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High damage awards in patent cases not always what they seem
Date:2018-01-26
In December 2016 a decision of the Beijing IP Court received wide attention as it potentially signaled increased damage awards in China patent cases. The decision by the Court in Watchdata System Co. Ltd. (“Watchdata”) vs. Hengbao Co., Ltd. (“Hengbao”) saw damages of RMB 50 million (USD 7.8 million) awarded to the plaintiff, including 1 million RMB for reimbursement of litigation costs. It was a noteworthy decision, because it represented the highest damage award in the history of the new court. It was also seen as a trend towards higher damage awards and the ability to reclaim attorney fees and evidence preservation cost.

One year on, it is interesting to look at the final outcome of this widely reported case. In November 2017, the Patent Reexamination Board of SIPO (PRB) issued a decision that partly invalidated the patent rights of Watchdata. As a result, the ruling of the Beijing IP court was revoked by the Beijing Higher People’s Court in the appeal proceedings shortly after the PRB decision and the high damages may never be paid.

This decision shows the importance of the parallel invalidation proceedings in the patent office on the patent itself in the split Chinese IP system. And the Watchdata case is not a single incident. In Neoplan Bus GmbH vs. Zhongda Group (Zhongda) the first instance patent court ruled in January 2009 to pay damages of RMB 21 million (USD 3.2 million) for infringement of a design patent. However the patent was invalidated by PRB for lack of novelty thereafter and the exceptionally high damages were not upheld on appeal in 2012.

The trend towards higher damage award

Whatever the end result in the Watchdata case, it is important to acknowledge the decision of the Beijing IP Court to award higher damages. Such a decision should not come as a surprise to the practitioners that have followed the Chinese government’s efforts to strengthen IP protection. In that case, the court made use of the new guidance provided in Art. 27 of the Judicial Interpretation of Supreme Court with regards to the Applicability of Relevant Laws when Patent Infringement Cases are Handled (effective from April 1, 2016).

After the defendant refused to produce evidence of their profits, the Court decided to determine the profit made by the infringer based solely on the patentee’s assumptions and claims. The decision to apply the reversal of burden of evidence was made in this case as the accused infringer was not collaborating with the Court. This is of great benefit to plaintiffs as it is difficult, or often even impossible, to provide evidence of the profits of the accused infringer. Evidence preservation means were limited and many plaintiffs therefore only claimed statutory damages which are limited to 1 million RMB (USD 156,000) for even the most severe cases of infringement.

Further, with regard to the reimbursement of litigation costs, the IP court made full use of Art. 65 of the patent law which states that “reasonable expenses” of the plaintiff to stop the infringing acts can be included in the damage award. In the past the courts took a very conservative local approach on “reasonable expenses” - rarely granting amounts over USD 10,000. The decision to award 1 million RMB (USD 156,000) in the Watchdata case means that plaintiffs providing proof of their costs could reasonably now expect higher compensation, even if those costs are significant.
Additionally it can now also be expected that the revision of the patent law in its upcoming 4th amendment will not only have new provisions for strengthening enforcement, but that those will also be utilized by the courts.

The 4th amendment will likely make the Supreme Court guidance for the reversal of burden of evidence part of the revised patent law. Furthermore double or triple damages may be awarded, if willful infringement is found. The multiplied damages will be more difficult to obtain as willfulness can probably only be proven in cases of repeated infringement with criminal intentions. However, these proposed law changes will make higher damage awards more likely and will be an important consideration when predicting outcomes of patent litigation.

The importance of patent validity

If higher damage awards can now be expected, plaintiffs should keep in mind that the patent quality will always be an important factor. China’s enforcement system is split with the patent validity being challengeable before the patent office (SIPO) while the infringement action is assessed in parallel in the IP or civil courts.

The two high damage award cases cited above show two potential outcomes of this system, one of them being that record damages cannot be obtained if the patent is invalidated in the part that covered the accused infringement. While win rates for patentees are higher than 80% in patent infringement cases, according to a June 2017 report of the Beijing IP Court, the patentee before the PRB in SIPO in the first instance still bears a significant risk to lose the patent there. As the invalidation proceedings are mostly slower than the infringement cases, an announced first instance decision of the infringement court can become obsolete if the PRB revokes the patent in total or part thereafter.

Further, although the PRB decision can be appealed for judicial review to the Beijing IP court and Beijing Higher People’s Court, the PRB decision bears significant weight and will generally be confirmed by the courts. This was also recognized in the law drafts of the 4th amendment of the patent law. It is foreseen that infringement cases which are suspended by the courts in view of the pending invalidation will be resumed once the PRB makes a decision in the invalidation case.

A comprehensive validity analysis under the known examination criteria of the PRB is therefore of utmost importance in judging the outcome of the patent infringement litigation apart from the chances to be awarded costs and damages. It is also crucial to prosecute Chinese patent applications in view of potential invalidation threats and to use the opportunities to make voluntary amendments to the claims during the examination proceedings to adapt the claims to Chinese practice.