20 May
2019

Order of discovery for profits from patent infringement

Beijing Wei Chixue Law Firm (Linda Liu Group)

China has no discovery system and applies the ‘burden of proof’ principle to be borne by the claimant. As a result, the plaintiff usually bears the heavy burden of proof. The plaintiff must prove the existence of the alleged infringement and, if a relatively high amount of damages is desired, will also have to prove the rights holder’s losses or the infringer’s profits obtained from the infringement.

In view of the difficulty regarding the burden of proof and low damages, a system of order of discovery for profit from infringement in patent infringement litigation was officially introduced on 1 April 2016 in the Interpretation (II) of the Supreme People’s Court on Several Issues Concerning the Application of Law in the Trial of Patent Infringement Dispute Cases (Patent Infringement Judicial Interpretation II).

This system has been used to petition in several patent infringement litigations for an order to urge the infringer to provide the evidence of profit obtained from the infringement. In such cases, if the infringers fail to provide the required evidence, the court fully supports the alleged damages in millions of renminbi.

Typical case

Case (2018) Yue Civil Final 682 at the Guangdong High Court as second-instance court, was between the design patentee MTG Co Ltd (the plaintiff) and the accused infringer IMATE Co Ltd (the defendant).

In July 2015 MTG released SIXPAD, body-fitting intelligent training gear. The product has been represented by Cristiano Ronaldo since it was released and has been promoted with a great deal of publicity. MTG registered a design patent for SIXPAD training gear. At the end of 2015 IMATE released similar training gear. MTG sought to enforce its patent right in relation to the IMATE product. After collecting the evidence, in 2017 it filed a lawsuit and claimed Rmb2 million in damages, along with an additional Rmb200,000 in reasonable expenses. The final decision was issued in August 2018, supporting the claims in full.

A presumed sales amount was filed with the court in respect of the allegedly infringing product, based on sales records and comments displayed on e-commerce platforms such as Tmall, JD and Taobao. Further presumed gains of at least Rmb3.47 million obtained by the infringer from sales (calculated by the difference in prices of the allegedly infringing product across various periods to be the profit of a single product used as prima facie evidence) were also claimed by the plaintiff, thereby applying to the court to urge the defendant to disclose all sales data relating to the allegedly infringing product. The court acknowledged that the prima facie evidence of the gains from the infringement had an objective basis and reason. The court therefore decided that within seven days the defendant should submit all sales records of the allegedly infringing product from each e-commerce platform. On receipt of the decision, the defendant immediately took the allegedly infringing product off the market and submitted only the sales records of the products still on sale. The defendant argued that the sales records could not be stored after the product was taken off the shelves and could therefore not be provided. In this regard, the policies of each e-commerce platform regarding online transaction records were provided by the plaintiff to the court to prove that the sales records of all products could not be erased. The court verified the claim. Thus, the court determined that the alleged infringer was capable but refused to provide evidence of the sales records of the allegedly infringing product, and that the reasons stated by the defendant were fake. The defendant’s behaviour constituted hindering proof and as a result the defendant had to bear any resulting adverse consequences.

The court decided that although the calculation of the gains from the infringement included presumptions it was reasonable, and the presumed gains from the infringement surpassed the amount of damages claimed. As a result, the claim for Rmb2 million in damages was supported in full.

As for the reasonable expenses, the total value of the bills for counsel and notary fees, among other things, amounted to more than Rmb14,000. The cost of the enforcement was increasing due to the continuing infringement of the defendant and was therefore also claimed. The court acknowledged the claims and supported the reasonable expenses of Rmb200,000 in full.

