As China steps up intellectual property protection, infringers’ annual financial reports and petitioning for the taking of evidence could convince courts to award rights holders big damages payouts
In recent years, with the intensified efforts to protect IP in China, cases in which large damages have been awarded in infringement actions have become quite common.
Between 2016 and 2019, damages awarded by courts in cases where at least one party was a foreign entity increased by about 300%. Since the beginning of 2021, there have been many cases in which damages of more than RMB10 million (USD1.5 million) were awarded in such IP fields as patents, trade secrets and trademarks.
The common denominator in cases where the plaintiffs succeeded in securing large awards is that the rights holders provided the court with as comprehensive and detailed evidence as possible regarding the damages. A rights holder may provide evidence concerning the loss it suffered as a result of infringement, the benefit derived by the alleged infringer or a reasonable multiple of the royalties.
With respect to the loss suffered by the rights holder as a result of the infringement, regardless of whether, in many cases, the rights holder and its attorneys endeavoured to provide a variety of evidence to the court, in general, the loss suffered as a result of the infringement is not easy to substantiate. This is because the loss suffered by the rights holder may involve numerous factors.
Taking a decline in sales as an example, the causes may also include seasonal variation, an increase in competitors, a change in industry technology, etc. An experienced opposing lawyer can easily raise enough doubts in the judge’s mind as to whether the above-mentioned loss was all due to the infringement.
In contrast, in many cases where huge damages were successfully secured, the plaintiff secured the court’s support by substantiating the benefits derived by the defendant in connection with the infringement. In this regard, there are many usable avenues available to rights holders.
Taking sales volume as an example, the alleged infringer will often present relevant information on its own website, electronic or print advertisements and other promotional materials. For listed companies, or companies on the verge of listing, each quarterly or annual financial report and the information submitted to the China Securities Regulatory Commission (CSRC) for listing purposes may disclose the specific sales volume of the alleged infringing product.
With respect to the calculation of the benefit derived in connection with the infringement, another important factor is the profit margin. In Tenda v WayOS et al. (2019), the plaintiff submitted a listing guidance report submitted to the CSRC by WayOS, on the basis of which the defendant’s average annual profit margin could be calculated.
Although the report did not document the specific profit margin for a product, the plaintiff successfully relied on that report as important evidence to make the court recognise that the benefit derived by the defendant in connection with the infringement far exceeded the amount it claimed and, thereby, ultimately succeeded in securing damages of at least RMB10 million.
In addition to a patent holder gathering evidence itself, another increasingly popular method is to petition the court for the taking of evidence, and that is because, in most cases, the original sales vouchers, profit margin and other such data are usually in the possession of the alleged infringer and are not accessible to the patent holder.
As can be seen from a number of cases, the objective in petitioning the court to take evidence is not merely to obtain the defendant’s financial data but is more like a litigation strategy used to assist in securing large damages.
In practice, few defendants elect to submit financial data to the court. In litigation, this has led to rather favourable consequences for plaintiffs. However, when a defendant refuses to provide financial data without good cause, the court may presume that the plaintiff’s claim for damages is tenable.
The rationale behind this is that it is the common view that participants in a legal action are bound to carefully weigh the consequences of their actions in the course of the litigation. In the case of a refusal to submit financial data, the court will deem that the alleged infringer, after weighing the consequences, deemed that the damages outcome that would result from the submission of its financial data would be greater than the measure of damages claimed by the plaintiff.
Accordingly, it is only for this reason that the alleged infringer would elect to refuse to submit the data. Therefore, if the alleged infringer elects to refuse to submit evidence, the court will likely presume that the measure of damages claimed by the plaintiff is tenable.
The strategy may also lead the court to deny the defence mounted by the alleged infringer regarding the damages. In a recent typical case released by the Supreme People’s Court (SPC), the rights holder, after fulfilling its preliminary burden of proof, petitioned the court to take financial data of the alleged infringer. The alleged infringer refused to submit the same and elected in court to challenge the evidence submitted by the rights holder regarding the damages.
The accused infringer argued that in this case, the rights holder’s determination that its IP’s contribution of 30% to the profit on the infringing product was overly high, thereby resulting in an error in the final calculation of the measure of damages. However, because the alleged infringer refused to submit financial data as ordered by the court, the SPC held that this made it impossible for the court to ascertain the specific technical contribution. Accordingly, the SPC refused to consider the defendant’s various arguments that the damages were too large.
In short, as China continues to strengthen its protection of IP, rights holders in China will have a better chance to apply their IP to secure large damages in legal actions if they are able to collect evidence on damages in a thorough manner, and use appropriate litigation strategies.