Interpretation of New Regulations | The key issues in application of punitive damages for intellectual property infringement—An analysis of the Guidelines on the Application of Punitive Damages in the Trial of Intellectual Property Infringement Civil Cases issued by Beijing High People’s Court

Xiaobo He and Chengyuan Zou

Article 63 of the Trademark Law of the People’s Republic of China amended on August 30, 2013 is the earliest rule on punitive damages. The Anti-Unfair Competition Law amended in 2019 added clauses related to punitive damages. Article 1185 of the Civil Code of the People’s Republic of China released in 2020 established the fundamental clauses about punitive damages for IPR infringement. Afterwards, the Patent Law and the Copyright Law made corresponding changes based on such fundamental clauses and added the clauses about punitive damages. The establishment of a punitive damages system for intellectual property infringement is helpful to punish severe IPR infringement in accordance with the law, enhance IPR judicial protection and fully exert the deterrent effect of the punitive damages system. 

On March 2, 2021, the Supreme People’s Court released the Interpretation on the Application of Punitive Damages in the Trial of Intellectual Property Infringement Civil Cases (hereinafter the “Interpretation”), unifying the standards for applying punitive damages. On April 25, 2022, the Beijing High People’s Court released the Guidelines on the Application of Punitive Damages in the Trial of Intellectual Property Infringement Civil Cases (hereinafter the “Guidelines”), further enhancing the effective implementation of IPR punitive damages and curbing severe IPR infringement. This article will briefly analyze some key issues and changes of the application of punitive damages in IPR-related cases in the context of the Guidelines.

I. Constitutive Elements

To apply punitive damages in IPR infringement civil cases, two statutory constitutive elements, i.e. “intention” and “severe circumstances”, shall be satisfied.

“Intention” includes “bad faith”, which can be understood as the same meaning. According to the Interpretation, to determine whether an intellectual property infringement is intentional, the people's court shall fully consider the objective type of the infringed intellectual property right, the status of the intellectual property right, the popularity of relevant products, the relation between the defendant and the plaintiff, or the relation between the defendant or any other interested party, as well as other factors. The Interpretation also lists the following circumstances under which an intellectual property infringement shall be deemed intentional: (1) The defendant still commits the act of intellectual property infringement after it is notified or warned by the plaintiff or any other interested party; (2) The defendant or its legal representative or manager is the legal representative, manager or actual controller of the plaintiff or any other interested party; (3) There is labor, labor service, cooperation, franchise, dealership, agency, representative relations between the defendant and the plaintiff or any other interested party, and the defendant has come into contact with the infringed intellectual property; (4) The defendant had any business relation with the plaintiff or any other interested party, or had any consultation for the conclusion of any contract, and has come into contact with the infringed intellectual property; (5) The defendant commits any act of piracy or counterfeits any registered trademark.

To determine whether an intellectual property infringement is severe, the people's court shall fully consider the infringement approach, frequency, the duration of infringement act, its territorial scope, scale, consequence, the act of the infringer in the litigation, as well as other factors. The Interpretation also lists the following circumstances under which the intellectual property infringement shall be deemed severe: (1) The defendant commits the same or similar infringement act after it has been subject to any administrative punishment or has assumed liability as ruled by the court due to infringement; (2) The defendant operates mainly by IPR infringement; (3) The defendant forges, destroys or conceals any evidence of infringement; (4) The defendant refuses to implement the ruling of preservation; (5) The defendant gains profits or causes huge losses to the right holder as a result of the infringement; (6) The defendant's infringement act may endanger national security, public interest or personal health; (7) Other circumstances that may be deemed to be severe circumstances.

Based on the Interpretation, the Guidelines extend the scope of circumstances of “intention” in addition to those listed in Article 2.2 of the Interpretation, including bad-faith registration, use of others’ well-known trademarks, coverage or eradication of right marks, continuous use of the revoked intellectual property rights, continuous infringement after receiving the infringement notice from the relevant authorities and other typical circumstances in practice. In addition to the “severe circumstances” set forth in Article 2.4 of the Interpretation, the Guidelines add a series of typical circumstances such as IPR infringement at sports events and exhibitions, dissemination of infringing videos via different channels, frequent infringement, long-term infringement, severe harm to the goodwill, interruption to the evidence collection and investigation of any state functionary through violence, threat or other illegal means, specifying “the acts and performance of the infringer during the administrative action” as one of the standards for identification of severe circumstances.

