Legislation & Policy

2021 Wrap Up – People’s Republic of China IP Developments

SIPSKnowledge, Legislation / Policy

The past year saw quite a few encouraging developments in the world of China intellectual property, encompassing developments in both the judicial and administrative spheres. This update introduces and summarises a number of the more interesting and impactful developments in 2021.

Judicial Confirmation of Settlements

The most recent amendments to the Civil Procedure Law (“CPL”) of the People’s Republic of China (“PRC”) were approved on 24 December 2021 and took effect a week later on 1 January 2022. Most of the reforms in the CPL had already been tested out during a pilot program launched by the Supreme People’s Court (the “SPC”) in 2020, resulting in, amongst other things, a more nuanced classification of cases by their complexity. In that same regard, and as caseloads in PRC courts have grown over the last 5–10 years, the PRC judicial system has been striving for means of expediting both administrative and civil trial proceedings and to reduce ever-growing caseloads – a major problem impacting China’s judicial system at all levels.

Among the procedural reforms impacting civil suits, the provision on judicial confirmation of settlements secured through mediations should be of most interest to IP owners. Up until now, IP owners settling with infringers in China have had a difficult time transferring settlement funds overseas in the absence of a valid court judgment due to China’s strict forex rules.

A means of satisfying those rules has been to have the settlement agreement confirmed by a court, a simple matter when civil proceedings regarding the matter are already on foot. Outside of that context, however, the only other types of mediated settlement agreements open for judicial confirmation were agreements reached through mediations organised by “People’s Mediation Commissions”, organisations set up by local villagers or perhaps a neighbourhood committee. In practice, those commissions have almost never mediated IP disputes, however, given the special nature and large amount of claims involved in IP disputes.

The SPC pilot program took a large stride forward by proposing judicial confirmation of mediations held not only by the Commissions, but also by certified mediation institutions and even individual mediators. Unfortunately, however, there was some pushback against the breadth of that provision by Judges and scholars,[i] ostensibly attributable to concerns over likely surges in judicial workloads, and the potential for abuse of procedure, and even fraud.

As a result, the CPL’s amendments only partially adopted the pilot program’s reform. Now, and instead of permitting settlements inked under the supervision of individual mediators to be judicially confirmed, the CPL only allows settlements organised by certain certified mediation institutions to be confirmed judicially, with settlements hammered out before individual mediators excluded. According to the People’s Court Mediation Platform[ii] established by the SPC, there are around 400 IP-specialised mediation institutions that are either recognised by courts, the National Intellectual Property Administration (the “CNIPA”), or both. Presumably, settlement agreements certified by those court-certified mediation institutions should satisfy the requirements of judicial confirmation. Furthermore, it is reported that the CNIPA and the Ministry of Justice are exploring remote “judicial confirmation rooms” into the mediation institutions’ online platform, which could well provide a one-stop solution to IP owners seeking judicial certification of their negotiated settlements.

Pre-Suit Mediation of Administrative Appeals in Trade Mark Refusal Appeals

In August 2021 and as, amongst other things, a means of reducing its judicial caseloads, the Beijing IP Court (the “BIPC”) issued a Notice[iii] providing for potential pre-suit mediation of administrative appeal cases arising from the Trade Mark Review and Adjudication Division (“TRAD”). When first announced, it was hoped that these mediations would assist the parties, in this case, brand owners and the TRAD, to solve disputes early, and without having to litigate such appeals to a court judgment, saving time and costs. For brand owners, in particular, effective pre-suit mediation of trade mark appeals could help to ameliorate the impact of a stubborn TRAD nearly always refusing to suspend review of trade mark appeals   – until co-pending disputes or appeals are finally and fully decided. That all-too-common refusal to suspend is one of the key factors, if not the key factor, driving unmanageable caseloads at the BIPC in the first place.

Under this new program, and after filing an appeal from a TRAD decision, impacted brand owners are asked by the BIPC to confirm whether they wish to participate in the pre-suit mediation process.

Under the BIPC’s program, the following overarching conditions are deemed ripe for possible pre-suit mediation:

  • the case only depends on the status of the cited mark and the parties acknowledge the determination of the status; and
  • the determination of the facts in a case is not sufficiently comprehensive, causing a party to file a lawsuit. Once the facts can be determined, the case can be swiftly resolved.

