Against the backdrop of soaring caseloads, Chinese courts that have been plagued with understaffing have turned to the pre-litigation mediation regime in recent years. Ideally, parties seeking to bring a court action are advised to negotiate with a view to reaching an amicable settlement without progressing to court proceedings. In judicial practice, should pre-litigation mediation fail, parties would proceed to litigation, but settlement remains an alternative solution whenever it is opportune.
Apart from securing damages from infringers in a time-efficient manner, IP rights holders could leverage settlement agreements to rein in repeated infringements, provided that a considerable amount of damages could be written into the agreement as an insurance policy in case of repeated infringement. The courts tend to validate such damages clauses as long as infringement is established.
IP right holders will be better positioned to pursue settlement and include damages clauses in case of repeated infringement if:
- the parties wish to close the case quickly, yet the court proceeding is unlikely to wrap up any time soon;
- the rights holder has difficulties obtaining evidence that would help to secure decent damages and the estimated damages to be awarded by the court is quite low;
- the infringer is a recidivist and is likely to resume infringement in the future; and
- the infringer would rather settle with the rights holder so that no court decision is published.
There are a few takeaways in drafting settlement agreements and devising damages clauses.
Include entities affiliated with infringer in settlement agreement
Court decisions have binding effect only on parties to the case. In practice, an infringer whose business operation was targeted could immediately set up another corporation and assume a new identity to resume its infringement activity. If the corporate personalities of the two corporations are not identical, the settlement agreement, which the rights holder and the infringer entered into at an earlier date, may likely have little or no bearing on the infringer's later offence.
Therefore, it would be a prudent precaution to include entities which have affiliation with the infringer in the settlement agreement and ensure that these entities bear liability for damages in case of repeated infringement. Rights holders may refer to company law for the definition of 'affiliation'.
The more recent exposure draft of the Opinions of the Supreme People's Court on Ramping up Sanctions on Intellectual Property Infringements, which was released on 15 June 2020, may also serve as a point of reference to rights holders.
China's judicial practice requires that court actions be brought separately if multiple IP rights are involved. Different patent infringement suits or trademark infringement suits targeting the same infringers must be initiated separately. Where settlement is to be reached over one particular case, rights holders may maximise their efficacy by addressing IP rights other than those relevant to the case.
In a case where the infringer not only exploited the rights holder's patent but also used the latter's registered trademark without authorisation, a settlement agreement was reached with the infringer on behalf of the rights holder in the patent infringement litigation, settling the infringement. The settlement agreement included a damages clause covering circumstances of repeated patent and trademark infringement, which the court agreed to include in the civil mediation statement.
The determination of infringement is an arduous task in litigation. If a settlement agreement elaborates on the circumstances to which damages clauses in case of repeated infringement apply, rights holders' burden of proof will be greatly alleviated.
To address continuous and repeated infringement, a reasonable grace period could be granted to infringers to ensure the destruction of all promotional materials, infringing products, moulds and other materials. On the expiration of the grace period, if the aforesaid promotional materials, products or moulds are spotted again, the infringer will bear liability for damages in case of repeated infringement.
To address the repeated offering for sale in patent infringement cases, where infringing products cannot be obtained to conduct infringement analysis, it would be advisable to explicitly provide in a settlement agreement that as long as an infringer uses promotional content identical to that from the previous infringement case, the infringer will bear liability for damages in case of repeated infringement.
Some infringers with continued interest in a certain model of product could design around the right holder's patent after being sued for infringement, but the modified product may still fall within the scope of protection of the patent claims. In general, the Chinese courts ascertain repeated infringement only when the accused infringing product is substantially identical with the one from the previous case. Since there is still controversy over whether modified products that fall within the scope of patent protection constitute repeated infringement, the parties could agree on whether such circumstances are subject to damages in case of repeated infringement in the settlement agreement.
Always aiming high when it comes to damages
Repeated infringement, which is regarded as a bad-faith infringement where the circumstances are serious, could warrant the awarding of punitive damages. To maximise the deterrence of damages and discourage repeated infringement, the amount of damages should be significantly higher than that of ordinary infringement cases and factors such as the actual increase in the amount of damages awarded in recent judicial practice as well as the latest trend proposed by the legislature should be considered. When calculating damages in settlement agreements, it is recommended to use either a fixed amount or the multiple of the actually calculated damages, whichever is higher.
The determination of repeated infringement is up to the court's discretion. Nevertheless, rights holders could still resort to Article 28 of the Interpretation (II) of the Supreme People's Court on Several Issues Concerning the Application of Law in the Trial of Patent Infringement Dispute Cases in seeking court approval in awarding the amount of damages determined in accordance with the terms that the rights holder and the infringer agree on in a patent infringement lawsuit in respect of the amount of damages or the calculation method of the damages of patent infringement and claim as long as the court finds infringement.
