Author: Yingying Zhu, Partner at Beijing MINGDUN Law Firm

Email: zhu.yingying@mdlaw.cn

Date: May 5, 2021

Introduction

In China, compensatory damages are also called “actual damages”, which compensate a plaintiff for the losses suffered due to the harm caused by the defendant. In addition to compensatory damages, punitive damages may be awarded by judges in some exceptional cases. Punitive damages are known as having a 'quasi-criminal' nature and serving the function of punishing the defendant in a civil lawsuit. In fact, the purposes of punitive damages are two-fold: to punish the defendant for outrageous misconduct and to deter the society from committing similar misbehavior in the future.

In a trademark infringement civil lawsuit, the basic principle is to monetarily compensate the plaintiff’s losses due to the defendant’s trademark infringement activities. Damages awarded in a typical trademark infringement lawsuit are meant to make the plaintiff “whole” again from a financial standpoint. That being said, punitive damages are possible in cases where the defendants are found to be willful, malicious and highly reprehensible and the circumstances of the case are severe.

The Guangdong High Court struck a heavy blow to a copycat of LEGO in the LEGO vs. LEPIN judgement[1] with an award of CNY30 million (USD4.56 million) as punitive damages to compensate the aggrieved plaintiff and to punish the defendants whose infringement acts were considered willful, malicious and especially reprehensible with severe circumstances.

As one of the landmark rulings in the landscape of awarding punitive damages under the trademark law regime, the LEGO vs. LEPIN judgement is sending a strong and positive message to brand owners who have been bitterly battling with copycats — “We've Got Your Back”.

Basic Facts

Since 2015, under the brand name “LEPIN”, Guangdong Meizhi and three affiliates had been actively engaged in copying LEGO building sets and multiple LEGO minifigures, passing off the LEGO brand, and carrying out unfair competition practices by imitating, manufacturing and selling building brick toys nearly identical with those of LEGO. In addition, the external design, packaging and manuals of LEPIN’s products were also direct imitations of those designed and used by LEGO. Furthermore, the defendants rushed to file a series of trademarks for LEPIN in relation to toys in China.

According to the figures released by a Shanghai court in a related criminal judgement,[2] during the period from September 2017 to April 2019, through the channels of online and brick-and-mortar stores selling, the defendants sold out nearly 4.25 million boxes of LEGO counterfeit toys involving 634 different LEGO models, generating a revenue of more than CNY330 million.

LEGO filed a series of civil and criminal lawsuits against Guangdong Meizhi and its affiliates in different Chinese cities to seek injunction against the defendants’ use of LEGO’s intellectual property as well as their activities of unfair competition, and to claim damages and legal expenses.

In the trademark infringement and unfair competition lawsuit filed in Guangdong Province, the court of the first instance, the Guangzhou Intellectual Property Court, found that Guangdong Meizhi and its affiliates had cloned LEGO toys since 2015 and produced numerous copycat versions under the LEPIN trademark and some other fraudulent trademarks, which are confusingly similar with those of LEGO’s. Their acts constituted trademark infringement and unfair competition. The Guangzhou Intellectual Property Court ruled that Guangdong Meizhi and the other three defendants should pay the maximum amount of statutory damages, i.e., CNY3 million (USD456,000).[3] Dissatisfied with the amount of damages awarded by the first instance court, both parties — the plaintiff and the defendants — appealed to the court of the second instance, the Guangdong High Court.

On February 26, 2021, the Guangdong High Court handed down the final judgment in this case. The Guangdong High Court multiplied by 10 times the initial damages awarded to LEGO. Guangdong Meizhi and three other defendants who are behind the clone brand LEPIN infringing upon trademark rights held by LEGO must now pay CNY30 million (USD4.56 million) as punitive damages, a large sum of damages award rarely rendered in previous trademark infringement cases.

Why Punitive Damages work in LEGO vs. LEPIN

To explain the awarding of the aforesaid punitive damages, the Guangdong High Court highlights the following elements of “culpability” on the part of the defendants:

1.    'LEPIN' infringement lasted for a long time, in large scale, and with high profitability.

2.    'LEPIN' infringed upon a series of the plaintiff’s commercial designations and logos. With an infringing network rich in design and organization, the defendants’ acts demonstrated an obvious malice of imitating and free riding 'LEGO', which should be categorized as a serious infringement, and should be given a heavy punishment.

3.    According to the sales data of 'LEPIN' provided by Zhejiang Taobao Network Company, it can be reasonably presumed that the sales amount of the infringing products exceeds CNY500 million. Based on the reasonable estimation of the profit rate of related industries, the overall profit of the infringing products involved should be far more than CNY160 million.

4.    The strength of judicial relief should match the reputation of the plaintiff’s involved intellectual property. After long-term use and publicity, the 'LEGO' trademark has a high popularity in the toy market and has already become the main logo used by the relevant public to identify LEGO products. Guangdong Meizhi and its affiliates had used 'LEPIN' logo for multiple times, which is very similar to 'LEGO' in terms of color combination, form of expression, overall visual effect, etc., and can easily lead to confusion among the public, thus weakening the distinctness of 'LEGO' trademark and damaging its market reputation.

5.    During the process of litigating the case before the courts, the evidence production of the two parties showed that the plaintiff was trying their best to prove the sales records of the defendants and the profits gained by them while the defendants were attempting to evade liabilities who shall then bear the unfavorable consequences of their dishonest acts during the litigation.

