Leading IP Infringement Case on Punitive Damages

China’s top court has ruled in favour of a US based manufacturer of sports equipment and ordered punitive damages of RMB 3 million. This judgement is evidence of China’s commitment to fight against intellectual property crimes and create an environment hospitable to international business.

Background of the Case
A U.S. based manufacturer of sports equipment (“Plaintiff”) filed a lawsuit to Shanghai Pudong District People’s Court (“the Court”), against a Chinese manufacturer (‘”Defendant”) over its IP infringement as Defendant sold and promoted a model of fitness equipment that infringed on Plaintiff ’s registered trademarks and patents. The Plaintiff claimed RMB 3 million as damages for trademark infringement including its economic losses and legal fees.

In September 2019, the Court rendered a judgement holding that use of same mark on the same commodity as that of Plaintiff constituted trademark infringement and awarded full damages to Defendant, that is, RMB 3 million, which was assessed based on 3 times of illegal gains obtained by Defendant.

The case was notable in that it is the first time that a Shanghai court has ordered punitive damages in IP infringement cases. This judgement is evidence of China’s commitment to fight against intellectual property crimes and create an environment hospitable to international business.

Punitive damages in China
China introduced punitive damages into Trademark Law in 2013, by providing Article 63: “for malicious infringement of exclusive rights to use trademarks, in serious cases, the compensation amount shall be determined in accordance with the aforesaid method based on one to three times of the determined amount.” This provision aims at reversing the previous situation of "high cost of rights protection and low cost of infringement" and effectively reducing the occurrence of infringement.

However, punitive damage has not been introduced into other areas until 2019. In 2019, China took two approaches regarding punitive damages: 1) Article 63 of Trademark Law was amended the compensation range from “one to three times” to “one to five times”; 2) Punitive damages provision went into Article 17 of Law Against Unfair Competition: “for business operators who infringe upon commercial secrets maliciously and if the case is serious, the compensation amount may be determined in accordance with one to five times the amount determined using the aforesaid method”. In the current draft amendment of Patent Law, the provision of punitive damages is also incorporated.

Observation
In the current practice in China, there are still limited IP cases that directly invoke the provisions regarding punitive damages and are awarded high compensation against the infringers. The main reason is that the two conditions in punitive damages are difficult to be determined, namely the malicious intention of the infringer and the serious circumstances of the infringement.

The Court awarded punitive damages in this case as it deemed the above two conditions have been satisfied. According to the Court’s findings, the Plaintiff, at the first time of discovery of the Defendant’s acts of infringement, had issued a cease & desist letter to warn the Defendant. After that, the Defendant had further entered into a settlement agreement with the Plaintiff under which the Defendant promised to stop any ongoing and future infringement. However, shortly after that, the Defendant was found to counterfeit the Plaintiff's products and trademarks which are sold various online and offline channels. There even exist quality issues with the counterfeited products. The court therefore opined that both the “malicious intention of the infringer” and the “serious circumstances of the infringement” giving rise to the punitive damages have been established in this case.   

Besides, as the law provides that the punitive damages can be ordered by the Court based on 3 times of illegal gains obtained by the Defendant; the Court had ordered the Defendant to provide relevant sales records, financial books and original receipts to ascertain the illegal gains of the Defendant. However, since the Defendant rejected to fulfil such court order, the Court thus determined the illegal gains of the Defendant based on the sales record published in its advertisement on social media, which come to an amount ranging from RMB 1,017,000 to RMB 1,395,000.  

The Court findings of this case shall serve as a clearer guidance with respect to the awarding of punitive damages under trademark infringement. It can be revealed from this case that facts and evidence of a trademark infringement showing the infringer’s continuous infringement after warning, expanded sales channels of the counterfeits in the market, the quality issues with the counterfeits may give rise to the possibility of requesting for punitive damages imposed on infringer.