28 May 2020

Guidelines on Damages Calculation in IP Disputes

By:Xu Jing

On April 21, 2020, Beijing Higher People’s Court released the Guidelines on Determination of Damages and Statutory Damages in Disputes over Intellectual Property and Unfair Competition (the “Guidelines”). It provides detailed guidelines on methods of damages calculation, punitive damages, recovery of attorney fees, evidence rules on defendant’s failure of producing evidence, and statutory damages. While the Guidelines have binding force among all the courts in Beijing, but it mirrors many existing practices across the country and is actually a secondary authority for all People’s courts. This note serves as an overview of those provisions related to trademark and passing off in the Guidelines followed by our comments and recommendations. 

OVERVIEW

-- Methods of Damages Calculations

The Guidelines restate Article 63.1 of the PRC Trademark Law (2019) (the “Trademark Law”) that a plaintiff can claimed damages based on the plaintiff’s losses, the defendant’s illegal profits, and/or a reasonable license fee (Article 1.2). Plaintiff may choose any of the above methods to calculate the damages caused by one single infringement, or different methods for different alleged infringements (Article 1.4). The claimed amount can be an exact figure or a range (Article 1.3). As for the illegal profits, the amount is normally calculated based on its operational profits, but its sales profits when the defendant is a professional infringer (Article 1.7). 

Statutory damages are applicable when all three above cannot be calculated (Article 1.10). The Guidelines also distinguish statutory damages from a long-time similar practice - “discretionary damages” (a concept invented by Beijing Higher People’s Court itself), which applies when the evidence on file shows that the plaintiff’s losses or the defendant’s illegal profits are higher than the maximum amount of the statutory damages (Article 1.8).
These provisions specify circumstances applicable for each method of calculation and summarize the current practices, and will increase degree of predictability for a plaintiff when it organizes its damages claim.

-- Punitive Damages

Punitive damages are available to trademark infringement cases (as well as misappropriation of trade secrets) under the current laws. Article 63 of the Trademark Law provides that an order for punitive damages can be granted in a range of 1 to 5 times of the calculated damages when the defendant is in bad faith and the infringement is serious. Punitive damages is discretionary. The Guidelines specify factors to be considered in determination of “bad faith” (Article 1.15) and “serious” (Article 1.16) and formula for calculating the punitive damages (Articles 1.18-19), which will be a clearer guidance for a plaintiff to build up its damages claim..

Courts may find that the defendant is in bad faith if any of the following nine factors are established: 1) repeat infringement by a defendant or its legal representative/controlling shareholder after an effective judgment is rendered; 2) continuous infringement after receipt of warning letters or administrative decision; 3) trademark counterfeiting; 4) freeriding goodwill of or filing to register a plaintiff’s well-known trademark; 5) use of a plaintiff’s well-known trademarks on identical or similar goods; 6) prior relationship with a plaintiff (e.g. employment, agency, distribution, etc.) or prior communications that establish the defendant’s actual knowledge of the asserted intellectual property; 7) the defendant’s concealment of the infringement, or forgery or destruction of infringing evidence; 8) the defendant’s refusal to comply with a preliminary injunctive order; and 9) other relevant factors (Article 1.15).

Courts may find that the infringement is serious if plaintiff can establish any of the following circumstances: 1) defendant is a “professional” infringer; 2) infringement exists for a long period of time; 3) infringement extends to a broad scope of areas; 4) illegal profits are enormous; 5) concurrent violations that could be harmful to personal safety, environment or public interests and 6) other relevant circumstances (Article 1.16). 

The basis for calculating punitive damages is the plaintiff’s loss, the defendant’s illegal profits or a reasonable license fee, excluding the plaintiff’s enforcement costs (Article 1.18). Courts have discretion to determine the multiples within the statutory range (Article 1.19). 

In addition, plaintiff must raise its claim for punitive damages before the end of court debate of the first-instance proceeding (Article 1.14). Defendant’s request for deducting the amount of administrative or criminal fine already paid by the defendant from the punitive damages are generally not acceptable (Article 1.20). 

-- Recovery of Attorney Fees

Courts may support a plaintiff’s claim for recovering attorney fees charged on an hourly-basis, if the case involves complex issues or heavy workloads or requires high degree of professional skills. Courts may also support a claim for unpaid attorney fees that is supported by agreement and already incurred at the trial (Article 1.23). Courts will consider reasonableness and necessity of the enforcement costs and check evidence like agreement, invoices and relevant payment records (Article 1.22).

PRC courts have been notorious for the conservative attitude in granting recovery for attorney fess, which are criticized by brand owners as “high costs, low returns”. Beijing Courts have tried to resolve this issue in individual cases, and granted full recovery of attorney fees if all relevant records are submitted. The Guidelines formalizes these practices as an official guidelines and thus become a unified standard for Beijing Courts in determining amount of attorney fees to be recovered. This is indeed an improvement for a brand owner to recover its enforcement costs.

-- Rules of Evidence related to Defendant’s Illegal Profits

The Guidelines mirrors the evidence rules under Article 63.2 of the Trademark Law - a court may order the defendant to produce its books or financial records related to the infringement if the plaintiff has produced preliminary evidence, and grant an award of damages based on the plaintiff’s evidence if the defendant does not produce the evidence without justification - and formalizes that the rule applies to all types of disputes related to intellectual property and unfair competition (Articles 1.26 and 1.27). The Guidelines further states that such evidence submitted by the defendant in an appeal to overturn a judgment is inadmissible if the defendant refused to provide the evidence or provide forged evidence (Article 1.28). The Guidelines also allow courts to demand litigants and attorneys to sign undertaking for non-disclosure if the evidence includes trade secrets (Article 1.30).

