On the Judicial Application of Punitive Compensation for Trademark Infringement

Zhong Yaoyao, Li Xiaoxiao

Abstract: In recent years, the issue of "punitive damages" in the field of intellectual property has increasingly become a focus and difficulty of judicial practice. The legislative system of punitive damages for infringement is becoming increasingly perfect. The establishment of this system is of great value for further strengthening the protection of intellectual property rights, solving the long-standing problems of low illegal costs and high enforcement costs of intellectual property infringement in practice, and curbing serious infringement of intellectual property rights. However, the legislative value needs to be realized through judicial practice. Since the implementation of China's intellectual property punitive compensation system 7 years ago, a unified judicial judgment standard has been difficult to form. This article is based on the trial practice of trademark cases, and from the perspective of judicial practice, selects typical cases directly related to punitive damages in intellectual property cases that have been concluded since 2021. Combined with the Fa Shi [2021] No. 4, it summarizes the basic principles, procedural requirements, substantive requirements, and hidden requirements of punitive damages, in order to further clarify the judicial application conditions of punitive damages and provide research results for litigation practice.

Keywords: Trademark infringement; Punitive damages; Statutory compensation; Compensation base; Compensation coefficient

In September 2021, the Central Committee of the Communist Party of China and the State Council issued the "Outline of Building an Intellectual Property Power (2021-2035)", which proposed the overall requirement of "building an intellectual property power with Chinese characteristics and world level". In the third part of the outline, "Building an intellectual property system oriented towards socialist modernization", Clearly requiring the comprehensive establishment and implementation of a punitive compensation system for infringement and increasing the intensity of compensation for damages. In recent years, China has continuously revised or promulgated a number of important intellectual property laws and regulations. Currently, the Civil Code and various specialized laws on intellectual property have introduced punitive compensation provisions, and multiple courts across the country (such as the Beijing High Court, Shandong High Court, Shenzhen Middle Court, etc.) have successively imposed punitive compensation The application of rules has introduced relevant judgment guidelines, opinions, research topics, etc. On World Intellectual Property Day, courts across the country have successively released typical cases of punitive damages for intellectual property, marking the gradual improvement of the system construction of punitive damages, and the increasingly prominent value and significance of punitive damages for intellectual property. However, in practice, due to inadequate procedural guarantees, unclear physical conditions, difficulty in calculating compensation bases, and lack of clear rules for compensation multiples,

This has led to the generalization of the application of statutory compensation, with few punitive damages and unclear application standards. In view of this, this article is based on the trial practice of trademark cases in China. Through sorting out the judgment documents and interpreting the Interpretation of the Supreme People's Court on the Application of Punitive Compensation in the Trial of Civil Cases of Infringement of Intellectual Property Rights (Fa Shi [2021] No. 4), it focuses on exploring the judicial application difficulties, understanding, and application of punitive compensation, hoping to mitigate the future damage to litigation participants in intellectual property cases

Provide accurate understanding and application of punitive damages in compensation claims.

1、 Overview of Punitive Compensation System for Trademark Infringement

（1） The Connotation of Punitive Compensation for Trademark Infringement

Punitive damages, as the name suggests, are additional punitive damages provided in addition to the general compensation system stipulated in civil liability for illegal acts, namely the "filling in principle". The punitive damages for trademark infringement specifically refer to: according to legal provisions, the defendant, due to their subjective fault and specific infringement circumstances, must pay the plaintiff more compensation than the plaintiff's actual economic losses in trademark infringement litigation.

（2） Legislative Development of Punitive Compensation

The provision of punitive damages first appeared in the revised Trademark Law of China in 2013, as stipulated in Article 63 of the law. In April 2019, the Trademark Law underwent several important revisions, including the amendment of Article 63. In 2020, the Civil Code was revised to include a punitive compensation clause in Article 1185.