Moreover, different from the Interpretation, the Guidelines set forth in Article 2.5 the circumstances of IPR infringement which may be deemed both intentional and severe and are typical and consistent with the development of business practices, including: (1) operating mainly by IPR infringement; (2) disseminating the infringing works without permission before the film, TV series, entertainment shows, sports event programs or online games are released or launched in public or at the early stage of such release or launch; (3) at the time of providing such goods or services as related to the IPR under legal authorization, providing goods or services infringing the same IPR without permission; (4) providing such genuine goods or services as related to the IPR in advertising, negotiating, signing contracts, displaying samples and providing customer experience and other activities, while providing or mainly providing infringing goods or services of the same IPR during actual transactions; (5) re-committing or continuing such infringement by the same infringer as has been determined as infringement in an administrative penalty or administrative decision; (6) re-committing or continuing such infringement by the same infringer as has been determined as infringement in a settlement agreement reached voluntarily by relevant parties; (7) re-committing or continuing such infringement by the same infringer as has been determined as infringement in an effective judgment, mediation letter, or arbitral award; (8) re-committing or continuing the same infringement by establishing a new company, changing the name of the company, replacing the legal representative, making use of the affiliate, etc.

The list of above circumstances combining both the objective and subjective constitutive elements in practice can help accelerate the trial progress and significantly relieve the proof burden of the right holder to some extent. However, any exceptions not covered by the above circumstances shall be analyzed and identified in accordance with Articles 2.2 and 2.4.

II. Determination of the Base Amount of Damages

Pursuant to the Interpretation, when determining the amount of punitive damages, the people's court may take the plaintiff’s actual loss amount, the defendant’s illegal income and the profits gained from the infringement as the base amount for calculation. Where it is difficult to calculate the aforesaid actual loss amount, illegal income and the profits gained from the infringement, the people’s court shall, in accordance with the law, determine the aforesaid amount, income and profits according to a multiple of the license fee of the relevant right, and take them as the base amount to calculate the amount of punitive damages.

Articles 3.2-3.4 of the Guidelines elaborate the rules for determination of the base amount in terms of the determination method, the application order and the adoption of such method.

Firstly, the Guidelines remain consistent with the Interpretation in terms of the method of determining the base amount, specifying that the statutory amount of damages shall not be used as the base amount in calculation of punitive damages. Moreover, the Guidelines emphasize that the profits gained from the infringement refer to the property proceeds acquired by the infringer from the infringement of intellectual property rights, and generally mean the operating profits thereof. However, for the infringer who operates mainly by IPR infringement, profits from infringement may be calculated based on the sales profits.

Secondly, the Guidelines summarize the general rules for the application of punitive damages in different types of IPR-related cases in light of trial practices. Pursuant to the Trademark Law and the Seed Law, punitive damages are applied in the following order: (1) the actual losses of the right holder; (2) the profits gained by the infringer as a result of infringement; (3) a reasonable multiple of the royalty; the application of punitive damages under the Patent Law and the Copyright Law is in the following order: (1) the actual losses of the right holder or the profits gained by the infringer as a result of infringement; (2) a reasonable multiple of the royalty or fees for use of the IP rights; pursuant to the Anti-Unfair Competition Law, punitive damages for trade secrets infringement are applied in the following order: (1) the actual losses of the right holder; (2) the profits gained by the infringer as a result of infringement.

Thirdly, the Guidelines specify that with respect to the order of application, it is generally preferred to determine the base amount of punitive damages in accordance with the prior method. Where it is difficult to determine the base amount according to the prior method, the right owner may choose a following method. The Guidelines specify the rules for the right holder to determine the applicable base amount and improve the conventional thinking adopted by the court when applying punitive damages in the trial of IPR-related precedents, thus enhancing the protection of the core technologies, key fields and emerging industries.

III. Determination of the Multiple

Article 6 of the Interpretation merely briefly specifies that when determining the multiple of punitive damages, the people’s court shall consider the defendant’s subjective fault, the seriousness of infringement act, as well as other factors. When determining the multiple of punitive damages, the people’s court shall also take into consideration circumstances under which the same infringement act has already been subject to administrative or criminal penalty and such penalty has been fully paid.

