China’s New Civil Code: Punitive Damages from IP Infringement Claims
Published: April 14, 2021
Anna Mae Koo Vivien Chan & Co. Beijing, China INTA Bulletins—Asia Pacific Subcommittee
The Civil Code of the People’s Republic of China came into effect on January 1, 2021. Among its approximately 50 new articles relating to intellectual property (IP), one significant impact is the introduction of punitive damages in a broadened scope of IP infringement cases involving “intentional” and “serious” infringements. Here’s a look at what to expect, based on analysis of existing guidelines and past cases.
Punitive Damages for All IP Infringement
Prior to the introduction of the Civil Code, punitive damages were available only with respect to “bad faith” and “serious” trademark infringement under Article 63 of the Trademark Law or infringement of trade secrets under Article 17 of the Anti-Unfair Competition Law. Based on analysis, it may be said that the new Civil Code widens the scope and opens the gate for owners of all types of IP rights to claim punitive damages when certain conditions are met.
Article 1185 of the Civil Code allows for the award of punitive damages to petitioners in IP infringement cases where there are “intentional infringement” and “serious circumstances.” This is in line with the latest versions of the Copyright Law and Patent Law, which was implemented on June 1, 2021. As such, the Civil Code in effect advances access to such damages for claims against patent or copyright infringement in the interim before the relevant new laws take effect.
The introduction of punitive damages for IP rights across the board in the new Civil Code effectively lowers the threshold further (that is, from “bad faith infringement” to “intentional infringement”) for obtaining such damages and is said to demonstrate China’s determination to protect IP rights and clamp down on squatters and counterfeiters.
Per the definition set out under Article 123 of the Civil Code, punitive damages are now available for infringement claims for IP rights covering (1) works; (2) inventions, utility models, and designs; (3) trademarks; (4) geographical indications; (5) trade secrets; (6) layout designs of integrated circuits; (7) new varieties of plants; and (8) other objects specified by laws.
When Will Punitive Damages Be Awarded?
Under Article 1185 of the Civil Code, two major elements must be satisfied in order to successfully claim punitive damages, namely (1) “intentional infringement” (a subjective requirement); and (2) “serious circumstances” (an objective requirement).
What Constitutes “Intentional Infringement”?
The current Trademark Law and Anti-Unfair Competition Law require “bad faith infringement” for claiming punitive damages. The new Civil Code’s requirement of “intentional infringement” is a newly introduced concept at a higher level, but it is still uncertain whether the Civil Code supersedes these laws. “Intentional” is not expressly defined in the Civil Code and there is not yet judicial guidance on how it should be defined.
The Civil Code opens the gate for owners of all types of IP rights to claim punitive damages.
But references and comparisons can be drawn from the Guidelines on the Determination of Damages and Statutory Damages in Disputes over Intellectual Property and Unfair Competition issued by the Beijing Higher People’s Court on April 21, 2020 (the Guidelines), which address what may amount to “bad faith infringement.”
What Is “Bad Faith Infringement”?
According to the Guidelines, “bad faith infringement” can be manifested in the following conduct of the infringer:
- Repeated or continued infringement after issuance of judgment, warning letters, or administrative decisions;
- Counterfeit of registered trademarks, trademark squatting and freeriding on well-known trademarks;
- Use of well-known trademarks on identical or similar goods;
- Destruction or covering up evidence of infringement; and
- Refusal to comply with preliminary injunctive orders.
“Bad faith infringement” consists of a certain level of malicious intent of the infringer, which is not required to meet the threshold of “intentional infringement.” An infringer can commit “intentional infringement” either (1) purposefully, knowing that the conduct will do harm; or (2) recklessly, not directly in pursuit of doing harm, but allowing the harm to be done.
As such, it should now be easier to claim punitive damages in IP rights infringement cases, as the threshold is arguably lower to prove “intentional infringement” as compared to the previously required “bad faith infringement.”
What Constitutes “Serious Circumstances”?
The Civil Code does not elaborate on what amounts to “serious circumstances,” but this concept has already been adopted and implemented in many trademark and anti–unfair competition cases in the past.
According to the Guidelines, the following actions should be considered when assessing “serious circumstances”:
- If the defendant is a professional infringer that does not operate any legitimate business;
- If there is an extensive duration and scale of infringement;
- If the amount of illegal profits obtained through the infringement is large; and
- If the infringement posed harm to personal safety, the environment, or public interest.
