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ZHONGSHAN LONGCHENG DAILY USE PRODUCTS CO., LTD. V. HUBEI TONGBA CHILDREN’S APPLIANCES CO., LTD. (2013) MTZ No. 116, SPC

Cause of action: Dispute over infringement of a utility model patent

Collegial panel members: Wang Chuang | Zhu Li | He Peng

Keywords: compensation, concurrence, infringement of a utility model patent

Relevant legal provisions: Contract Law of the People’s Republic of China, article 122 Patent Law of the People’s Republic of China, article 65(1)

Basic facts: Zhongshan Longcheng Daily Use Products Co., Ltd. (hereinafter “Longcheng”) is the patentee of the utility model named “Wheel Alignment Device”. In April 2008, Longcheng filed a claim in the Wuhan Intermediate People’s Court against Hubei Tongba Children’s Appliances Co., Ltd. (hereinafter “Tongba”) on grounds of patent infringement, and the court ordered Tongba to cease the infringement and to compensate Longcheng.

Tongba refused to accept the judgment and filed an appeal. At second instance, the parties reached a mediation settlement and Hubei Higher People’s Court prepared a civil mediation agreement ([2009] EMSZZ No. 42), the main contents of which included that Tongba should promise not to further infringe Longcheng’s patent and that, in the event of any further infringement on the utility model of Longcheng, Tongba should voluntarily indemnify Longcheng in the amount of RMB1 million.

Later, Longcheng found that Tongba was still engaging in business activities that infringed upon Longcheng’s patent and hence, in May 2011, it lodged another lawsuit with Wuhan Intermediate People’s Court, requesting that the court order Tongba to compensate Longcheng in the amount of RMB1 million and to bear the litigation costs. At first instance in this second case, after hearing the court’s interpretation of the case, Longcheng made it clear that it was lodging this lawsuit on the grounds of patent infringement rather than breach of contract, but it asked the court to calculate the amount of compensation due according to the amount agreed by both parties during mediation. The court held that, in accordance with article 122 of the Contract Law of the People’s Republic of China, the injured party should indeed have the right of choice of remedy in the event of simultaneous tort liability and liability for breach of contract. However, because Longcheng expressly chose to lodge the lawsuit for infringement, the amount of compensation would be determined under the Tort Law. If the standard for compensation were subject to the previous mediation agreement, this would conflict with the provisions of article 122 of the Contract Law. Because Longcheng had lodged the lawsuit for infringement, the lawsuit concerning breach of contract could not be included in the court’s investigation, and the court need not decide on any breach of contract and consequent liabilities; thus it would have been inappropriate to calculate the amount of compensation due in this instance of breach on the basis agreed by both parties. Instead, the court of first instance applied the statutory standard of compensation and ruled that Tongba should compensate Longcheng RMB140,000.

Longcheng refused to accept this ruling and lodged an appeal. At second instance in this second case, Hubei Higher People’s Court held that determination of the rights and liabilities between parties of the case at issue should be based on whether the infringement in fact took place. The allegedly infringing model of baby buggy involved in the previous case was different from the allegedly infringing model involved in this case and thus the amount of damages agreed in the mediation agreement could not be applied to this case. On this basis, the second-instance court dismissed the appeal and affirmed the finding at first instance.

Longcheng still refused to accept the courts’ rulings and applied to the Supreme People’s Court for permission to appeal. The Supreme People’s Court reheard the case and, on December 7, 2013, it ruled that the first- and second instance judgments in this second case should be overruled, and that Tongba should compensate Longcheng RMB1 million.

Held: On October 24, 2011, Wuhan Intermediate People’s Court delivered its judgment ((2011) WZCZ No. 467), in which it ordered Tongba to compensate Longcheng RMB140,000 and rejected Longcheng’s other claims.

