Understand Damages for Trademark Infringement in China

In July 2016, the Guangdong High People’s Court (the “High Court”, the highest local court in Guangdong Province) rendered judgement in the New Balance trademark infringement case, which had drawn public attention since the trial began in 2013. This case involves a number of interesting trademark law topics in China, such as conflicts between trademark and company name, defense of prior use, trademark squatting, and other such subjects. The decision also addressed how to calculate damages for trademark infringement, which has long been a popular issue in trademark law.
China has a civil law system, which means that the decisions made by the courts are not binding. However, the courts’ application of the statutes to the specific facts usually facilitates the understanding of the statutes which are sometimes vague.
Background
When the foreign companies do business in China, they use not only the trademarks in their original languages, but also the Chinese version of their trademarks to promote and market their products in a more recognizable and acceptable way to Chinese customers. New Balance used the Chinese characters “新百伦” (Xin Bai Lun) in its marketing promotion, including in brochure, advertisement, invoice and online shops. “新” means new, and “百伦” is a transliteration of “Balance”.
However, Chinese citizen Zhou Legun owns the trademarks to the words “百伦” and “新百伦.” “百伦” was registered in 1996 for “clothes, shoes, socks.” “新百伦” was filed for registration in 2004. New Balance thus filed a claim against this application in December 2007 with China Trademark Office (“CTMO”). The CTMO, however, decided in favor of Mr. Zhou, who in turn obtained the registration of trademark “新百伦” for use on items such as shoes and sports apparel.
In July 2013, Mr. Zhou filed a lawsuit against New Balance for trademark infringement. On April 21, 2015, Guangzhou Intermediate People’s Court ruled that the use of “新百伦” trademark by New Balance constituted trademark infringement and ordered New Balance to pay 98 million RMB (approx. USD 14.5 million), an amount equal to 50% of its profits, as damages.
New Balance then appealed to the High Court, which substantially reduced the damages to 5 million RMB (approx. USD 740,000).
Factors Considered in Awarding Damages
Since Mr. Zhou only claimed damages prior to February 2014, the High Courts applied the PRC Trademark Law amended in 2001 (“2001 Trademark Law”) to this case.* Under the 2001 Trademark Law, the amount of damages for trademark infringement can be determined by either the profits that the infringer has earned as a result of the infringement (“Infringer’s Profits”), or the losses that the infringed has suffered as a result of the infringement (“Suffered Losses”), including any reasonable expenses the infringed has paid in its effort to put an end to the infringement. If the Infringer’s Profits or the Suffered Losses are hard to determine, the court shall, on the basis of the circumstances of the infringement, award no more than RMB 500,000 (approx. USD 74,000).
Additionally, the judicial interpretation of the Trademark Law released by Supreme People’s Court, which is an important supplement to the application of Trademark Law by the courts, provides the factors to be considered in determining the amount of damages. These factors include the nature, duration, consequence of the infringement, reputation of the trademark, amount of the license fee, the reasonable expense incurred in ceasing the infringement, and the type, term, and scope of the trademark license.
In the New Balance case, the High Court applied the Infringer’s Profits approach because Mr. Zhou did not provide any evidence of Suffered Losses. However, in determining the amount, the court refused to take into account all the profits of the products as the basis to calculate damages because the “新百伦” trademark only contributed a small portion to New Balance’s entire profits, New Balance’s extensive use of “NB,” “New Balance” trademarks (which enjoy a high regard amongst Chinese consumers), along with the good quality of its products, carried much more weight in contributing to New Balance’s profits. In addition, the High Court also took the following factors into consideration:

1. Bad faith in using the “新百伦” trademark.

Since New Balance has opposed plaintiff’s application for the “新百伦” trademark before, New Balance apparently acknowledged the existence of the exclusive trademark right owned by the plaintiff. Still, New Balance has continuously and intentionally used the “新百伦” trademark, which indicates that its bad faith was obvious.

2. How the “新百伦” trademark was used.

New Balance generally used the “新百伦” trademark in combination with its “NB” and “New Balance” trademarks.

3. Scale of the infringement.

New Balance had more than 800 New Balance stores all over the country, and operated several online stores. Therefore, the sale scale was massive.

4. Duration of the infringement.

The claimed duration for calculation is from July 2011 to February 2014.

5. Reasonable expense incurred by Mr. Zhou in ceasing the infringement.

The High Court supported Mr. Zhou’s expenses on notarization, lawyers’ fee, and notarized purchasing of infringing products.
In light of the above means and factors, the High Court finally determined that the damages should be RMB 5 million. The High Court in this case considers the major issues in determining the amount of damages for trademark infringement, which could be a good reference to those doing business in China when seeking compensation for trademark infringement.
 
*It is worth noting that the Trademark Law was amended in 2013 (“New Law”). The damages article has been amended as follows:

1. Other than Infringer’s Profits and Suffered Losses, a new means to determine the amount of damages has been adopted, which is by referencing the times of the trademark license fee (“Times of License Fee”).

2. The New Law puts a sequence on the application of the means. First, the court shall determine the Infringer’s Profits, if Infringer’s Profits are unable to be determined, then the court shall determine Suffered Losses, then Times of License Fee. If all the three means fail to determine the amount, then the court has the discretion to award the damages less than RMB 3 million (approx. USD 444,000) in light of the circumstances of the infringing act.

3. Introduction of punitive damages to malice. For seriously malicious infringements, the awarded damages may be one or three times of the aforesaid amount determined in light of the foregoing regulations.

 
Jie Li is a L.L.M. candidate, 2017, at NYU School of Law.