Trademark Infringement Damages Determination

Calculation of trademark infringement damages based on “profit from infringement”: How to determine the profit margin

Author: Blair Bi

Legal provisions

Article 63 of the Trademark Law of the People’s Republic of China established the basic principles of compensation for trademark infringement: The number of damages for infringing the exclusive right to use a trademark shall be actual losses that the right owner has suffered as a result of the infringement during the period of the infringement; where the losses suffered by the right owner cannot be determined, the number of damages for trademark infringement shall be the profits that the infringer has earned as a result of the infringement during the period of the infringement; where the losses suffered by the right owner, or the profits earned by the infringer, cannot be determined, the number of damages shall be determined based on a reasonable amount that would be paid for a licensing royalty for the trademark right.

From the legal provisions themselves, the order of consideration of the court in determining the amount of compensation is the loss suffered by the right holder – the benefit gained by the infringer – multiples of the licensing royalty for the trademark right.

The benefit gained by the infringer/ Profits from infringement

Compared with other methods of calculating damages, calculating damages based on “the benefit gained by the infringer “takes into account ” the principle of restitution” and “the principle that no one shall take advantage of his own wrong”, which can give more comprehensive protection to the right holder.

According to Article 14 of Interpretation of the Supreme People’s Court on Several Issues Concerning the Application of Law in the Trial of Trademark Civil Dispute Cases (2020), the benefit gained by the infringer under Article 63(1) of Trademark Law of the People’s Republic of China may be calculated based on the product of the sales volume of the infringing goods and the unit profit of the goods; if the unit profit of the goods cannot be identified, it shall be calculated in accordance with the unit profit of the registered trademark goods.

Therefore, the calculation formula is “profits from infringement = sales volume of infringing goods * profit per unit of goods”.
However, in current judicial practice, the concept of “profit margin” has been increasingly introduced to determine the “profits from infringement”, and the corresponding formula is ” profits from infringement = infringing goods sales revenue * profit margin”.

Typical situations include: (1) In the case when the infringers’ “infringing goods sales revenue” is determined and the “sales volume” cannot be verified, the “Profit margin per unit of goods” is calculated by using the proportional relationship between the cost and revenue per unit of goods; (2) If the cost of sales of infringing goods cannot be verified, it is claimed that the “average profit margin in the same industry” is applicable.

Article 8 of the Opinions of the Supreme Court on Increasing the Punishment of Intellectual Property Infringement in accordance with the Law, which came into effect on September 14, 2020, also provides that the people’s courts shall actively use the relevant data provided by the parties from industrial and commercial taxation departments, third-party commercial platforms, infringers’ websites, promotional materials or documents disclosed in accordance with the law, as well as the average profit rate of the industry, to determine the profitability of infringement in accordance with the law.

The sales of the infringing party are often more readily available due to developed e-commerce and electronic payments than the benefits gained by the clearly known infringing party. So, with only the sales revenue data of the other party, will the court support the claim to determine the amount of compensation by referring to the profit margin of listed companies?

Cases in which the above claims were upheld by the courts

Case I: Suzhou Intermediate People’s Court, Jiangsu, (2020) Su 05 Min Chu No. 271

The Court’s Views: The plaintiff’s claim based on the industry average profit margin is supported by corresponding evidence, and in the absence of corresponding counter-evidence submitted by the defendants to refute or disprove such claim, the plaintiff’s claim is accepted. According to the public financial materials of Zhibang and Oppai, the average net profit margin for the period from 2016 to 2019 is 14.05%. Accordingly, it is found that the average net profit margin of 14.05% is used to calculate the Defendants’ profitability.

Case II: Shanghai Intellectual Property Court, (2021) Hu 73 Min Zhong No. 744

Basic facts: The plaintiff, Wilo China, owned the trademark “Wilo”, and the defendant, Wilo Shanghai, was ordered to stop infringement by the effective judgment. However, until the trial in 2021, the defendant still imitated the “Wilo” brand and did not stop using the relevant trademarks, and refused to provide the account books and materials related to the case.

The Court’s Views: When the defendant refused to comply with the effective judgment and its objective operating condition could not be determined, the court retrieved its enterprise annual report and VAT invoicing from the Market Supervision Administration and Tax Administration in accordance with the law and determined the compensation based on the sales revenue and VAT invoicing data disclosed therein during the infringement period, regarding the average profit rate of listed companies in the same industry in the past three years, and the extent of the contribution of the infringement sued on the sales profit.

Cases in which the above claims were not upheld by the courts

Case I: The High People’s Court of Hunan Province, (2020) Xiang Zhi Min Zhong No. 826

Basic facts: The plaintiff Louvre Company claims that an employee of the defendant Huadi Company stated that the defendant’s annual sales in 2019 were about 60 million yuan, and claims that the defendant’s gross profit margin of producing and selling the infringing goods sued was 25% based on the gross profit margin of wood doors of four listed companies in 2019.

The Court’s Views: The 25% profit rate claimed by the plaintiff is based on the average profit rate of several listed companies in the wood doors industry, but the scale of the defendant’s business is not comparable to the listed companies, so the gross profit rate cannot be used as the gross profit rate of the defendant’s production and sales of the infringing goods.

Case II: The High People’s Court of Guangdong Province, (2022) Yue Min Zhong No. 139

The plaintiff Opple is the right holder of the trademark involved, and the defendant LIANG Juanmei used the trademark involved in her online store for product promotion and sales without permission. The plaintiff submitted the financial analysis of Opple and other lighting enterprises Foshan Lighting, Tai Long Lighting, and Sunshine Lighting from 2015 to 2020 to prove that the main business profit margin of the lighting enterprises in the past five years is between 13.02% and 36.92% and claim the amount of compensation from the defendant accordingly.

The nature, scale, cost, and profitability of the listed company are significantly different from those of the defendant as an individual merchant on Taobao. Therefore, the profit margin of the main business of the enterprises is not comparable to the profit margin of the infringing products in this case.

The above two cases occurred after the implementation of the Opinions of the Supreme Court on Increasing the Punishment of Intellectual Property Infringement in accordance with the Law, the claim to determine the amount of compensation by referring to the profit margin of listed companies will not necessarily be supported by the court. But the common feature of the above cases is that the courts considered that the defendant (scale of operation) was not comparable to the listed company, therefore, the courts did not recognize calculating the benefit gained by the defendant by referring to the profit margin of a listed company.