For instance, in the trademark infringement case Deere & Company and its Chinese subsidiary John Deere (China) Investment Co., Ltd. v Agricultural Machinery Co., Ltd and others (Beijing Higher People’s Court, Jin-Min-Zhong No. 413, 2017), the court found that the defendant’s infringement of multiple well-known trademarks of the plaintiff and continuous infringement even after an administrative penalty had been issued against the defendant constituted serious circumstances of infringement. It awarded punitive damages of RMB 5,000,000 (equivalent to around US $725,690 at the time of judgment).
To prove “intentional infringement,” it would be important for the petitioner to prove that the infringer had prior knowledge of the petitioner’s rights to show that the infringer intended to take advantage of the petitioner’s rights.
Good evidence to prove “intentional infringement” by the defendant and “serious circumstances” could include the existence of a cease-and-desist letter sent to the infringer in case of repeated infringement, refusal of the infringer’s trademark application due to similarity with the petitioner’s marks, and evidence of a prior legal or commercial relationship between the petitioner and the infringer (such as employment or distributorship). The petitioner may take advantage of the lowered threshold provided by the Civil Code to obtain punitive damages going forward.
It is now easier to prove ‘intentional infringement’ than ‘bad faith infringement’ as previously required in order to claim punitive damages in IP rights infringement cases.
How Much Can Be Claimed in Punitive Damages?
The Civil Code does not expressly provide for a formula for calculation of punitive damages to be awarded. It is generally expected that the calculation will be similar to that provided in the existing Trademark Law and Anti-Unfair Competition Law as amended in 2019.
According to these laws, the amount of punitive damages to be awarded is one to five times the amount of loss suffered by the rights owner. Or alternatively, if the loss suffered by the rights owner is unascertainable, the amount of punitive damages will be based on the infringers’ profits from the infringement. In addition, the petitioner can also claim reasonable expenses incurred in stopping the infringement, such as legal expenses and notary and translation costs.
It is of prime importance for the petitioner claiming punitive damages to show causation between infringement on the one hand and the loss suffered or profits gained on the other. Otherwise, the Chinese courts will reject the claim.
The case Zhejiang Shenghuojia Baroque Tiles Co. Ltd v. Baroque Forestry Co. Ltd etc. (Jiangsu Higher People’s Court, Su-Min-Zhong No. 1297, 2017) was a prime example for establishing such a claim. It resulted in the court awarding the full claimed amount of RMB10,000,000 (around US $1,451,379 at the time of judgment) to the plaintiff for the defendant’s continuous and repeated infringement of its trademark right. The amount of damages awarded represented two times the loss suffered by the plaintiff. The plaintiff presented a clear and complete chain of evidence showing the casual relation between its loss and the defendant’s infringement.
The evidence and the plaintiff’s arguments are summarized below:
|Inference supporting causation between infringement and loss suffered by plaintiff
|The plaintiff and defendants sold the same types of products under the same name. Some of their stores were located in the same commercial center and the storefronts were very similar.
|The plaintiff and defendants are direct competitors and the two parties are essentially competing for the same potential market.
|Notarized evidence of the defendant offering for sale products with a lower price to the plaintiff’s distributors.
|The relevant date of such evidence of sales coincided with the date when the plaintiff’s profits started to fall.
|Statistics on the overall market trend in the industry during the relevant period and comparison of performance of the plaintiff against its other competitors in the same industry: during the relevant period, the plaintiff’s domestic sales decreased but export sales increased.
|The loss suffered by the plaintiff was inconsistent with the overall market trend and the loss was unnatural. It also shows that the plaintiff’s loss was not caused by the shrinking of market size. It ruled out the possibility that the plaintiff’s loss was caused by its own mismanagement.
Although the Civil Code does provide for a lowered threshold for claiming punitive damages, the burden of proof still lies heavily on the petitioner to cite sufficient evidence to prove that its loss (or the defendant’s gain) was caused by the identified infringement.
The plaintiff will need to adduce evidence of its own sales, the defendant’s sales, and, potentially, of market trends showing performance of other companies in the same industry. Even if all the necessary evidence is available, it is important that the plaintiff makes a compelling case by demonstrating that, if not for the defendant’s infringement, the plaintiff would not have suffered such losses.
Although every effort has been made to verify the accuracy of this article, readers are urged to check independently on matters of specific concern or interest.
© 2021 International Trademark Association
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