China’s Supreme Court Issues Rules on Punitive Damages in IP Cases

On 3 March 2021, China’s Supreme People’s Court (“SPC”) issued the Interpretation of the Supreme People’s Court on the Application of Punitive Damages in the Trial of Civil Cases of Infringement of Intellectual Property Rights (“Judicial Interpretation”), effective as of the same day. Although comprised of only seven articles, the Judicial Interpretation further develops the system of punitive damages first heralded – in China’s intellectual property (“IP”) framework – less than eight years ago and not confirmed to apply to the entire IP framework until China’s Civil Code, which came into effect just two months ago. The addition and development of the framework for punitive damages responds, inter alia, to longstanding complaints by IP rights-holders that infringers have not been subject to sufficient liability and therefore deterrence. This Newsletter summarizes the Judicial Interpretation and suggests some of the significance it and its further development of the punitive damages framework may have on businesses vying over IP rights.

Basic Preconditions for Punitive Damages

The Judicial Interpretation confirms the two basic substantive preconditions for a court to order punitive damages: (1) the defendant “intentionally” infringed IP rights and (2) the “circumstances were serious”. While the latter has been consistently codified, from the 2013 revision of the Trademark Law through the revisions of the Anti-Unfair Competition Law, Patent Law, and Copyright Law and into the Civil Code, the former precondition has in some legislation been expressed as “malicious”. The Judicial Interpretation can be taken as the definitive formulation of the first precondition, especially as the Judicial Interpretation further sets out important examples of circumstances from which intentionality “may” (and therefore likely will) be judicially deduced; it also sets out circumstances that a court may determine to be “serious”.

Presumption of Intentional Infringement

In addition to the typical provision requiring a court to comprehensively consider various factors (e.g., the type of IP rights infringed and the popularity of the related products), the Judicial Interpretation specifies five sets of facts from which a court “may”, provided they are proven by the plaintiff, make a “preliminary determination” that an infringement was intentional – and therefore find one of the two substantive preconditions for punitive damages. The sets of facts are as follows (supplemented by the catch-all, typical in PRC rules, “other circumstances that can be determined as intention”):

1. The defendant continued to commit the infringing act after being notified or warned by the plaintiff or an interested party. 
2. The defendant or its legal representative or manager was the legal representative, manager, or actual controller of the plaintiff or interested party. 
3. The defendant and the plaintiff or interested parties have had a labor, service, cooperation, licensing, distribution, agency, representative, or other such relationship, and the defendant had contact with the infringed intellectual property rights. 
4. The defendant and the plaintiff or interested parties have had business dealings or negotiated for the conclusion of contracts, etc., and the defendant had contact with the infringed intellectual property rights.
5. The defendant committed acts of piracy or counterfeiting of registered trademarks.

Conduct such as the above has long been used as evidence supporting an argument or finding of intentional (or “malicious”) infringement, but the Judicial Interpretation suggests that proving any one of the above is now by itself sufficient, absent counterpoints raised by a defendant, for the court to determine an infringement was intentional. The counterpoints a defendant can raise, once a preliminary determination has been made (i.e., if the plaintiff has successful proven one of the sets of facts above, over any counterargument and evidence adduced by the defendant to show that the set of facts is not proven), are likely to include the already commonly used counterpoints, e.g., showing that, after the plaintiff sent the defendant a warning about IP infringement, the defendant obtained a reliable report, issued by an IP lawyer or other suitable professional, analyzing the alleged infringement and determining that the defendant’s product did not infringe the plaintiff’s.

Examples of Serious Circumstances

The Judicial Interpretation also specifies six circumstances (plus a catch-all) that a court “may” determine to be serious – thus satisfying the second substantive precondition for punitive damages: 

1. After being punished by an administrative penalty or a court decision for infringement, the defendant committed the same or similar infringement again.
2. The defendant was committing infringement of intellectual property rights as a business. 
3. The defendant forged, destroyed, or concealed evidence of infringement. 
4. The defendant refused to abide by a (evidence) preservation order.
5. The defendant obtained huge gains from the infringement (or caused huge losses to the plaintiff). 
6. The infringement endangered national security, public interests, or personal health.

