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Understanding and Application of the Interpretation on the Application of Punitive Damages in the Trial of Civil Cases of Infringement of Intellectual Property Rights


Table of contents
 
I. Regarding the determination of “being intentional” and “being malicious”
 
II. Regarding the determination of serious circumstance
 
III. Regarding the determination of the calculation base
 
IV. Regarding the determination of multiples
 
V. Regarding the effective time
 
VI. Regarding preventing the abuse of punitive damages
 
On February 7, 2021, the 1831st meeting of the Judicial Committee of the Supreme People's Court discussed and passed the Interpretation on the Application of Punitive Damages in the Trial of Civil Cases of Infringement of Intellectual Property Rights (hereinafter referred to as the Interpretation), which has been implemented as of March 3, 2021. The Interpretation consists of 7 articles, mainly based on the Civil Code, Copyright Law, Trademark Law, Patent Law, Anti-Unfair Competition Law, Seed Law, Civil Procedure Law and other relevant legal provisions, covering the scope of application, the content of the claim and timeline, determination on being intentional and serious circumstances, calculation base and multiple, effective time and other important and difficult issues in the trial practice related to intellectual property. This article intends to elaborate on the relevant circumstances in the legislation of the Interpretation and the noteworthy issues on application in order to understand the original intent of the provisions more accurately and ensure the correct application of judicial interpretations.
 
I. Regarding the determination of “being intentional” and “being malicious”
 
From the perspective of the history of the punitive damages system, since punitive damages have the nature of aggravating liability, intentional infringement is the legitimate basis of punishment. In order to realize the social control function of punishment and prevention of punitive damages, and to prevent abuse, the degree of subjective fault of the party is an important consideration in determining punitive damages.
 
The Civil Code stipulates that the subjective condition of punitive damages is intentional, and the Paragraph 1 of Article 63 of the Trademark Law and the Paragraph 3 of Article 17 of the Anti-Unfair Competition Law stipulate it as malicious. After seeking opinions from all parties and making multiple researches, we believe that the meaning of intentional and malicious should be understood as consistent. First of all, the Civil Code is the upper level law. Although the Trademark Law and the Anti-Unfair Competition Law were amended earlier, the interpretations on being malicious stipulated by them should also be consistent with the Civil Code. Moreover, both the Patent Law and the Copyright Law, which were amended after the promulgation of the Civil Code, stipulated that the subjective condition of punitive damages shall be intentional. In addition, in the judicial practice of intellectual property, since it is often difficult to accurately distinguish intentional from malicious, the consistent interpretation is helpful to strengthen the operating nature of practice and also helps to avoid misunderstanding that malicious is applied in trademark and unfair competition fields, while intentional is applicable to other areas of intellectual property.

The intention of the party is an inherently subjective state, which is difficult to find out in civil litigation and can often only be determined based on objective evidence. Generally, the closer the relationship between the infringer and the right holder, the more likely the infringer is aware of the disputed intellectual property rights. For example, Article 15 of the Trademark Law, Article 15 and Article 16 of the Provisions on Several Issues Concerning the Trial of Administrative Cases Concerning Trademark Affirmation and Confirmation stipulate how to identify the specific relationship due to which the party knows other’s trademark.
 
II. Regarding the determination of serious circumstance
 
The serious circumstances mainly target the infringement methods and the consequences, and generally do not involve the subjective status of the infringer. The situations listed in Article 4 of the Interpretation are mainly derived from typical cases in judicial practice.

In order to correctly implement the punitive damages system, on March 15, 2021, the Supreme People's Court released 6 typical cases of the infringement of intellectual property rights where punitive damages were applied, all of which involved the determination of serious circumstances. For example, in the trademark infringement dispute case of the Company Wuliangye vs. Xu Zhonghua(natural person), the Company Wuliangye has exclusive use right of the registered trademark “Understanding and Application of the Interpretation on the A”with the authorization of the trademark registrant. The store actually controlled by Xu Zhonghua was imposed of administrative punishment for selling the counterfeit Wuliangye liquor and the unauthorized use of the word "Wuliangye" in its store board. Xu Zhonghua and others constituted the crime of selling counterfeits with registered trademarks, and were sentenced to fixed-term imprisonment and other penalties. Under the circumstance that Xu Zhonghua and others have been imposed administrative and criminal punishment for selling the counterfeits of Wuliangye products, the courts of first and second instance considered the pattern and duration of the alleged infringement and other factors and held that they basically took infringement as business, thus ordered them to bear the punitive damages liability which is twice of the infringement profit. The typical significance of this case lies in accurately defining the serious circumstances such as taking the infringement of ... infringement of intellectual property rights as its business, which could serve as a model case.
 
