In a landmark ruling in China, Yamaha Motors has won the highest damages ever awarded to a foreign company for trade mark infringement.

China's Supreme Court ordered domestic motorcycle manufacturer Zhejiang Huatian to pay Rmb8.3 million ($1.1 million) in damages to Yamaha. The Court upheld the earlier decision of the Jiangsu Higher People's Court.

Zhejiang Huatian set up a shell company in Japan called Nippon Yamaha Co in 2000, which then entered into a trade mark licensing agreement with Zhejiang Huatian. The Chinese company claimed that this allowed it to manufacture motorcycles in China using the name Yamaha. 

"The judgment is a breakthrough in some areas," August Zhang, a lawyer for Rouse & Co International in Beijing told MIP Week.

The first breakthrough involves not just the size of the damages, but also the way they were calculated. The judge took into the account the evidence submitted by Yamaha but ignored the financial information provided by an auditor's report.

The report claimed that Zhejiang Huatian made no money from the sale of the trade mark infringing motorcycles and should therefore only be liable for statutory damages.

The second is that the judge made two distributors, Taizhou Jiaji and Taizhou Huatian, jointly and severally liable for paying the damages.

In making this decision the Court agreed with Yamaha's argument that all three parties knew that they were infringing the Japanese company's trade mark.

The three companies also have to make a public apology in a motorcycle magazine. 

But Zhang warned that Yamaha might find it difficult to collect the damages because the judgment contains no property preservation order to freeze the assets of the defendant. Companies in China often avoid paying court fines by hiding their assets and claiming they do not have the money. 

The company that Zhejiang Huatian set up in Japan is sometimes called a shadow company. A shadow company is a company incorporated in bad faith whose registered name includes a trade mark belonging to another party. This company is then used to license the manufacture of trade mark infringing goods, usually in China.

Hong Kong is the most popular location for setting up these companies due to the ease with which a company can be incorporated there. Although Anheuser Busch managed to change the name of nine shadow companies in April,  and progress has been made by other companies too, the problem remains serious. That counterfeiters also use Japan to incorporate these companies shows how widespread the problem is. 

In a twist to the case, Zhejiang Huatian's boss Li Shutong is the brother of Li Shufu, the boss of Geely Car Co, which successfully defended a similar trade mark infringement case against Toyota four years ago.