Related laws and regulations

The order of discovery for profit from infringement is specified in Article 27 of the Patent Infringement Judicial Interpretation II:

Where it is difficult to determine the actual loss suffered by a right holder, the people’s court shall require the right holder to furnish evidence to prove the gains obtained by the infringer from the infringement in accordance with Paragraph 1 of Article 65 of the Patent Interpretation of the Supreme People’s Court on Application of the Civil Procedure Law of the People’s Republic of China Law. Where a right holder has provided the prima facie evidence proving the gains obtained by the infringer but the account books and materials related to the acts of patent infringement are mainly controlled by the infringer, the people’s court may order the infringer to submit such account books and materials; where the infringer refuses to provide such account books and materials without justification or provides false account books and materials, the people’s court may determine the gains obtained by the infringer from the infringement based on the claims of the right holder and the evidence furnished thereby.

According to Article 112 of the judicial Interpretation of Civil Procedure Law, where the documentary evidence is under the control of the opposite party, the party which bears the burden of proof may submit a written application requesting the people’s court to order the opposite party to submit it before the expiry of the time limit for adducing evidence. According to Article 75 of the Evidence Rule, where there is evidence that a party holds evidence and refuses to disclose it without due reason, if an opposing party alleges that the content of the evidence is not conducive to the evidence holder, it can be presumed that assertion of the opposing party is established.

Compared to the provisions of the above judicial interpretations, the provision of the Patent Infringement Judicial Interpretation II is clearly more specifically directed at the evidence for profit from the infringement in a patent infringement litigation. The provision aims to relieve the rights holder from the burden of proof and increase the rights holder’s opportunity to be awarded higher damages.

Applicable conditions

According to the provision of the judical interpretation, the applicable condition of the order of discovery for profit from infringement is that “a rights holder has provided the prima facie evidence proving the gains obtained by the infringer but the account books and materials related to the acts of patent infringement are mainly controlled by the infringer”. Since it is apparent that “account books and materials related to the acts of patent infringement are mainly controlled by the infringer”, in judicial practices, as long as the rights holder can provide the prima facie evidence proving the gains obtained by the infringer, there is a chance for the rights holder to apply for an order issued by the court to urge the infringer to disclose the account books and materials related to the gains obtained from the infringement.

As for “the prima facie evidence proving the gains obtained by the infringer”, according to current judicial practice, the criteria conducted by the court is not very strict. Pursuant to relevant articles of the judicial interpretations, the gains obtained by the infringer are calculated by multiplying the sales volume of the infringing products with the profit of the sale of a single infringing product. Therefore, when proving the gains obtained from the infringement, the rights holder must provide the prima facie evidence for “the sales volume of the infringing products” and “the profit of the sale of a single infringing product”. The prima facie evidence can be evidence serving for presumption instead of complete evidence for proving the exact profit.

In judicial practice, the most common method of providing the prima facie evidence of “sales volume of infringing products” is to collect the product’s online sales data. Since online shopping has become common in China, the sales model of some infringing products includes and may even be dominated by online sales. Leading e-commerce platforms such as Taobao and Alibaba display sales records on their webpages. These records, which cannot be altered or removed, form powerful evidence of the sales amounts. In cases where high damages have been awarded, the sales volume on e-commerce platforms and product feedback information have been collected for presuming a ‘sales period’ of the infringing product, thereby calculating sales volume. For an infringing product that is not sold online, as it is difficult to collect offline sales data, the prima facie evidence can be obtained according to each specific case. The annual sales amount of an infringing product can be assumed by dividing the annual sales amount of all products published by an industry yearbook, a statistics company or the infringer itself, by the total number of the infringer’s product types. Other clues can be used – for example, one case filed a request with the court to access the original data of the tax record of the infringer as stored with the Tax Administration. From such original data, the sales volume of the allegedly infringing product can be extracted or presumed.

It is more difficult for a rights holder to prove “the profit of the sale of a single infringing product”. Due to the objective difficulty of proof, the court has lower requirements for this sort of proof. The rights holder can usually provide as evidence the profit of its own product, the average profit in the industry and the profit of other companies in the industry, among other things, or the profit of the sale of a single infringing product can be presumed according to the overall profitability of the infringing company and the selling price of the infringing product. In several cases, it was proposed to consider the difference between the retail price and the wholesale price, as well as the difference between the ordinary price and promotional discount of the infringing product as the profit margins of the infringing product, as in the abovementioned case, which is considered reasonable by the court.

