In a recent decision, the Supreme People's Court ordered Zhejiang Hua Tian Industry Ltd. and its co-Defendants to pay 8.3 million Yuan in damages to the Claimant, Japan Yamaha Co. Not only is it the largest monetary award yet for a trademark case in China, but in reaching that sum the Court turned the tables on infringers who prevent fair damages awards by refusing to produce their financial records. Previously, Claimants have been forced to accept often tiny statutory damages. Zhang Yi and He Fang of Rouse & Co. explain the reasoning behind the Court’s award and examine in particular the Court’s treatment of evidence and its calculation of damages.
In a recent decision, the Supreme People's Court ordered Zhejiang Hua Tian Industry Ltd. and its co-Defendants to pay 8.3 million Yuan in damages to the Claimant, Japan Yamaha Co. Not only is it the largest monetary award yet for a trademark case in China, but in reaching that sum the Court turned the tables on infringers who prevent fair damages awards by refusing to produce their financial records. Previously, Claimants have been forced to accept often tiny statutory damages. Lastly, the Court publicly shamed the Defendant by ordering it to make an apology in a nationwide motorcycle magazine. In this article, we will describe the facts of the case and the reasoning behind the Court’s award, examining in particular the Court’s treatment of evidence and its calculation of damages.
The Facts Of The Case
Japan Yamaha Engine Co. Ltd. owns the exclusive rights in the registered trademarks, “YAMAHA” “雅马哈” and “FUTURE.” From December 2000 to March 2001, Zhejiang Hua Tian Industrial Co. Ltd. sold motorbikes prominently bearing the marks “雅马哈”, “YAMAHA” and “FUTURE”. These motorbikes were all retailed through two companies: Taizhou Jia Ji Motorcycle Distribution Co. Ltd. and Taizhou Hua Tian Motorcycle Distribution Co. Ltd. The Nanjing Lianrun Car and Motorcycle Distribution Co. Ltd. also bought 122 motorcycles from Taizhou Huatian Motorcycle Distribution Co., but subsequently returned all of them. Thus, Lianrun caused no damage to Yamaha, and as a result avoided liability.
In 2002, the Japan Yamaha Engine Co. Ltd. filed a lawsuit with the Jiangsu Higher People's Court, arguing trademark infringement. The Jiangsu Higher People’s Court ruled that the Defendants were co-infringers and should be jointly liable for the RMB8.3 million award. The Zhejiang Huatian Industrial Co. Ltd. appealed to the Supreme People’s Court, arguing that their use of the company name “Japan Yamaha Co. Ltd.” was authorized since it had registered this company name with the proper authorities in Japan and China. Thus, they argued that they had not committed trademark infringement and the compensation award was without factual or legal basis. However, the Japanese courts had invalidated their registration on the grounds of likely consumer confusion. Likewise, the Supreme People's Court held that the trademark had not been validly registered in either Japan or China. The Defendant’s prominent use of the company name was intended to look like a trademark and to lead to consumer confusion. The Supreme Court finally upheld the lower Court’s decision that the YAMAHA mark was a well-known trade mark and the manufacturer and the distributors were jointly liable for the infringement. They were ordered to pay approximately RMB8.3 million in damages.
Legal Analysis Of The Judgment
Determining the amount of compensation often complicates IP litigation in China, particularly in trademark cases where the Claimant is burdened with proving damage. According to Article 56 of The Trademark Law of the People's Republic of China:
“The amount of damages shall be the profit that the infringer has earned because of the infringement in the period of the infringement or the injury that the infringed party has suffered from the infringement in the period of the infringement, including the appropriate expenses incurred by the infringed in the course of stopping the infringement … Where the profits earned by the infringer or the losses suffered by the infringed … cannot be determined, a Peoples’ Court shall award damages up to RMB 500,000, depending upon the facts of the case.”
Obtaining a reliable figure for those profits has generally been a daunting hurdle for trademark, owners leaving them facing the considerably lesser sum of RMB500,000 (at best). However, in this case the Supreme Court applied the law of evidence with laudable dexterity, thus enabling it to arrive at this impressive amount.
The Right To Evidence Preservation
According to China’s Civil Procedure Law, “whoever makes a claim has to prove it.” Thus, when a rights owner claims an amount in damages, they must prove the infringer has earned that amount at the Claimant’s expense. Showing how much the infringer has earned from their infringement is no easy task. While the infringer may well have such information in his books, the infringer is unlikely to divulge it to the trademark owner. However, the IP owner can apply to have the evidence preserved by the Court. The Claimant here exercised this right and the Court seized the manufacturer’s books for a third party to audit. This provided the Court with quantified insight into the infringers’ business practice.
