China to adopt punitive damages for IP infringement – An economic commentary

The IPKat is happy to publish the following guest post by Roya Ghafele (OxFirst) on the important issue of punitive damages from an economic perspective.

Here's what Roya writes:

“China is to adopt punitive damages for IP infringement, according to information from Reuters and the New York Times. This is an approach with which the United States is intimately familiar with. To the skilled political economist, the key question in applying legal remedies, be they damage awards or injunctions is that they should be welfare enhancing: ‘If Courts understate damages, the distributional damage remedy may disappear altogether. However, if Courts overstate remedies, then this gives way to strategic behaviour and opportunism and extortion.’  

How to strike such a balance should be core to any governance structure for IP enforcement. The advantage of damages awards is that they allow to offer an award based on the value of the patented technology and not the nuisance from an injunction. For this to happen under fair and equitable conditions, damage awards need to be more systematically assessed from an economic point of view and the practice of IP valuation and damage calculation further promoted. When sound economic principles are applied to the assessment of damages, they allow indeed to model the value of a patent, be it in the eye of the infringer or of the rightholder.

For this to happen, China, like many other countries, would need to come to grips with the economic analysis of damages. Raising the traditionally low damage awards in China may hence be in fact welfare enhancing as it will allow to model damage awards according the economic merits of the case, provided China or its trading partners are willing and able to help build economic competences as they relate to the assessment of damages. This will require to further promote the practice of IP valuation when assessing damages. If Courts want to apply damage awards correctly, they will need to systematically apply IP valuation methods. Finding the right amount of damages is not infeasible: IP valuation methods are used for sales, licensing, litigation, tax, and accounting purposes.

At the same time, China may want to consider to re-think its practice of issuing quasi-automatic injunctions. In fact, UC Berkeley scholar Renjun Bian analysed all publicly available final patent infringement cases decided by local people’s courts in 2014, which amounted to a total of 1,663 patent infringement judgments.  He finds that all plaintiffs won in 80.16% of all patent infringement cases and got permanent injunctions automatically in 90.25% of cases. Hence China, has been reported to issue a permanent injunction on a quasi- automatic basis in over 90% of all cases where a judge ruled that a patent was valid and infringed.

The inherent challenge with an injunction that is issued on a quasi-automatic basis is that it dictates a purely one-size-fits-all approach. It is not necessarily related to the economic worth of the harm and deprives the Court of the ability to issue a damage award reflective of the value of the IP at stake. Rather, the injunction will reflect the value of the business or business line that is to be closed down.

Hence, a major short coming of quasi-automatic or automatic permanent injunctions can be that it deprives the Court of the ability to issue a nuanced statement on the value of damages and adequately reflect the economic value of the patents at stake. Overall, automatic or near-automatic injunctions are likely to bring the infringed party an arbitrary remedy (if at all) as an injunction is not linked to the economic value of the patent.

If China is hence to depart from a tradition where damage awards are rather low and adopts a more US type rationale for damage awards, it may want to consider to consider to tie the issuance of an injunction also to a U.S. style four factor test, which is required in this country since the 2006 decision of the Supreme Court in eBay Inc. v. MercExchange, LLC. In an article published with the Iowa Law Review, Seamen finds that during a study period of 7.5 years, injunctions in the United States remained fully available for all market participants except patent assertion entities, which obtained an injunction only in 16% of all district Court decisions. Measures along those lines, could alongside a more systematic understanding of patent damages from an economic point of view allow China to find its way to an equitable IP enforcement system!”