China: Highest Court upholds punitive damages of up to five times the illegal gains in ip infringement claims

In a publication dated 15 March 2021 called Typical Cases of Application of Punitive Damages in Civil Intellectual Property Infringement Cases (the Typical Cases Article), the Supreme People's Court of China confirmed that punitive damages of up to five times the amount of any illegal gains could be awarded. In one of the cases mentioned in the Typical Cases Article, The Supreme Court ordered a punitive damages payment of CNY50 million (or USD7,68 million).

In order to substantiate a claim for punitive damages, a claimant will need to demonstrate:

• a high reputation of its IP rights in question;
• a prior relationship with the infringer;
• that the infringement was “serious” in terms of some or all of the following: duration, geographic scope, scale and consequences; and
• the infringer's bad faith, persistent or defiant behaviour after receiving the owner's notice or warning, or in the course of the law suit.

The first case in the Typical Cases Article, Guangzhou Tianci v Anhui Niuman, was a first instance case where the Supreme Court adjusted an award of punitive damages. Taking into account the Defendant's bad faith, its engagement in infringement as a profession, the large scale and the long duration of its technological secret infringement, and its obstruction in adducing evidence, the Supreme Court took the initiative to increase the punitive damages award from 2,5 times (given by a lower court) to the maximum of five times the amount of the Plaintiffs' economic losses. The principal Defendant was ordered to pay CNY30 million (or USD4,61 million).

The third of the cases in the Typical Cases Article, Xiaomi Tech v Zhongshan Benteng, illustrates the concept of ‘serious’ circumstances of infringement. Multiple kinds of infringing products of large quantities were sold through multiple e-commerce platforms and other online shops, and were continuously promoted and sold until the adjudication at second instance. The trade mark infringed was a well-known trade mark, and enjoyed a high reputation, goodwill and market influence. As the infringing products were found to be defective in quality, they caused harm to the owner's reputation. The Supreme Court awarded damages equal to three times the illegal gains, totalling CNY50 million (or USD7,68 million).

In the fifth of the cases mentioned, Adidas v Ruan Guoqiang, three instances of administrative penalties were previously imposed on the infringer following raids finding in excess of 17,000 shoes uppers (unfinished shoes). Adidas adduced its statements of accounts showing a gross profit margin of 50,4%. The relevant court took from the evidence the number of shoe seized in the third raid (6,050) and gave a discount of 40% on the unit price of CNY189 because shoe uppers (as opposed to finished shoes) cannot be directly sold to consumers. The court calculated the infringer's gains to be 6,050 x CNY189 x 50.4% x (1 - 40%) = CNY345,779.28, and then trebled that figure to give an accurate punitive damages award of CNY1,037,337.84 (or USD0,16 million).

The above cases are indicative of the Supreme Court's approach to punitive damages awards. To increase the chances of obtaining such awards, IP owners initiating civil law suits in China should meticulously preserve and prepare their evidence, and plead a punitive damages claim as early as possible. It is worth noting that if a Plaintiff does not include a claim for punitive damages from the very outset, it will need to bring a separate action for punitive damages.