III. Regarding the determination of the calculation base
 
Regarding the calculation method of the base of punitive damages, the Paragraph 1 of Article 71 of the Patent Law, the Paragraph 1 of Article 54 of the Copyright Law, the Paragraph 1 of Article 63 of the Trademark Law, and the Paragraph 3 of Article 17 of the Anti-Unfair Competition Law, the Paragraph 3 of Article 73 of the Seed Law have explicit provisions. In judicial practice, it is difficult to accurately calculate the amount of damages, which often leads to difficulties in the application of punitive damages. In order to give play to the important role of the punitive damages system in deterring infringement and based on the reality of intellectual property trials, the Paragraph 3 of Article 5 of the Interpretation prescribes the amount of damages determined with reference to the plaintiff's claim and the provided evidence as one of the  bases. In addition, reasonable expenses to stop infringement can only occur in the actual process of rights protection, which is in nature different from infringement damages. In addition, the Copyright Law, Trademark Law, Patent Law, and Anti-Unfair Competition Law all exclude reasonable expenses from the calculation base. Therefore, the Paragraph 1 of Article 5 stipulates that the base does not include reasonable expenses paid by the plaintiff to stop the infringement. At the same time, considering that the Seed Law stipulates that reasonable expenses are included in the calculation base, a proviso is added to this paragraph: “If the law provides otherwise, such provision shall prevail."
 
Regarding the base calculation method, the Copyright Law stipulates that the calculation base of the amount of damages shall be the actual loss or the infringer's illegal income, and that provided in the Patent Law, Trademark Law, Anti-Unfair Competition Law, and Seed Law is the actual loss or the benefit obtained from infringement. The Trademark Law, Anti-Unfair Competition Law and Seed Law prescribe that the calculation base shall be firstly determined based on actual losses; where if it is difficult to determine, the calculation base is then determined based on the benefits obtained from infringement, which means the sequence of the calculation method is stipulated. However, the Copyright Law and Patent Law have no provision on the sequence of the calculation. In order to solve the problem of convergence with the various departmental laws, Paragraph 1 of Article 5 of the Interpretation provides that the relevant laws shall be followed respectively.

It needs to be pointed out that the amount of compensation to make up for the loss, that is, the calculation base, and the amount of punitive damages, should be calculated separately. In other words, if the multiple of punitive damages is determined to be 1 time, then the total amount of damages assumed by the accused infringer should be the sum of the amount of compensation to make up for the loss plus the amount of punitive damages, which is twice the base.
 
IV. Regarding the determination of multiples
 
The multiple is another key factor in determining the amount of punitive damages, which should be determined by people’s courts in accordance with the law within the range of multiples prescribed by law. When determining the multiple, not only the degree of the infringer’s fault, the severity of the circumstances, and the evidence supporting the amount of damages must be considered, but also the relationship between the punitive damages of intellectual property rights and administrative penalties and criminal fines need to be taken into account. In addition, the multiple is not necessarily to be an integer.

Regarding the relationship between punitive damages for intellectual property rights, administrative fines, and criminal penalties, the value orientations of the three are not completely consistent, on which Article 187 of the Civil Code also has clear stipulation. Therefore, in order to increase the intensity of infringement sanctions, Article 6 of the Interpretation stipulates that the punitive damages liability in civil litigation cannot be reduced or exempted because of administrative fines or criminal fines has been imposed. However, in order to avoid a serious imbalance in the interests of the parties, Paragraph 2 of Article 6 of the Interpretation also provides that the people's court may comprehensively consider the administrative fines or criminal fines that have been executed when determining the multiple.
 
V. Regarding the effective time
 
The Interpretation has come into effect as of March 3, 2021, but the Copyright Law and Patent Law will not take effect until June 1, 2021, so if the parties of the copyright and patent infringement cases accepted from January 1 to June 1, 2021 claim for punitive damages, can punitive damages be determined in accordance with the Civil Code that came into effect on January 1, 2021? In view of the fact that the Civil Code, as the upper law of the Patent Law and Copyright Law, has explicitly stipulated the punitive damages system, there is no legal obstacle to determine punitive damages in accordance with the Civil Code. As for the range of multiples, the specific provisions of the Copyright Law and Patent Law can be referred to and applied.
 
VI. Regarding preventing the abuse of punitive damages
 
Increasing the amount of damages for infringement is one of the means to increase the intensity of penalties for infringement, but we cannot simply equal the high amount of damages with the strong protection of intellectual property rights and the better effect. The amount of punitive damages must be reasonably determined based on the evidence. In order to ensure the correct implementation of the system of punitive damages for intellectual property rights and to avoid abuse in practice, first of all, we should accurately grasp the constitutive elements of punitive damages. The Interpretation explicitly provides the scope of the application of punitive damages, the content of the claim and timeline, subjective conditions, objective conditions, calculation base, determination on multiple, etc., which covers all the conditions applicable to punitive damages and provides clear operational guidelines. It also gives the parties a stable expectation, ensures that the punitive damages system is used fairly and appropriately in judicial practice, and provides a guarantee from the trial rules to prevent the abuse of punitive damages. Secondly, we should strengthen guidance through typical cases. The Supreme People's Court published 6 typical cases where punitive damages are applied for intellectual property rights on March 15, 2020, in order to further accurately grasp the meaning of the provisions of the Interpretation. In the future, the Supreme People's Court will continue to summarize trial experience, further promote the improvement of the punitive damages system, and effectively deter serious infringement of intellectual property rights.
 
Source: Supreme People's Court
Authors: Lin Guanghai; Li Jian; Qin Yuanming
Date: April 19, 2021
 
 
 
 

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