General Secretary Xi Jinping once stated that ‘one case is more convincing than a dozen documents’. This pronouncement vividly explains the important role cases play in providing examples and guidance for judicial organs at all levels.
On 22 April 2024, the Supreme People’s Court of China released its Top 10 IP cases of Chinese courts in 2023. Among these 10 cases, the trademark infringement and unfair competition case of Siemens was particularly significant. The judgment of this case is significant in matters of determining consumer confusion, calculating compensation amounts and other issues concerning the application of the law. What is more, it underscores that infringers who intentionally withhold evidence and impede the court’s fact-finding process will face adverse legal consequences.
The evidence in Siemens indicated that the infringing profits significantly exceeded the statutory maximum compensation of 5 million yuan, as prescribed in paragraph 4 of Article 17 of the Anti-Unfair Competition Law. If the compensation awarded had remained within this statutory limit – granted that the subjective malice of the infringer was confirmed and the punitive compensation claim could be fully supported thereafter – the rights holders (Siemens AG and Siemens (China) Co., Ltd) could not have been fully compensated.
Siemens AG and Siemens (China) asked for the compensation amount to be calculated according to the infringing profits, and the two companies provided relevant media reports of these as evidence. However. this evidence was not enough to determine the profits made from the infringement by the defendant, Ningbo Qishuai Electrical Appliance Co., Ltd. The first instance court required Qishuai Company to submit complete financial account books, product production plans and production records (including specific product models and quantities) of its cooperative business transactions with Shanghai Siemens Electrical Appliances Co., Ltd., as well as the contracts and complete financial account books of its cooperation with Kunshan Xinweichuang Electric Appliances Co., Ltd, and others. Neither Qishuai Company nor Xinweichuang Company had justifiable reasons for not submitting.
However, when Qishuai Company refused to provide these financial materials, the court of first instance chose to accept media coverage as the basis for calculating the total sales amount. It was able to determine the amount of damages by calculating the proportion of sales of the allegedly infringing products as one-fifteenth of the overall sales. Although the existing evidence could not prove either the profit or loss due to the infringement, it did establish that Qishuai Company’s benefits from producing and selling the alleged infringing products exceeded the statutory maximum amount of compensation. Considering that the names of Siemens AG and Siemens (China) are relatively well known, that Qishuai Company had obvious subjective malice, the scale and duration of infringement and the profit margin of washing machine products and other factors, the first-instance court determined to fully support the 100 million yuan (approximately US$14 million) compensation as damages and an additional 163,000 yuan (approximately US$23,285) as a reasonable request of Siemens AG and Siemens (China).
In the second instance of the SPC, Siemens AG and Siemens (China) clarified that they had so far only claimed compensation for unfair competition, and not for trademark infringement. Therefore, the second-instance court only determined the amount of compensation due for the Qishuai Company’s unfair competition. However, both trademark infringement and unfair competition were reflected in Qishuai Company’s use of the logo ‘Shanghai Siemens Electrical Appliances Co., Ltd’. The profit amount was also reflected in the production and marketing of the alleged infringing products. The production and sales numbers of the alleged infringing products were fixed, and by determining the compensation amount by calculating the proportion of sales of the allegedly infringing products as one fifteenth of the total reported sales of 1.5 billion yuan, it was not obviously inappropriate to determine the compensation amount of 100 million yuan, even when considering the only unfair competition aspect of the case. Therefore, the second instance of the SPC rejected the appeal and upheld the original judgment.
It should be noted that, in recent years, people’s courts in China have increased compensations for infringements by applying systems such as punitive damages. As a result, the costs of infringement and related illegal activities have significantly increased.
The SPC’s work report for 2023, released on 8 March 2024, showed that courts in China handled 319 cases involving punitive damages in that year. This amounted to a year-on-year increase of 117 per cent. The amounts awarded totalled 1.16 billion yuan, or three-and-a-half times more than the previous year.
However, even this amount of compensation is not enough. The main problem is an inaccurate grasp of the evidence and the specific circumstances of the infringement act, as well as deviations in the understanding of the legal rules. In its second instance judgment of the Siemens case, the SPC clarified the applicable conditions and considerations for determining a compensation amount over the statutory limit. On this basis, it made a reasonable determination of the compensation amount combined with an analysis of the evidence and an application of the system of obstructing the burden of proof. Granting the rights holder full compensation of up to 100 million yuan demonstrated China’s determination to vigorously crack down on acts of maliciously trading on others’ goodwill and infringing others’ business logos. And it also has a positive effect on purifying the competitive market and creating a good business environment.
Under such circumstances, when the rights holder determines the compensation amount for acts of infringement act and unfair competition under Article 63 of the Trademark Law and Article 17 of the Anti-Unfair Competition Law, the following aspects should also be well noted to ensure that the loss can be fully compensated.
First, there is a certain sequence to the method of calculation. The people’s courts must follow a certain sequence when determining the amount of infringement compensation, as illustrated below.
Sequence for selecting the applicable calculation method
Second, according to Article 13 of the Interpretation of Trademark Disputes, rights holders can choose how the compensation amount is calculated. If the rights holder selects a specific method, the calculation should first be made according to this method, but the rights holder should submit the corresponding evidence.
Third, punitive damages can be applied. Both the first paragraph of Article 63 of the Trademark Law and the third paragraph of Article 17 of the Anti-Unfair Competition Law stipulate that for malicious infringement and serious circumstances, the compensation amount can be calculated at one to five times the amount obtained by the above method. In judicial practice, this provision is usually referred to as punitive damages. The Interpretation of the Supreme People’s Court on the Application of Punitive Damages in Civil Cases Involving Infringement of Intellectual Property Rights further explains the conditions relevant to applying punitive damages. It will help rights holders obtain a higher compensation amount and increase the intensity of protection intensity if they try their best to prove intentional infringement, the serious circumstances and the profit gained by the alleged infringer.
Fourth, when the existing evidence cannot prove the specific amount of the profit gained by the infringer or the loss suffered by the infringed, but can prove that this is significantly higher than the statutory compensation limit, the people’s court should consider the following factors:
- the popularity of the enterprise’s name;
- the subjective malice of the infringer;
- whether the infringer has acted to obstruct proof;
- the specific circumstances of the infringement act; and
- the reasonable expenses incurred by the infringed party.
Fifth, the system of obstructing the burden of proof can be applied. The second paragraph of Article 63 of the Trademark Law stipulates that if the infringer acts to obstruct proof, the people’s court can determine the compensation amount by referring to the claim and the evidence provided by the rights holder. The Anti-Unfair Competition Law has no such provision, but the Siemens case shows that judicial practice is already applying this system.
Besides the above, this case offers significant insights for both the plaintiff and the defendant.
Plaintiff vs defendant
In conclusion, it is believed that on the principle that protecting IP rights is protecting innovation itself, courts at all levels in China have effectively strengthened the legal protection of intellectual property rights. Further, they have protected the legitimate rights and interests of both domestic and foreign parties to create an open, fair, equitable and non-discriminatory environment for the development of science and technology, and a market-oriented, world-class business environment governed by a sound legal framework.