A Flexible Approach To The Rules Of Evidence
According to Article 75 of Some Provisions of the Supreme People’s Court on Evidence in Civil Procedures:
“Where evidence proves that a party possesses evidence but refuses to provide it without good reason and where the other party claims that the evidence is unfavorable to the possessor of the evidence, it may be deduced that the claim stands.”
In this case, according to the audit report based on the seized accounting documents, the Defendant did not earn a profit on the motorcycles. However, the Court found that both Taizhou Jia Ji Motorcycle Distribution Co. Ltd. and Taizhou Hua Tian Motorcycle Distribution Co. Ltd. were in possession of evidence to the contrary which they were refusing to provide to the Court. Based on the audit, the Jiangsu Higher Peoples’ Court held that because of the close relationship between the manufacturers and the distributors, and their obvious intent to infringe, it could be inferred that the Defendants were concealing their true profits. The Jiangsu Higher People’s Court held that Zhejiang Hua Tian Industrial Co. Ltd. produced and sold 2,113 motorbikes, with 2,094 of these bikes going to Taizhou Jia Ji Motorcycle Distribution Co. Ltd. and the remaining 19 going to Taizhou Hua Tian Motorcycle Distribution Co. Ltd. On the other hand, the Court declined to rely on the audited documents insofar as they claimed a rather suspicious lack of profits. The Supreme People’s Court upheld the decision of the Jiangsu Higher People’s Court on the issue and rejected the appeal of Zhejiang Huatian Industrial Co. Ltd.
Calculating profits is generally essential to accurately calculate damages in trademark disputes. According to Article 13 of the Interpretation of the Supreme People’s Court Relating to the Application of Law in the Adjudication of Civil Trademark Disputes,when assessing the amount of compensation to be paid by the infringing party pursuant to Article 56 of the Trademark Law, the claimant can select from one of three measures (subject to the Court’s approval): their own losses, the Defendant’s ill-gotten profits or statutory damages. A true assessment of lost sales is inherently subjective and hard to prove. As mentioned above, statutory awards typically fall well below the actual damage incurred, particularly in cases of this magnitude. Until now, however, infringers have had every incentive to force claimants to accept those lesser damages by withholding their vitally important financial records.
Article 14 of the Interpretation says that the Defendants’ profits can be calculated by simply multiplying the quantity of sales by the per unit profit. If the Defendant’s unit profit cannot be ascertained, the calculation will be based on the unit profit of the trademark owner’s legitimate goods.
In the present case, the manufacturer sold the infringing motorbikes to its distributors, who in turn sold them to the public. The manufacturer argued that the Court was unable to accurately calculate the unit profit and was thus obligated to use the statutory damages which are capped at RMB500,000 by Article 56 of the Trademark Law. The Defendants maintained that the Claimant had miscalculated the production costs, making a reliable calculation of profits impossible. The Defendants also submitted that the proper measure of profit was the net profit, and that as the Claimant’s lacked an accurate figure of income tax paid, the Claimant’s figures were wrong. However, the Court found it reasonable to base its calculation on gross (pre-tax) profits. The Court then easily calculated this figure by taking the sale price of the motorbikes and subtracting the unit costs stated in the audit report from that price.
The Court found support for this method of calculation in the rules governing patent disputes. According to Article 20(3) of Several Provisions of the Supreme People's Court on Issues Relating to Application of Law to Adjudication of Cases of Patent Disputes (2001),
“The pecuniary interest procured by the infringer from their infringement may be computed according to the total of infringing products sold in the market multiplied by the reasonable profit of each infringing product. The income of the infringer from the infringement is generally calculated according to the infringer’s gross profits. In the case of infringers whose business is solely based on infringement as its or his entire business, income may be calculated according to its or his entire sales profit.”
Overall, this decision provides helpful guidance for computing damages in trademark infringement cases. The Claimant’s right to have evidence preserved allows the Claimant to access accounting information that is crucial for proving damages. Moreover, where there is evidence that the Defendant is withholding accounting records, a flexible approach to the Rules of Evidence allows the Courts to use the Claimant’s reasonable calculation of those figures in determining profits, rather than forcing the Claimant to opt for often paltry statutory damages. The RMB8.3 million award is itself a clear demonstration of what this means for successful claimants. The decision of the Yamaha Case also means that previously uncooperative infringers may have an incentive to miraculously rediscover ‘lost’ financial records. Successful Claimants now have a far better chance of obtaining damages that are fair and appropriate.
This decision is a clearly positive step in the development of China’s intellectual property law. Unfortunately, the second half of the battle for Yamaha, and companies like it, is getting infringers to actually pay up: even if the Defendants have not already hidden away or gone bankrupt – or perhaps because they already have – the judgment did not include a property preservation order. Infringers who defy Court orders have little to fear: Chinese courts cannot hold them in contempt, and at present no effective mechanism exists to ensure that judgments are enforced.