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Dawning for punitive damage against patent infringement in China - Case story about a "nursing bottle" patent

18

APR

2019

Preface:

In order to implement President Xi Jinping’s important instructions on strengthening the protection of intellectual property rights and establishing a punitive damages system against patent infringement, China is intending to stipulate a punitive damages system for patent infringement in the 4th comprehensive Revision of the Patent Law. This is long-awaited by many scientific and technological innovation companies, and is also of great concern to IP practitioners. Here, the authors briefly introduce three infringement cases of a patent about nursing bottle, in which they represented the patentee, to indicate that introducing punitive damages system for patent infringement is actually general trend and also imperative, and discuss a few subtle issues that may need attention in future practice.

Story lines:

  1. In March 2013, on behalf of a European company (Patentee), the authors launched a lawsuit against a domestic infant products company (hereinafter referred to as "Company T") for infringing its patent right on nursing bottles in Beijing. In May 2013, Patentee and Company T reached a mediation agreement, and the Court of first instance issued a paper of civil mediation (hereinafter referred to as "the 1st paper of civil mediation"). Under the mediation agreement, Company T, in addition to compensating Patentee for RMB 50,000, undertook to recall infringing products remaining in the market and also undertook to compensate RMB 150,000, if after May 2013, Company T manufactured, sold and offered to sell the nursing bottles (including but not limited to the nursing bottles involved in this Case) infringing Patentee's patent right about nursing bottles.

  1. In the early 2014, the Patentee found that another type of infringing bottles was manufactured by Company T and sold by a retailer Q on website Taobao. For this reason, the authors again launched a lawsuit against Company T and Q in Beijing and requested the Court to award the Patentee RMB 150,000 compensation according to the 1st paper of civil mediation. However, the Court of first instance held that the evidence submitted by the Patentee (the bottle purchased from the retailer Q) was not sufficient to prove that the Company T manufactured and sold the alleged infringing products after May 2013, so only the Company T was ordered to pay compensation of RMB 100,000 by the Court of first instance. The Court of second instance furthermore held that the amount of compensation determined in the 1st paper of civil mediation was the result of consultations between the parties and could not certainly apply to the determination of the amount of compensation in the present Case. The first instance verdict was eventually upheld by the Court of second instance in June 2016.

  1. In November 2018, the Patentee launched a lawsuit against a houseware company (hereinafter referred to as "Company X") in Guangzhou and another infant products company (hereinafter referred to as "Company Y") associated with Company X for joint infringement of its bottle patent. In March 2019, Patentee reached a mediation agreement with Company X and Y. Accordingly, Guangzhou IP Court issued a paper of civil mediation (hereinafter referred to as "the 2nd paper of civil mediation"). According to the 2nd paper of civil mediation, Companies X and Y compensated the Patentee for economic losses of RMB 100,000 and undertook not to infringe again, and if they violated the commitments in the future, they will voluntarily bear damages for breach of contract of RMB 250,000. In the 2nd paper of civil mediation, the Court also explicitly confirmed that the above mediation agreement is enforceable.

Additional Information: In the above mentioned three Cases of patent infringement, due to well-known difficulties of obtaining evidence for patent infringement, the plaintiff was unable to obtain valid evidence on the specific sale amount and/or production scale of the infringing bottles, and therefore could not determine the actual loss of the patentee and the beneficial gain of the infringer. In addition, there is no royalty available for reference to determine the amount of compensation reasonably.

Analysis and Comments to the Punitive Damage issues in above Cases:

In accordance with the draft of the Patent Law Amendment, it is proposed that for the first time: for intentional infringement of patent rights, the compensation or damage can be awarded more than one time but no more than five times of the determined amount of damage. In addition, it is also intended to raise the lower limit of statutory damage from RMB 10,000 to RMB 100,000, while the ceiling of statutory damage will be increased from RMB 1 million to RMB 5 million.

In our view, the significant raise of lower limit of statutory damage as such also forms a part of the punitive damages system, for under some circumstances, RMB 100,000 may likely exceed the sum of the cost of patent enforcement and the actual loss of the patentee, thus show its more punitive nature.

The above intended amendments indicate that China is about to apply the punitive damages system to patent infringement, as the current compensatory damages system in China has obvious shortcoming, namely low compensation, which makes the protection of patent rights weak and inadequate. In order to deal with such an unfavorable situation, around three years ago, in Shenzhen, a pioneer city of China’s reform and opening-up, where there are a large number of technological innovation companies, local governments and courts tried to make a breakthrough in the punitive damage mechanism against malicious infringement of intellectual property rights. But up to now, there is no widely effective nationwide "public relief" concerning punitive damages, i.e. the punitive damage system established by legislation.

