Punitive damages for IP infringement recognized for the first time

The Supreme People’s Court has, for the first time, recognized a form of punitive damages for IP rights infringement. 
The court's Opinion on the Implementation of the National IP Strategy, which was published in April 2009, appeared at first blush to provide only for policy considerations. However, a careful reading of Article 5 suggests that the opinion represents a significant development in Chinese IP law.
Under Article 5, the Supreme People’s Court opines that Chinese courts may raise compensation awards (“enhanced damages”) for the purposes of deterring infringement and lowering the costs of IP enforcement when contending with:

  • repeat offenders;
  • infringement on a large scale; and
  • cases involving bad faith.
In contrast to Article 5 of the opinion, Article 117 and 118 of the General Principles of the Civil Law of the People's Republic of China stipulates that the basic principle underlying damages awarded for IP infringement is to be based upon compensation, rather than punitive or exemplary punishment. For trademark infringement, this principle is further codified under Article 56 of the Trademark Law, which provides that damages are to be assessed according to:
  • the losses suffered by the trademark owner;
  • the profits made by the infringer; or
  • statutory damages.
Deterrence is not an objective of compensatory damages – rather, it is an objective of punitive damages. Thus, the opinion not only provides the first official endorsement of damages for the purposes of deterring IP infringement by the Supreme People’s Court, but it also marks the introduction of punitive damages into Chinese IP law.
To some owners of Chinese IP rights, civil enforcement of their rights represents a no-win proposition - even when successful in litigation, damages awarded are insufficient for the purposes of covering their costs of enforcement and do not provide the required deterrent effect against future infringement. Article 17 of the Judicial Interpretations on Trial of Civil Disputes of Trademarks (2002) provides that a trademark owner is entitled to reasonable costs incurred to prevent infringement, which include the costs incurred when conducting investigations and collecting evidence. The court may also award costs of legal fees upon considering the specific circumstances of the case and the regulations of the relevant governmental departments. However, awarded costs are almost always less than actual costs. 
Accordingly, IP owners in China faced with egregious infringement of their IP rights may refer to the formal recognition of “enhanced damages” in the opinion for the purposes of recouping their costs of civil enforcement - and also as a means of deterring future infringement.
George Chan, Rouse, Beijing

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