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Five Times! The SPC of China Punched on Intentional Infringement and Issued The First Punitive Damages in an IP Infringement Case

11

MAY

2021

On March 3, 2021, the Supreme People's Court of China (the SPC) issued the Interpretation of the Supreme People's Court on the Application of Punitive Damages to the Trial of Civil Cases of Infringement of Intellectual Property Rights (the Judicial Interpretation of Punitive Damages). The Judicial Interpretation of Punitive Damages has made specific provisions on the conditions of application of punitive damages to IP infringement cases, including, inter alia, the intent, the severity of circumstances, as well as the calculation base and multiple. On March 15, 2021, the SPC issued six typical IP cases issuing punitive damages, among which the Tinci case is a well exemplification of the Judicial Interpretation of Punitive Damages.

Guangzhou Tinci Materials Technology Co., Ltd. (Guangzhou Tinci) and Jiujiang Tinci Materials Technology Co., Ltd. (Jiujiang Tinci) sued Anhui Newman Fine Chemicals Co., Ltd. (Anhui Newman), individuals Hua, Liu, Hu, Zhu and Peng etc. for infringing on the technical secrets regarding Carbomer products. The SPC heard the appeal as the second instance. According to Article 17 paragraph 3 of the Anti-Unfair Competition Law of China, and upon finding the infringers were intentional and the circumstances were extremely serious, the SPC, for the first time, issued five times upper-limit punitive damages of RMB 30 million.

Brief of the case

Guangzhou Tinci developed Carbomer products. Individual Hua worked in Guangzhou Tinci and signed employment contract and commercial confidentiality and non-competition agreement with Guangzhou Tinci in December 2007. Hua left Guangzhou Tinci in December 2013. From 2012 to 2013, Hua illegally obtained the production process data of Carbomer and sent them to Liu and others of Anhui Newman. Anhui Newman made use of Tinci's technology of Carbomer products and sold them at home and abroad.

The two Tinci companies filed a lawsuit to Guangzhou IP Court in October 2017, claiming that, 1) Hua, Liu, Anhui Newman and others jointly infringe on the technical secrets of Carbomer which has caused huge losses to Tinci companies; 2) the defendants shall immediately stop the infringement; 3) the defendants shall pay damages of RMB 70 million.

The Guangzhou IP Court obtained the export data involving Carbomer products of Anhui Newman from August 2016 to January 2019 according to the application of the Tinci companies. The Guangzhou IP Court ordered Anhui Newman to provide the profit data involving Carbomer products from 2014 to the date of trial, and to attach the corresponding financial records and original documents. But Anhui Newman refused to provide the required documents by excuse.

On July 19, 2019, Guangzhou IP Court made its judgment: 1) Anhui Newman, Hua, Liu, Hu and Zhu etc. immediately stop infringement on the technical secrets involved in the case and destroy the relevant data; 2) Anhui Newman pay the Tinci companies RMB 30 million upon applying 2.5 times punitive damages and reasonable expenses of RMB 400,000 within 10 days from the effective date of the judgment, and Hua, Liu, Hu and Zhu should bear joint liability within the scope of RMB 5 million, RMB 5 million, RMB 1 million and RMB 1 million respectively. The Court rejected other claims of the Tinci companies.

Both sides appealed to the SPC. On November 24, 2020, the IP Tribunal of the SPC made the final judgment: 1) maintaining the first and third decisions of the first-instance judgment; 2) Anhui Newman pay the Tinci companies RMB 30 million and reasonable expenses of RMB 400,000 within 10 days from the effective date of the judgment, and Hua, Liu, Hu and Zhu should bear joint liability within the scope of RMB 5 million, RMB 30 million, RMB 1 million and RMB 1 million respectively; 3) rejecting all appeals of Hua, Liu and Anhui Newman.

Factors considered

  1. The subjective element of punitive damages: intentional

The SPC articulated that, punitive damages shall only be applied to intentional infringement as a heavier punishment on the accused infringer. Here the intentional equals to malicious. The subjective intent is a kind of psychological state and should be assessed through the behavior. An intentional infringer pursues the interests that should be enjoyed by the plaintiff. Even knowing that his behavior infringes the plaintiff's right, the infringer still pursues and allows the damages to occur.

