market shares caused by the infringement. The combined strategies brought significant advantages to the plaintiff because the damages calculated through different routes can be cross-referenced so that the judge may feel more comfortable with the amount of compensation finally decided in the sentence. This might be critical in securing higher damages in IP infringement litigation.
In the vanillin case, the plaintiff first began with the loss suffered by the infringement. This is relatively easy when calculating but difficult in convincing the judge, because the loss may be caused by various reasons, like the change of seasons, advertisement and/ or the price of raw-material prices.
However, the loss suffered could be a good starting point to leave the judge a general picture about how huge the loss could be. Another reason to begin with the loss suffered by the infringement is that the data relating to the loss typically can be collected and calculated by the plaintiff. In the vanillin case, the measure of damages derived from this route is about RMB1.16 billion.
Evidence then focused on the profits gained by the accused infringer, which was accepted by the SPC and resulted in the final damages. Here, the plaintiff proved that the production capability of the defendant was at least about 5,000 tons/year and was tripled since 2015. On the basis of that, the defendant had to allege that the annual production of vanillin is about 2,000 tons per year, which became the basis of damages to be calculate in this case. The court confirmed this number because it is rather conservative as compared with the total production capability of 17,000 tons/year. The measure of damages is about RMB1.55 billion based on the capability of 2,000 tons per year plus RMB0.04 billion reasonable expense for stopping the infringement through trial.
The final route adopted by the plaintiff is the change of market shares. The plaintiff found out that the market share was dramatically shrunk since the trade secret has been infringed. The damages calculated through the change of the market share are up to RMB7.9 billion. Although the court did not accept the amount of damages based on the drop of market share, we believe the highest damage demand through this route did open good room for the final damages decided by the court.
In the trial, the plaintiff once requested a court order asking the defendant to disclose the profit margin, the refusal of the defendant was taken into the court's account when deciding the damages. The court held that since the defendant had refused to disclose the profit margin, which led to great difficulty in ascertaining the exact profits gained by infringement, the court thus stopped finding out the real profit margin of the defendant but turned to use the plaintiff's profit margin in the calculation, leading to the amount of RMB1.59 billion.
This is a remarkable change because in the past the court tends to reject the plaintiff's calculation if the plaintiff cannot provide the defendant's financial data because of insufficient evidences no matter how difficult the plaintiff can access that evidence.
The trial court rejected the plaintiff's claims due to the same reason but just awarded a statutory damage of RMB3 million. The appellate court, the SPC, reversed and shifted the burden of proof to the defendant in the appeal, resulting in the highest damages in the trade secret infringement litigations. Given by the SPC case, it is foreseeable that the Chinese courts would more and more consider the shift of proof burden during IP infringement litigations if the financial data of the defendant is not accessible to the plaintiff. The result is, as the vanillin case shows, the measure of damages keeps increasing because the biggest obstacle for patentees to obtain high compensation seems to be gradually disappearing.
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.