I  Principles of Compensation

According to the General Principles of Civil Code (GPCC 1986, Art. 117 & 118), the basic principle for award of damages in civil cases is compensatory damages rather than exemplary (or punitive) damages. In the cases of IP infringement, the principle is expressed as full compensation to damages, which is in fact consistent to the compensatory principle. At a national conference on trial of IP cases in November, 2004, the SPC has expressed a strong intention to strengthen the principle of full compensation and set up some guidelines.

II  Methods of Calculation

According to the IP laws including relevant judicial interpretations, there are generally four methods for calculating compensation against IP infringement. Especially, the Judicial Interpretations on Trial of Patent Civil Disputes issued on June 22, 2001, provide detailed calculation methods that can be referred in other IP infringements.

1) Loss of the IP Owner

The loss of the obligee (generally IP owner) can be calculated by multiplying the reduced sales volume of the patented products by the unit profit per patented product. If the reduced sales volume is hard to be determined, then the sales volume of the infringing products may be regarded as the reduced sales volume of the patented products.

2) Gains of the Infringer

The illegal gains of the infringer can be determined by multiplying the sales volume of the infringing products by the unit profit per infringing product (the profit of infringing product generally means the operating profit). For infringers who make their whole living on infringement, quantum of damages can be calculated according to sales profit. The sales profit is calculated by the sales income minus the manufacture cost; the operating profit is the further deduction of the sales profit with accounting and management cost.

In my view, in the cases of intentional infringement, the profit of the infringing product should be calculated according to the sales profit rather than the operating profit since the legal consequence of infringement should fall within the reasonable anticipation of infringers.

3) Referring to Royalty

At present, only the judicial interpretations on patent promulgate that when determining quantum of damages with reference to patent license royalty, the court should determine the damages within the range of one to three times of the patent license royalty.

4) Discretionary Damages / Statutory Damages

When quantum of damages cannot be determined by all the three methods mentioned above, the court may generally determine the quantum of damages of no more than RMB 300,000 (rough equals to US$ 38,000 or GB£ 25,000). For cases of severe consequence or serious circumstances, quantum of damages can be above RMB 300,000 but no more than RMB 500,000 (rough equals to US$ 63,000 or GB£ 42,000).

Besides the damages caused by IP infringement, the IP Laws stipulate that an appropriate or reasonable expenses of the infringee for stopping the infringement should also be recovered by the infringer. But the laws are still silent as to whether the attorney fee should be included in the "reasonable expenses". Some people argued that the attorney fee should not be counted in reasonable expenses because the relevant language in the TRIPs Agreement refers to "may include appropriate attorney's fees" rather than using the word "shall" or "must". However, Article 17 of The Judicial Interpretations on Trial of Civil Disputes of Trademarks (2002), provide that the reasonable costs incurred to prevent infringement include the reasonable costs incurred by the claimant or its authorized agent to conduct investigation and evidence collection in respect of any infringement; on the parties’ request and considering the specific circumstances of the case, legal fees pursuant to the regulations of the relevant governmental departments may be included in the amount of compensation.

On January 17, 2002, the SPC issued a potentially ground breaking judgement in relation to the enforceability of copyright contracts. In the complaint, the plaintiff relied on a clause of a film distribution agreement that it concluded with the defendant, which stated that “the Distributor (defendant) undertakes to compensate the Investor (plaintiff) ten times of any discovered omission or concealment of film revenue”. Apparently, this clause has been beyond the general principle of the Contract Law, which is in favor of a recovery of actual and predictable economic losses rather than punitive damages. However, the Court held the clause to be valid and enforceable due largely to the objective difficulties existing on the part of the Investor as to collecting evidence, and accordingly awarded the Investor RMB 2.277million (approximately US$ 280,000) for damages. This decision was unexpected since no such clause has been invoked successfully in a contract dispute in China before.[1] This decision is clearly of important meaning not only for establishing a precedent for future contract cases, but also for providing a reference for IP infringement cases.