China: Patent Infringement Damages In China

In the May issue¹, we reported how Jaguar Land Rover had recovered substantial damages – all they had claimed – in unfair competition proceedings. The latest (fourth) revision of the Chinese Patent Law proposes to introduce an express provision that, if the accused infringer fails to provide accounts and materials or provides fake accounts and materials ordered by the court, the court may determine the compensation for patent infringement by reference to the patentee's claims and evidence. Toby Mak (Overseas Member) in one of his regular reports argues that the practice is already in action – illustrated in Ningbo Aux Air Conditioner v Zhuhai Gree Electric Appliances.

Difficulties with low levels of compensation

In addition to infringers who simply run away after being found to be infringing in court decisions, low levels of compensation is another problem for patent enforcement in China. The Chinese Patent Law specifies compensation for patent infringement should be awarded in the following order:

1. damages suffered by the patentee;
2. profit made by the infringer;
3. multiples (1 to 3 times) of a reasonable licence fee; and finally
4. statutory damages of between ¥10,000 and ¥1,000,000² (£1,140 – £113,800).

Of course, the first three points (a-c) above require substantive proof acceptable to a Chinese court. Because of the high evidence requirements in China, over 95% (if not 99%) of claims for compensation for patent infringement have been rewarded by Chinese courts as statutory damages, typically in the region of ¥50,000 to ¥500,000 (about £5,700 to £57,000). Such low levels of compensation is far from adequate in most cases, particularly in a large country like China. This has been criticized from all sides, domestic and international, and admitted even by the CNIPA. It has led to the following proposed revisions to the Chinese Patent Law (part of the "Proposed fourth revisions to the China patent law in front of the NPC"):

1. Raising of statutory damages from between ¥10,000 and ¥1,000,000, to between ¥100,000 and ¥5,000,000.
2. Introducing a provision that, when determining compensation for patent infringement, if the accused infringer fails to provide accounts and materials or provides fake accounts and materials ordered by the court, the court may determine the amount of compensation by reference to the patentee's claims and evidence.

The first point is straight forward. The second is highlighted in Ningbo Aux Air Conditioner Co., Ltd. (Aux) v Zhuhai Gree Electric Appliances, Inc. (Gree) below. This case was decided by the Ningbo Intermediate People's Court (the court) on 12 July 2018. It should be noted that it is not unusual that planned changes to the law in China have already been experimented with for some time before the law and regulations are formally changed. [My own comments are in square brackets.]

Aux's allegations

1. Aux's utility model ZL201520143902.0 ('902), filed on 15 March 2015, was claimed to be infringed by Gree's product model no. KFR-35GW/(35573)FNAa-A1 (the alleged infringing product). Aux purchased two sets of Gree's alleged infringing product, with proper notarization, and submitted the evidence to the Ningbo's Intermediate People's Court.
2. Aux requested compensation of ¥10,000,000 (about £1.14 million) for patent infringement. They submitted as evidence Gree's annual reports from 2015-2017, and media reports that Gree had on the infringing product. [Gree is a company listed in the China stock market.]
3. Aux also requested compensation for its legal fees for enforcing '902, and submitted invoices from its attorney.

Gree's defences

1. Gree asserted that it completed the design of the alleged infringing product in 2013 and obtained a national compulsory product certification in the same year. Therefore, the alleged infringing product belonged to the prior art.
2. Gree argued that their product did not infringe '902.
3. Aux's utility model ZL201520143902.0 is invalid, and Gree has already filed an invalidation petition at the Patent Re-examination Board (the PRB) of the CNIPA. Further, Gree filed a patent ownership dispute of '902 at the Ningbo Intermediate People's Court. Gree submitted acceptance of the invalidation petition by the PRB; and the patent ownership dispute of '902 by the Ningbo Intermediate People's Court as evidence.
4. Gree asserted that it did not make a profit from the alleged infringing product. Gree provided a one-page summary indicating sales of just 17 units (including two bought by Aux as evidence) at ¥17,000, and a final conclusion showing an overall loss.

Court's handling of various issues in the case

1. Gree's prior art defence

The evidence provided by Gree were accepted by the court on the basis of the compulsory official product certification and proper notarization of chain of evidence. However, this defence failed, as the prior art product at issue in fact had substantive differences from '902. Specifically, the two base installation holes and the lifting lugs were on a different horizontal line in '902, to effectively improve stability of installation in a limited installation space due to longer relative distance and displacement. By contrast, the two base installation holes and the lifting lugs in Gree's prior art product were on the same horizontal line.

2. Gree's non-infringement defence

The independent claim in Aux's '902 that survived after Gree's invalidation petition, and was at issue in the infringement case is set out below:

Gree argued that their alleged infringing product did not have lifting lugs but, screw columns instead. In Gree's product, the lifting lug is located at another remote end but not close to the motor.

The court decided that Gree's product infringed due to the following reasons:

• According to the specification, the lifting lug means an ear-shaped member that hangs from the main body of the installation seat.
• As a stepper motor for air conditioner is small and light, the lifting lug in '902 was an ear-shaped member that functioned as a fixed point for hanging stabilization and bearing the motor switching installation seat.
• The screw columns of Gree's product hang from the main body of the base, which had the same function of installing the installation seat on the housing without interference, as in '902, and there is no substantial difference compared with the lifting lug in '902, and therefore fell within the scope of '902.