-- Statutory Damages in Trademark Infringement Cases

In addition to the factors that have been widely used by courts - distinctiveness and degree of fame of the asserted trademark, price and profits of each party’s products, the defendant’s business model and bad faith, specific circumstances of the infringement, etc. (Article 7.1) , the Guidelines also formalizes some types of evidence that are normally considered in granting statutory damages - 1) the defendant’s claimed sales figure and profits; 2) sales figures shown on third party platforms; 3) data in research reports issued by neutral agencies; 4) comparable sale figures (e.g. competitors); 5) average price in the industry; and 6) other relevant evidence (Article 7.2). The amount of statutory damages against a manufacturer should not be lower than RMB 200,000 (Article 7.3). For sellers, it ranges from RMB 2,000 to 30,000, and it can be 1 to 5 times this amount when the evidence shoes its sales figure or influence is big (Article 7.6).
The Guidelines also specify ranges of statutory damages when the asserted trademark enjoys high degree of fame and/or the infringer is in bad faith. Specifically, if the asserted trademark enjoys relative high degree of fame, the court can grant the damages 1-5 times the standard amount (i.e. no less than RMB 200,000 against a manufacturer); if a well-known trademark is involved, it will be 5 to 10 times the standard amount (Article 7.8). The court also has discretion to grant 1 to 5 times the standard damages if the infringement has been existing for a long period of time, extends to a broader scope of area or the illegal profits are high (Article 7.9).

-- Statutory Damages in Unfair Competition Cases

The Guidelines lists the following factors that court may consider in calculating an amount of statutory damages: 1) impacts on the plaintiff’s loss caused by the unfair competition act; 2) losses of investment returns, transaction opportunities, competitive advantages, clients, market shares and impairments on the plaintiff’s reputation; 3) possible illegal profits or other interests that the defendant could obtain through the unfair competition; 4) industry and business model; and 5) other relevant factors (Article 8.2). As a general matter, the amount of statutory damages in a passing off case should not be lower than RMB 100,000 (Article 8.3). 

RECOMMENDATIONS

As mentioned at the beginning, the Guidelines only has binding force of three levels of courts in Beijing, but it formalizes or clarifies the existing practices among courts in the country and can be used as a reference to build your damages claims and organize the evidence. In other words, while courts might have different practices, the Guidelines at least cover considerations and factors that courts most likely consider in calculating damages. Our recommendations are as follows:
1. Muster the strongest evidence that can show losses, illegal profits and license fees to support a “discretionary damages” if none of them can directly and independently support a claim. It is still difficult to establish a solid damages claim based on plaintiff’s losses in a trademark or passing off case, as contribution between the loss and the infringement is always difficult to prove. License fee is rarely used as well. Showing illegal profits is a little easier, but in most of cases, a plaintiff cannot easily obtain the defendant’s financial records even with the court’s investigation order, evidence preservation or other measures. While this direct evidence is normally difficult to obtain, indirect evidence or information claimed by the defendant in public-accessible platforms are considered by courts seriously. Thus, it is always recommended to collect any evidence supporting the three methods of calculation align with the factors and rules under the Guidelines, no matter direct or indirect, and to choose “discretionary damages” (courts in different regions may have different names, such as “the doctrine of comprehensive compensation” in Shanghai IP Court) if your evidence can support an amount higher than the threshold of the statutory damages. Statutory damages are no longer your only choice when direct evidence is unavailable, and it is recommended to consider the discretionary damages first as the standard amount of statutory damages is relatively low. 

2. Claim for punitive damages if any preliminary evidence shows “bad faith” and “serious circumstances.” Punitive damages were introduced in the amendment to the Trademark Law in 2014, but it is rarely granted in the past 6 years. Punitive damages were granted in a case in which the defendant intimated the plaintiff, counterfeited the plaintiff’s trademark, and continued infringement after an administrative punishment decision was issued1. Such orders were also granted for cases that the defendants were very egregious2. Courts have yet to have a unified standard for applying and calculating damages, and the Guidelines are useful guidance for a plaintiff to produce evidence to show the two key elements. It is not very likely that courts granted statutory damages together with punitive damages, as the Guidelines does not treat it as a basis for calculating punitive damages and some commentary articles hold a view that punitive damages cannot coexist with statutory damages in one claim as its conditions and burden of proof are completely different3. 

3. Keep complete records with your attorneys to show that they actually worked for the case and you paid for the service. The three elements in Article 1.23 - complexity, workload and expertise - were first introduced in a patent infringement case decided by Beijing IP Court in 20164, where the plaintiff’s claim for attorney fees in the amount of RMB 1 million based on an hourly-basis was supported. To convince judges to grant such an order, full records of services are critical - legal service contracts or engagement letters showing representation for this particular case, invoices issued by the attorneys, and most importantly, payment records showing actual payment for the legal service. If your attorney charges you on an hourly basis, a translated working statement with all of the time entries is very helpful to assist the judge in evaluating the three elements under Article 1.23.

4. Support your claims for statutory damages with a reasonable explanation and evidence. It is always important to produce evidence to demonstrate the factors considered by court - the asserted rights, the infringement, the defendant’s fault, consequences and causation - when a plaintiff seeks recovery for statutory damages. The Guidelines specify the factors that have been widely used by courts across the country, and also provides a guide on the multipliers - “degree of fame” and “bad faith.”



Footnote:

1. (2017) Jing Min Zhong No. 413

2. (2015) Min San Zhong No. 7, (2017) Jing 73 Min Zhong No. 1991

3. https://www.chinacourt.org/article/detail/2020/05/id/5186031.shtml

4. (2015) Jing Zhi Min Chu Zi No. 441

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