Patent legislation across Asian jurisdictions is constantly catching up with the pandemic’s demands, with stronger protection, foreign filing and higher compensation being common themes. However, the gaps persist, and businesses need to fathom the domestic barriers to stay ahead.
In the 2000s, an IP rights holder would receive expected damage compensation from infringement litigation for possibly not more than USD20,000 on average. A variety of reasons led to this situation, including insufficient ways to collect evidence, limited experience in handling IP infringement actions, and the depth and breadth of IP rights.
As time has passed, the situation has changed and, recently, it reached a critical point as a batch of typical IP cases were issued by the Supreme People’s Court (SPC), and RMB159 million (USD24.6 million) in damages were awarded to the owner of a trade secret for manufacturing vanillin, the most widely used spice in food industries – the highest damages affirmed by the SPC to date.
The record is likely to be broken again soon because such an amount was just a part of damages until the end of 2017. The rights holder may apply for additional damages for the infringements that occurred after 2017, as the Unfair Competition Law introduced punitive damages in 2018.
Larger damages have become more common in IP infringement actions. On the one hand, more Chinese companies have realised the importance of IP when running their business. More than 1.497 million invention patent applications were filed in 2020, plus 2.927 million utility model applications and 770,000 design patents. Meanwhile, 5.761 million trademarks were registered in 2020. These IP rights provide more available options for the rights holder when enforcement 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 the introduction of the court’s technical expert to assist the judge, court orders 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 choose to submit financial data like sales records or the profit margin of the accused infringing product, even when facing a court order requiring them 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.
As evidence preservation becomes more common and popular in IP litigation, the court has a better chance of finding out the damages caused by the infringement, resulting in an increasing amount of compensation in such litigation.
Some recent cases published by the SPC reveal that the owners of IP rights use combined strategies when proving the damages in a 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 may become critical in securing larger 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 have been caused by various reasons, like the change of seasons, advertisements and/or raw material prices.
However, the loss suffered could be a good starting point to give the judge a general picture of 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 this case, the measure of damages derived from this route was about RMB116 million.
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 per year, and had tripled since 2015. Based on that, the defendant had to allege that the annual production of vanillin was about 2,000 tons per year, which became the basis of damages to be calculated in this case.
The court confirmed this number because it was rather conservative compared to the total production capability of 17,000 tons per year. The measure of damages was about RMB155 million based on the capability of 2,000 tons per year plus RMB3.4 million in reasonable expenses for stopping the infringement through trial.
The final route adopted by the plaintiff is the change of market share. The plaintiff found out that the market share had dramatically shrunk since the trade secret had been infringed. The damages calculated through the change of the market share were up to RMB790 million. Although the court did not accept the damages amount based on the drop of market share, the author believes the highest damage demand through this route did open good room for the final damages decided by the court.
In the trial, the plaintiff requested a court order asking the defendant to disclose the profit margin, and the refusal of the defendant was taken into the court’s account when deciding the damages. The court held that the defendant’s refusal to disclose the profit margin led to great difficulty in ascertaining the exact profits gained by infringement, and stopped the court from finding out the actual profit margin of the defendant. However, the court used the plaintiff’s profit margin in the calculation, leading to RMB159 million in damages.
This is a remarkable change because in the past the courts tended to reject the plaintiff’s calculation if the plaintiff could not provide the defendant’s financial data because of insufficient evidence, no matter how difficult it was for the plaintiff to access that evidence.
The trial courts rejected the plaintiff’s claims for the same reason, but only awarded statutory damages 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 trade secret infringement litigation to date.
Given the SPC case, it is foreseeable that the Chinese courts will more often consider the shifting of the burden of proof during IP infringement litigation 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 will keep increasing because the biggest obstacle for patentees to obtain high compensation seems to be gradually disappearing.
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