In view of this, in March 2021, the Supreme People's Court issued the Interpretation on the Application of Punitive Compensation in the Trial of Civil Cases of Infringement of Intellectual Property Rights (Fa Shi [2021] No. 4), which stipulates that punitive damages

The practical operation of compensation clauses has been further refined accordingly.

The provisions of the above laws and regulations highlight the importance of the punitive compensation system for intellectual property rights.

2、 Analysis of Judicial Application of Punitive Compensation for Trademark Infringement

（1） The Application Status of Punitive Compensation for Trademark Infringement

This article screened the keyword "punitive damages" from the Chinese Judgment Document Network, and obtained a total of 1123 related judgments from the period of 2013-2020 under the condition of applying Article 63 of the Trademark Law. A further search was conducted on trademark infringement cases of "punitive damages" in 2021, and a total of 58 related judgments were obtained. From a time distribution perspective, from 2013 to 2018, China's application of punitive damages was still in the embryonic stage of experimentation and exploration. There were individual cases that were adjudicated, but the number of cases was relatively small, and the overall amount of compensation was also relatively low. From 2019 to 2021, with the increasing recognition of punitive damages in legislation, high compensation awards have been increasing year by year. From the perspective of geographical distribution, the judicial judgments of punitive damages are concentrated in coastal areas such as Beijing, Guangdong, Jiangsu, and courts in mega city areas, which is matched with the level and intensity of judicial protection of intellectual property in the region. In terms of proportion, the proportion of cases with statutory compensation is as high as 95%, with only a few cases relying on punitive compensation. Related research also indicates that even if the elements of malicious intent and serious circumstances of the infringer have been achieved, if the plaintiff fails to provide evidence to prove the three calculation bases of punitive damages, in practice, most cases still apply legal compensation. The root cause of the above is that the judicial application rules for punitive damages are not yet clear. Taking the "CK" trademark case of the Qingdao Intermediate People's Court in 2015 as an example, the defendant sold a large amount of clothing with the accused infringing logo in its online store without permission, which infringed on the plaintiff's registered trademark exclusive rights; In the series of cases where three Tmall online stores were originally accused of infringing their trademark exclusive rights, one of them was self operated by the defendant, while the other two were provided with invoices by the defendant. The online store page design was identical, and the plaintiff's trademark was used prominently on the homepage of the network. Therefore, the court found that the infringement behavior of the three sued online stores was clearly malicious and applied the principle of punitive damages, fully supporting the original complaint, Order the defendant to stop the infringement and compensate the plaintiff for a total of RMB 2.1 million in economic losses.

This case is the first case in Qingdao to apply the principle of punitive damages, reflecting the court's exploration of implementing punitive damages for well-known trademarks and the defendant's malicious and obvious infringement of "near famous brands". However, this case is not a true application of punitive damages, but only a higher amount of compensation was determined based on the determination of the statutory compensation amount, taking into account the defendant's malicious intent and serious circumstances. This judgment approach demonstrates that there is still significant controversy and confusion among the courts regarding the relationship between statutory compensation, actual loss or infringement profit compensation, and punitive compensation.

（2） The Causes of the Current Application of Punitive Compensation Cases

Due to different understandings of the punitive damages rules for trademark infringement in judicial practice, the proportion of cases in China that apply punitive damages for trademark infringement is relatively low. The reasons for this phenomenon are:

Firstly, there is a functional overlap between punitive compensation and statutory compensation. If the parties have not explicitly requested or cannot apply punitive compensation, can the court proactively apply the upper limit of compensation close to statutory compensation to reflect "punitive"? There are significant differences in the use of the punitive compensation system by the court;

Secondly, some courts apply punitive damages on the grounds of "malice+serious circumstances", some courts only apply punitive damages on the grounds of "malice", and some courts directly apply punitive damages without specifying conditions. The understanding of the applicable conditions of punitive damages is relatively chaotic;

