How does China's punitive damages system for patent infringement apply?
date: 2021-07-09 Mengqiu Wu Read by:

In the context of strict protection of intellectual property rights, the fourth amendment to the Chinese Patent Law was passed in October 2020, and implemented on June 1, 2021. The new patent law has greatly strengthened the protection of the legitimate rights and interests of patentees. In particular, regarding compensation for patent infringement, Article 71 of the New Patent Law stipulates:


 “The amount of compensation for patent infringement shall be determined based on the right holder's actual losses caused by the infringement or the benefits acquired by the infringer through the infringement. Where the losses of the right holder or the benefits acquired by the infringer are hard to determine, the amount shall be reasonably determined by reference to the multiple of the royalties of the patent. For intentional infringement, where the circumstances are serious, the amount of compensation shall be more than twice but less than five times of the amount calculated by the above method.

Where the losses of the right holder, benefits of the infringer, or royalties of the patent are all hard to determine, the people's court may, on the basis of the factors such as the type of the patent, nature and particulars of the infringement, determine the amount of compensation within the range from 30,000 yuan to 5,000,000 yuan.

The amount of compensation shall include the reasonable expenses paid by the right holder for stopping the infringement.

Where the right holder has tried his best to provide evidence and the account books and materials related to the infringement are mainly under the control of the infringer, the people's court may, in order to determine the amount of compensation, order the infringer to provide the account books and materials related to the infringement; where the infringer does not provide or provide false account books and materials, the people’s court may determine the amount of compensation by reference to the right holder's claim and evidence.”


The new Patent Law not only increased the statutory compensation, but also raised the upper limit of statutory compensation to 5 million yuan, and raised the lower limit to 30,000 yuan. Additionally, a punitive damages system was established. For intentional infringements where the circumstances are serious, the court may determine the compensation amount as more than twice but less than five times of the amount calculated by the actual losses suffered by the right holder, the benefits obtained by the infringer, or the multiple determined amount of the patent license fee.


In addition, in order to ensure the correct implementation of the system of punitive damages for infringement of intellectual property rights, on March 3, 2021, the Supreme People’s Court issued the "Interpretation on the Application of Punitive Damages to the Trial of Civil Cases of Infringement of Intellectual Property Rights" (hereinafter referred to as the "Interpretation"). In the Interpretation, specific provisions were made on the content and time of the request for the application of punitive damages, the determination of intentional and serious circumstances, and the determination of the calculation base and multiples, etc. The Interpretation has given operational guidance in terms of the application of the punitive damages system. In the present article, the author attempts to briefly explain the application of the specific provisions in the "Interpretation", and from this, provide guidance to determine the corresponding countermeasures that enterprises should consider in the punitive damages system of the new Patent Law when they are enforcing their patent rights or facing the risk of infringement.


I.              Applicable elements of punitive damages for infringement

Article 1 in the Interpretation: If the plaintiff claims that the defendant intentionally infringed the intellectual property rights the plaintiff enjoys in accordance with the law and the circumstances are serious, and the plaintiff requests to order the defendant to bear punitive damages, the people's court shall review and deal with the matter in accordance with the law.

That is, in order to apply the punitive damages provisions, the accused infringing party is required to have a subjective intention, and the circumstance of infringement is objectively required to be serious. Article 3 and Article 4 of the "Interpretation" have respectively clarified the criteria for determining subjective intentions and serious objective circumstances. The specific considerations of the judgment are given and the circumstances that can be considered intentional and serious are listed.


Specifically, as to whether the infringing party has subjective intentions, Article 3 indicates that the factors that need to be considered comprehensively include the type of intellectual property object, the status of rights, the popularity of related products, the relationship between the defendant and the plaintiff or interested parties, etc. Meanwhile, the five specific situations that can be identified as intentional are also listed: (1) The defendant continues to commit the infringement after being notified or warned by the plaintiff or the interested party; (2) The defendant or their legal representative or manager is the legal representative, manager or actual controller of the plaintiff or interested party; (3) The defendant has relationships such as labor, service, cooperation, licensing, distribution, agency, representative, etc. with the plaintiff or interested parties, and has been in contact with the infringed intellectual property rights; (4) The defendant has business dealings with the plaintiff or interested parties or negotiated for the conclusion of contracts, etc., and has been in contact with the infringed intellectual property rights; and (5) The defendant committed acts of piracy and counterfeiting of a registered trademark.

For patent infringement, the situations listed in items (1) to (4) above may be applicable.

