Introduction

On 17 October 2020 China promulgated the fourth amendment to the Patent Law, which took effect on 1 June 2021. The amendment makes substantial changes to patent filing and enforcement, among other matters.

The amendment largely codifies the evolving patent practice of the Chinese judiciary, incorporating revisions that are expected to change the litigation landscape – including:

  • raising statutory damages;
  • introducing punitive damages; and
  • leveraging the good-faith principle to address the abuse of patent rights.

This article analyses these revisions and helps stakeholders to navigate the changing litigation landscape.

Damages

Increase of amount of statutory damages

Article 71(2) of the new Patent Law increases the amount of statutory damages from between Rmb10,000 and Rmb1 million (approximately $1,535 to $153,458) to between Rmb30,000 and Rmb5 million (approximately $4,605 – $767,290).

In China, damages are calculated by:

  • the losses incurred to the rights holder;
  • the illegal profit acquired by the infringer; or
  • a reasonable multiple of patent royalties.

Where it is difficult to determine the amount of damages using these approaches, the court may resort to statutory damages and determine at its discretion the amount of damages within the range provided by the Patent Law. In practice, over 90% of patent infringement cases apply statutory damages.

The amendment regarding statutory damages reflects stakeholders' pressing demand for a stronger patent protection regime in China. Before the promulgation of the amendment, the courts had been raising the amount of damages to echo such demand, albeit with fluctuation, as corroborated by the statistics from a survey carried out by the China National Intellectual Property Administration, shown in the following table.

Damages for Patent Infringement: 2014 to 2019

Amount of compensation (Rmb)

2014

2015

2016

2017

2018

2019

0

-

45.5%

46.7%

25.5%

28.9%

26.8%

Less than 100,000

51.3%

21.7%

28.9%

34.7%

43.3%

27.8%

100,000 to 500,000 (exclusive)

34.3%

23.9%

18.8%

13.4%

11.7%

29.4%

500,000 to 1 million (exclusive)

11.5%

6%

3.8%

15.3%

10.7%

10.1%

1 million to 5 million (exclusive)

2.6%

1.1%

1.7%

10.7%

3%

3.6%

More than 5 million

0.3%

1.8%

0.1%

0.4%

2.4%

2.4%

Despite increasing media coverage of cases with considerable damages in recent years, the statistics delineate a slightly different picture. Of all of the cases concluded by the Chinese courts, only 6% were granted damages of over Rmb1 million in 2019. The increase in the ceiling of statutory damages from Rmb1 million to Rmb5 million gives courts more leeway to support high damages.

However, while the increase grants the possibility of awarding higher damages, it does not exempt patentees from the onerous burden of proof. Patentees are still strongly advised to furnish compelling evidence on actual loss, illegal profit or royalties to facilitate the court's determination of statutory damages.

Allocation of burden of proof

While patentees often opt to calculate damages by referencing the illegal profit acquired by the defendant, evidencing such profit is difficult. The amendment provides that the court may allocate the burden of producing account books to the defendant, provided that certain conditions are met.

The amendment introduces the possibility to allocate the burden of proof regarding damages to the infringer. Specifically, Article 71(4) of the new law provides that where a patentee has made its best effort to adduce evidence and the account books or materials relating to the infringement are controlled by the infringer, the court may order the infringer to provide such account books and materials. Non-compliance may result in the court awarding damages by reference to the claims and the evidence provided by the patentee.

Allocating the burden of proof to the defendant is not new. In 2016 the Supreme People's Court (SPC) issued the Interpretation (II) on Several Issues concerning the Application of Law in the Trial of Patent Infringement Dispute Cases, which promulgated a similar rule. However, lower-level courts have generally been conservative towards this rule and their concerns are legitimate. The courts often struggle to confirm the authenticity of account books produced by the defendant (if any are turned over at all). Further, the cost and time-consuming audit process and the uncertainty of return on waging a costly war against the infringer can be quite intimidating to patentees.

The SPC has been trying to use exemplary cases to guide the lower courts' practice. In Dunjun v Tenda ((2019) Zui Gao Fa Zhi Min Zhong 147), Dunjun sued Tenda for patent infringement and claimed compensation of Rmb5 million, based on the illegal profit that Tenda had acquired from infringement. Dunjun produced evidence collected from Tenda's online store, which showed a sales revenue of over Rmb20 million. This was multiplied by the average profit margin of the industry, 30%, which made a profit of about Rmb6.1 million.

The first-instance court found that Dunjun had provided preliminary evidence to prove the scale of the infringement and, on Dunjun's application, ordered Tenda to submit account books relating to the manufacture and sales of the accused product. Tenda refused without a justifiable reason. The court thus supported Dunjun's claimed damages of Rmb5 million.

Tenda appealed to the SPC IP Court, which also ordered Tenda to disclose the account books. Tenda again refused to comply. It argued that:

  • the online sales revenue was unreliable;
  • there was no proof to substantiate the industry profit margin; and
  • the contribution of the patent to product profit was low.

Because Tenda had furnished no contrary evidence, the court dismissed its argument. The court concluded that without account books, it was impossible to assess the contribution of the patent to the accused product. The court of appeal finally affirmed the lower court's decision.

