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Judicial protection of IP in China improves

Xie Guanbin and Zhang Bin of Lifang & Partners analyse the increasing level of protection afforded to IP rights holders in China, examining the quantification of damages and developments that facilitate better judicial decisions

IP protection in China has attracted a lot of attention recently. Some of that attention has been positive, such as the World Intellectual Property Organisation (WIPO) reports showing an increasing number of patents being filed in China and by Chinese companies, independent and government data showing fair treatment of foreign litigants and the famous Supreme People's Court case involving Michael Jordan. However, not all the attention being given to IP protection in China is positive. Those who follow the news will be aware that US president, Donald Trump, is reportedly considering a big fine against China for what he considers to be IP theft.

Those interested in China should be aware that its laws reflect national policies. Chinese President Xi Jinping declared at the 16th meeting of the Central Leading Group on Finance and Economic Affairs in July 2017 that: "Greater punishments should be imposed against IP infringers and that they should pay a heavy price for their infringing acts."

Another important policy indicator came a year earlier in August 2017. During a report on the work of the IP courts, the president of the Supreme People's Court, Zhou Qiang, said: "We should spare no effort to solve the problem of low costs for infringement and high costs for enforcement. We should strengthen the punishment of IP infringement and duly increase infringement damages, making infringers pay for the consequences of their actions."

Also in 2016, the Planning on the Protection and Utilisation of Intellectual Property Rights during the period of the 13th Five-Year Plan was released. It clearly emphasised that the nation should focus on a policy of: "Strictly enforcing IP protection, increasing infringement compensation, and promoting good faith and integrity during litigation."

However, before looking at how matters have improved in China, it is worth keeping in mind that the legal mechanisms for the protection of IP in China are only around 35 years old. Since 1983, China has evolved from a country where IP was an entirely alien concept to a nation that made 1.3 million domestic patent applications in 2016. The Chinese IP system has developed rapidly.

Developments include the creation of special IP courts, the increasing professionalism of the judiciary, the live broadcasting of trials and a steady increase in the value of damages. All of these developments have attracted attention, but the steady increase in the value of damages has attracted the most attention.

The increase in the value of damages reflects a greater focus on IP protection and is attributable to the Chinese judiciary's dedication to the exploration of various ways for determining damages, improving evidential rules for IP litigation and creating special features to facilitate IP protection.

An exploration of the different ways of determining damages

In China, damages for IP infringement can be determined based on the actual loss suffered by the rights owner, illegal gains of the infringer, reasonable royalty rates, agreed compensation, legal compensation, discretionary damages that break the ceiling of legal compensation and other relevant factors.

Before 2015, legal compensation prevailed in the overwhelming majority of IP infringement cases. For example, in IP infringement cases from 2013 to 2015 in Beijing, legal compensation was applied to 97.12% of copyright infringement cases, 99.59% of trade mark infringement cases and 88.33% of patent infringement cases. In another example, from 2008 to 2011, the courts in Guangzhou accepted 10,356 IP civil cases at first instance and legal compensation was applied nearly 100% of the time.

Developments include the creation of special IP courts, the increasing professionalism of the judiciary, the live broadcasting of trials and a steady increase in the value of damages

At present legal compensation is below RMB 0.5 million ($79,000) in copyright infringement cases, below RMB 1 million ($158,000) in patent cases and below RMB 3 million ($473,000) in trade mark cases. Damages based on legal compensation are relatively low and often do not match the losses resulting from IP infringement.

To prevent the inappropriate overuse of legal compensation, the Opinions of the Supreme People's Court on Several Issues Concerning the Trial of IP Cases against the Current Economic Backdrop states that damages can exceed legal compensation limits. Afterwards, guiding opinions issued by Beijing, Shanghai, Zhejiang and other districts followed suit by clarifying that damages may exceed legal compensation limits. Since the status of legal compensation was clarified, the courts have gradually standardised some common practices when applying discretionary damages.

