Application of punitive damages in TM infringement cases

The first paragraph of article 63 of the Trademark Law specifies that, “Where the exclusive right to use a trademark is maliciously infringed and the circumstances thereof are serious, the measure of damages may be determined at not less than one time and not more than three times the amount determined by the aforementioned method”. This article illustrates the application of punitive damages in judicial practice, including the base figure for punitive damages, determination of the key conditions for constituting “malicious” and “circumstances thereof are serious”, etc., by looking at two cases.

Overview of the cases. Case 1: Deere & Company et al v John Deere (Beijing) Agricultural Machinery Co et al, a trademark infringement dispute. The plaintiff was the rights holder in the trademark in question, which it licensed on a non-exclusive basis to its Chinese subsidiary (also a plaintiff in the case). The three defendants jointly committed trademark infringement and engaged in unfair competition, false publicity and commercial defamation.

Furthermore, as the products in question infringed upon the plaintiff’s products, bearing the trademark that it had the exclusive right to use, the administrative authorities of two regions had previously assessed administrative penalties against the three defendants. The plaintiff claimed that the three defendants had derived benefits of at least RMB4.2 million (US$600,000) from the infringement, their infringement constituted malicious infringement and was subject to punitive damages.

Accordingly, it requested that the court order the three defendants to compensate for economic losses of RMB5 million. Both the court at first instance and appeal accepted that punitive damages were applicable and upheld the full amount of the plaintiff’s claim.

Case 2: Fila Sports Co v Zhejiang Zhongyuan Shoes Co et al, a trademark infringement dispute. The plaintiff enjoyed the exclusive right to use the trademark in question, and that trademark had achieved a high degree of notoriety in the clothing and footwear markets through long use by the plaintiff. The three defendants engaged in producing and selling alleged infringing goods, and doing publicity for the alleged infringing mark.

Furthermore, one defendant had previously applied for a trademark similar to the trademark in question, but the application for the registration of said trademark for “clothing, headgear and footwear” was denied by the Trademark Office on the grounds of similarity. The plaintiff requested that the court apply punitive damages and order the three defendants to compensate for its economic losses of RMB9 million. The courts at first instance, appeal and retrial upheld the full amount of the plaintiff’s claim.

Determination of the base figure for punitive damages. Pursuant to the Trademark Law, the base figure for punitive damages may be determined based on the amount of the rights holder’s losses, the benefits derived by the infringer, or a multiple of the licensing fee, and the measure of damages is determined by multiplying this figure by not less than one time, and not more than three times.

The base figure excludes the reasonable expenditure portion. Where the base figure cannot be determined using the above-mentioned three methods, the People’s Court will, depending on the circumstances of the infringement, award damages of up to RMB3 million in accordance with article 63 of the Trademark Law.

There exists a difference of opinion in judicial practice as to whether punitive damages are still applicable. The judgment in Case 1 shows punitive damages are applicable if the benefits derived by the infringer are markedly higher than the ceiling of RMB3 million for statutory damages.

In Case 1, the court expressly stated that, “Punitive damages of not less than one time and not more than three times are limited to instances where the measure of damages can be determined on the basis of the rights holder’s losses, the benefits derived by the infringer, or with reference to a multiple of the licensing fee for the trademark, that is to say that the scope for calculating the base figure for punitive damages excludes the statutory damages specified in the third paragraph of article 63 of the Trademark Law”.

However, in another case, Beijing Huiyuan Food & Beverage Co v Heze Huiyuan Canned Food Co, a trademark infringement dispute, the court, taking into consideration the fact that the defendant’s subjective bad faith was clear, determined on the basis of the evidence of the defendant’s sales turnover and profits submitted by the plaintiff that the defendant compensate for the economic losses of the plaintiff in the amount of RMB10 million.

Determination of malicious infringement of the exclusive right to use a trademark. Trademark infringement involves presuming that the infringer was negligent, but the “malicious” in punitive damages refers to a situation where the infringer was well aware of another’s trademark but nevertheless committed the infringement.

In Case 1, that the three defendants continued their infringement after being assessed administrative penalties for trademark infringement, and in Case 2, that the defendants continued their infringement after an application for a trademark similar to the trademark in question was rejected, show that the infringers were well aware of the third party’s trademark but nonetheless infringed the same.

Furthermore, both above-mentioned trademarks had a relatively high degree of notoriety, which also evidences the infringers’ subjective bad faith. Moreover, the infringer previously having an agency relationship or other business dealings with the trademark rights holder, making it familiar with the trademark, and the infringer continuing to commit the infringement after receiving warning letters from the trademark rights holder on several occasions, may also be considered in a finding of “maliciousness”.

Determination of the “circumstances thereof are serious”. In Case 1, the court held that the phrase, “circumstances thereof are serious”, means that the infringement, in terms of the method, scope and impact of the infringement, caused the rights holder to incur a heavy loss and an adverse effect, mainly including involvement of a relatively broad scope, a variety of means of infringement, involvement of numerous trademarks, and continued infringement after the assessment of administrative penalties.

The distinctiveness and notoriety of the trademark in question and the severity of the damaging consequences engendered are also noted. In Case 2, the court mainly considered the size of the sales turnover of the alleged infringing goods in question.

Currently, application of the punitive damages system in Chinese judicial practice remains limited. The above-mentioned cases have a certain reference value in understanding this system.

Mi Tai is an associate at Sanyou Intellectual Property Agency.