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China IP: Ya Want Damages? I Got Low Damages And Here’s Why.

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Law firms frequently retain the China lawyers at my law firm to assist their clients in China. During our initial phone calls, the outside lawyer doing the retaining often will remark upon having heard China has no law dealing with this or that. For instance, there is a fairly widespread belief among lawyers that China has no tort law (negligence, product liability, etc.), no intellectual property (IP) law (trademarks, patents, copyrights, trade secrets), and even that it is impossible to collect on a breach of contract claim against a Chinese company.

I think a lot of this misperception arises from the damages in Chinese cases being so low as to make the case not worth bringing for a foreign lawyer or company. Let’s face it, damages in Chinese tort and IP cases are far far lower than in such cases in the United States and in much of the world and it is also difficult to get lost profits in any Chinese lawsuit, even a breach of contract case. This is why, despite my law firm having such close connections with China, only a relatively small portion of our international dispute resolution practice involves China. So it was with great interest that I read a post over at the Seattle Trademark Lawyer Blog laying out how damages were calculated in favor of Starbucks in a trademark infringement case Starbucks recently won.

The post is entitled, Chinese Official Explains How His Court Calculated Infringement Damages, and I will let Michael Atkins of Seattle Trademark Lawyer explain:

The December 2007 issue of China Intellectual Property magazine had a nice write-up about the Starbucks Corp. v. Shanghai Xingbake Cafe Corp. Ltd. trademark infringement case that Shanghai’s No. 2 Intermediate People’s Court decided last year. The case (which STL discussed here) was important because it was the first time China’s new Trademark Law had been applied to a famous trademark.

Besides the detailed summary of the case, what I found most interesting was its explanation as to how the court calculated its RMB 500,000 ($64,000) damages award. Here’s an excerpt:

The compensation claimed by the plaintiffs totaled RMB 1,060,000 including RMB 500,000 for economic losses and RMB 560,000 for reasonable expenses and legal fees. The defendants argued that the calculation of the plaintiffs’ profits was groundless, and thus should not be admitted. The defendants had no objection to the manner of collecting the notarization fee and legal fees, but held that the defendants’ lawyers spent too much time in collecting evidence proving the trademarks were well-known.

The court held that it was on the basis of the profits made by the defendants from the infringement that the plaintiffs claimed compensation for economic losses. The amount of profits was calculated on the basis of the notarized statistics of the defendants’ customer volume. Although some factors on the formation of the defendants’ profits were taken into account at the time of calculation, the said amount is not completely objective and reasonable. Therefore, the court did not adopt this calculation for determining the amount of profits. The claim of the plaintiffs should be upheld for the retainer, notarization fee and translation fee as well as other fees. In the present case, the defendants committed trademark infringement and unfair competition. The overlapping parts should not be calculated repeatedly in the determination of compensation. Since it was hard to determine the profits made by the two defendants from the infringement and the losses suffered by the two plaintiffs from the infringement, the compensation should be lawfully determined as RMB 500,000 in view of the specific circumstances.”

The article’s author, Lu Guoqiang, should know what he is talking about. He is vice president of the Shanghai No. 2 Intermediate People’s Court.

Not very often one does one get such an explanation and such an explanation should be quite helpful for future cases. This explanation reinforces the difficulty in collecting lost profits from Chinese courts.

12 responses to “China IP: Ya Want Damages? I Got Low Damages And Here’s Why.”

  1. I don’t normally comment on blog posts just because they are helpful (and I have nothing or very little to add), but this article is extremely informative and should have good use among all lawyers involved in China practice. Thanks for the post!

  2. There’s something fishy going on here. I posted some IP data a while back and the largest awards from those cases was RMB500,000, and the claims were for more far more than RMB1,060,000. One was an RMB500,000 award for patent infringement on a claim of RMB37,500,000, and another was an RMB500,000 award for infringement of the Honda trademark on a claim of RMB12,509,555.01. Coffee costs a lot in China, RMB18 for an espresso in Shanghai last summer, and RMB500,000 is ridiculous for years of infringement. Are the Chinese courts showing an unwillingness to grant more than RMB500,000 for IP violations? Does this incentivize IP violation? It is great that the right side is winning, but with such low damages there is no winner.

  3. Much of the problem arises from the limited availability of incisive discovery in Chinese legal proceedings. The Chinese legal system doesn’t furnish the statutory authority for the wide scope of discovery of facts that the common law systems provide. It now and will continue seriously to hamper plaintiffs in commercial and non-commercial suits in Chinese courts.

  4. @Will Lewis – Interesting data, I also seem to remember reading an Economist piece a while back reporting that less than a third of damages awarded (by Beijing courts I think it was) were actually paid. I suppose that the record on enforcement of injunctions is far better – do you have any data on that?

  5. @Todd L. Platek – While the lack of adequate discovery (now called disclosure in the UK – sigh) is definitely a factor, I would say there has to be more to it than that. Especially when I seem to recall a recent case of a German company being made to pay up some 30 million Euros for infringing a Chinese utility model. It does seem to be a case of the courts just refusing to award more than 500,000 RMB where a foreign claimant is involved. Still, the injunction is the main thing, but the lack of any kind of effective damages means that there is little to deter infringement.

  6. FOARP: In which court was the German infringement case held? If it was a Chinese court, how did that court determine damages? TLP

  7. FOARP, From what I was given, injunctions are almost always issued if the court holds that there was infringement. But, it is quite curious that the damages are maxing out at RMB500,000…

  8. @Todd – it was mentioned in an interview with Alison Brimelow, head of the EPO, which I connected to from here: http://tinyurl.com/2de626 , unfortunately it’s now behind the ‘subscribers only’ firewall, so I can’t get to the precise details (at least, not without spending sixty-odd quid). If anyone has them I’d be happy to see them.

  9. I don’t have a copy of the statutes readily at hand, but there is a statutory maximum for all kinds of IP infringement where the tortfeasor’s profits or the claimant’s losses cannot be accurately determined. RMB 500K sounds like the right figure as far as I remember. I don’t think this is simply or purely a case of courts refusing to award more than 500,000 to foreigners.
    One must remember that by the standards of most jurisdictions, the damages sought and awarded in most US jurisdictions are grossly inflated: similar howls of protest are not unknown from American companies in England and many continental courts. And the simple fact is that by any standards in China, RMB 500,000 is certainly by no means an inconsequential sum. There might be a case for saying it is too low, but it is not as low in real terms as many multi-national companies would have us believe.

  10. @Nick Boorer
    I asked someone from SIPO about this a while back and they say the limits only apply under special conditions. At any rate, the claimants could not have made such large initial claims if it were not possible for the other side to be made to pay them.

  11. The key point for damage is that you have enough evidences to prove the lost. As I know, the highest compensation of IP litigation is 0.33 billion RMB (458.3million). This case is on the appeal.

  12. The relevant statutory provisions are:
    Copyright Law of the PRC, Article 48, Trademarks Law of the PRC, Article 56, Interpretation of the Supreme People’s Court on Several Issues Regarding the Applicatble Laws for the Hearing of Civil Trademark Dispute cases, Article 16.
    These simply state that the statutory limit can be applied where calculation of quantum on either of the two alternative bases (loss of the injured party or profit of the infringer) is “difficult”. They certainly can not be said simply to apply in special conditions. Such vagueness means that it is often politically or socially convenient and expedient for the court to decide that damages are too difficult to assess. It does not mean that there is a malicious conspiracy to award low damages.

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