Latest Decision: Highest Damages Award in the Specialized IP Court in Beijing of $7.5 Million-Also Awarded Attorney Fees Charged by Hour

On December 8, 2016, the Beijing Intellectual Property Court issued its highest damages award since its inception in November 2014. The Court ordered Defendant Hengbao Co., Ltd. to immediately stop infringing Plaintiff Beijing Watchdata Data Systems Co., Ltd.’s patent No. ZL200510105502.1, covering a USB key. The Defendant is to pay the Plaintiff damages of 49 million Chinese Yuan, and to compensate the Plaintiff for its litigation expenditure of 1 million Chinese Yuan. In total, the damages award is 50 million yuan, approximately $7.5 million. In many aspects, this is a landmark case. Since the Supreme People’s Court also made a decision in the Michael Jordan case on the same day and clearly expressed a resolute position on judicial trademark protection, the legal industry in China applauded these developments by calling December 8, 2016 “China’s IP Protection Day.”

Key Takeaways:

• This is the third largest IP damages case in China, and the highest damages amount in the history of the Beijing IP Court.
• The Plaintiff had limited evidence of the Defendant’s sales data during the damages period, and there’s no discovery in China. However, the Court conducted investigations and gathered evidence on Defendant’s sales of the infringing products (USB key) to its customers, including 12 major Chinese banks.
• The Court calculated lost profits by multiplying the total sales quantity of the infringing products by the profit per unit. This is in accordance with the “Interpretation of the Supreme People's Court on Certain Issues Concerning the Application of Law in the Trial of Cases Involving Patent Disputes.”
• The Court also ordered the Defendant to compensate the Plaintiff for its litigation expenditure, calculated using Plaintiff attorneys’ hourly rate. The Court supported Plaintiff’s assertion that attorney fees should be based on elements such as the necessity of case representation, difficulty of the case, and the actual work load of the attorneys. This is the first time a Chinese IP case has ruled on hourly attorney fees in a judgment.

Case Overview:
Plaintiff Watchdata Data Systems Co., Ltd. (hereinafter referred to as “Watchdata”) and Defendant Hengbao Co., Ltd. (hereinafter referred to as “Hengbao”) are both engaged in the production of intelligent cryptographic key products for the financial sector. The patent-in-suit is Plaintiff’s invention patent No. ZL200510105502.1, “a physical authentication method and an electronic device.” Plaintiff Watchdata alleged that Defendant Hengbao’s USB key products practice the physical authentication methods that fall within the Plaintiff patent’s scope and therefore constituted patent infringement. Plaintiff Watchdata found that Defendant Hengbao’s infringing USB key products were being sold to dozens of Chinese banks for online bank transfer transactions. On February 26, 2015, the Plaintiff brought the lawsuit to the Beijing IP Court, seeking injunction, economic damages of 49 million yuan, and litigation expenses of 1 million yuan.

The Defendant Hengbao argued that the manufacturing and sale of USB key products and online banking transactions in the process of physical authentication method used in the technical program did not fall into the scope of the Plaintiff's patent protection.

After hearing the case, the court held that the physical authentication method used by the Defendant’s USB key products and the Defendant's use of the infringing product in online banking transfer transactions fell into the scope of protection of the patent-in-suit. The act constitutes infringement of the patent right of the Plaintiff. The collegiate panel of the Beijing IP Court decided that the damages calculation of this matter should be submitted to the trial committee for discussion.¹

The Judicial Committee of the Beijing IP Court decided:

1. The damages should be calculated as: the actual sales of products multiplied by the reasonable profit of each infringing product.
2. In view of the Defendant's refusal to provide financial records such as the profits from the sale of the alleged infringing products to Bohai Bank, Zhejiang Rural Credit Cooperative (Cooperative Bank) and Hubei Bank, the Committee accepted the Plaintiff’s profit estimate as being reasonable. The assumption was that the Defendant’s profits from these three banks were at least 2 million Yuan, based on estimated sales amount and 10-yuan profit per product. However, as the Plaintiff only conservatively claimed 858,000 yuan in damages, the Court held that the 858,000 yuan is a reasonable damages amount related to infringing sales to these three banks.
3. The time charging method adopted by the Plaintiff’s law firm can be used as the standard for calculating attorney fees in this matter.

Regarding the Plaintiff’s 49 million yuan damages claim, the Plaintiff requested the calculation method that multiplies the actual sales of infringing products by per unit profit. The Plaintiff sought the actual damages suffered by them given the patent infringement. Through the Bank of China, 11 other Chinese banks and their suppliers, the Beijing IP Court investigated and gathered evidence to identify the actual sales of infringing products, according to the relevant judicial interpretation of the Supreme People's Court. According to Bank of China’s reply to the Court, it signed a purchase order with the Defendant in December 2011 and has received 3,299,700 infringing products. The manufacturers responded that they supplied infringing products to these banks since 2011, and they provided the number of units they made for and shipped to their customers, including Bank of China. Thus, the Court was able to determine that the overall sales to these 12 banks were 4,814,200 units.

