Authored by He Jing, AnJie Law Firm and Jerry Xia, Honeywell China
While some feel that damages awards in China are still insufficient, recent cases show that the courts are becoming much more sophisticated in calculating damages and awards are increasing – especially in cases of wilful infringement
China’s newly amended Trademark Law is due to come into effect on May 1 2014. One of the most significant changes for many brand owners and trademark professionals will be the increase in damages in trademark infringement cases. The law will raise the amount of statutory damages to Rmb3 million – almost six times the previous limit. It will also recognise punitive damages and ease the burden of proof for brand owners in establishing damages.
All of these changes sound promising. In order for brand owners and other legal professionals to compare this with their own experience in enforcing trademarks in China, this article reviews the relevant binding rules, current court precedents and judicial policies. It also offers practical tips for obtaining and collecting damages against infringers, predictions of future trends – especially the implications of the pending judicial reforms on damage awards in China.
The Trademark Law was the first IP statute enacted when China opened its doors to the world at the end of 1970s. The current Trademark Law was originally passed in 1982 and was further amended in 1993 and 2001. The practice and relevant rules of trademark law have also had a significant impact on patent law and copyright law.
The rules on damages have always been friendly to brand owners. Article 56 of the law allows brand owners to calculate damages using one of two methods:
• the profit gained by the infringer as a result of the infringement; or
• the actual losses suffered by the rights holder due to the infringement (including reasonable expenses paid by the rights holder to stop the infringement).
The law further provides for statutory damages for brand owners (ie, where it is difficult to determine compensation using these two methods, the people’s court may use its discretion to order compensation of up to Rmb500,000).
The same provision also makes it clear that the reasonable amount of enforcement shall be compensable as part of the actual loss suffered by the rights holder.
In 2002 the Supreme People’s Court further clarified how to determine the amount of the infringer’s profits and the rights holder’s actual losses under the Trademark Law through its judicial Interpretation of the Supreme People’s Court Concerning the Application of Laws in the Trial of Cases of Civil Disputes Arising from Trademarks. According to Article 14 of this interpretation, the infringer’s profit can be calculated by multiplying the unit profit by the quantity of units of the infringing product sold. Where it is impossible to ascertain the unit profit, the unit profit of the rights holder’s own genuine product shall be used. According to Article 15, the rights holder’s actual losses can be calculated based on the loss in product sales it suffered as a result of the infringement, or by multiplying the sales amount of the infringing product by the unit profit of the rights holder’s products.
The interpretation does not solve all problems, however, there are plenty of difficulties in determining damages because of practical barriers to obtaining relevant evidence. Many infringers do not maintain reliable financial records or refuse to disclose them. Chinese judges rarely sentence such defendants to imprisonment for contempt, even though they arguably have the power to do so. As a result, Chinese courts mostly rely on statutory damages to award damages. In many cases between 2002 and 2008, the damages awarded fell far below the cap of Rmb500,000. However, over the past five or six years, the courts have been increasing damages awards in trademark infringement cases to a level that is beginning to approach the statutory cap, and in some cases are even finding ways to exceed it. This clearly reflects a shift in attitude on the part of Chinese courts.
Third round of amendments to Trademark Law
China started the third round of amendments to the Trademark Law in 2006. Effective compensation of rights holders in civil cases was always a key issue. In fact, it turned out that damages-related provisions were among the most significant changes in the final version of the law – in particular, the raising of the statutory cap to Rmb3 million, which only happened at the last minute when the National People’s Congress carried out its final reading of the amendments. This last-minute change demonstrates the legislature’s willingness to enhance the remedies available to rights holders.
The third round of amendments featured a total of 53 changes to the Trademark Law. The most significant changes in terms of damages are as follows:
• New method to calculate compensation – the new Trademark Law preserves the two methods set out in the current law (ie, the infringer’s profits and the rights holder’s losses), while Article 63 of the new law provides an additional method of a reasonable multiple of the royalty fee.
• Punitive damages for wilful infringement – Article 63 of the new law stipulates that in cases of wilful trademark infringement, the court may impose an amount of between one and three times the damages determined through the abovementioned three calculation methods.
• Elevated cap of Rmb3 million (about $500,000) for statutory damages – pursuant to Article 63 of the new law, if it is difficult to determine compensation through all three methods, the courts may impose compensation of up to Rmb3 million by taking into account the circumstantial evidence.
• Alleviated burden of proof for rights holders – Article 63 stipulates that if the infringer refuses to provide financial records or other related evidence, the court may decide on the amount of damages by reference to the evidence provided by the plaintiff. This is designed to deter infringers who cover up or falsify evidence.
• Requirement of prior use to establish damages – pursuant to Article 64, the rights holder must have used the registered trademark within the past three years in order to obtain compensation. This is new and is designed to help legitimate rights holders to defend claims from bad-faith trademark squatters.
The changes have been welcomed as positive steps through which China can improve trademark enforcement using the civil court system. It is anticipated that similar packages may be adopted by subsequent amendments to the Copyright Law and the Patent Law.
However, despite the improvements introduced by the latest amendments, for some commentators these changes only confirm what has long been generally accepted by the international community: while China has the right rules in place, there are still concerns about enforcement.
Rights holders and courts face at least two challenges. The first relates to evidence – how rights holders can locate sufficient evidence to prove their own losses or the infringer’s earned profits, and what kind of evidence is admissible with respect to royalty rates and expert testimony. The second relates to the judges – in the absence of clear evidence of damages, how may the court impose an appropriate amount of damages in such a way that rights holders are compensated fairly? How can courts work within the statutory cap (Rmb500,000) and make it work for rights holders?
The first challenge is closely linked to the role of the Chinese judiciary. Many practitioners advise their clients to apply for evidence preservation orders to secure copies of sales records. However, the courts do not always grant such orders for various reasons, which include that they are often overburdened with demands and IP cases are not generally given high priority. If the judges grant the evidence preservation actions, the defendants may not fully comply with them and may still refuse access to their records. Judges rarely impose civil sanctions in such situations in order to avoid confrontations.
The second challenge is probably less of a problem, although it can frustrate rights holders that are able to find convincing evidence to show losses or the defendant’s earned income. While judges find it difficult not to award big sums of money in the face of evidence, they remain concerned about the consequences of a big damages award from a policy perspective. In 2007 Pepsi lost a trademark infringement case to a local company for its use of the BLUE STORM mark in Chinese mark, with the local court ordering it to pay Rmb3 million in damages. The court found that the Pepsi factory in China made a net profit of Rmb131.8 million that year, but the plaintiff was unable to prove what percentage of the net profit derived from the use of the BLUE STORM mark. The local court eventually awarded Rmb3 million to the plaintiff, far exceeding the Rmb500,000 statutory cap.
Below we examine some more recent cases to see how the judiciary has been dealing with these challenges and identify some likely trends.
[A full version is available at June/July version of World Trademark Review]