3. Gree's invalidation petitions against Aux's '902

The PRB decided on 27 December 2017 that '902 was partly invalid; only original claims 5 and 6 were valid [the above claim 1 in "Gree's non-infringement defence" is the claim 5 surviving after invalidation]. Gree appealed to the Beijing IP Court on 10 January 2018.

At about the same time, Gree filed a second invalidation petition using different evidence from the first invalidation petition. However, as the first invalidation decision was still in appeal, the PRB did not start this second invalidation petition.

Although the first invalidation petition was under appeal and there was a second invalidation petition, the court decided that it was not necessary to suspend this infringement case as the PRB maintained '902, although only in part.

4. Aux's request for compensation for patent infringement

The court considered that Aux had presented as much evidence as Aux could on the infringement and profits made by Gree. Since the accounts and materials for proving the profit from the alleged infringing product were mainly possessed by Gree, the court ordered Gree to submit evidence such as accounts, materials and other relevant data on sales volume, sales unit price, profit rate, and the like, relating to Gree's alleged infringing product. Gree replied to the court with its one-page form, a short summary showing sales of just 17 units (including two bought by Aux as evidence) at ¥17,000, and a final conclusion that a loss resulted. No complete financial accounts and materials in accordance with the Chinese accounting standards were provided by Gree.

The court decided that Gree had not fulfilled the court's request for submission of evidence for the following reasons:

• Gree's submissions were inconsistent with Gree's self-proclaimed "huge national response and good branding", and reports by third parties in the media of the product "being popular... with rapid sales".
• The development cost of the product was estimated to have reached tens of millions of ¥. The total annual business revenue of Gree's air conditioner business was about ¥100 billion, which corresponds to a sales volume of more than 260,000 of Gree's air-conditioner. By contrast, the total sales volume of the alleged infringing product within 34 months was 17 at the unit price ¥17,000, that is the total turnover was only ¥280,000. The commercial cost and the total turnover are extremely divergent.
• According to Gree's annual reports, Gree's air-conditioner revenues in 2015, 2016, and 2017 were ¥83.7 billion, more than ¥88 billion, and more than ¥123.4 billion, respectively. The annual business revenue of air-conditioners of about ¥100 billion directly reflected the overall production and sales of Gree's air-conditioners. On just one e-commerce platform, Jingdong, Gree's sales of a similar product were more than 260,000.
• It was difficult to understand why Gree continued to produce the alleged infringing product for 34 months while suffering such substantial commercial losses.

Based on the above, the court ruled that Gree had failed to provide accounts and materials of infringement profit without any justifiable reasons, and should bear the consequences, i.e. the court would determine the compensation amount by referencing to the patentee's claims and evidence.

The court decision regarding compensation is summarised below:

Sales – considering that the unit price of the alleged infringing product is ¥17,000, nearly five times the unit price of similar products with sales of 400,000 units, the corresponding sales of units were reasonably estimated to be about 80,000. Therefore, the sales of the alleged infringing product was estimated to be ¥17,000 x 80,000 = ¥1.36 billion.

Profit margin and net profit rate – according to Gree's 2016 and 2017 annual reports, these were:

As the alleged infringing product is a new product with a higher price than those of ordinary products, and Gree's profit margin was higher than the net profit rate, the court decided that the profit margin of the alleged infringing product was not less than 35%.

Contribution rate – the alleged motor switching installation seat is an important component of the air conditioner, but not a finished air conditioner. Gree's brand would also have an impact on the consumers, which should be taken into account by the court.

Considering the above, the court fully supported Aux's claims of ¥10 million for compensation, as such did not exceed the reasonable scope.

All change – following the second infringement decision

Aux's '902 was found to be invalid in Gree's second invalidation petition on 14 January 2019. Specifically, '902 was found by the PRB to be not novel in light of CN10107015A. This invalidation decision made the above compensation decided on 12 July 2018 ineffective.

Observations

This case has several interesting points to note.

1. Gree's infringement was decided based on equivalence

As reported in an earlier article³, "Patent infringement claims with equivalence in China", this is yet another case showing that Chinese companies working around patents are not very sophisticated.

2. Invalidation petitions of '902, and no stay of the infringement proceeding

The court's decision not to stay the infringement proceeding due to the "failure" of Gree's first invalidation petition was procedurally fine, as Gree's first invalidation petition was not successful, and Gree was found to be infringing the surviving claims. The big reversal was that '902 was then found to be invalid on Gree's second invalidation petition, making the compensation of ¥10 million ineffective. This, unfortunately, is the risk a bifurcated patent system has to bear.

3. Court's determination on compensation

It is not unusual for a defendant to refuse to present evidence on compensation, or to present relevant evidence that the defendant actually made no profit from the infringing product (as in this case). From the handling of this case, the Chinese court will not allow defendants to wriggle their way out as before. They should have told a better story, with better evidence, if they wanted to convince the court that no profit was made from the infringing product.

While this may be good news to patentees, it should be remembered that this could affect foreign companies when they are defendants to an infringement claim. I will be interested to hear from in-house colleagues how they would react when facing an order from a Chinese court to deliver accounting records for an alleged infringing products.

Footnotes

1. April [2019] CIPA 19

2. We have used the ¥ symbol for the renminbi / RMB

3. February [2018] CIPA 26

Originally published by CIPA Journal, July-August 2019.

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