Damages for patent infringement: the Chinese perspective

Kat friends, Professors Bashayer Almajed and Bashar Malkawi, offer a summary of the current approach to damage calculations for patent infringement under Chinese law.

Chinese Patent Law: A Multi-layered Approach to Damages

The Chinese patent law was enacted in 1985 and amended in 1992, 2000 and 2008. Importantly, on 17 October 2020, new amendments were enacted, due to take effect on June 1, 2021. Compensation for patent infringement is one of the key areas of focus.

Like the legal approaches in the U.S. and EU, the traditional framework for calculating patent damages in cases of infringement in China is multifaceted and founded on actual compensation. However, in practice, China tends to rely on statutory damages rather than assessed compensatory damages. According to research at Zhongnan University, 97.25% of all patent infringement judgments awarded are statutory damages, thus making it nigh on impossible to properly analyze patterns in judicially imposed royalty rates.

Despite that US. patent law does not provide for statutory damages in patent cases, the "25% rule of thumb”, [i.e., a fixed ratio of 25:75 for determining a baseline royalty, related respectively to the licensor and the actual or potential licensee and litigation damages] is, in fact, not meaningfully different from a “statutory damages” rule, and the use of statutory damages in China is, for similar reasons, namely simplicity and clarity.

In financial terms, the award of statutory damages in China has been of a significantly lower order of magnitude, closer to the pre-Uniloc 25% rule approach. The Uniloc v. Microsoft decision held that the 25 percent rule of thumb is a fundamentally flawed tool for determining baseline calculations, because it did not tie the reasonable royalty base to the facts of the case at issue.

Actual Damages

The starting point in China is that compensation will be calculated based on actual losses, calculated as the benefits accrued to the infringer, the losses suffered by the patentee, or a multiple of an assessed license fee. Article 71 of the 2020 amendment states that:

The damages for a patent infringement shall be determined according to the actual loss suffered by the right holder due to the infringement or the benefits obtained by the infringer from the infringement.

If difficult to assess, Article 71 goes on to state that profits earned because of the infringement can be used as the basis. If this also proves difficult, the “the damages shall be reasonably determined by reference to the multiple of the royalty for this patent.” As in US law, there is no fixed, statutory royalty rate.

Statutory Damages

As mentioned, Chinese courts rely heavily on statutory damages but, unlike most Western legal systems, Chinese law specifically enables this option. Thus, Article 71 states that if the first three methods of assessing actual damages, as mentioned above, are too difficult to determine, the court may award statutory awards instead, with the current range being from 30,000 yuan to no more than five million yuan (approximately $4,646 to $774,377).

In theory, therefore, statutory damages are the fourth and last resort method in the hierarchy. However, statutory damages have become the standard remedy. As such, this has led a self-fulfilling effect because, with exceptionally few awards being based on actual losses, unfair profits or a multiple of royalty rates, many lawyers and industry specialists do not even consider these as options when seeking to calculate patent damages in China.

Moreover, although Chinese case law reveals a move towards higher patent damages claims, in practice many cases are settled prior to judgment. Notably, the Supreme Court’s 2016 Judicial Interpretation shows that, for increased awards, the primary focus is on the first two methods of calculation, i.e., proof of actual losses and profits, rather than royalty rates. The result is that royalty rate assessments are broadly overlooked as a calculation method.

Punitive Damages

As a significant further step towards deterrence, the 2021 reforms in China will introduce punitive damages for the first time. Starting June 2021, Chinese law will allow the judge to award up to five times the original compensation (the benefits of the infringer or the losses of the patentee) in punitive damages if he/she deems that the infringement is intentional and serious in terms of size, duration, and geographical location.

This mirrors the U.S. remedy of ‘enhanced damages’ allowed under the Patent Reform Act of 2009, even if, in the U.S., enhanced damages are based on a multiple of three, not five.

Picture on right is by Savannah Grandfather and is licensed under the Creative Commons Attribution 2.0 Generic license.

Picture on left is by Mr. priono and is licensed under the Creative Commons Attribution-Share Alike 4.0 International license.