In practice, this means that the following types of cases are deemed to generally meet one of those two conditions:

  • the blocking mark has been cancelled for non-use, invalidation or opposition or is pending cancellation;
  • the blocking mark and the applied-for mark being appealed effectively belong to the same proprietor (and the assignment is presumably in progress); and/or
  • a co-existence agreement is in place and has been provided (noting recent TRAD/judicial developments throwing the utility of co-existence agreements in PRC trade mark disputes very much into doubt).

Up to now, however, the program appears to be struggling to get off the ground, where the TRAD, at least in the authors’ experience, appears to be consistently refusing to engage in the mediation process. Indeed, in each of the cases where our clients’ have confirmed their willingness to mediate the dispute, no mediation has been organised. Instead, we have simply received notices from the BIPC for trial dates in the matter, without any reference again being made to any possible “mediation”. The BIPC may at least be reaching out to the TRAD in such cases to discuss the facts and whether a mediation could resolve the case. But in the absence of a final unappealable decision in dependent cases, we really do not see the TRAD suddenly reversing its refusal to suspend its review of the underlying appeal.

To make matters worse, even if a mediation were indeed organised, it would not do much to reduce the burdens of foreign plaintiffs in these appeals. This is because for non-Chinese appellants, a fully formalised notarised/legalised Power of Attorney and a Certificate of Incorporation (or equivalent) – always costly and difficult to obtain, particularly during the COVID pandemic – must actually be provided before the BIPC would even consider proposing mediation. It is safe to say that until now, the BIPC’s “pre-suit mediation” program has been a disappointment.

That being said, we are not willing to count this process out entirely just yet. First, the mediation mechanism is an important part of the BIPC’s effort to classify different types of administrative cases by their complexity – a goal directed by the SPC[iv] and expressly set out in the State Council’s recently published “14th Five-year IP Protection and Application Plan”.[v] Given that high level of focus, it is hoped that more administrative appeal cases would actually be resolved through pre-suit mediation, so the aforesaid goal could be reached.

Secondly, the number of trade mark prosecution cases accepted by the BIPC continues to grow roughly 25 per cent each year.[vi] The BIPC will feel ever-increasing pressure to resolve more simplistic cases via mediation so they do not unnecessarily clutter up the Court’s docket.

Last but not least, the pre-suit mediation mechanism is only a pilot program for now, and reports indicate that the BIPC is working to expand the scope of cases that may qualify for pre-suit mediation. As the BIPC further refine their respective procedures and internal guidelines, hopefully the concerned parties in administrative appeals would be more open to actively engaging in pre-suit mediations.

Social Credit System and IP Protection

Since 2014, the Chinese Government has been developing a nationwide “Social Credit System”, aiming to strengthen compliance by individuals and corporate entities operating in the PRC socialist market system. In essence, the Social Credit System tracks certain social and commercial behaviour of persons or entities, awarding credit or imposing penalties accordingly. Similar to the financial credit rating systems in many Western countries, a major function of China’s credit system is to rate an individual’s or entity’s financial credibility. Notably, however, China’s social credit system also extends to other aspects of social life and has the potential to make it difficult or even impossible for parties with a negative credit record to perform certain social functions, such as obtaining a loan or purchasing a property.

The most effective part of the social credit system is a “blacklist” operated by the SPC (the “SPC Blacklist”), which keeps records of parties who refuse to comply with effective legal judgments (not due to inability to perform) and is available to the public. In addition to the social stigma that comes with it, bad-faith defaulters on the SPC Blacklist are also subject to a series of sanctions. Most of these sanctions are justifiable – such as restrictions on participating in government procurements, acquiring loans from financial institutions, taking up positions such as a company’s legal representative, director, or supervisor, or even purchasing plane and high-speed train tickets. That said, other provisions might strike some as overkill, such as restricting the defaulter’s children from going to private schools, for example.

Nevertheless, some IP owners may unwittingly have already benefited from the social credit system, where it is becoming increasingly common for IP infringers to proactively comply with legal judgments and pay damages to avoid the bite of Social Credit penalties.