Unlike the circumstances relating to a preliminary determination of intentionality, the Judicial Interpretation suggests that if the plaintiff proves any one of the above, a court may determine the circumstances of infringement to have been serious regardless of any counterpoints the defendant raises. Of course, as the rule – for both intentionality and seriousness – use the phrase “a court may” (rather than “a court shall”), courts still have some discretion to not make a determination of seriousness even if plaintiffs prove the above.

Further Conditions for Punitive Damages

The Judicial Interpretation clarifies the framework for the punitive damages themselves. As an initial matter, one article of the Judicial Interpretation indicates that a request for punitive damages should be made when the plaintiff files the suit, although another article indicates a court should allow a request to be made later, any time up to the end of the first-instance court hearing. In any case, the request must include not only a general request but rather the amount requested, an elaboration of the method for calculating the amount, and facts and reasons justifying punitive damages. However, the Judicial Interpretation sets out principles for calculating the amount.

First, a “base figure” is to be determined, usually equivalent to the plaintiff’s losses or the defendant’s gains from the infringement, but if both are difficult to ascertain, the base figure can be determined with reference to licensing fees for the infringed IP rights. An important clarification from the Judicial Interpretation is that the base figure cannot include the plaintiff’s expenses in attempting to put an end to the infringement, unless a particular law expressly provides for the inclusion of such expenses (as the Copyright Law does). In addition, the Judicial Interpretation reiterates other recent rules in providing that if a defendant does not cooperate with the court's request to provide the account books and information related to the infringement, the court can accept the plaintiff’s claims and evidence for the underlying amounts (e.g., the defendant’s gains) in calculating the base figure.

Second, a “multiple” is to be determined, i.e., punitive damages will equal the base figure multiplied by one, two, three, etc. The Judicial Interpretation does not add much concerning the multiple: the court shall determine it based on a comprehensive consideration of factors such as the degree of the defendant’s subjective fault and the severity of the infringement. 

Takeaways

China is reinforcing its IP protection regime more and more. The very existence of punitive damages in the IP area, first for trademark infringement from 2013 and then for all the other types from 2019/2020, is itself significant since the country provides for punitive damages in almost no other area of law.[1]

Beyond that, the consistent efforts of both legislators and courts to revise and refine the rules for the application of punitive damages is also significant not only as a general matter but specifically in how effectively they respond to needs in practice. For example, it was just a few months ago when the SPC issued a ruling on a case where the meaning of “malicious” was in controversy – the Judicial Interpretation tracks and confirms the SPC’s view in that case, i.e., “intentionality” is the (lower) threshold.

More than just tracking issues in the application of punitive damages themselves, the Judicial Interpretation illustrates how China’s amendments and new rules concerning punitive damages dovetail with particular weaknesses identified over the years in the larger IP legal framework. For example, other than “low amount of damages”, a common complaint about IP protection in China concerns the “difficulty of proof”: defendants all too often refuse to produce materials requested by plaintiffs or even courts, not infrequently destroying evidence even when under a “preservation order”. The Judicial Interpretation’s inclusion of “forging, destroying, or concealing evidence of infringement” and “refusing to abide by a (evidence) preservation order” as circumstances courts can determine to be serious – and thus, provided infringement was also “intentional”, subject to punitive damages – clearly aims to mitigate the “difficulty of proof” problem in IP infringement litigation. 

Finally, court practices have gone hand-in-hand with the advance of the written rules. Not only are new courts, or departments within courts, being developed to specialize in IP cases but the handling of cases is indeed growing in sophistication and significance. In fact, the Judicial Interpretation comes on the heels of the Chinese court case with “the highest damages for trade secret infringement in history”, whose judgment was released on 26 February 2021 and which suggested that the RMB 159 million award to the plaintiff might have been even higher – but, based the timing of the case, punitive damages were not yet expressly permitted for trade secret infringement. On the same day, the SPC also released its own first judgment involving punitive damages, applying a multiple of 2.5 times and thus yielding an award of RMB 30 million. The message is clear: with the framework for punitive damages now fleshed out, IP infringers must beware of liability amounting to many times their profits and ultimately in the multiple hundreds of millions of renminbi (tens of millions of U.S. dollars).

[1] The other notable areas in which punitive damages are provided for include consumer protection, food safety, and drug administration.