Monday, January 26, 2015

Chinese Court Awards $12 Million in Damages for Infringement of Two Utility Models

Recently I came across an article by Song Haining in 2014 issue 4 of China Patents & Trademarks titled A Story of Battling Giants: Comments on Goer Tek Acoustics v. Knowles Electronics.  (The article does not appear to be freely available on the magazine's website yet, but interested readers may want to check back in a few weeks.)  In any event, according to Mr. Song, the parties compete in the market for micro-electrical-mechanical systems (MEMS), and both supply microphones to Apple and Samsung.  (Knowles is a U.S. company with a Chinese subsidiary, Knowles (Suzhou); Goer Tek is a Chinese firm.)  In 2013, Knowles commenced an ITC investigation and a patent infringement suit against Goer Tek in the U.S., both of which matters remain pending.  Shortly thereafter, Goer Tek filed actions in China against Knowles (Suzhou), the Chinese subsidiary, for infringement of four utility models and one patent.  Knowles filed an invalidation action against two of the utility models, but lost on one and withdrew its request regarding the other.  The actions proceeded to trial on these two utility models and judgment was entered for Goer Tek in April 2014.  (According to Mr. Song, the other three actions (involving two utility models and one patent) remain pending.)  As far as remedies are concerned:

1.  The court enjoined a retailer, Weifang Sanlian Home Electronic Appliances Co., Ltd., from selling Samsung cell phones (model GT-I9500) that contained the infringing product;

2.  The court enjoined Knowles (Suzhou) from selling or making infringing microphones; and

3.  The court ordered Knowles (Suzhou) to pay Goer Tek RMB 74.4 million, which comes to approximately U.S. $12 million.  To my knowledge, this makes the judgment one of the largest ever in China, though not quite as large as the RMB 330 million awarded by the Wenzhou Intermediate People’s Court in the 2007 case of Chint Group Corp. v. Schneider Electric Low-Voltage (Tianjin) Co. (see my book p.355).

Analyzing the case, Mr. Song argues that the injunction is disproportionately harsh as to the retailer, given the relatively small value of the infringing component in comparison with the price of a cell phone, but states that under Chinese law an injunction remains the "default remedy for patent infringement."  He also notes, however, that there are some Chinese precedents permitting courts to withhold injunctions in the public interest, including a case titled Zhuhai City Jingyi Glass Engineering Co. Ltd. v. Guangzhou Baiyun International Airport Co., Ltd., where a court denied an injunction against an airport due to its "special nature as a public transport facility."  (See also the discussion in my book at pages 349-50 of China Environmental Project Co., Ltd. v. Fujikasui Engineering Co., Ltd., Huayang Electric Power Co., Ltd., another case in which a Chinese court denied an injunction on public interest grounds.)  Moreover, Mr. Song cites "an internal draft document being circulated among Chinese IP professors as of June 2014" in which "the Supreme People's Court proposes that, in addition to 'public interest', 'serious imbalance of interests between parties' might also justify an exception to injunction."  As I note in my book (pp. 350-51), Supreme People's Court Vice President Cao Jianming made a similar suggestion in a 2008 speech, so perhaps it would not be surprising if China formally adopted such a rule in the near future.

As for damages, the court awarded lost profits calculated by taking the number of infringing products (estimated from sales data disclosed by the defendant and from "import/export data from Chinese customs") and multiplying it by the "average profit rate in the industry."  This sounds very similar to a procedure used in Japan under article 102(1) of the Japan Patent Act, which states in relevant part and subject to some qualifications that “the amount of damage sustained . . . may be presumed to be the amount of profit per unit of articles which would have been sold by the patentee . . . if there had been no such act of infringement, multiplied by the quantity . . . of articles assigned by the infringer . . . .”  To my mind, however, the procedure seems problematic, since it may well be the case that the infringer would have been able to make some or all of its sales by using a noninfringing alternative--though if I understand Mr. Song correctly, in this case the defendant didn't provide any rebuttal evidence.  In any event, lost profits are not awarded very frequently in China, as I discuss in my book at pp. 354-55; so-called statutory damages are much more common.  So for that reason alone the Goer Tek case is significant, and I am thankful to Mr. Song for bringing it to my attention in his paper.   

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