Through a preliminary investigation and survey of recent cases where the courts awarded discretionary damages exceeding legal compensation limits, we observe that courts will generally award discretionary damages based on the following: evidence preserved through evidence preservation; evidence disclosed by the parties; the balance of probabilities; estoppel; the need for multiplying royalties; third-party data; judicial appraisal; reasonable estimates; and financial audits. It is also worth noting that cases involving discretionary damages tend to involve valuable patents and severe, large-scale infringement.

In IP cases, several new judicial practices are gradually forming regarding the determination of damages. The first practice is to take the market value of the infringed IP as a benchmark for determining damages. The second is to determine damages by giving priority to compensatory damages and supplementing it with punitive compensation, which raises compensation standards and solves the practical problem of low costs for infringement and high costs for enforcement. The third is to reduce the application of legal compensation, apply the rule of evidence in IP litigations and ignore the upper limit of legal compensation. When used together these new practices make judicial decisions more professional and precise.

Improving evidential rules for IP litigation

In retrospect, we note that legal compensation has been widely applied in IP infringement cases due to the difficulties faced by IP owners in obtaining and producing evidence. Evidence of illegal gains tends to be in the possession of infringers and is rarely accessible to IP owners. To solve this problem, China has been making proactive efforts to improve legislation and the Chinese judiciary is gradually modifying evidential rules to meet the needs of IP cases. Two particular improvements to evidential rules are worth highlighting.

Firstly, China has set forth evidential rules regarding obstruction of evidence. Article 75 of Several Provisions of the Supreme People's Court on Evidence for Civil Actions (Revision 2008) provides that: "Where any evidence proving that one party is in possession of evidence but refuses to provide it without justified reasons and the other party claims that such evidence is unfavourable to the party in possession of the evidence, an inference that the other party's claim is valid may be drawn."

Evidence of illegal gains tends to be in the possession of infringers and is rarely accessible to IP owners. To solve this problem, China has been making proactive efforts to improve legislation and the Chinese judiciary is gradually modifying evidential rules to meet the needs of IP cases

The Trademark Law (Revision 2013) has a similar provision in Article 63 that states:

"Where a rights holder has provided proof using their best efforts, and the accounts books and materials relating to the infringement are held by the infringer, the People's Court may order the infringer to provide accounts books and materials relating to the infringement; where the infringer does not provide accounts books and materials or where the accounts books and materials provided are false, the People's Court may determine the compensation amount with reference to the assertion of the rights holder and the evidence provided."

Despite having existed since 2008, the evidential rules relating to the obstruction of evidence were not immediately and consistently applied by the courts. As IP protection gained prominence in China, the courts began to pay more attention to applying such rules. A good example of this is the patent infringement case of Watchdata v Hengbao, in which the Beijing IP Court awarded the IP owner RMB 50 million ($8 million) in damages. Despite the possibility of this case being overturned due to patent invalidity, the Beijing IP Court's decision in relation to damages provides useful insights.

Secondly, legislation covering evidence preservation has effectively alleviated the burden of proof for IP owners. Evidence preservation is usually classified into pre-action preservation and in-action preservation. Evidence preservation is a critical means for obtaining evidence in IP cases as it allows the IP owner to gain access to evidence that would usually be inaccessible. Past practice indicates that there is a high probability of IP owners applying for evidence preservation in cases involving software copyright, trade marks and unfair competition. However, evidence preservation requires prior approval from a court. Whether a court approves of evidence preservation will mainly depend on if the IP owner has submitted preliminary evidence of infringement and if there are reasonable grounds for evidence preservation e.g. emergency, possible destruction of evidence.

Creating special features to facilitate IP protection

In recent years, the Chinese judicial system has witnessed constant innovation. Due to the peculiarities of IP, a series of special features were created to protect it.