Regarding whether the circumstances are serious or not, Article 4 indicates that the factors to be comprehensively considered include the means and frequency of infringement, the duration of the infringement, the geographical scope, the scale, the consequences, and the actions of the infringer in the litigation. In addition, six situations that can be identified as "serious circumstances" are listed: (1) After being punished by an administrative penalty or a court ruling for infringement, the same or similar infringement is committed again; (2) Infringement of intellectual property rights as a business; (3) Forging, destroying or concealing evidence of infringement; (4) Refusal to perform the preservation ruling; (5)The profit gained from the infringement or the damage to the right holder is huge; and (6) Infringements may endanger national security, public interests or personal health.


As well as the specific circumstances listed above, the above clauses also indicate that other circumstances that can be considered as deliberate and serious can be included. For example, hindrance of proof may also be regarded as a serious fact. Among the 6 “Typical Cases of Application of Punitive Compensation in Civil Cases of Infringement of Intellectual Property Rights” issued by the Supreme People’s Court on March 15, 2021, in one technical secret dispute case, the court cited "serious circumstances" as a consideration factor. When the court of first instance ordered Anhui Newman Company to provide profit data within a time limit and attach financial account books and original vouchers, although Anhui Newman submitted their balance sheet and income statement, they refused to provide financial account books and original documents without justifiable reasons. As a result, it was impossible to find out the exact amount of the infringement profits in this case, which constituted an obstacle to the production of evidence and should bear unfavorable legal consequences.


II.            Calculation method of punitive damages

Articles 5 and 6 of the "Interpretation" give specific guidelines on the calculation method of punitive damages. Article 5 indicates the basis for calculating punitive damages, that is, the actual loss of the plaintiff, the amount of the defendant’s illegal gains or the benefits obtained from infringement, or the multiple of the license fee as the calculation basis, and the basis does not include reasonable expenses. Article 5 also stipulates that the people’s court shall order the defendant to provide the account books and information related to the infringement in accordance with the law. If the defendant refuses to provide or provides false account books and information without proper cause, the people's court may refer to the plaintiff's claims and evidence to determine the basis for calculating the amount of punitive damages. Article 6 clarifies the factors that the court considers when determining the multiples of punitive damages, that is, factors such as the degree of the defendant’s subjective fault and the severity of the infringement shall be considered comprehensively. For example, the degree of subjective malice of the infringer, the damage suffered by the right holder or the profit of the infringer, the scale of the infringement, and the length of duration for the infringement.

According to the above regulations, it is clarified that the calculation base does not include the reasonable expenses paid by the right holder for rights protection, and statutory compensation cannot be used as the basis for punitive damages. In the application of punitive damages, when actual losses or profits from infringement are used as the base of compensation, it can be calculated accurately or determined based on the plaintiff’s claims and evidence, and the multiple mainly corresponds to the severity of the infringement.


III.           Strategies for the use and response of the punitive damages system

Based on the above, it can be seen that through the clear operating guidelines for punitive damages in the "Interpretation", after the implementation of the new patent law, both the patentee and the potential infringer can anticipate the applicable elements of the punitive provisions. Thus, when defending rights or facing the risk of infringement, full consideration can be given in terms of how to use or avoid the application of punitive damages.

For example, as a patentee, if they know that the infringement of the other party is intentional and serious, and can apply punitive damages in the infringement lawsuit, it will constitute a greater deterrent to the infringing party. On the one hand, if the patentee wins the lawsuit, they can receive a higher amount of compensation; on the other hand, it is helpful to improve the initiative of the other party to reconcile in the litigation process, so as to stop infringement in a timely and effective manner, and save litigation time and costs. Therefore, before the patentee initiates an infringement lawsuit against the infringing party, when collecting evidence of compensation, the subjective and objective requirements applicable to the above punitive damages can be used to collect targeted evidence proving the infringing party's intention and the seriousness of the infringement.

For companies that are at risk of patent infringement, they need to pay attention to avoid falling into the aforementioned application of punitive damages. For example, when receiving an infringement warning letter from the patentee, it is necessary to conduct a patent infringement comparison in a timely manner to assess the risk of infringement; if the possibility of infringement is high, it is necessary to stop the implementation of related potential infringements in time to avoid falling into the subjective intentional situation stipulated in the “Interpretation”. It is also necessary to avoid failing to fulfill the judicial organ’s evidence preservation ruling without reasonable grounds, which falls into the serious circumstances stipulated in the above "Interpretation".

Given that the new Patent Law has just taken effect on June 1, 2021, the specific applicable standards for punitive damages for patent infringement may be further improved in practice through relevant court cases. In order to determine the specific application of the system in the new Patent Law, it is recommended that companies continue to pay attention to the relevant court precedents.