4.4.2 Compensation for losses
4.4.2.1 Calculation method of compensation
According to Article 71 of the Patent Law, in trials of civil cases involving patent infringement, the people’s courts shall determine the amount of compensation in one of the following four ways.
The first is a determination based on the actual losses suffered by the right holder due to the infringement. According to Article 14 paragraph 1 of the Provisions on the Trial of Patent Disputes, actual losses can be calculated by multiplying the total reduction in the sales volume of the patented product of the patentee due to the infringement by the reasonable profit of each piece of the patented product. Where it is difficult to determine the total reduction in the sales volume of the right holder, the product of multiplying the total sales volume of the infringing product in the market by the reasonable profit of each piece of the patented product is deemed to be the actual loss suffered by the right holder due to the infringement.
The second is a determination based on the profits earned by the infringer from the infringement. According to Article 14 paragraph 2 of the Provisions on the Trial of Patent Disputes, such profits can be calculated by multiplying the total sales volume of the infringing product in the market by the reasonable profit of each piece of the infringing product. The “reasonable profit” is generally calculated based on the operating profit of the infringer. For an infringer completely using infringement as its business, the reasonable profit can be calculated based on the sales profit.
Third, where it is difficult to determine the losses suffered by the right holder or the profits earned by the infringer, the amount of compensation can reasonably be determined by reference to a multiple of the royalties for the patent license. According to Article 15 of the Provisions on the Trial of Patent Disputes, the people’s courts may consider factors like the category of patent, the nature and circumstance of the acts of infringement, and the nature, scope and duration of patent licensing. Article 32 of the Provisions on Evidence in Civil Procedures involving Intellectual Property Rights states the following:
Where the concerned party asserts to determine the amount of compensation with reference to a reasonable multiple of the royalties for the patent license, the people’s courts may consider the following factors to examine and determine evidence related to the royalties for the patent license:
- (1) whether the royalties have been paid and method of payment, and whether the licensing contract has been performed or recorded;
- (2) the rights that have been licensed, and the manner, scope, and duration of license;
- (3) whether the licensee has an interest with the licensor; and
- (4) customary licensing standard in the industry.
Thus, the key factors include whether the royalties referred to were actually paid, whether the customary standard was met and whether the rights being licensed – and the manner, scope and duration of license – are comparable.
The fourth method for determining compensation is statutory compensation. According to Article 71 paragraph 2 of the Patent Law, where it is difficult to determine the losses suffered by the right holder, the profits earned by the infringer and the royalties for the patent license, the people’s courts may, based on the type of the patent right, and the nature and circumstances of the infringement act, determine a compensation amount between RMB 30,000 and RMB 5 million. The nature and circumstances of acts of infringement refer primarily to the subjective fault of the infringer, the means of infringement, the duration of acts of infringement, the damaging consequences to the right holder and so on.
4.4.2.2 Compensation should have a causal relationship with and be proportional to the act of infringement
Article 16 of the Interpretation of Patent Infringement Dispute Cases stipulates the following:
In determining the profits earned by the infringer as a result of the infringement, the profits shall be confined to those acquired by the infringer from the acts of infringement, while profits earned from other rights shall be reasonably deducted.
Where the product infringing upon an invention or a utility model patent right is a component of another product, the people’s courts shall reasonably determine the amount of compensation based on factors such as the value of the component itself and its role in achieving the profit of the final product.
The main consideration for this provision is that, if an alleged infringing product involves several patent rights or simultaneously involves a patent right and trademark right, then, in a lawsuit over infringement of one or part of the patent rights thereof, the profits earned by the infringer should be determined based on the profits earned as a result of the infringement of the involved patent, rather than the full profit of the product. In Article 16, “other rights” refers primarily to intellectual property rights. The profits earned from other rights can be reasonably determined based on the specific facts and overall circumstances of the case.
In an appeal of a dispute over patent infringement, Hua Jiping v. Shanghai Oxylane Trade Co.,106 the Supreme People’s Court held that, when considering relevant factors for determining the compensation, the focus is the reasonability and the proportionality thereof. In determining the amount of compensation for intellectual property infringement, the degree of subjective fault of the concerned party may be considered in determining the compensation liability, especially when it is necessary to use discretion to determine the specific calculation criterion.
In a retrial of a dispute over utility model patent infringement, Wuxi Guowei Ceramic Electrical Appliances Co. v. Chagnshu Linzhi Electrical Heating Components Co.,107 the Supreme People’s Court held that, in calculating the amount of compensation for patent infringement based on the profits earned by the infringer as a result of the infringement, for an alleged infringing product involving several components or several patents, the profits should, in principle, not be calculated by simply multiplying the total sales amount of the infringing product by the profit margin thereof. Instead, the involved patent’s ratio of contribution to the profit of the infringing product should be considered, and profits as a result of the infringement may be calculated based on the following formula: total sales amount of the infringing product × profit margin × contribution ratio of the patented technology to the product value. The contribution ratio of the patented technology to the product’s value can be determined with discretion by considering the importance of the involved patent to the product.
