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27 March, 2018
In China, most damages awarded in patent cases are statutory in nature despite the availability of additional options of calculating damages including losses by the plaintiff, profits obtained by the defendant, or where a previous license exists, a royalty rate based on a multiple of the prior license agreement. Nonetheless, given there is no discovery process in China similar to that in the U.S., information needed for calculating losses or profits resulting from the infringement tends to be difficult to determine.
Moreover, while traditionally the plaintiff has the burden of submitting the evidence for their damages claim, records such as profits per infringing unit or total amount of infringing units sold- are often maintained by the infringing party. Given these challenges, the plaintiff is often resigned to accepting a statutory damages amount- which is capped to at most RMB 1 million (approximately USD 158,000).
The good news is that more recently there is a growing trend of cases where Chinese Courts have applied a “burden shifting” approach in calculating damages resulting in considerably larger damages than the statutory cap. In this article, we will briefly review the relevant provision of the Judicial Interpretations related to burden shifting, how this burden shifting provision was applied by IP courts in three recent high-profile patent infringement cases, and takeaways moving forward with respect to patent damages in China.
While the current version of the Chinese Patent Law is silent regarding the shifting of evidentiary burden, the Supreme People’s Court published their Judicial Interpretation of the matter in a 2016 update of the “Issues Concerning the Application of Law in the Trial of Patent Infringement Cases” (the “Interpretations”). While the Interpretations are not national law per se, the lower courts are required to follow them in guiding their application and understanding of the relevant Chinese laws and regulations. Here, Article 27 of the Interpretations provides the following with respect to the principle of burden shifting:
“Where it is difficult to determine actual losses suffered by the right holder suffered from the infringement…if the right holder has provided preliminary evidence of profits gained by the infringer, and the accounting books and materials relating to the patent infringing acts are mainly under the control of the infringer, the people’s court may order the infringer to provide such accounting books and materials; if the infringer refuses to provide the accounting books or materials without justification or provides false books and materials, the people’s court may determine the profits gained by the infringer from the infringement based on the right holder’s claims and evidence provided by the right holder.”
This has been the provision relied upon by the Chinese IP courts for shifting the burden of damages in some recent high-profile patent cases, namely: Watchdata v. Hengbao; Huawei v. Samsung Electronics; and LG Innotek v. Nidec.
Watchdata v. Hengbao
In Watchdata v. Hengbao, a case decided by the Beijing IP Court, the infringing product relates to a USB key which banks provide to customers for securitized online banking. While Watchdata provided sufficient evidence for their claim of Hengbao’s profit rate per infringing USB key, they had limited evidence regarding the amount of USB keys sold by Hengbao. Nonetheless, at the request of Watchdata, the Beijing IP court sent investigative enquiries to 15 banks. 12 out of the 15 banks provided sales volume information to the Beijing IP court, leading to a finding of 4,814,200 units sold by Hengbao to these 12 banks. In addition, while Hengbao admitted on their website to selling the USB keys to 3 other banks, when ordered by the Beijing IP court to submit their sales records for these 3 banks Hengbao refused. Given this and applying Article 27 above, the court accepted Watchdata’s estimate of Hengbao’s profits made from the 3 other banks. In total, the Beijing court awarded Watchdata RMB 49 million (or approximately USD 7.7 million) in damages.
Huawei v. Samsung Electronics
In Huawei v. Samsung Electronics, a case decided in Fujian Province by the Quanzhou Intermediate People’s Court, the infringing technology relates to the arrangement and display of icons and widgets on Graphical User Interfaces of certain Samsung smart phones and tablets. Like the above Watchdata case, Huawei aimed to calculate damages based on total profit gained as a result of the infringement. For establishing amount of sales, Huawei submitted a third party report from International Data Corporation (IDC) which also provided an estimate of the revenue generated from the sales. The report was accepted by the Quanzhou court as a credible reference for evaluating Huawei’s damages claim. Moreover, the court noted that despite its requests for Samsung Electronics to provide sales figures of the products at issue, Samsung Electronics did not submit such figures and thus, specifically citing Article 27 of the Interpretations, the court noted that the sales volume provided by Huawei could serve as a baseline for evaluating the damages. Regarding profit rate per infringing phone, the court relied on information contained in an annual report from Samsung Electronics (submitted by Huawei) and information contained in a research report obtained from the Chinese Ministry of Industry and Information Technology (MIIT) related to domestic phone makers (submitted by Samsung Electronics). The court then awarded damages based on the lower of the two profit rates (submitted by Samsung Electronics) and the IDC data (submitted by Huawei) to arrive at a number that was much higher (RMB 2.4 billion) than what Huawei originally claimed (RMB 80 million). Thus, the court fully supported Huawei’s damages claim of RMB 80 million (or approximately USD 11.7 million).
LG Innotek v. Nidec
Lastly, in LG Innotek v. Nidec, the infringing product relates to types of motor for copying DVDs. Like Watchdata, the case was decided by the Beijing IP Court. Similar to the above two cases, LG Innotek needed to establish volume of sales- however, such financial information was confidential and in the hands of the defendant. In this case, LG Innotek relied on sales data that was disclosed by a manager at Nidec from a prior administrative enforcement action (through a local IP office) against Nidec. Some additional sales data came from a third party purchase order receipt obtained from court initiated investigation and evidence collection. The defendant Nidec submitted some counter evidence regarding its sales volume of the infringing motors which showed lower sales data than the Nidec manager had previous disclosed to the IP office. However, Nidec could not produce more evidence to explain why the sales data should be lower.
Thus, the court applied Article 27 of the Interpretations and fully supported LG Innotek’s claimed damages (based on evidence collected from local IP office and by the Beijing court) which amounted to RMB 3.8 million (or approximately USD 606 thousand).
Key takeaways:
Historically, China has been known for awarding relatively low patent damages. This has led to the perception that much of the value of filing a patent infringement case in China is the possibility of obtaining injunctive relief. However, the above cases illustrate a growing trend of Chinese courts to award damages based on “the burden shifting” provision of Article 27 of the Interpretations and a showing of preliminary evidence provided by the plaintiff in relation to defendant’s profits and sales. Additionally, while these cases do not provide a clear “hard and fast” rule for what exactly constitutes an adequate showing of preliminary evidence to shift evidentiary burden, these judgments illustrate that a wide range of evidence may be considered credible for calculating damages. For example, for evaluating volume of sales the Watchdata court relied on official responses provided by third party banks, the Quanzhou court used an IDC report submitted by Huawei, and the Beijing court in the LG case relied on evidence collected from a previous IPO action. While there will likely be continued variation (among jurisdictions and judicial panels) of what damages evidence would be best suited for burden shifting, these cases show a willingness to move away from defaulting to statutory damages and are consistent with China’s continued commitment towards protecting and valuing intellectual property.
