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How to Calculate Damages in Case Patent Infringer Refuses to Provide Account Books

22

JUN

2020

In April 2020, the Supreme People's Court (“SPC”) issued “Trial Gist of SPC IP Court (2019)”, in which 36 typical cases are selected from all technology-related IP cases concluded by SPC IP Court in 2019. Forty trial rules are applied in those cases. One of the cases is Shenzhen Dunjun Technology Co., Ltd. (hereinafter referred to as “Dunjun company”) v. Shenzhen Jixiang Tengda Technology Co., Ltd. (hereinafter referred to as “Tengda company”) for patent infringement (case no. of second instance: (2019)ZGFZMZ 147; hereinafter referred to as “this case”). Two trial rules from this case are worthy of attention. One is about “judgment of infringement of method patent implemented by multiple entities”, and the other is about “the calculation of damages in case where accused infringer refuses to provide the infringement-related account books without justifiable reasons”, which means: the patentee claiming for damages based on the infringement profit has fulfilled the burden of preliminary proof for the infringement scale facts, while the accused infringer refuses to provide corresponding evidence related to the basic facts of infringement scale without justifiable reasons, and it results in that the basic facts for calculating the infringement profit cannot be accurately determined. In such case, the defendant’s views such as “the contribution degree of the patent involved in the case to the infringement profit should be considered” would not be accepted by the court.

Conventional calculation of damages

According to Article 65 of the patent law, there are three ways to determine the damages of patent infringement: 1) Plaintiff’s lost profit; 2) Defendant’s profit; and 3) Reasonable multiple of royalty. If none of the above applies, statutory compensation shall be adopted. Among the above ways, calculating damages based on Defendant’s profit is the most popular one. Its corresponding calculation formula is as follows:

Defendant’s profit = Revenue of sales × Profit rate × Contribution degree

Among the three factors in the formula, the first two are known financial terms (Revenue of sales = sales volume × unit price, Profit rate = operating profit / whole business revenue), whereas the contribution degree is not a financial term. It is broadly stipulated by one of Judicial Interpretations issued by SPC, that is, “If the infringing product is a part of another product, the damage shall be determined in a reasonable way based on the value of the part itself and its role in realizing the profit of the finished product, etc.”. In Chinese legal practices, the calculation method of the contribution degree has not yet been unified. So, in addition to the proportion of the part cost in the overall product cost, the court would usually take into account other factors such as brand influence, trademarks, advertising investment, and all patents implemented in the infringing product (“apportionment”), so as to comprehensively evaluate the contribution degree of patent technology to a product’s total profits. A technical appraisal report for this purpose of evaluation may be helpful or necessary.

To a certain extent, “Profit rate” × “Contribution degree” can be regarded as a reasonable royalty rate. For example, the analytical approach in USA calculates the reasonable royalty rate = the projected profit rate for infringement - the industry profit rate.

Infringer's obstruction of proof simplifies calculation of damages

In this case, despite the court order of submitting account books involving the infringing products upon the plaintiff's request, the infringer refused to provide them all the time. Consequently, the infringer was ordered by the court to bear the heavier burden of proof obstruction.

As for the burden of proof obstruction, there are some rules of principle in previous judicial interpretation. The Article 27 of the Interpretation of the Supreme People's Court on Several Issues concerning the Application of Law in the Trial of Patent Infringement Dispute Cases (II), which came into force on April 1, 2016, stipulates that where the infringer refuses to provide such account books and materials without justifiable reasons, or submits false account books and materials, the people's court may determine the gains obtained by the infringer from the infringement based on the claims and the evidences presented by the right holder. However, how to specifically determine the burden of proof obstruction is still greatly at the discretion of the trial court(“Judge’s discretion”).

In this case, the defendant, Tengda company, put forward several defense arguments, such as: the cumulative number of comments on the e-commerce platform is not equal to the sales volume; the industrial profit rate 30% claimed by Dunjun company is obviously too high; the contribution degree of the patent technology should be considered when determining the compensation amount. These defensive arguments are directly targeted at the three factors in the above formula, i.e. “Revenue of sales”, “Profit rate” and “Contribution degree”. Objectively speaking, the defendant's arguments are reasonable to a certain extent, but because of ignoring court order of submitting the financial account books, they were ultimately not accepted by Court. Hence, this case sets a clear rule that accused infringer shall conduct substantive defense based on necessary supportive evidences.

There seems to be such a logic hidden behind the court judgement: if the amount of compensation claimed by the right holder is higher than the actual profit of the infringer, the infringer usually would like to provide account books and materials, and to the contrary, if the infringer has been refusing to submit any account books or related information, especially ignoring the court order of submission thereof, it means that the amount of compensation claimed by the right holder has not yet exceeded the actual profit of the infringement, although the profit rate and contribution degree of patent technology claimed by the right holder may be exaggerated or unreasonable.

In this case, because Tengda company always refuses to provide account books and related information, especially related to the basic facts about the scale of infringement, it is impossible to determine its operating profit rate, which results in that the (possibly exaggerated) industrial profit rate (30%) provided by Dunjun company is eventually accepted by court, the defense of “contribution degree of patent technology” of Tengda company is eventually rejected by court on the ground that “the consideration of contribution degree lacks support of basic facts about infringement scale”. This leads to the decision that the “contribution degree of patent technology” in this case is 100% and the reasonable patent royalty rate is 30% (30% × 100% = 30%). This is apparently much higher than the known average patent royalty rate (generally less than 10%). Nevertheless, it should be pointed out here that, whether the consideration of contribution degree of patent technology must be based on the basic facts of infringement scale, may be worth discussing.

Tips for Patentee

- First of all, preliminary evidence on sales data of products involved in the case should be provided. The sales data can come from online e-commerce platform or offline, or even third-party statistics. In addition, the following can also be reasonably deduced, e.g., inferring national sales volume from local sales volume, inferring annual sales volume from monthly sales volume, etc.;

- Secondly, try best to evidence the profit rate of the accused infringer for infringement. The profit rate can come from the annual report of the company concerned or other public statements that can reflect the business status. If none of them are available, the public statements of other listed enterprises in the industry or the financial data of the Patentee itself can also be referred to in order to obtain the reference profit rate.

Tips for Infringer

- During the process of litigation, please avoid trying to defend only by refuting the logic or unreasonable presumption of the plaintiff, but rather raise substantive defenses, that is, present necessary counter evidences, such as account books, evidence about contribution degree, etc., to challenge the objectiveness and accuracy of the evidences provided by the patentee;

- The infringer should actively cooperate with the court to avoid being held accountable for obstruction of proof, in cases that court would very likely find that the infringement was established and cases that the court ordered the defendant to provide account books and materials. But infringer may first cooperatively request the court to specify the time span, scope and specific form of account books, and process the account books in a confidential way.

Conclusion

Although the process of discovery in the U.S. Patent Litigation does not exist in China, the Supreme People’s Court uses this exemplar case and its underlying rules to send a clear signal to the future infringers that during the process of litigation, the infringer should actively cooperate with the court to fulfill the basic burden of proof, otherwise the infringer will face nearly punitive adverse consequences.

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