In this blog we look at the recent landmark decision in China in which New Balance was awarded damages of 10 million RMB for trade mark infringement. We consider why the award was so high and what this means for IP owners. (See the end of this blog for the Chinese translation.)
On 15th August 2017 (Beijing time), US President Trump issued a Presidential Memorandum which directed US trade representative Robert Lighthizer to investigate China’s business practices for theft of US technology and violation of US intellectual property rights under Section 301 of the Trade Act 1974. Several days later, it was widely reported that New Balance, the US sports shoemaker, had won a “landmark” trade mark case with damages in an amount of 10 million RMB. Interestingly, the court decision was dated and issued on the 15th August 2017, the same date as the Presidential Memorandum. However, this blog will not discuss why the dates so coincide, but why the level of damages awarded was so high and what this actually means for IP rights owners.
Why was the award of damages so high?
According to China’s trade mark law, there are several ways to calculate an award of damages:
(1) the loss to the trade mark owner;
(2) the profits gained by the infringer;
(3) an amount reasonably determined with reference to the royalties; or
(4) statutory damages (if an amount is difficult to determine by methods 1-3).
Overall, though, in practice, due to the difficulty of collecting evidence in China, the most commonly used way is statutory damage. The trade mark law revised in 2013 increased the maximum amount of statutory damages from RMB 500,000 to RMB 3 million. We have seen an increasing amount of damages rendered by Chinese courts in trade mark infringement cases in recent years, probably partially because of this reason.
However, the amount of damages in the New Balance trade mark case was not determined using the more common statutory damages scheme. Instead, the court considered the loss suffered by the trade mark owner, in addition to the profits made by the infringers.
The loss suffered by the trade mark owner was calculated using the following formula: the number of infringing products sold by the infringer, multiplied by the profit per unit of the products of the registered trade mark (which is the price of the New Balance shoes multiplied by the profit rate in this case). According to the evidence accepted by the court, the number of shoes sold which violated the trade mark was “at least” 1 million pairs. The “lowest” price for a pair of shoes on New Balance’s official website was 269 RMB and the net profit rate for New Balance was 14.47%. According to the above formula, the “lowest” possible loss suffered by New Balance was 1,000,000 x 269 x 14.47% which is equal to 38,924,300 RMB; an amount far higher than 10 million RMB.
The profits of the infringers were calculated using another formula: the number of infringing products sold by the infringer, multiplied by the profit per unit of the infringing products. Besides the profit earned from the selling of shoes, the infringers also charged their franchisees franchising fees which when totaled came to over 4,100,000 RMB. According to the statement made by one infringer, the profit made per a pair of shoes was around 10 to 15 RMB. Using this formula, we can see that if 1,000,000 pairs of shoes were sold at 10 RMB profit per pair of shoes then the profits made already reached 10 million RMB. This is even before we take into account the franchising fees.
What does this mean for brand owners?
With the above calculations in mind, one could argue that the payout of 10 million RMB is, in fact, far too low. The loss suffered by New Balance, the trade mark owner, far outstrips what they received in compensation. Further, the ratio between the illegal profits gained by the infringers and what they eventually had to pay out is similarly disproportionate. However, New Balance only ever sought 10 million RMB when filing the suit. Consequently, the court decided that the loss of New Balance and the profit of infringers were both higher than the 10 million RMB claimed by New Balance.
So why did New Balance not ask for a higher amount of damage and why is this judgment so acclaimed? The interesting development that this case presents is not so much to do with how much was paid out for the infringement, it’s more about how the compensation figure was reached upon by the court. As mentioned above, the court applied two formulas rather than the statutory damage scheme. The reason that the 10 million RMB comes as a surprise is because these schemes are rarely applied due to the sheer amount of evidence required in order to apply them. Collecting evidence of sufficient quality is very difficult and so it is in turn a challenge to persuade a court to utilize that evidence and apply the formulas. Further, Chinese courts have very harsh and rigid rules on what kind of evidence can be accepted. This is likely why New Balance were quite conservative in only asking for 10 million RMB. Therefore, the most noteworthy part of this case is not the high amount of damage itself, but how the court accepted evidence to prove such amount of damage.
Interestingly, the court also fully supported the payment of reasonable expenses to New Balance. The payment of 800,000 RMB in expenses is rather unusual in this kind of case.
Trade mark owners are often hesitant when considering whether to launch a law suit against an infringer. A typical concern is that the costs in carrying out legal action are high whilst the amounts of compensation received are usually pretty low. This case gives IP right owners a very encouraging signal, which is that if you prepare a case well and collect evidence properly, there is a strong possibility for you to recover your investment on the legal procedure, gain compensation for infringement and, finally and most importantly, defend your product’s place in the market.
商标权人的损失按照如下公式计算：侵权商品的销售数量x该注册商标商品的单位利润（在本案中即新百伦公司的鞋子的最低售价x新百伦公司的利润率）。根据法院采纳的证据证明，被控侵权产品在2015年和2016年的销量至少在100万双，而新百伦公司在其官网上销售的运动鞋最低价为269元，新百伦公司的净利润为14.47%。按照上述公式，新百伦公司因为侵权所遭受的损失最起码为1,000,000 x 269 x 14.47% =38,924,300元。这个数字已经远远超出了一千万的赔偿额。