More importantly, China appears to be in the process of establishing a blockbuster IP credit management system that will be linked to the country’s general social credit system. The ambitious program was set out in 2018, when 38 PRC authorities – including the CNIPA, the SPC, the Ministry of Finance, People’s Bank of China, State-owned Assets and Supervision Administration, General Administration of Customs and others – signed a Memorandum on Imposing Joint Disciplinary Action against Serious Discrediting Conduct in the Patent Field[vii] (the “Patent Joint Disciplinary Action Memorandum”). In particular, joint sanctions can be imposed against parties who commit repetitive patent infringement, who refuse to perform or comply with effective decisions or punishments, and who submit abnormal patent applications or fake documents in relevant patent procedures.

In July 2021, the State Administration for Market Regulation, the parent agency of the CNIPA, also issued Measures for the Administration of the List of Serious Violations of Law and Dishonest Behaviour (the “SAMR Measures” and the “SAMR List”).[viii] According to the SAMR Measures, anyone upon whom severe administrative penalties were imposed based on the following situations (among others) will be placed on the SAMR List:

  1. intentional infringement of IP rights;
  2. filing abnormal patent applications or bad faith trade mark registration applications; and
  3. acts of serious unfair competition.

Subsequently, in November 2021, the CNIPA in its draft Regulations on Intellectual Property Credit Management (trial) (the “CNIPA Regulations draft”) further provided that refusing to comply with an administrative penalty or otherwise comply with an administrative ruling or decision will cause a party to be added to a blacklist managed by the CNIPA (the “CNIPA List”).

It is made clear in the SAMR Measures that the SAMR List will be shared with other PRC government authorities. Regrettably, at present, and unlike the broader impacts from being named to the SPC Blacklist and the Patent Joint Disciplinary Action Memorandum, the range of sanctions imposed on parties on the SAMR List and the CNIPA List are limited to denial of preferential treatment, access to government financing, and higher frequency inspections. That said, the SAMR Measures do make clear that violators who have “eliminated the effects” can be removed from the blacklists. For IP owners, this de-listing procedure should hopefully serve as a leverage against infringers who have already been penalised and wish to be removed from the SAMR List.

For now, it remains to be seen whether concerted actions from other government departments will be imposed on parties on the SAMR List and the CNIPA List. In the meantime, the CNIPA just launched a second-round pilot program[ix] on establishing an IP social credit classification system in a few cities, presumably in preparation for national implementation of joint penalties on certain IP violators in the future.

Calculating Factors for Punitive Damages

Punitive damages for infringement of IP rights are a recent addition to China IP Law. It was only first introduced via the PRC Trade Mark Law in 2013, which provided that in cases of bad-faith infringement of another’s trade mark rights where the circumstances are serious, the amount of compensation potentially awarded may be between one and three times the amount calculated (with the base amount calculated by either the loss of the infringed party, the gain of the infringing party, or by reference to royalties of the trade mark – statutory damages do not qualify for punitive damages treatment). Subsequently, the 2019 amendments increased the multiplier for punitive damages to between one and five times the underlying damages award. Similarly, corresponding provisions can be found in the Civil Code and the latest amendments of the Copyright Law, Patent Law, and the Anti-Unfair Competition Law. As long as an IP infringement is intentional and the circumstances are serious, the IP owner is entitled to claim punitive damages.

The availability of punitive damages has important significance for IP owners. On the one hand, IP owners being ripped off in China have long been woefully under-compensated. This is because it is invariably difficult for IP owners to prove their actual losses or the infringer’s illegal gains, where civil litigation in China does not have a discovery system that compels disclosure of adverse evidence. As a result, catch-all statutory damages (which have also increased over the years), are normally very, very low. An award of punitive damages could go a long way to making rights owners whole – as well as hopefully finally deterring infringers from either repeating their infringement or even infringing in the first place.

Even though the law allows for between one and five times the amount of damages calculated by the court, it does not provide clear guidance on how to determine which multiple to apply. As a result, and up until now, generally conservative Chinese Judges have clearly been hesitant in applying and awarding punitive damages. This is in spite of explicit encouragement by the Chinese Communist Party, the central government and the SPC since their introduction. Thus, for example, in 2021, courts at all levels in Guangdong Province (a true hotbed of counterfeiting) concluded nearly 200,000 IP-related cases – a third of all IP cases nationwide – yet only awarded punitive damages in 67 cases.

In 2021, the SPC issued Interpretations on the Application of Punitive Damages in Adjudicating Civil Intellectual Property Rights Infringement Cases (the “Interpretation”), specifying the factors that courts must consider when determining whether an infringement is intentional and whether circumstances are “serious”. It also confirms that enforcement-related expenses (e.g., legal fees, notarial charges for sample purchases) should be awarded separately from punitive damages and should not be the subject of multiplication.