Articles 3.14-3.19 of the Guidelines set forth detailed provisions on the determination of the multiple. In addition to the circumstances of “intentional infringement” and “severe circumstances” as specified therein, the following factors may also be taken into account according to the specific circumstances of the case: (1) the degree of intention of infringement; (2) the duration of infringement act; (3) the number of infringed IP rights; (4) damage caused by the infringement to the industry; (5) whether the infringer has repeatedly infringed the IP rights; (6) whether the infringer has truthfully submitted the evidence of profits.

The Guidelines also provide guidance to determination of the multiple of punitive damages in patent, trademark, copyright, trade secret, new plant variety and other infringement cases. With respect to patent infringement, the type of the patent, the degree of innovation, the value, the remaining valid period of the patent and the number of the infringed patents shall be particularly considered; with respect to trademark infringement, the goodwill of the right holder, the popularity of the trademark, the degree of similarity between the infringing trademark and the granted trademark, the horizontal competition between the infringer and the right holder and other factors shall be taken into account; for copyright infringement, the popularity and influence of the right holder, the business model related to the subject matter of the copyright, the number of rights under or related to the infringed copyright, infringing profits, the scale and duration of infringement, etc. shall be considered; for infringement of trade secrets, the type and value of the trade secret, the innovation degree, the cost input, confidentiality measures, means of infringement, the maintenance of the competitive advantage, etc. are most relevant; with respect to the infringement of new plant varieties, the following factors shall be taken into consideration: the production and reproduction scale and the price and quantity of the infringing plant variety, the market scale of the authorized plant variety whether the seeds of the authorized plant variety are prohibited from importation or exportation, and whether the said infringement is harmful to the national food security.

Moreover, Article 3.20 of the Guidelines specifies the principle of application of punitive damages according to agreement. The relevant parties may reach an agreement on the base amount for calculating punitive damages, the method of determining such base amount, the multiple and the total amount of damages and the agreed multiple is not subject to the statutory scope of 1 to 5 times. The exception principle of “obviously unreasonable” shall apply to the agreed punitive damages. In other words, on the one hand, where the punitive damages claimed by the right holder are different from such agreed punitive damages and the infringer claims application of the punitive damages within the said agreed scope, the infringer’s claim may be supported, unless the right holder provides justifiable evidence proving the said agreement is obviously unreasonable; on the other hand, where the agreed multiple of punitive damages falls out of the statutory scope and one party requests the application of the agreed multiple, such request is generally supported, unless the other party provides justifiable evidence proving the said agreement is obviously unreasonable.

IV. Application of Punitive Damages to Internet Service Providers

 To solve the significant problem of IPR infringement in live-streaming marketing and purchase by agent, the fourth section of the Guidelines sets forth the rules on application of punitive damages to Internet service providers (“ISPs”). According to Article 4.2 of the Guidelines, the ISP shall be deemed to have known that its users take advantage of the network services to conduct the infringement where the said ISP: (1) receives the infringement notice from the right holder; (2) receives the infringement notice from the IPR administrative authorities; (3) is involved in such relevant proceedings as litigation or arbitration due to the infringement by its users through taking advantage of the network services; (4) provides the subject matter of the infringement by cooperating with its users.

Article 4.3 of the Guidelines lists six circumstances under which the assistance or instigation by the ISPs shall be determined as severe circumstances, including but not limited to:

(1) Where the network users refuse to perform the effective judgements or rulings, and the ISP still provides network services to the said network users to continue the same infringement;

(2) Where the ISP still provides network services to its users to continue or conduct the same infringement again after the ISP has been ruled infringing in accordance with the law due to such users’ taking advantage of its network to conduct infringement.

 Articles 4.7-4.8 list the circumstances of live-streaming marketing and purchase by agent where punitive damages are probably applicable.

The above provisions can serve as reliable grounds for further regulating the online platform governance and avoiding further expansion of consequences of intentional infringement, in timely response to the demand for the application of punitive damages at a time of rampant infringement on online platforms.

Lastly, the fifth section of the Guidelines deals with the procedural issues in the application of punitive damages. On the one hand, it specifies the timing of claiming or changing the calculation of the punitive damages and sets forth detailed rules on the circumstances under which the joint right holders make separate claims for punitive damages, or the right holder claims different punitive damages against the joint infringers. On the other hand, the Guidelines make clarifications on the application of punitive damages based on different stages of infringement, providing clear guidance to judicial practices.

In conclusion, under the principle provisions of the Interpretation, the Guidelines refine and differentiate relevant rules in light of practical experience, providing corresponding measurement criteria for different circumstances, which are more typical and practical.