How to increase damage awards when litigating in China for intellectual property infringement?

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(Author: Dr. Jian Xu, the China IP Blogger)

Damages have long been a headache for intellectual property right holders when litigating in China. This is especially true for foreign clients which might be used to the level of damages in the common law countries such as US and UK. Consequently, injunction relief is almost always the primary reason for litigating in China.

Despite the challenges of low damages, it has been one of the central themes of China’s IP law reform over the past ten years to drive up the level of damage awards. This article aims to explore reasons of low damages, and recommend ways and tactics you can employ to increase the awards.

What’s the principle of damage calculation in China?

The principles are all sound and nice, and harmonised with international standards. Briefly, there are four ways to calculate damages in China.

1)     the financial loss of the right holder;

2)     the financial gains of the infringer;

3)     reasonable multipliers of IP licence fees (if there is such a reference); and

4)     statutory damages.

Note that the fourth method, statutory damages, is highlighted, as the vast majority of the damages are decided at the discretion of the judge within statutory damages. So much so that many plaintiffs do not even bother to provide evidence of damages but simply request or agree for the judge to determine damages solely. This brings us to the next question.

Why does the damage award tend to be low in China?

The major reason is that it is very difficult for plaintiffs to prove damages, i.e. financial loss of the plaintiff or gain of the defendant, in China. The two primary factors are (a) difficulty in evidence collection, and (b) high plus inflexible standard of proof for damages.

To prove the loss, the plaintiff needs to show both the loss itself and how the loss is correlated with the infringement. Neither is an easy task, especially the correlation between the loss and the infringement. Since Chinese courts are reluctant to presume or infer based on the facts, the proof of loss is usually a difficult task.

To ascertain the gain of the infringer, the right holder usually has to provide evidence like the accounting books for manufacturing and sales, the sales contracts, the manufacturing records, etc., all withheld and highly protected by the infringer. Without US type of discovery procedure, it is very difficult for the right holder to obtain such evidence as accounting records. Without the sanction of contempt of court in civil court proceedings, the infringer might provide false evidence of sales or simply does not provide any evidence, when the judge demands the defendant to surrender such evidence.

In view of the above difficulties regarding evidence or proof, it is not surprising that statutory damage which supposes to be the last resort, becomes the norm. Although China has increased the upper limit of statutory damages in almost every major IP law reform, with the current upper limit around RMB 3 million (c.a. USD 440,000) depending on the type of rights, it is still low compared with US and European practices.

Are there any ways to increase damage awards when litigating in China for intellectual property infringement?

Despite the challenges, right holders can still find ways to increase damage awards rather than leave it solely to the judge. It would be nice to be able to prove loss or gain or find a reference of license fee levels recognised by the court. However, given that the majority of awards are still statutory damages, most of the tactics focus on ways to influence the judge’s discretion so a higher damage award nearer the upper limit of the statutory damage can be obtained. The right holder can consider the following ways to maximise their chances for higher damages.

1)     Comb public information thoroughly to collect information on the level of infringement. Such information include the scale of the infringer’s business, the level of marketing and promotion, the unit price, the period of sales, the number of stores, the territory of sales, and writing statement on the level of sales in marketing materials, etc. With dedicated effort, a lot of information can be gathered through public channels, and can paint a better picture on the seriousness of the infringement.

2)     Gather information to show the infringement is blatant, such as the fact that the defendant knowingly infringes, or takes a free ride of the reputation of the right holder.

3)     Provide enough information about the use and reputation of the right holder and the product in question. Such evidence is within the control of the right holder so it should be easy to gather those to potentially show the financial loss of the right holder can be huge.

4)     Always ask the court to conduct an evidence preservation order or asset preservation order if possible. If accounting information is seized during a court organised raid of the infringer, this is admissible and the judge will be happy to calculate damages based on the seized accounting information.

5)     Ask the court to order the defendant to provide the relevant accounting books and information about the infringing product. If the infringer does not cooperate, which is common in China, it is another factor of bad faith, and the court is more willing now to increase damages based on this factor.

6)     Request the court to award large part or full legal fees as incurred. Traditionally Chinese courts only grant nominal cost recovery for legal fees. However, the trend is changing, and the Beijing IP court granted full legal fees of RMB 1 million (c.a. USD 150,000) in a patent infringement case in 2016.