Thirdly, when it is difficult to determine the actual losses, infringement profits, and multiple trademark licensing fees, some courts refuse to apply punitive damages on the grounds that the calculation base does not exist, while others choose a certain amount as the calculation base and apply punitive damages on this basis. The determination of the calculation base for punitive damages is not clear;

Fourthly, when the court determines the amount of punitive damages based on several times the base number, it only argues based on what the court considers to be more reasonable. The choice of multiples is relatively arbitrary, and there are also different understandings of multiples;

Fifth, for cases where punitive damages are applied separately, or both punitive damages and statutory compensation judgments are applied, does the plaintiff need to clearly claim the proportion of the amount of statutory compensation and punitive damages in the litigation request, or does the court choose to apply after investigation? The relationship between punitive damages and statutory compensation is not clear among judges in different courts, and there are significant differences in the judgment standards of different courts.

3、 Understanding and Application of Punitive Compensation Rules for Trademark Infringement

There are still significant difficulties in determining the amount of compensation in judicial practice, and punitive damages need to be further refined in terms of procedural rules and considerations of constituent elements. With the continuous heated discussion of the punitive damages system, it can be foreseen that in the future, there will be a significant increase in the number of litigation participants advocating the application of punitive damages. This article combines the provisions of Fa Shi [2021] No. 4 to draw the following research results on the application of punitive damages for trademark infringement:

（1） Adhere to the basic principle of "compensation first, punishment second"

Punitive compensation is different from compensatory compensation in that its main function is to punish and deter those who have seriously infringed on the rights and interests of others. The legal attribute of the punitive compensation system for intellectual property rights is civil liability, and due to its dual function of punishment, it is a civil liability with the nature of "private fines".

The ultimate goal of intellectual property protection is to achieve a balance between public and private rights. The principle spirit of legislation is still based on compensation, supplemented by punishment. Therefore, punitive compensation systems should only be introduced to severely punish infringements that seriously adjust the boundaries of rights and established rules for distribution of interests. The punitive compensation system for intellectual property rights is a supplement and improvement to the existing compensation system, rather than a subversion or replacement of the existing compensation system. Therefore, in practical operation, it is still necessary to adhere to the principles of legal application, equal protection, proportional coordination, protection of the legitimate rights and interests of rights holders, and consistency in maintaining public interests. However, the significance of determining the relationship between punitive damages and compensatory damages mainly focuses on theoretical research. In judicial practice, litigation participants generally do not propose to apply both compensatory damages and punitive damages at the same time, but choose to advocate for direct application of punitive damages. So is the true intention of the litigation participants to waive legal compensation in the event that punitive damages are not applicable? Obviously not. The viewpoint that this article agrees with is that it should be inferred that the intention of the litigation participants is to apply both compensatory and punitive damages, and should not be overly harsh on this, but it can be required to clarify the base (i.e. the amount of compensatory compensation) and the amount of punitive damages.

（2） The procedural requirements for the application of punitive damages

The starting conditions for punitive damages are the procedural issues that need to be clarified first when applying the system. The starting conditions include the starting subject, starting time, and proposing method of punitive damages. According to the provisions of Article 1, Paragraph 1, and Article 2 of Fa Shi [2021] No. 4, the following three points should be noted for the understanding of the above provisions:

1. Regarding the initiation subject. Punitive damages should be applied based on the application of the right holder, and should not be applied by the court ex officio. This rule is more in line with the basic principle of "no lawsuit, no action" in the Civil Procedure Law, and also in line with the position of a neutral judge in the court.

2. Regarding startup time. The right holder should clearly propose the application of punitive damages at the time of prosecution. If no proposal is made at the time of prosecution, it should be submitted at the latest before the end of the first instance court debate. This rule is also consistent with the time regulations for adding or changing litigation requests in the Civil Procedure Law.

3. Regarding the presentation method. The right holder may claim in writing the application of punitive damages, or may verbally request the application of punitive damages in court during the trial process. This handling not only helps to improve trial efficiency, but also ensures that it is well documented.

