The Beijing IP Court's 50 Million RMB Judgment in WatchData v. Hengbao

Today I am pleased to publish a guest post authored by Yijun (Jill) Ge, a former student of mine who is now an associate at Allen & Overy LLP in Shanghai, on the Beijing IP Court's recent judgment in WatchData v. Hengbao.  (For my two earlier posts on this decision, see here and here.) 

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Compared to the damages law in the US, Chinese patent law accords a plaintiff alternative routes to prove damages.  Illegal gains are recognized here.  Yet the majority of the patent cases have ended up with the courts awarding statutory damages.

In a recent patent infringement case, WatchData v. Hengbao, the Beijing IP Court awarded damages of RMB 49 million and attorneys’ fees of RMB 1 million.  What is worth noting is not only the high damages amount, but also the fact that the court admitted all the damages evidence proffered by the plaintiff and fully adopted its damages theory.   

The accused product is an everyday product for online banking.

WatchData involves two Chinese companies and the technology at issue concerns a USB token solution.  Most of the banks in China require the use of a USB drive with a security token preinstalled (or “USB Key”) for online banking.  A user has to plug in his or her USB Key and authorize transactions from the USB Key.  The parties of the case both supply USB Key products to banks in China. 

Plaintiff sued for lost profits.

WatchData sued its competitor Hengbao in early 2015 and claimed damages of RMB 49 million and costs of RMB 1 million.  WatchData elected its lost profits as the base for calculating damages. 

Article 20(1) of the Patent Trial Guidelines issued by the Supreme Court provides that where it is difficult to determine a plaintiff’s actual losses, these may be calculated by multiplying the number of the infringing products sold in the market with the reasonable profit of the patented product.  The law assumes that the defendant’s sales can be used as a proxy for the plaintiff’s lost sales.  Note that provisions like Article 20(1) are rarely litigated, as statutory damages have been the norm in China. 

To prove its profit level for the USB Key product, WatchData filed the following evidence:

·         Its purchase agreements with two bank customers listing a per-unit price of RMB 30 and RMB 32.5, respectively.

·         An audit report commissioned by its affiliate concluding that the gross margin is 30.22% and 35.61% for the sales with those two customers.

According to WatchData, its gross profit in connection with the aforementioned sales is RMB 10.68 and RMB 9.82, respectively.  This is calculated by multiplying the per-unit price with the gross margin.

WatchData also filed the public disclosure documents of a third party competitor, Feitian Technologies Co., Ltd.   According to the disclosure, Feitian had a per-unit gross profit of RMB 15, RMB 12.6 and RMB 11.6 for 2011, 2012 and 2013, respectively.  And Feitian’s gross profit margin ranges from 36.73% to 43.24%.

As such, WatchData claimed that for purposes of damages calculation, its reasonable profit for USB Key products is RMB 10 per unit.  The court agreed with WatchData, stressing that its audit report is objective and reliable, given that a higher gross margin was reported by Feitian in its public disclosure.

The court collected evidence concerning the defendant’s sales.

Under the Civil Procedure Law, Chinese courts are empowered to investigate and collect evidence that would otherwise be impossible to collect by the parties.  This is a mechanism that can potentially mitigate the lack of discovery in China.  Nonetheless, courts rarely invoke such power. 

In this case, to ascertain the defendant’s sales of the accused products, the court issued an investigation letter to Bank of China and two other entities responsible for preinstalling the token in the USB for the banks.  One entity is China Financial Certification Authority and the other appears to be a military technology unit.

The third parties’ responses to the court reveal that the defendant sold a total of 4,814,200 units of USB Key products to 12 banks.  The defendant challenged the accuracy of the data stating that other than those sold to Bank of China, the reported number cannot evidence the units that were actually sold.  The court dismissed this argument citing the fact that a token is uniquely assigned to each USB Key product purchased by the banks and that the third parties’ responses are directed to products with tokens preinstalled. 

Accordingly, the court went on calculating the lost profits by multiplying 4,814,200 units with a per-unit profit of RMB 10.  This arrives at RMB 48.142 million.

The court also drew negative inference from the defendant’s refusal to adduce evidence.

WatchData proffered evidence of the defendant’s website, through which it admitted sale to three additional banks.  The court twice ordered the defendant to submit its books and records concerning its sales to those three banks.  The defendant did not comply. 

The Supreme Court’s evidentiary rules provide that a negative inference can be drawn from such failure to cooperate unless there is good cause shown.  Note that a similar provision has been adopted in the Judicial Interpretation II for the Adjudication of Patent Infringement Disputes, which came into effect on April 1, 2016.

Consequently, drawing a negative inference against the defendant, the court supported the plaintiff’s estimation that the profits made by the defendant from sales to three additional banks exceed RMB 2 million.  The decision did not specify the basis for such estimation.  The court merely noted in passing that this is in accordance with the industry standard.

As a result, the court concluded that the damages calculation should also take into account RMB 2 million for sales to the three additional banks by the defendant.  Yet the plaintiff chose to claim only RMB 0.858 million. 

A shift from statutory damages?

The WatchData court awarded the plaintiff damages of RMB 49 million.  The amount consists of (i) RMB 48.142 million for the plaintiff’s lost profits in respect of the defendant’s sales to 12 banks, and (ii) RMB 0.858 million for the defendant’s gains derived from the sales to three other banks.

This is in fact a hybrid approach as the damages account for both the plaintiff’s lost profits and the defendant’s illegal gains.   

China has been known for low damages awards, which are usually in the form of statutory damages.  Some papers suggest that the top jurisdictions in China have a median damages award between RMB 80,000 and RMB 150,000.  Statutory damages have arguably led to under-compensation for patent infringement in China.  The WatchData case illustrates the trend where the Chinese courts have endeavored to increase the damages award and to properly compensate patentees. 

In particular, courts now might employ procedural mechanisms so as to allow damages evidence to be introduced and appraised in a trial.  Courts might also show more willingness to admit evidence indicative of the parties’ profit level or that of the industry.  

The next issue is how the courts would exercise scrutiny of the damages assessment.  While proving damages would likely remain an exercise of estimation, questions need to be raised as to whether any estimation is economically sound and evidentiarily reliable.  Otherwise it could result in overcompensation.