Next, the Court determined the profit on each infringing product was 10 Yuan. Evidence supporting this conclusion included: a purchase order the Defendant signed in 2013 indicating a retail price of 30 yuan with a gross margin of 35.61%, and a purchase order the Defendant signed in 2013 indicating a retail price of 32.5 yuan with a gross margin of 30.22%. In addition, the Court identified a company in the USB key sector named Feitian Chengxin, which is publicly traded in China. According to Feitian Chengxin’s securities filings, the Court calculated a per unit profit range between 11.6 and 15 yuan. Regarding the abovementioned evidence, the Defendant argued Feitian Chengxin’s USB key sales activities are not comparable to its own, and that purchase orders vary, depending on specific circumstances.

In addition, the Beijing IP Court also confirmed that besides the 12 banks they contacted, there were three other banks that were sold the infringing products; however, the Court could not independently verify the sales amount. The Defendant has the actual sales data but refused to provide the information. The Beijing IP Court held that pursuant to the judicial interpretation of the Supreme People's Court on proof of obstruction provisions, the refusal to produce the sales data was detrimental to the Defendant. The Court, therefore, supported the Plaintiff’s proposed 858,000 yuan in damages related to infringing sales to these three banks. The two damages amounts – the profit from the infringing sales to the 12 banks contacted by the Court plus the Plaintiff’s estimate of profit from the infringing sales to an additional three banks, totaled 49 million yuan, and it was fully supported by the Court.

With regard to the Plaintiff's one-million-yuan attorney fee claim, the Beijing IP Court held that the time charging method adopted by the Plaintiff’s law firm is a normal practice of the legal industry. Thus, it can be used as the calculation basis of attorney fees in “Reasonable Expenditure on Litigation.” This is the first time a Chinese IP case has ruled on hourly attorney fees in a judgment. In the review of whether the attorney fee claims are reasonable, the court for the first time confirmed the "the necessity of representation, the difficulty of the case, the attorneys’ actual work" are the principles of its review.

What is also worth mentioning is that in October 2014, the Defendant requested an invalidity declaration on the patent-in-suit to the Patent Reexamination Board based on creativity reasons. However, the reexamination board decided in April 2015 that the patent-in-suit was valid.

This is the highest damages amount that has been awarded since the establishment of the Beijing IP Court in November 2014. China established specialized courts across the country in Beijing, Shanghai, and Guangzhou, only hearing IP disputes. The specialized IP court in Beijing is the oldest one, the ones in Shanghai and Guangzhou were both founded in December 2014. Since the inception of these three specialized IP courts, all of the newly filed IP cases in the three cities went to these courts exclusively, instead of other People’s Courts as before.

In addition, both parties presented experts to testify on the technical application of the patent-in-suit. Examination and cross examination of these experts were conducted at trial.

Conclusion:
This is the third largest IP damages case in China. The No.1 patent damages case so far is Chint Group v. Schneider Electric, in which the Wenzhou Intermediate Court of Zhejiang province= ordered Schneider Electric to pay 330 million yuan, approximately $45 million in 2007.² The second biggest patent infringement damages case in China has been Wuhan Jingyuan v. FKK Corporation. In 2008, the Supreme People’s Court of Fujian province ordered the Japanese defendant FKK to pay approximately $7.6 million.

This Watchdata v. Hengbao case has the highest damages amount in the history of the Beijing IP Court. As of 2015, the average Beijing IP Court supported damages for patent infringement matters were 460,148 Yuan, approximately $68,000. This amount was almost six times of the average nationwide patent infringement damages amount prior to the establishment of the specialized IP courts. In 2015, the Beijing IP Court only awarded one patent case damages over 3 million Yuan, approximately $445,000.

The result of this case is consistent with our observation that the Chinese IP Courts are increasing damages rendered against IP infringers, and that the publication of the Courts’ process to determine those damages awards is helpful to litigants.

Law firms: Beijing TianYuan Law Firm represented the Plaintiff, and Beijing Zhongzhou Law Firm represented the Defendant.

Case number: Beijing IP No. 441 (2015).

Laws involved: Patent Law of the People’s Republic of China, Interpretation of the Supreme People's Court on Certain Issues Concerning the Application of Law in the Trial of Cases Involving Patent Disputes, and Some Provisions of the Supreme People's Court on Evidence in Civil Procedures.

Duff & Phelps' Pauline Booth and Yi Zhang of the Disputes and Investigations practice co-authored this article on the Beijing IP Court's decision in a patent infringement case to award groundbreaking damages.

^₁.In this matter, the trial committee consisted of seven judges at the Beijing IP Court, not including the presiding judge of this case, He Xuan.  The trial committee included all three Court Presidents. In 2015 alone, each judge at the Beijing IP Court heard 168 cases on average.

^2.The Plaintiff is a Chinese company.  The Defendant is a French company.  They are both engaged in the electronic equipment business.  The parties later settled on around $23 million to end this dispute.