（3） The substantive requirements for the application of punitive damages

Due to the punitive nature of the punitive damages system, compared to general torts, only meeting the general requirements may lead to issues such as the universality of the system and the imbalance of legal relationships. Therefore, from the perspective of existing legal norms, the elements that require deconstruction analysis of the punitive damages system also include subjective elements, objective elements, and implicit elements.

1. Regarding subjective elements.

Intention or malice is a subjective psychological state that is difficult to prove by other subjects except for the perpetrator's clear knowledge. Therefore, distinguishing between intentional and malicious judgments will lead to difficulties for the court in determining subjective elements. Therefore, according to Article 1, Paragraph 2 of Fa Shi [2021] No. 4, intentional and malicious intent are synonymous at the level of legal rules and are not distinguished. Article 3 of the Law Interpretation [2021] No. 4 has clear provisions on the specific situations involved in intentional or malicious behavior. In addition, there are also provisions on the situation of "intentional" or "malicious" in the guidance opinions formulated by multiple courts, which can be used as a reference for courts in specific practice. As for other newly emerging situations in the case, it is necessary to request the court to carefully determine the facts and evidence of the entire case based on a systematic understanding of the existing legal provisions that have been cited.

2. Regarding objective elements.

Serious plot "refers to the adverse impact of the development and evolution process of an event in terms of time, degree, scope, consequences, etc., and generally does not involve the subjective state of the actor. For the determination of serious circumstances, it is necessary to combine the principles of daily life experience and the specific circumstances of intellectual property infringement cases to determine.

Case citation 1: In the trademark case of "Maotai Liquor v. Shengshi Dadian Liquor Industry" by the Beijing Intellectual Property Court in 2021, the court found that the "serious circumstances" referred to the following circumstances: the subjective intention of the five defendants to infringe on the plaintiff's registered trademark exclusive right and the goodwill of the trademark exclusive right holder was obvious, objectively causing market confusion and disrupting market order. At the same time, considering the market reputation and commercial value of the plaintiff's trademark involved in the case, and the popularity of the Maotai brand, the five defendants manufactured and sold counterfeit well-known Baijiu and provided similar goods of lower quality than the trademark owner. Their behavior seriously damaged the market reputation of the plaintiff and the Maotai brand, and the infringement was serious, so punitive compensation should be applied in this case. According to Article 4 of Fa Shi [2021] No. 4, by analyzing the above provisions and existing judicial practice regarding the situation of "serious circumstances", the following two aspects can be considered: first, the mode of behavior, including malicious infringement methods, long infringement time, wide infringement scope, multiple infringements or infringements of multiple intellectual property rights, and business based infringement. The second is the consequences of damage. Compensatory compensation requires causing damage to the right holder, so as a more severe punitive compensation system than compensatory compensation, it naturally requires causing more serious consequences of damage to the right holder. Specifically, it can be manifested in the huge profits from infringement, the harm to personal safety and environmental resources, the serious damage to social public interests, and the significant negative impact on the reputation, social evaluation, or social image of the rights holder.

3. Regarding implicit elements.

(1) Determine the base number.

When exploring the application conditions of punitive damages, both theoretical and practical circles mainly focus on analyzing subjective and objective elements. However, it cannot be ignored that an essential implicit condition when applying punitive damages is: the actual losses suffered by the right holder due to infringement, the amount of illegal gains obtained by the defendant, or the benefits obtained from infringement (hereinafter referred to as the infringer's profits) The multiple of the license fee can be determined, which is commonly referred to as the "base" of punitive damages. In other words, if the "base" of punitive damages cannot be determined, even if both subjective and objective elements meet the requirements, it will still be impossible to apply punitive damages because the "base" cannot be determined. Therefore, the calculation of the "base" of punitive damages is crucial for the application of punitive damages. Considering the particularity of intellectual property as intangible property, the possibility of accurately calculating the losses, profits, and licensing fees caused by infringement is extremely low. If judicial practice blindly emphasizes the accurate calculation of the above amounts, it will inevitably result in the inability to apply the three methods mentioned above, and make punitive damages meaningless because the "base" cannot be accurately calculated. Therefore, in terms of calculating the losses of the rights holder, the profits of the infringer, and the licensing fees, precise calculations should not be excessively demanded. The parties can prove the specific amount of compensation and also the reasonable range of compensation amount; It can be accurately calculated or summarized for estimation.