When the prima facie evidence of the gains obtained by the infringer is provided, the plaintiff can apply for an order issued by the court to urge the infringer to provide the evidence of profit obtained from the infringement.

Applicable procedures and results

Each court has its own procedures for the application of the order of discovery. For example, in cases before the Beijing or Shanghai Intellectual Property Courts, when a judge examines the substantial infringement facts in a pre-trial conference or hearing procedure and gives a preliminary determination on probable infringement, and also examines the evidence submitted by the plaintiff for profit from infringement and holds that the evidence is a preliminary proof of the profit gained from the infringement, the judge will orally require the alleged infringer to submit financial information related to the profit of the infringing product within a certain period.

In the case abovementioned, Guangdong High Court required the plaintiff to submit an independent application which specified the contents of the materials that the defendant was ordered to provide. The court further reviewed the application and issued a written decision determining whether the application and required scope of evidence to be disclosed were reasonable, and then ordered the defendant to provide proof considered reasonable by the court.

A court will clearly specify a period for the submission of materials, whether written or verbal. According to the rules for presuming hindering proof, if the defendant fails to provide the related evidence within the specified period, the court will fully support the evidence and the plaintiff’s claims. Some courts may examine and verify the plaintiff’s evidence and claims to rule out the unreasonable parts of the claims and determine a damages amount.

If the defendant submits the related evidence, the case will enter a further cross-examination procedure where the plaintiff gives a cross-examination opinion on the evidence submitted by the defendant, and the court will then determine whether the evidence can be accepted. Usually, if the evidence submitted by the defendant is merely one-sided statistics or an explanation, it is unlikely to be accepted by the court. This is basically equivalent to the failure to submit evidence.

If the defendant submits a large amount of evidence in the form of accounting books and materials, the procedure will become more complicated. If the court approves the authenticity of the evidence, the case will enter a judicial audit process where an accounting firm will audit the profits of the allegedly infringing products according to the submitted accounts. Judicial auditing often takes time, and the audit fees will be pre-paid by the rights holder. Moreover, since the financial records of some infringing companies are not formal, the final results may show little or no profit obtained from infringement, which, for the rights holder, is time and labour consuming, as well as money-wasting, carrying the risk of a dissatisfying result.

Comment

In current judicial practice, the court usually has a relatively positive attitude towards the use of the system of discovery for profit from infringement. If the patent owner can primarily prove the substantial gains obtained by the infringer from the infringement and apply to the court, the court will usually support the patent owner’s claims. Moreover, the judgment will generally be favourable to the rights holder. However, the system’s application raises certain risks. Thus, it is not always necessary to apply to the court to order the opposing party to submit evidence of profit gained from the infringement. The rights holder should consider the specific circumstances of the case and choose the most favourable path for enforcement.

Beijing Wei Chixue Law Firm (Linda Liu Group)

F16 Tower C, Beijing Global Trade Centre

36 North Third Ring East Road

Dongcheng District, Beijing 100013

China

Tel +86 10 5825 6366

Fax +86 10 5957 5201

Web http://www.lindapatent.com

Sai (Jie) Chen

Manager

[email protected]

Sai (Jie) Chen has significant experience in IP infringement litigation, administrative proceedings, anti-counterfeiting, copyright protection, IP licensing and technology transfer. Ms Chen has represented clients from medium-sized companies to Fortune 500s. She helped Bridgestone to win a favourable decision in the Supreme People’s Court at retrial – this case was listed among the Top 50 Typical IP Cases by Chinese Courts in 2011. She also represented a major consumer electronics company in an infringement lawsuit, where it was awarded Rmb3.2 million in compensation – the case was listed among the Supreme People’s Court’s Top 10 IP Cases in 2016. In addition, Ms Chen also represented MTG in a design infringement case and handled other cases involving the system of order of discovery.

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