In the Judicial Interpretation of Punitive Damages, some typical situations that could serve as indicators of intentional are listed:

  • (1) The defendant continues to commit the infringing acts after being notified or warned by the plaintiff or the interested party;
  • (2) The defendant or legal representative or manager thereof was the legal representative, manager or actual controller of the plaintiff or interested party;
  • (3) The defendant and the plaintiff or the interested parties have relationships in terms of labor, service, cooperation, licensing, distribution, agency, representative etc., and have accessed to the infringed IP rights;
  • (4) The defendant has business with the plaintiff or interested parties or has negotiated for reaching a contract, etc., and has accessed to the infringed IP rights;
  • (5) The defendant committed acts of pirating, or counterfeiting registered trademarks;
  • (6) Other circumstances that can be determined as intent.

In this case, from the actual behavior of the infringers, they carried out the infringement in the informed situation. Hua was a researcher in Guangzhou Tinci, he violated the confidentiality obligations and requirements, and disclosed the technical secrets to Anhui Newman, Liu, Zhu and the others, who knew the disclosure was illegal but still used the technical secrets in their products. Therefore, the infringers were fully aware of their infringement on the technical secrets and still implemented them, which obviously are intentional.

  1. The objective element of punitive damages: serious circumstance

The severity of the infringing circumstances is also a major factor to be included. The Judicial Interpretation of Punitive Damages provides that where the defendant engages in one or more of the following acts, the people's court may determine that the circumstances are serious:

(1) After being punished in an administrative penalty or a court decision for infringement, committing the same or similar infringement again;

(2) Committing the infringement of IP rights as its primary business;

(3) Forging, destroying or concealing evidence of infringement;

(4) Refusal to perform the preservation ruling;

(5) Infringement gains or the right holder's losses being huge;

(6) Infringements likely to endanger national security, public interests or personal health;

(7) Others.

In this case, considering that the defendants committed the infringement as their whole business; the technical secrets played a key role in the process of the products; the infringement caused great losses to the plaintiff; the infringers had a huge production scale and gained high profits; the infringers didn't stop the infringement for a long time during the trial and even after the court's first-instance judgment; the infringers refused to provide the evidence required by the court, the court decided that the infringement was extremely serious.

  1. The basis for computing punitive damages

According to article 17, paragraph 3 of the Anti-Unfair Competition Law of China,

The compensation for a business operator who suffer damages due to unfair competition shall be determined in accordance with the actual losses suffered as a result of the infringement; where it is hard to ascertain the actual losses, the compensation shall be determined in accordance with the gains made by the infringer from the infringement. 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.

The Judicial Interpretation of Punitive Damages also provides that,

When determining the amount of punitive damages, the people's court shall use the actual loss suffered by the plaintiff, the amount of the defendant's illegal gains, or the profits obtained due to infringement as the basis for compute in accordance with relevant laws.

Here is a point worth attention that when deciding the basis for computing punitive damages, all the major factors in the production should be considered. In the first instance, when determining the basis and profits of infringement, the Guangzhou IP court did not take into consideration the role of the technical secrets involved and the role of other production factors in the whole process of Carbomer. In the second instance, the IP Tribunal of the SPC found that the technical secrets of this case included two parts: the process part and the formula part, which equally contributed to the commercial profits. The defendant's formula was not found to constitute infringement. Therefore, the basis for computing punitive damage was 50% of that in the first instance.

In this case, as analyzed above from the subjective and objective elements, the infringers were in the extremely serious circumstance, such as direct intent, committing infringement as whole business, large-scale infringement, long duration, huge profits, burden of proof and so on. So the IP Tribunal of the SPC issued five times, the upper-limit punitive damages, and ruled that Anhui Newman compensate RMB 30 million for the losses of Guangzhou Tinci and Jiujiang Tinci, and RMB 400,000 for reasonable expenses, and that Hua, Liu, Hu and Zhu bear joint and several liabilities within the ranges of RMB 5 million, RMB 30 million, RMB 1 million and RMB 1 million, respectively for the aforementioned compensation amount.

Case significance

This case is the first case of issuing punitive damages in an IP infringement case by the SPC of China. The five times of punitive damages remarks that China is going forward to strengthen the judicial protection of trade secrets.

In an infringement case, both subjective and objective elements will be jointly considered. The multiple of punitive damages has a corresponding relationship with the severity of the circumstances. The determination of the amount of compensation will adhere to the principle of moderation and proportion. When applying punitive damages, the role of each infringer in the infringement will be reasonably defined to determine the joint responsibility.

The punitive damages have the function of punishment, deterrence, prevention and compensation of infringement. It plays an obvious and practical role in combating intentional infringement, effectively protecting the competition based on IP rights and maintaining the order of market.

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