Therefore, in practice, many patentees have already begun to try "private remedy" to obtain punitive damages, e.g. by introducing the prima facie "liquidated damages clauses", but de facto "penalty clauses" into the mediation agreements signed with Infringers, so as to ensure true cease and desist of infringement and avoid repetitive infringement by the same infringers. For example, in the 1st infringement case I as mentioned above, although the amount of compensation in the mediation agreement is only RMB 50,000, but the promissory compensation for breaching the agreement does triple. Given that such a high compensation could be obtained by simply proving the concerning party’s breach of contract, without need to provide any evidence of the scale of the infringement (i.e. evidence for quantifying the damages), and that the lower limit of statutory damages stipulated in the current Patent Law is only RMB 10,000, the prima facie "liquidated damages clauses" about compensation of RMB 150,000 in the 1st paper of civil mediation is obviously punitive ("penalty clause").

However, penalty clauses are usually not considered enforceable. According to Article 114 of the current Contract Law, if the agreed "liquidated damage" is excessively higher than the actual loss caused, the parties may request the Court to reduce it appropriately. According to the judicial interpretation of the Supreme Court on the Contract Law in 2009 (II), if the liquidated damage exceed 30% of the losses caused, it can generally be considered as "excessively higher than the losses caused". Thus, the nature of "liquidated damage" according to civil law in China is still "compensation-oriented" and "supplemented by punishment". The punishment effect of "real" liquidated damage is quite limited.

Therefore, although the 1st paper of civil mediation issued in Case I confirms that the said mediation agreement conforms to the relevant legal provisions, however in Case II, the Patentee’ request to invoke the 1st paper of civil mediation of Case I was eventually not accepted by the first and the second instance Courts. And the amount of damage (RMB 10K) awarded by Courts was lower than the "promissory compensation for breach of contract" (RMB 15K), for Courts very likely deemed that the "promissory compensation for breach of contract" in the 1st paper of civil mediation overly exceeds the actual loss of Patentee and thus seems unconscionable, in other words, the Courts actually decides the true nature of "promissory compensation for breach of contract" or the prima facie "liquidated damage" in the 1st paper of civil mediation as penalty, and penalty clauses in China are generally unenforceable.

In contrast, in the 2nd paper of civil mediation issued in Case III, besides confirming that the relevant mediation agreement conforms to the relevant legal provisions, the Court further clearly confirms that the relevant mediation agreement (including the provisions of damages for breach of contract in the amount of RMB 250,000) is enforceable. Needless to say, this change highly complies with the general trend that China intends to further strengthen the protection of scientific and technological innovations by introducing punitive damages system.

Consideration and Tips for future practice:

First, there is a legal issue here, whether the repetitive infringement breaching the mediation agreement should be considered as intentional or willful infringement?

In our opinion, repetitive infringement itself implies intention to a certain extent, not to mention meanwhile breach of mediation agreement, it is hardly to say that it is due to the failure to exercise due diligence and caution. Moreover, even if the punitive damages system for intentional infringement of patent rights is successfully established in the future, it will be difficult to prove "by intention or willfulness" too. Therefore, if the Patentee can sign a mediation agreement including punitive damages clauses with the infringer, such a "private relief" is still very favorable for Patentee and thus highly recommended.

Nevertheless, in view of the potential risks that may arise as above mentioned, the mere use of the words "liquidated damages (违约金)" is neither decisive nor enforceable, for it is the task of the Court and not of the parties to decide the true nature of the sum payable, in particular according to the explicit criterion ("exceeding 30% of the actual losses"), and so far we are not sure about whether for the purpose of being compatible with the promising draft of the Patent Law Amendment, the current relevant legal provisions of Contract Law would be amended or further Judicial Interpretation would be issued, the parties in the mediation agreement reached in the Case III did not use the words "liquidated damage(违约金)" as usual, but used a new term "damage for breach of contract (违约赔偿金)" instead.

This may also be a safe and thus recommended tip for future practice. Of course, other alternative, literally different words than "liquidated damages (违约金)" are also considerable, e.g. "promissory damages for defaulting (约定赔偿金)", and maybe even "punitive damages (惩罚性赔偿金)" can be used in the future, that is, after finally successful establishment of the punitive damage system for IP infringement in China.

According to the draft of the Patent Law Amendment, for intentional infringement of patent rights, the amount of determined damages, which are determined on the basis of actual loss of the Patentee or the beneficial gain of the Infringer or reasonable multiple of royalty for reference, could be eventually increased at most by quintupling and awarded to Patentee. Although the determined damage may happen to be the same amount of lower limit of statutory damage according to current Patent Law, namely RMB 10,000, but should have never been lower than it.

Hence, once the lower limit for statutory damage is significantly lifted from RMB 10,000 to RMB 100,000 according to the promising draft for the Patent Law Amendment, the general punitive damage may be additionally augmented accordingly. That means, in the mediation agreement to be reached with the Infringer, the Patentee may also set the amount of punitive damages to 5 times of lower limit for statutory damage of RMB 100,000, i.e. RMB 500,000. We may anticipate that for future practice, the agreed punitive damages of less than RMB 500,000 would unlikely be regarded by Courts as "excessively high" and thus as grossly unfair and unconscionable .

About the Firm

Liu Shen & Associates
Address 10/F, Building 1, 10 Caihefang Road, Haidian District, Beijing 100080, China.
Tel 86-10-6268 1616
Fax 86-10-6268 1818
Email mail@liu-shen.com
Link www.liu-shen.com

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