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Securing large damages in intellectual property infringement litigation

In recent years, with the continuing intensified efforts to protect intellectual property in China, cases in which large damages have been awarded in intellectual property infringement actions have become quite common. Statistics show that, between 2016 and 2019, the measure of damages awarded by courts in cases where at least one party was a foreign entity increased by approximately 300%. Since the beginning of 2021, there have been many cases in which a measure of damages exceeding RMB10 million (USD1.5 million) was awarded in such intellectual property fields as patents, trade secrets, trademarks, etc.

The common denominator in cases where the rights holder succeeded in securing large damages is that such rights holders provided the court with as comprehensive and detailed evidence as possible regarding the damages. In accordance with the law, a rights holder may provide evidence concerning the loss it suffered as a result of the infringement, the benefit derived by the alleged infringer in connection with the infringement or a reasonable multiple of the royalties.

With respect to the loss suffered by the rights holder as a result of the infringement, regardless of whether, in many cases, the rights holder and its attorneys endeavoured to provide a variety of evidence to the court, in general, the loss suffered as a result of the infringement is not easy to substantiate. This is because the loss suffered by the rights holder may involve numerous factors. Taking a decline in sales as an example, the causes may involve seasonal variation, an increase in competitors, a change in industry technology, etc. An experienced opposing lawyer can easily raise enough doubts in the judge’s mind as to whether the above-mentioned loss was all due to the infringement.

In contrast, in many cases where huge damages were successfully secured, the plaintiff secured the court’s support by substantiating the benefits derived by the alleged infringer in connection with the infringement. In this regard, there are many usable avenues available to rights holders. Taking sales volume as an example, the alleged infringer will often present relevant information in its own website, electronic or print advertisements and other promotional materials; for listed companies or companies on the verge of listing, each quarterly or annual financial report and the information submitted to the China Securities Regulatory Commission (CSRC) for listing purposes may disclose the specific sales volume of the alleged infringing product.

With respect to the calculation of the benefit derived in connection with the infringement, another important factor, in addition to the sales volume, is the profit margin. In Tenda v WayOS et al. (2019), the plaintiff submitted a listing guidance report submitted to the CSRC by the defendant WayOS, on the basis of which the defendant’s average annual profit margin could be calculated. Although the report did not document the specific profit margin for a product, the plaintiff successfully relied on that report as important evidence to make the court recognize that the benefit derived by the defendant in connection with the infringement far exceeded the amount it claimed and, thereby, ultimately succeeded in securing damages of at least RMB10 million.

In addition to a patent holder gathering evidence itself, another increasingly popular method is to petition the court for the taking of evidence, and that is because, in most cases, the original sales vouchers, profit margin and other such data are usually in possession of the alleged infringer and are not accessible to the patent holder. From many currently existing cases, it can be seen that the objective in petitioning the court to take evidence is not merely to obtain the defendant’s financial data but is more like a litigation strategy used to assist in securing large damages.

In practice, few defendants elect to submit financial data to the court. In litigation, this has led to rather favourable consequences for plaintiffs. For example, when a defendant refuses to provide financial data without good cause, the court may presume that the plaintiff’s claim for damages is tenable. The rationale behind this is that, it is the common view that participants in a legal action are bound to carefully weigh the consequences of their actions in the course of the litigation. In the case of a refusal to submit financial data, the court will deem that the alleged infringer, after weighing the consequences, deemed that the damages outcome that would result from the submission of its financial data would be greater than the measure of damages claimed by the plaintiff. Accordingly, it is only for this reason that the alleged infringer would elect to refuse to submit the data. Therefore, if the alleged infringer elects to refuse to submit evidence, the court will likely presume that the measure of damages claimed by the plaintiff is tenable.

Furthermore, the foregoing strategy may additionally lead the court to deny the defence mounted by the alleged infringer regarding the damages. In a recent typical case released by the Supreme People’s Court of China, the rights holder, after fulfilling its preliminary burden of proof, petitioned the court to take financial data of the alleged infringer. The alleged infringer refused to submit the same and elected in court to challenge the evidence submitted by the rights holder regarding the damages. The accused infringer argued that in this case, the rights holder’s determination that its intellectual property’s contribution of 30% to the profit on the infringing product was overly high, thereby resulting in an error in the final calculation of the measure of damages. However, because the alleged infringer refused to submit financial data as ordered by the court, the Supreme People’s Court held that the refusal by the alleged infringer to provide the evidence made it impossible for the court to ascertain the specific technical contribution. Accordingly, the Supreme People’s Court refused to consider the defendant’s various arguments that the damages were too large.

In short, as China continues to strengthen its protection of intellectual property, holders of intellectual property rights in China will have a better chance to apply their intellectual property in China to secure large damages in legal actions if they are able to collect evidence on damages in a thorough manner and use appropriate litigation strategies.

(Translated by China Business Law Journal