Where the acts of infringement are severable, in calculating the amount of compensation for the infringement, if a part of the losses suffered by the right holder or profits earned by the infringer can be relatively accurately calculated and a part thereof is difficult to calculate, then compensation for the former may be calculated based on the losses or profits, statutory compensation applies for the latter, and the sum of the two is used to determine the final amount of compensation.
4.4.2.3 Agreement on the amount or calculation method of compensation for patent infringement in accordance with the law
Article 28 of the Interpretation (II) of Patent Infringement Dispute Cases stipulates the following:
Where the right holder and the infringer agree, according to law, on the amount or the calculation method of compensation for patent infringement and assert during a patent infringement lawsuit that the compensation amount shall be determined in accordance with such an agreement, the people’s courts shall support such an assertion.
For such an agreement, the people’s courts will, in accordance with the provisions of the Civil Code and the assertion of the concerned parties, examine whether there is any circumstance that may render the agreement invalid or revocable.
In a retrial of a dispute over utility model patent infringement, Zhongshan Longcheng Daily Products Co. v. Hubei Tongba Children’s Appliances Co.,108 the Supreme People’s Court held that the Tort Liability Law and Patent Law do not prohibit an infringed person and the corresponding infringer from making prior agreements on the form of tort liability and amount of compensation. The substance of such agreements is a previously agreed simple method for calculating and determining the losses of the right holder or the profits of the infringer with respect to an infringement that has not yet occurred. Such agreements include agreements made either after or before the acts of infringement.
4.4.2.4 Reasonable expenses of the right holder
Article 71 paragraph 3 of the Patent Law stipulates the following: “The amount of compensation shall also include the reasonable expenses of the right holder paid for putting an end to the infringement.” According to Article 16 of the Provisions on the Trial of Patent Disputes, if a right holder asserts the reasonable expenses they paid for putting an end to the infringement, the people’s courts may calculate such costs in addition to the compensation determined in accordance with Article 65 of the Patent Law.
In an appeal of a dispute over patent infringement, Hua Jiping v. Shanghai Oxylane Trade Co.,109 the Supreme People’s Court held that the costs of the right holder for investigating and putting an end to the infringement – so long as they are reasonable – can be incorporated into the amount of compensation. Such reasonable expenses do not necessarily need to be proved individually by vouchers. According to the specific circumstances of the case, the people’s courts may consider the amount of reasonable expenses that can be proved by vouchers and other reasonable factors of expenditure to determine the amount of reasonable expenses but not exceeding the amount asserted by the right holder.
In judicial practice, circumstances also exist where right holders abuse their rights to bring infringement lawsuits, while alleged infringers require the right holders to compensate for reasonable expenses. In this respect, the Reply on Compensation for a Plaintiff’s Abuse of Rights stipulates that, in an intellectual property infringement lawsuit, where the defendant submits evidence to prove the lawsuit filed by the plaintiff constitutes an abuse of rights according to law, which has damaged the defendant’s legitimate rights and interests, and requests the plaintiff to compensate for the defendant’s reasonable expenses (e.g., attorney’s fees, travel expenses, and boarding and lodging expenses) arising from the lawsuit, the people’s courts shall support such a request. The defendant may also file a separate lawsuit to request the plaintiff to compensate for the above reasonable expenses.
4.4.2.5 Rules of evidence related to compensation
Compensation is determined based on evidence. In judicial practice, evidence related to the nature and circumstances of acts of infringement and the profits earned by the infringer is usually held by the infringer and difficult for the right holder to obtain. To reduce right holders’ difficulty in producing evidence, the Patent Law and related judicial interpretations have stipulated rules of evidence that are related to compensation and in compliance with the characteristics of civil cases involving intellectual property infringement generally.
Article 71 paragraph 4 of the Patent Law stipulates that, where a right holder has tried their best to provide evidence, but the account books or materials related to the patent infringement are mainly in the possession of the infringer, then, to determine the amount of compensation, the people’s court may order the infringer to provide those account books or materials. Where the infringer refuses to provide the account books or materials or provides false account books or materials, the people’s court may determine the amount of compensation by reference to the right holder’s claims and the evidence provided.
According to Article 31 of the Provisions on Evidence in Civil Procedures involving Intellectual Property Rights, account books and documents, sales contracts, documents on the inflow and outflow of goods, annual reports of listed companies, prospectuses, websites or promotion catalogs, trading data stored in equipment and systems, commodity circulation data accounted by third-party platforms, assessment reports, intellectual property right licensing contracts, and records on market supervision, taxation and finance departments may be produced as evidence to prove the amount of compensation for intellectual property infringement asserted by the plaintiff.