Case reference 2: In the "Jinggong" trademark case of Guangzhou Intellectual Property Court in 2021, the first instance court adopted the plaintiff's compensation calculation method, based on the tax data submitted by the plaintiff from the "Value Added Tax Declaration Form" and "Tax Declaration Details" of the national tax authority, as well as the industry profit margin data published on the website of the National Bureau of Statistics provided by the plaintiff, Taking the average industry profit representing the overall sales situation of an industry year as the standard for calculating infringement profit, the total infringement profit of the defendant is calculated to be 11312574 yuan. The second instance court also considered the above calculation method and rejected the appeal and upheld the original judgment.

Case reference three: In the trademark case of "Qiren Catering v. Love Dad's Fried Food and Beverage" filed by the Chengdu Intermediate People's Court in 2021, the court used the first statistics from Meituan.com as the revenue of the accused store, and based on the average profit margin of 13.73% in the hot pot industry published in the 2020 China Catering Industry Annual Report, claimed that this was the standard for calculating actual profits. The court calculated the infringement profit of the trademark part to be 3714136 yuan.

Case reference 4: In the "Wyeth" trademark case of the Zhejiang Provincial High People's Court in 2021, the court held that based on the financial data submitted by the original Guangzhou Wyeth Baby Maternal and Child Products Co., Ltd. and the number of distributors and annual purchase indicators submitted in administrative procedures, the range of infringement profits calculated was 7.8908 million yuan to 51.9319 million yuan, and determined this as the base for punitive damages.

When calculating the "base" of punitive damages, the following two types of compensation amounts need to be excluded: first, the compensation base determined according to legal compensation. The second is reasonable expenses.

Case reference 5: In the "Nintendo" trademark case of the People's Court of Yuexiu District, Guangzhou City in 2021, the court divided the calculation method of compensation for infringement damages into three situations: "1. If the loss or infringement profit of the right holder can be determined, the compensation amount should be calculated based on the loss or infringement profit of the right holder; for malicious infringement or serious behavior, punitive compensation can be applied If the loss or infringement profit of the right holder cannot be determined, the legal compensation shall be applied to calculate the compensation amount. 3. If partial losses or infringing profits can be determined, the compensation amount should be calculated based on the partial losses or infringing profits. If the applicable punitive compensation requirements are met, the punitive compensation amount should be determined based on the partial losses or profits; If the loss or infringement profit cannot be determined, legal compensation should still be applied. The final compensation amount is the sum of the compensation amounts obtained by these two calculation methods.

(2) Calculation of multiples.

If determining the "base" of punitive damages is to play the role of compensating compensation to fill in the losses of the rights holder, then the process of determining the "multiple" of punitive damages should focus on realizing the functions of punishment, deterrence, and stopping potential infringement. Therefore, the "multiple" of punitive damages should be calculated as the sum of the base of compensatory damages and the multiple of punitive damages.

Case reference 6: In the "Wyeth" trademark case of the Zhejiang Provincial High People's Court in 2021, the biggest feature was greater than the multiple determined by the Hangzhou Intermediate People's Court, which was three times the compensation base × 3. However, the Zhejiang Provincial Higher People's Court believes that the final total amount of compensation borne by the accused infringer should be the sum of the base amount and the punitive damages, so the total amount of compensation should be (1+3)=4 times the base amount. The "multiple" can be an integer or not, and whether the determination of "multiple" is scientific and reasonable also directly affects the implementation of punitive functions to a certain extent. When determining the "multiple" of punitive damages, the following factors can be considered:

Firstly, if the subjective fault degree of the infringer is more serious, the infringement circumstances are worse, and the severity of the liability is higher, the multiple should also be higher. According to Article 6 of Fa Shi [2021] No. 4, the court may handle the case at its discretion within the multiple range based on the specific infringement circumstances of the infringer.