Establishment of additional IP courts

Considering the success of the original IP courts in Beijing, Shanghai and Guangzhou, the Intermediate People's Courts of Nanjing, Suzhou, Wuhan and Chengdu established IP courts in January 2017 for transregional trials. In August that same year, IP courts were also established in Hangzhou, Ningbo, Hefei, Fuzhou, Jinan and Qingdao. Using dedicated IP courts will improve judicial professionalism and facilitate the determination of infringement damages.

Technical investigators

Technical investigators are an innovative specialist role, created to support IP courts. In patent cases involving complex technology, a court may appoint a technical investigator to participate in the case. Before a court hearing takes place, a judge will make inquiries about the technical issues to be determined. Thereafter, expert witnesses from each side will address those technical issues, which may involve some debate. Once the expert witnesses have submitted their opinions, the technical investigator will cross-examine them to clarify any outstanding issues. Once those issues have been clarified, the technical investigator will provide the court with review comments.

Other matters in which technical investigators will participate include investigations, evidence collection, inspections, evidence preservation, inquisitions, hearings and other procedures. Technical investigators attend the deliberations of collegial panels, but will not comment on their decisions. Technical investigators are merely advisors who provide technical opinions on issues that are ultimately for the courts to decide.

Expert witnesses

Expert witnesses, who have professional knowledge and expertise and whose statements have the same effects as litigants, usually provide opinions in important patent cases and can play a significant role in assisting the courts. Though they are not extensively used, expert witnesses can assist litigants and the courts by explaining complex technical matters. Expert witnesses and technical investigators working together help judges to better understand technical issues. This improves the quality and efficiency of judgments.

Case citation

This system originates from the Opinions of the Supreme People's Court on Implementation of the Juridical Responsibility System (Trial). At present, some courts have broken away from traditional civil law practices by requesting that the parties to a case each submit a case citation report. Once the reports have been received, a court may hold a hearing in which it will consider the arguments of the parties regarding appropriate case citations. It may be helpful to think of this as a type of non-binding persuasive precedent system.

Looking forward

China is becoming an IP generating powerhouse. In 2016 alone, 1.3 million patents were filed in China. IP represents a great opportunity for national development, and due to this potential, IP protection has attracted much government attention. IP owners should be more aware of their rights and take full advantage of all the available mechanisms to protect those rights.

Xie Guanbin
Xie Guanbin is skilled in intellectual property disputes, antitrust and competition law, matters concerning hi-tech companies and venture capital, finance and insurance related issues. He has gained a strong reputation in these areas with his solid academic background, government experience and professional dedication. He is listed in Chambers as a band one leading individual in the field of IP, is a Managing Intellectual Property IP Star, and is a highly recommended individual in Legal 500 and other league tables. Clients have found him “very strategic, experienced and responsive” and praised him for his “standout presentation, attention to detail and sound advocacy skills.”

Xie Guanbin is an arbitrator for the World Intellectual Property Organisation and an arbitrator, specialising in international commercial cases, for the Beijing Arbitration Commission. Xie Guanbin founded Lifang & Partners in 2002 and is now the firm’s managing partner.

Zhang Bin
Zhang Bin practises intellectual property law, finance and insurance law, civil and commercial litigation and arbitration. She has experience working with the scientific, cultural and creative industries. She is renowned in these areas for her professional dedication and outstanding achievements. She has represented clients in a number of important cases before the Supreme People’s Court, provincial High People’s Courts, and in cases of significant social impact, which receive wide media coverage. Some of her cases were listed as Top 10 Intellectual Property Cases or Top 10 Software Cases. Since 2012, Zhang Bin has been recognised in Chambers as a leading lawyer in the IP area.

Zhang Bin has extensive experience in handling litigious and non-litigious matters relating to trade marks, copyright, patents, unfair competition, trade secrets, domain names, technology contracts and corporate intellectual property arrangements. She is retained as external counsel by a number of high-tech, cultural and creative companies, where she advises on corporate management, contracts, shareholding structures, labour and investment disputes.

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