Dunjun v Tenda exemplified how to allocate the burden of proof between parties in terms of damages. The fact that the defendant is ordered to produce its account book does not mean that the patentee is exempted from producing evidence to substantiate the claimed damages. The plaintiff should produce preliminary evidence to prove the defendant's likely illegal profit. To make an effective rebuttal, the defendant must produce contrary evidence, rather than merely casting doubt on the plaintiff's evidence, even if the doubt sounds reasonable (the patent contribution to profit was not considered in Dunjun v Tenda).

The amendment will carry a wider influence than the 2016 judicial interpretation and exemplary cases. Courts are increasingly considering the allocation of the burden of proof to the defendant in producing account books. Defendants of patent infringement proceedings will have to tread more carefully in the rebuttal of the plaintiff's evidence of damages. Casting doubts over the plaintiff's evidence will not suffice. Defendants are advised to base their counterargument on convincing contrary evidence and provide justification where it is difficult to disclose their account books.

Punitive damages

Article 71(1) of the new law provides punitive damages of up to five times the damages for wilful patent infringement in serious circumstances.

Bad faith had been taken into account by the courts in the determination of damages long before the amendment. Without a legislative basis to order punitive damages, the courts tend to award higher damages within the legislative framework. However, the amendment remains silent regarding the parameters to find wilfulness and to what extent the damages should be applied.

On 3 March 2021 the SPC issued the Interpretation on the Application of Punitive Damages to the Trial of Civil Cases involving Infringement of Intellectual Property Rights to guide lower courts on the use of the regime.

The judicial interpretation states that the circumstances are deemed serious if the defendant:

  • commits infringement again after being found to have infringed previously by a court or government agency;
  • is an IP infringer by trade;
  • forges, destroys or conceals evidence of infringement;
  • refuses to comply with a court's preservation ruling;
  • reaps significant illegal profit or causes huge losses to the rights holder; or
  • may endanger national security, public interest or personal health.

The judicial interpretation leaves many issues unaddressed. A recent trade secret infringement case decided by the SPC IP Court could serve as a frame of reference in applying five times the amount of damages under serious circumstances. In Tianci v Newman ((2019) Zui Gao Fa Zhi Min Zhong 562), the first punitive damages case decided by the SPC IP Court, five times the damages were granted. The court based its decision on the facts that:

  • since its creation, the infringer (Newman) had been mainly engaged in the production of the accused infringing products;
  • Newman had continued significant infringement even after its former legal representative was convicted for trade secret infringement; and
  • Newman had refused to produce account books and materials, which showed the gravity of its wilful infringement.

Tianci v Newman showcased a combination of some of the aforementioned serious circumstances – namely, that the defendant:

  • committed infringement again after being found to have infringed in the past;
  • was an IP infringer by trade; and
  • likely refused to comply with court's preservation ruling.

Practitioners will have to pay close attention to future judicial practice to understand how the courts connect the extent of wilful infringement and the gravity of the serious circumstances to the multiple of damages.

Nevertheless, the introduction of the punitive damages regime in the amendment and the promulgation of the SPC interpretation will encourage the Chinese judiciary to use it with more confidence in judicial practice.

Abuse of patent rights

The amendment also addresses the abuse of patent rights. Article 20 of the new law reads as follows:

Patent filing and enforcement of patent rights shall follow the principle of good faith. Patent rights shall not be abused to harm public interests or the legitimate rights of others. Misuse of patent rights that eliminates or restricts competition so as to constitutes monopolistic behavior, shall be dealt with in accordance with the Anti-Monopoly Law.

The newly added provision is believed to aim to balance the enforcement of patent rights and public interest, with an emphasis on good faith and a reference to the Anti-monopoly Law.

So far, there has been nothing to suggest that this article will discourage rights holders' regular enforcement action. The existing cases which fall under this category are limited and mainly address bad-faith litigation. In Qiao'an Company v Zhang ((2019) Hu Min Zhong 139), the Shanghai High Court found that the design patentee, Zhang, had abused his right by filing a design patent over a surveillance camera product that had already been launched to the market prior to the filing date of the design patent, a fact found by a court in an earlier dispute between Zhang and Qiao'an.

Afterwards, Zhang sued Qiao'an based on the design patent at issue. He claimed damages of Rmb10 million and applied for the preservation of the equivalent amount of property owned by Qiao'an to secure damages. After looking into the previous dispute between the parties, the court found that Zhang had exhibited bad faith in enforcing his patent by taking into account that:

  • Zhang had been fully aware that the design patent at issue was devoid of novelty;
  • Zhang had deliberately intended to harm the interests of Qiao'an by claiming damages of Rmb10 million, which was far beyond the contribution of the patent at issue to the product profit; and
  • Zhang's application to preserve Qiao'an's property apparently aimed to disrupt Qiao'an's business operation.

The amendment remains silent on how the good-faith principle should be observed in patent filing and circumstances where patent enforcement harms public interests or violates the Anti-monopoly Law, which are expected to be clarified in future contentious practice.

Comment

The amendment reflects how judicial practice has evolved over the years but is far more than a summary of existing practice. Instead, it provides direction and leaves room for judicial practice to develop. With the increase of statutory damages, allocation of the burden of proof to the defendant and the installation of punitive damages, the rights holder has more tools to fall back on in claiming high damages, while the defendant will face a higher burden of defence.

Future patent litigation will largely rest on evidence. With the addition of the provision which bans patent abuse, patentees are advised to double check their patent stability and assess court preservation actions before initiating a proceeding.

An earlier version of this article was first published in MIP China IP Focus.