Secondly, is there any other punishment situation. In addition to civil compensation, administrative fines and criminal fines also punish trademark infringement. If applied simultaneously, it will result in excessive punishment for the infringer. Therefore, when determining the amount of compensation for punishment, the court may consider the punishment of administrative fines and criminal fines. According to Article 6 of Law [2021] No. 4, if the corresponding punishment has been pursued, a lower multiple may be considered when determining the amount of punitive damages.

Thirdly, does it constitute a hindrance to providing evidence. In practice, the infringer holds relevant evidence, refuses to provide it without reasonable reasons, or provides false evidence in order to prevent the court from investigating the facts related to the amount of compensation. In this case, the court can refer to the claims and evidence of the right holder to determine the amount of compensatory compensation. According to Article 5 (3) of Fa Shi [2021] No. 4, on the premise that the loss of the right holder, the profit of the infringer, and the license fee can be determined, the situation of the infringer's obstruction of proof mentioned above also indicates that their subjective fault of evading legal sanctions and obstructing litigation is obvious. Therefore, when determining the "multiplier", it can be considered as a factor to increase punitive damages.

Case reference 7: In the 2021 Jiangsu Intermediate People's Court "Nature Floor" trademark case, the two defendants, upon request by the court, still failed to provide evidence of their profits from selling the accused infringing products. Therefore, it is believed that the plaintiff's calculation method of unit profit has corresponding evidence to support it. In the absence of corresponding counter evidence to refute or overturn the defendant's claim, the plaintiff's calculation method is supported.

Case reference 8: In 2021, the Intermediate People's Court of Changchun City, Jilin Province, in the "Haoyue" trademark case, determined that the franchise fee was 30000 yuan. The "Haoyue Farmers' Trade Community Monopoly Store Contract" does not directly specify the amount of trademark license fees. However, according to the contract in question, the use of the "Haoyue" registered trademark, signboard, and brand by the franchise store at the designated time and location is an important content of the franchise contract in question. Therefore, the franchise fee includes trademark license fees. According to the rights and obligations of both parties in the franchise contract, as well as the popularity of the "Haoyue" trademark involved, a trademark licensing fee of 10000 yuan is determined, and a double of the trademark licensing fee of 10000 yuan is used as the base for calculating the compensation amount in this case.

4、 Conclusion

Punitive compensation, as a powerful legal tool to increase judicial protection and improve the level of intellectual property protection, can be applied appropriately and have an immediate deterrent effect on combating infringement. If applied improperly, it will lead to abuse of rights and excessively squeeze the space for public behavior. At present, the understanding and application of punitive damages, in addition to the legal provisions of Fa Shi [2021] No. 4, are based on the guidance opinions formulated by higher people's courts in various regions. However, the guidance opinions are not standardized legal sources and cannot be elevated to a national judicial perspective. In order to avoid the occurrence of "different judgments in the same case" in various courts, it is urgent for the Supreme People's Court to issue guidance cases as soon as possible and unify the national judgment scale. For the punitive compensation system, our lawyer industry should also approach it rationally and not blindly apply it. We should strive to explore and summarize the judicial path of punitive compensation application in practice, and jointly help optimize the business environment, service innovation driven development strategy, and deepen "traceability governance".

Author's unit: Zhejiang Liqun Law Firm

Contact information: 15712668311 18657613220

Mailing Address: 3F, Building 6, Yintai City, Zhongxin Avenue, Jiaojiang District, Taizhou City