Highlights of China’s Supreme Court’s new Interpretation on punitive damages in IP cases

Publication and entry into force

On 3 March  2021 China’s Supreme People’s Court (“SPC”) issued the Supreme People’s Court Interpretation of the on the Application of Punitive Damages to the Trial of Civil Cases of Infringement of Intellectual Property Rights (最高人民法院关于审理侵害知识产权民事案件适用惩罚性赔偿的解释,  “Interpretation”). The Interpretation came into effect immediately on its date of publication, i.e. 3 March 2021, and is relatively brief, containing only 7 articles. The Interpretation is meant to provide detailed guidelines to the Chinese courts on how to apply the punitive damages provisions for IP infringement, which are contained in a piecemeal manner throughout China’s Civil Code, Copyright Law, Trademark Law, Patent Law and Anti-Unfair Competition Law. In particular, the Interpretation gives both general guidelines and concrete circumstances that explain the double condition for punitive damages, i.e. intentional and serious infringement. 

Clarification of the first requirement of “intentional” infringement

According to the Interpretation (art. 3), the courts will generally take the following factors as a whole into account when assessing the intentional character of the infringement: the type of the infringed intellectual property rights, the status of rights and the fame of the relevant products and the relationship between the defendant and the plaintiff. The Interpretation also specifies that the following specific circumstances will generally be considered as rendering the infringement “intentional”:

1. The defendant continues to commit the infringing act after being notified or warned by the plaintiff or an interested party. This reinforces the importance of cease-and-desist letters in Chinese legal practice;
2. The defendant or its legal representative or manager is the legal representative, manager or actual controller of the plaintiff or an interested party;
3. The defendant and the plaintiff or an interested party had prior relationships such as employment, labor services, cooperation, licensing, distribution, agency, representative, etc., and had access to the infringed intellectual property rights;
4. The defendant has business dealings with the plaintiff or an interested party or has negotiated for the conclusion of contracts, and had access to the infringed intellectual property rights; and
5. The defendant committed acts of pirating or counterfeiting registered trademarks. In this case the Interpretation presumes bad faith exists due to the pattern of infringing behaviour in counterfeiting activities.

These circumstances are not exhaustive, and the courts are free to recognize other circumstances in finding infringement to be “intentional”. Moreover, article 1 of the Interpretation adds that activities that are considered acts of bad faith under the Anti-Unfair Competition Law (“AUCL”) or the Trademark Law (e.g. trademark hoarding) are also recognized as “intentional infringement”. This provision may serve as a shortcut for IP owners who have already established the bad faith of the infringer under the Trademark Law or the AUCL in claiming punitive damages.

On the basis of the above five elements, it is clear that a subjective intention to consciously and willingly infringe is not required to be able to successfully claim punitive damages. Instead, it is sufficient that the infringer was notified of its infringement and chose to continue its behaviour. However, in this context it is not all clear whether - as is the case in USA practice - a legal opinion from external counsel concluding that certain behaviour does not constitute infringement, or that the underlying IP right asserted is invalid, may help the infringer to avoid punitive damages by eliminating the intentional element. This remains to be settled by the courts.

Clarification of the second requirement of “serious” infringement

According to the Interpretation (art. 4) elements to judge the seriousness of the infringement on are the means and frequency of the infringing conduct, the duration, geographical scope, scale, and consequences of the infringement, and the behaviour of the infringer during the infringement lawsuit (e.g. forgery of evidence, non-compliance with preservation orders etc.), which are to be taken as a whole in making the determination. The Interpretation also lists a number of specific circumstances that will generally be considered as rendering the infringement “serious”:

1. After being held liable for infringement in an administrative penalty or a court decision for infringement, the infringer commits the same or similar infringement again;
2. Committing infringement of intellectual property rights as a business activity;
3. Forging, destroying or concealing evidence of infringement;
4. Refusal to perform preliminary or interim preservation orders;
5. The infringer makes huge gains or the right holder suffers huge losses;
6. The infringement may endanger national security, public interest or personal health;

These circumstances are not exhaustive, and the courts are free to recognize other circumstances as amounting to ‘serious infringement’.

Basis of calculation and determination of the amount of punitive damages

The basis of calculation of punitive damages is the amount of direct damages proven by the claimant, excluding reasonable enforcement expenses (e.g. court fees and attorney fees). Punitive damages can only be calculated on evidence of direct damages, and cannot be claimed in cases where the plaintiff relies on the lump sum statutory damages (e.g. in case of lack of evidence on the amount of damages).

Once the basis of calculation of punitive damages is determined by the court, the court can pick the multiplier for awarding punitive damages at between 1 and 5 times of the direct damages. The court determines the specific multiplier on the basis of the degree of the defendant’s subjective fault and the severity of the infringement. The court can exercise wide discretion here. Earlier administrative penalties or criminal fines imposed for the same infringing behaviour will not support claims for reduction of, or exemption from, punitive damages, but the court can take it into account when determining the multiplier.

Procedural aspects

In terms of procedure, according to the Interpretation (art. 2), punitive damages can be claimed by the plaintiff at any time before the parties conclude the submission of substantive arguments during oral hearing in first instance. If punitive damages are first claimed on appeal then the court may mediate between the parties, but if this fails, i.e. if the parties cannot come to an agreement for the court to accept and consider the claim for punitive damages, the plaintiff would then need to file a fresh lawsuit to claim punitive damages.

As to evidence, in accordance with the general rules of Chinese civil procedure, the burden of proof of the amount of damages is on the plaintiff. However, article 5 of the Interpretation provides that the courts may to a certain extent reverse this burden by ordering the defendant to provide its accounting books and materials related to the infringement. If the defendant refuses or provides false information, the court may refer to the plaintiff’s claims and evidence in determining the basis for calculating the amount of punitive damages.

Conclusion

The Interpretation contains a set of very important rules that are set to have a profound impact on the Chinese IP practice. For example, it is likely that cease-and-desist letters will be even more widely used in China as they may assist strongly in establishing intentional infringement to support a claim for punitive damages. The Interpretation already came into force, and IP owners should now start exploring punitive damages as an option in their litigation strategy to combat and deter IP infringement.
 

Authored by Stefaan Meuwissen and Yu-An Chang.