Revised Trademark Law increases penalties, but is that enough?

In recent years, weak protection of trademark rights, difficulty in suppressing bad-faith infringement, repeated infringement violations and relatively low measures of damages for infringing behaviour have emerged as prominent problems during the course of implementing the Trademark Law. In our experience, the measure of damages awarded by courts has frequently been insufficient to make up for the losses incurred by the rights holders, and at times have even been less than the costs expended by the rights holders in protecting their rights. This is one of the main reasons why rights holders have failed to advance the protection of their rights, and why infringers continue to engage in such behaviour.

Recently, the latest draft of the amended Trademark Law was formally completed and submitted to the Standing Committee of the National People’s Congress for deliberation. It attempts to actively address the problems mentioned above.

Damages

Addition of punitive damages. In accordance with the Trademark Law, the measure of damages for the infringement of trademark rights is two-fold. One method is to calculate damages from the benefits derived by the accused from the infringement during the period of such infringement. The second is to measure damages from the losses incurred by the injured party as a result of such violation during the period of infringement. However, one will find the calculation method above impracticable. For example, if the measure of damages is to be determined based on the losses incurred by the injured party, it is necessary to show that the decrease in the volume of the sales of the rights holder’s product is attributable to the appearance of a certain infringing product. But this is impossible for a rights holder to prove. It is also rare for the court to rule in favour of the rights holder based on this provision. Additionally, determining the measure of damages based on the benefits derived by the infringer is not any easier to prove. An infringer will not normally voluntarily provide its accounts, and even if it does, it is difficult to differentiate genuine account information from false information. Under such a circumstance, the gap between the damage incurred and damages awarded is difficult to bridge. Such circumstances foster the frequent occurrence of bad-faith infringements. In the face of “habitual infringers”, rights holders often find themselves “winning the case but losing money”.

The bill introduces a punitive damages system to address such issues, specifying that “in respect to bad-faith infringements of one’s exclusive right to use a trademark and instances of gross violation, the compensation amount may be in the range of one to three times the amount of the loss incurred by the rights holder, the benefits derived by the infringer or the royalty paid by a registered trademark user”. The punitive damages system increases the legal liability for intentional infringement. With respect to certain obvious acts of bad-faith infringement, punitive damages can better leverage a judge’s discretion, effectively bringing sanctions to fruition against bad-faith infringements.

Increasing the limit on statutory damages. The Trademark Law provides that, where the actual losses or benefits arising from the infringement are difficult to determine, the court may at its discretion award damages of up to RMB500,000 (US$80,000 – often referred to as statutory damages). In practice, a court will first attempt to determine the measure of damages based on the rights holder’s loss or the benefits derived by the infringer. Given the many difficulties in adducing evidence, statutory damages become the most common method of determining compensation during a trial. However, with the development of China’s economy, the provisions on statutory damages have long been insufficient to deter infringement activity, and the application of awarding the maximum damages of RMB500,000 by the courts has been few and far between. In the vast majority of cases, the rights holder only manages to secure symbolic damages of RMB100,000 to RMB200,000. Even more frustrating for rights holders is that because of long lead times for legal actions, they are commonly required to bear the high cost of litigation.

The revised Trademark Law addresses this problem by raising the upper limit on statutory damages to up to RMB1 million.

Burden of proof

There is a direct and intimate relationship between the evidence difficulties presented for a rights holder and the low level award for damages arising from infringement. As China implements the basic evidence rule that “whoever makes a claim is responsible for adducing evidence therefrom”, and given the fact that infringement is usually committed in a surreptitious manner, imposing the burden of proof on rights holders in fact increases their difficulties in protecting their rights and securing comprehensive damages.

After considering relevant practices abroad in shaping the draft for the amended Trademark Law, the current bill provides that where it has been determined that the rights holder has used its best efforts to adduce evidence, the court may order the infringer to provide books and information relating to the infringement to determine the measure of damages. If the infringer fails to provide such or provides fraudulent books or information, the court may determine the measure of damages for infringement by referring to the claims and evidence provided by the rights holder.

Other shortcomings

The latest draft amendments made to the Trademark Law do not clarify how to determine such issues as “bad-faith infringement” or what “the rights holder’s best efforts to adduce evidence” may be. It also remains to be seen in practice whether raising the upper limit of the statutory measure of damages will effectively deter infringements. We believe that an award of damages even of RMB1 million will still be far less than the actual loss incurred by the rights holder.

Therefore, we believe the key to resolving the issues pertaining to “the difficulty of protecting the rights” and “the low level of damages and compensation” centres on the ability of rights holders to substantiate their actual losses. Achieving this objective requires an effective set of evidence rules applicable during the trial, as well as the establishment by all market entities of sound credit and financial systems suitable for this situation. Since the bill essentially follows the Trademark Law framework, it is unlikely to fundamentally resolve the problem in the short term. At this stage, we would recommend that rights holders still stress striking hard against infringement as the prime objective of protecting their trademark rights, and treat securing sufficient damages as a secondary objective.