Application of agreed compensation for IP infringement in judicial

By Pei Yinzhou, Kangda Law Firm
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In recent years, there has been a growing trend in the application of agreed compensation in intellectual property (IP) infringement cases. However, the existing regulations are somewhat vague, leading to numerous controversies in practice. To clarify these issues, this analysis will delve into the legal concepts and attributes of agreed compensation for infringement.

Legal concepts

Pei Yinzhou, Kangda Law Firm
Pei Yinzhou
Senior Partner
Kangda Law Firm
Tel: +86 138 0108 7811
E-mail:
yinzhou.pei@kangdalawyers.com

Agreed compensation for IP infringement refers to the compensation responsibility assumed by the infringing party for future IP infringement actions as stipulated in civil contracts signed by both parties before the infringement, settlement agreements reached through prior infringement procedures, civil mediation agreements confirmed by courts or arbitration institutions, and commitments made by the infringing party. Following the occurrence of future infringement actions, the rights holder can file a lawsuit in court and demand compensation based on the previously agreed terms.

Currently, the basis for calculating compensation includes: losses suffered by the rights holder due to infringement; profits gained by the infringing party from the infringement or illegal gains; multiples of licensing fees; and statutory compensation. In practice, agreed compensation has become another independent method of determining compensation.

Legal attributes

Agreed compensation is a simplified method agreed upon by both parties in advance to calculate and determine the losses suffered by the rights holder or the profits gained by the infringing party in the event of future infringement, which is an independent method where parties agree on future infringement compensation based on their autonomy of will.

Agreed compensation is generally included in settlement agreements, civil mediation agreements, commitment letters, and civil contracts. Regarding whether agreed compensation involves co-opetition between infringement and breach liability, the author believes that the first three of those four belong to special civil contracts with conditions attached, corresponding to liability for infringement only.

However, civil contracts, being basic transaction contracts, contain pre-agreed compensation obligations and may involve co-opetition between breach and infringement liability, requiring the assertion of one.

In cases where infringement is established and there are no grounds for invalidation, modification or revocation of the agreement, priority should be given to agreed compensation, aligning better with the practical challenges of determining compensation for IP infringement.

Agreed v punitive compensation

Agreed compensation and punitive compensation are both related and distinct. The conditions for their application are similar: punitive compensation requires both intentional infringement and serious infringement, while the same conditions apply to the application of agreed compensation.

Both types of compensation carry punitive elements. Directly agreed compensation amounts serve a dual purpose of compensation and punishment, akin to “statutory compensation” by agreement between the parties, thus already carrying punitive elements, making punitive compensation inapplicable; however, the calculation method of agreed compensation can be applied to punitive compensation.

The base for calculating punitive compensation should be a compensation amount determined fairly accurately without considering punitive elements. If the rights holder and infringing party have agreed on the compensation calculation base in advance, it serves as the basis for punitive compensation.

Agreed compensation

When there is no illegal basis for the agreed compensation clause, and respect is given to the parties’ private autonomy, and the agreed amount is reasonable, courts tend to fully support the agreed compensation amount based on the prior agreement.

When a court judgment is based on statutory compensation, but the awarded amount matches the agreed compensation, it indirectly recognises the agreed compensation. In cases where the application of prior agreed compensation clauses is not supported, and the awarded compensation is generally lower than the prior agreed amount, agreed compensation is not widely recognised.

Some courts have started incorporating agreed compensation clauses into mediation work, one approach being to include such clauses in commitment letters issued by infringers.

The author suggests that agreed compensation clauses should be carefully considered and should clearly specify:

  1. Agreed compensation clauses need to be specific and precise, detailing compensation amounts for specific acts of infringement, IP rights, or breaches of agreement. Failure to specify may lead to broad interpretation by the courts;
  2. The direct amount or calculation method should vary depending on the case. For smaller-scale infringers, it may be advantageous to directly agree to a higher compensation amount considering punitive elements, but the compensation amount should be carefully considered, taking into account the value of the involved IP, production and operation conditions, industry status and court rulings;
  3. For cases involving prolonged or large-scale infringement, a calculation method for agreed compensation is more suitable than specifying a fixed compensation amount, and such calculation methods can be combined with punitive compensation.

Pei Yinzhou is a senior partner and director at Intellectual Property Specialised Committee at Kangda Law Firm. He can be contacted by phone at +86 138 0108 7811 and by email at yinzhou.pei@kangdalawyers.com

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