Therefore, LEGO's claim for compensation in the amount of CNY30 million (USD4.56 million) has been fully upheld the Guangdong High Court as the Court finds that the defendants are willful, malicious and highly reprehensible and the circumstances of the case at bar are severe.

How Punitive Damages Came into Play under the Chinese IP Laws

In China, intellectual property litigations especially trademark infringement litigations almost always end up with low damages awards which have long been a shared concern for intellectual property right holders. Therefore, to establish a system where awarding punitive damages would become possible has been one of the central themes of China's major intellectual property law reforms over the past decade.

In 2013, the China Trademark Law was amended and made the first attempt to establish a system of punitive damages for malicious infringement by providing under Article 63: “[I]f the infringement is committed in bad faith with serious circumstances, the damages shall be determined in accordance with the aforesaid method[4] based on one to three times of the determined amount.”

In 2019, Article 63 of China Trademark Law was amended for the damages to be ranged from “one to three times” to “one to five times”. In addition, the punitive damages system was added to the Anti-Unfair Competition Law which was amended in the same year. Furthermore, a policy-type Regulations on Improving the Operation of Business promulgated and implemented in 2019 established a punitive compensation system for infringement upon intellectual property rights.

In 2020, the China Patent Law and the China Copyright Law, which were amended in the same year also explicitly formulated a system of punitive damages.

In January 2021, the Civil Code of China, which came into effect on the very first day of 2021, provides that “[I]n case of intentional infringement of another party's intellectual property rights and under serious circumstances, the infringed party shall have the right to request the corresponding punitive damages.”

In March 2021, the Supreme Court of China issued the Interpretation on the Application of Punitive Damages in the Trial of Civil Cases involving Infringement of Intellectual Property Rights and timely published six typical cases of punitive damages applied in civil cases involving infringement of intellectual property rights.

Practical Tips on Presenting Punitive Damages Cases at Trial

As demonstrated in the above, with respect to trademark infringement litigation, punitive damages are only possible in exceptional cases, where the “malicious intention” of the infringer and the “serious circumstances” of the infringement could be well established. Here are some practical tips on presenting punitive damages cases at trials concerning trademark infringement:

·         Gather information from websites, social media and online or offline sales platforms to show method and frequency of the infringement, the duration of the infringement, the geographical scope, scale and consequences of the infringement, the unit price of the infringing products, the annual sales records of the infringer, and the average profit rates in the same or related industries.  

·         Raise evidence to show the reputation of the plaintiff’s involved trademarks or products, the duration of the use, the geographical scope, scale and popularity of any advertising activities, records of being protected by any previous administrative or judicial actions and comparable licensing fees of the involved trademarks.

·         Show to the judge that the defendant still commits infringement upon intellectual property rights after being notified or warned by the plaintiff or party of interest. 

·         Consider having communications with the defendant notarized and bringing notaries to meetings with the defendant.  

·         Review the defendant’s trademark filings for evidence that it has applied for illegitimate trademarks, a fact that increases the possibility that a court will find bad faith.  

·         Check the defendant’s litigation history to see if it has a prior record of being sued by other legitimate brand owners.  

·         Review corporate records to see if the defendant was a previous trading partner of the plaintiff’s business.  

·         Consider bringing the following facts to the judge: the defendant forges, destroys or conceals any evidence of infringement; the defendant obtains huge benefits from the infringement or causes huge loss to the plaintiff’s business due to the infringement.

·         Seek a court order asking the defendant to provide its sales records, account books and original receipts relating to the infringement, and if the defendant refuses to provide them without any justified reason or provides any false account book or other documents, the court may determine the base number for calculating the amount of punitive damages by referring to the plaintiff’s claim and evidence.  

·         Notarized evidence of bad faith has a unique and important probative value before the court.

·         With preliminary evidence of infringement, a preservation action seeking to preserve evidence of infringement including sales records, account books and original receipts can be an effective weapon. 

Conclusion

In China, the call for awarding punitive damages has been intensified due to the increase in malicious infringement, the importance for adequately compensating the plaintiff and the need for deterrence.

The LEGO vs. LEPIN judgement of the Guangdong High Court is a crucial milestone in the long struggle by brand owners and advocates to remedy the bitter fact of “high enforcement costs of the IPR owners and low infringement costs of the infringers”. This decision and the continued amendments to the China Trademark Law and other major IP laws strengthen the position of legitimate IPR owners against malicious copycats and counterfeiters. 

Footnotes

[1] _{Lego Group vs Guangdong Meizhi, etc., Guangdong High Court: (2020) Yue Min Zhong No. 1642.}

[2] _{The Third Branch of Shanghai Municipal People's Procuratorate of the People's Republic of China vs Li Haipeng, etc., Shanghai High Court: (2020) Hu Ling Zhong No. 105. Under this criminal judgment, nine principals of LEPIN were heavily fined and sentenced to jail due to their criminal acts of copyright violation upon various LEGO toys.}

[3] _{Lego Group vs Guangdong Meizhi, etc., Guangzhou IP Court: (2016) Yue 73 Min Chu No. 1692.}

[4] _{“The aforesaid method” means: “[T]he amount of damages for infringement upon the right to exclusively use a registered trademark shall be determined according to the actual losses suffered by the right holder from the infringement; where it is difficult to determine the amount of actual losses, the amount of damages may be determined according to the benefits acquired by the infringer from the infringement; where it is difficult to determine the right holder's losses or the benefits acquired by the infringer, the amount of damages may be a reasonable multiple of the royalties”, as provided under Article 63 of the China Trademark Law.}