The defendant sold various electronic devices on its Taobao store, using the term 'Xiaomi' extensively
The court granted Xiaomi's claim for damages in full, elaborating at length on the basis for calculating punitive damages
The decision may serve as a valuable example for IP rights owners and practitioners seeking to claim punitive damages
On 31 December 2021 the Shenzhen Intermediate People's Court, applying punitive damages, handed domestic mobile phone giant Xiaomi a big victory worth Rmb30 million. This case has been selected by the Guangdong High People's Court as one of the six landmark IP cases of 2021 that applied punitive damages.
Punitive damages in China
Punitive damages were first introduced in IP infringement cases in the 2013 version of the Trademark Law, which allowed courts to award up to three times the plaintiff's actual losses or infringers' profits, or reasonable multiples of royalties, in cases of malicious trademark infringement causing serious harm. In the 2019 amendment to the Trademark Law, this amount was raised to up to five times.
Not many cases have successfully applied punitive damages in the past decade, as the thresholds for “maliciousness” and “serious harm” remained unclear, and it is difficult to ascertain the basis for calculating punitive damages. Nevertheless, there have been many positive and meaningful explorations in the judicial practice, especially in the past two years.
On 3 March 2021 the Supreme People's Court issued its "Interpretation on the Application of Punitive Damages in Civil Cases of Infringement of Intellectual Property Rights", which provides specific rules and factors to consider when determining whether there was "maliciousness" and "serious harm". Many local courts rolled out practical guidelines on the application of punitive damages, including the Beijing High People's Court and the Shenzhen Intermediate People's Court. Moreover, punitive damages have been successfully applied in some cases, and various study reports about punitive damages have been publicised.
The Xiaomi case
What makes this case so high-profile is the court's thorough elaboration on the basis for calculating punitive damages.
The defendant was a local company selling a variety of electronic devices on its Taobao store. The term 'Xiaomi' was used extensively in the Taobao store, as well as in webpage keywords for hundreds of products.
The Shenzhen court used the following formula to calculate damages:
"damages = infringing product profit * profit margin * contribution ratio of the use of XIAOMI trademark and trade name to product profit"
The Shenzhen court further elaborated on how it ascertained the numbers in the equation, which can be a valuable example for IP rights owners and practitioners looking to claim punitive damages:
Infringing product revenue:as the defendant’s sales primarily originated from its Tmall store, the revenues were ascertained based on the Tmall transaction records. The defendant claimed that some were false transactions, but failed to submit supporting evidence.
Profit margin:the defendant refused to submit any documents or figures, despite the Shenzhen court's explicit orders. Therefore, the court referred to the profit margin of a listed company with a similar business scope (submitted by Xiaomi).
Contribution ratio: there was no doubt that using the XIAOMI trademark and trade name misled consumers and contributed to the defendant’s sales; however, it was difficult to quantify such contribution. The court used its discretion to set the contribution ratio as 50%, meaning that 50% of the profits were considered as resulting solely from the use of the XIAOMI trademark and trade name in promoting the products.
The Shenzhen court concluded that three times the amount of actual damages should be granted, considering that:
the XIAOMI trademark is well known;
the defendant should have been aware of the brand before it started its infringing use; and
other factors supported a finding of maliciousness and serious harm.
The amount of damages should thus have reached Rmb47 million, which was higher than the amount requested by Xiaomi. Therefore, the court upheld Xiaomi's claim for Rmb30 million in full.
While representing a major breakthrough, this is not the highest amount of damages ever granted to Xiaomi. In early 2021 the Jiangsu Provincial High People’s Court granted Xiaomi Rmb50 million in damages, including punitive damages, against an habitual infringer who sold small home appliances and hijacked dozens of trademarks. This was one of the landmark cases selected by the Supreme People’s Court when it released its interpretation.
The above cases, judicial interpretations and court guidelines showcase China’s efforts to make punitive damages more easily applicable and accessible for right owners. When building a case, it is crucial to preserve all the evidence on bad faith and find a reasonable way to ascertain the basis for the calculation of damages.