Shortly after issuance of the Interpretation, the SPC further published six Guiding Cases to illustrate the factors set out in the Interpretation. Perhaps intentionally, the SPC Interpretation still does not clarify exactly how much weight should be assigned to each factor. Instead, it indicates that courts should apply their own discretion when imposing punitive damages of one to five times the base amount.

To this end, a few Judges have taken the initiative to opine on the weight of each factor. For example, Judge Shang Jiangang of the Shanghai IP Court has devised a checklist based on the Interpretation and the six Guiding Cases.

By way of illustration, and when determining the severity of an infringement, Judge Shang’s checklist suggests a multiplier of 0.5 if the infringement lasted for 1-2 years, 1x if 2-3 years, and 1.5x if more than three years. Beyond that, the checklist suggests 0.5x if the actual loss or illegal gains fall between RMB 1 million (~US$157,000) and RMB 5 million, 1x for RMB 5 million to RMB 10 million, or 1.5x if the damages exceed RMB 10 million.

Once an infringer is found to have acted in bad faith, the checklist suggests consideration of the strength and popularity of the IP right in dispute. Thus, the checklist advises a multiplier of 0.5x if the IP right is widely known within a province, 1x if widely known in China or 1.5x if widely known globally.

Other non-exhaustive factors suggested by the checklist include whether the defendant is a repeat infringer, whether the infringement is out-and-out piracy or counterfeiting, whether there is a prior relationship between the parties, or whether the infringement continued notwithstanding a cease and desist letter, a court injunction, or even a first-instance judgment being issued in the case.

While not binding, Judge Shang’s checklists provide important insights into how much weight Chinese courts might be inclined to assign to each of the factors – something rarely (if ever) elaborated upon in published judgments. It is hoped that with clear (even informal) guidelines like Judge Shang’s checklist serving as potential reference tools, litigants will be able to craft their cases in a manner that will more readily permit Chinese Judges to feel comfortable awarding punitive damages in the future.

Conclusion

The changes discussed in this update represent clear efforts to streamline and strengthen China’s IP protection system. The full impact these changes will have on that system will likely remain unclear for some time, however. Indeed, and while these reforms look promising at first sight, they are currently really just blueprints for improvements, rather than practical solutions that can immediately be brought to bear. Thus, and for now it remains to be seen whether:

  1. settlements certified by “qualified mediation institutions” will also be confirmed judicially, whether such settlements will become common in the IP sphere, and whether judicial confirmation will indeed simplify foreign exchange compliance requirements;
  2. pre-suit mediations will end up an effective means of achieving early, cost-effective solutions of TRAD appeals;
  3. concerted actions to exploit social credit penalties will be taken across all levels of PRC enforcement authorities, and whether they will have material impact on not only patent infringers, but infringers of other types of IP rights as well; and
  4. whether Chinese courts will finally become willing to regularly and fiercely award punitive damages in a manner that stands a reasonable chance of compensating victim brand owners and deter future infringement.

By Dan Plane, Grace Chen and Yixin Chai


Endnotes

[i] 2021年修正民事诉讼法评述(附新旧条文对照)(qq.com).
[ii] 人民法院调解平台 (court.gov.cn).
[iii] 北京知识产权法院就商标授权确权案件 推进行政诉讼程序繁简分流试点 (weibo.com).
[iv] 最高人民法院关于推进行政诉讼程序繁简分流改革的意见 – 中华人民共和国最高人民法院 (court.gov.cn).
[v] 国务院关于印发“十四五”国家知识产权保护和运用规划的通知(国发〔2021〕20号)_政府信息公开专栏 (www.gov.cn).
[vi] 彰显知产审判的“中国范儿” ——北京知识产权法院加强国际交流工作纪实 – 中华人民共和国最高人民法院 (court.gov.cn).
[vii] 印发《关于对知识产权(专利)领域严重失信主体开展联合惩戒的合作备忘录》的通知_知识产权_中国政府网 (www.gov.cn).
[viii] 市场监督管理严重违法失信名单管理办法_其他_中国政府网 (www.gov.cn)
[ix]【国家知识产权局办公室关于确定第二批开展以信用为基础的分级分类监管试点单位的通知】_信用中国 (creditchina.gov.cn).