Longcheng refused to accept the ruling and instituted an appeal before the Hubei Higher People’s Court, asking that it overrule the first-instance judgment and amend it according to law. The second instance court delivered its judgment on May 11, 2012, dismissing the appeal and affirming the first-instance judgment.

Longcheng still refused to accept the judgments and applied to the Supreme People’s Court for permission to appeal. The Supreme People’s Court reviewed the case and, on December 7, 2013, it delivered its ruling that the first- and second-instance judgments should be overruled, and that Tongba should compensate Longcheng in the amount of RMB1 million.

Reasoning: On appeal, the Supreme People’s Court held as follows.

I. On the effect of the mediation agreement made by both parties in the previous case

The mediation agreement that resulted from the previous case was made by both parties on the basis of free will and its contents concern only the disposal of private rights; they do not involve social public interests and third-party interests. There are no other circumstances under the law that would render the agreement invalid, and the Hubei Higher People’s Court delivered the civil mediation agreement after reviewing and confirming the parties’ mediation settlement; thus the agreement made by both parties in the previous case should be legally valid.

II. Whether quantum of damages in this case could be based on the calculation agreed in the previous mediation agreement

First, the civil liabilities that Tongba should have borne did not fall within the scope of simultaneous tort liability and liability for breach of contract. The premise for determining such simultaneous liability, as provided under article 122 of the Contract Law of the People’s Republic of China, is that “the personal and property rights of the other party are damaged due to breach of contract by one party”. According to that provision, the principle in instances of simultaneous tort liability and liability for breach of contract should be based on a transactional relationship between the parties. When one party breaches a contractual obligation and such breach infringes upon the other party’s interests, the first party incurs tort liability. The “breach” stipulated in that provision should therefore refer to the fact that one party has violated an obligation agreed in the basic transactional contract, and that the violation simultaneously infringes upon the rights and interests of the other party, rather than refer to the violation of an agreement concerning the way in which the parties will calculate liabilities for damages after an infringement has taken place. Subject to its contents, the mediation agreement made in the previous case was not a basic transactional contract between Longcheng and Tongba, but an agreement concerning how to apportion liability for damage in the event of infringement (including calculation methods and amount) after occurrence of an infringing act. Therefore, in this case, the civil liabilities that Tongba should have borne did not fall within the circumstance of simultaneous tort liability and liability for breach of contract, as stipulated in article 122 of the Contract Law.

Secondly, the civil liabilities that Tongba should assume in this case should be only the liability for infringement. On the one hand, as noted, Longcheng and Tongba were not in a basic contractual relationship; on the other hand, the legal significance and effect of the mediation agreement that resulted from the previous case did not lie in the parties’ agreement on the contractual obligations of Tongba, but in their agreement on how to apportion liability for the infringement. Even in the absence of the mediation agreement, Tongba should bear the obligation of non-infringement according to the law. Both parties drafted into the mediation agreement the specific methods of calculating the amount of compensation due in instances of future infringement by Tongba only to specify how Tongba should assume the liability for infringement should it infringe upon the patent yet again.

Thirdly, the Tort Law, Patent Law and other laws do not prohibit the infringed party and infringer from agreeing in advance the method by which they will apportion liability for infringement and calculate the amount of damages, among other things. The substance of such an agreement is to confirm, in advance, a simple method for calculating and determining the patentee’s losses or the infringer’s benefits as a result of any future infringement. Considering such factors as the difficulty in furnishing evidence, and the time-consuming and laborious nature of litigation, among other things, both parties concerned can certainly agree on an amount of damages that shall be payable for infringement to the extent of their autonomy under private law, and such an agreement may include both ex post remedies for actual infringement and ex ante measures to be taken in advance of the occurrence of infringement. The application of the method for determining the amount of compensation to which both parties agreed during mediation in the previous case did not conflict with relevant provisions of article 65 of the Patent Law of the People’s Republic of China. In conclusion, the method for determining the amount of compensation as agreed by Longcheng and Tongba in the mediation agreement during the previous case could be applied in this case.