Prior agreements between the patentee and infringer can be the basis to determine the damages of patent infringement

——Case of Utility Model Patent Infringement Dispute between Zhongshan Longcheng Daily Use Products Co., Ltd. and Hubei Tongba Children Ltd.[1]

[Syllabus]

The agreement on the sum of damages between the patentee and the infringer in advance does not constitute a transactional agreement between them. Hence, the civil liability of the infringer is only confined to tort liability, which does not fall into the circumstance described in Article 122 of the Contract Law of the People’s Republic of China, i.e., concurrence between tort liability and liability for breach of contract.

A prior agreement on the sum of damages between the patentee and the infringer is a calculation method agreed by both parties in advance regarding the loss of the patentee or the proceeds by the infringer due to future infringement. In absence of any laws or regulations that may render the agreement invalid, the people’s court may directly determine the sum of tort damages on the basis of the prior agreement between the patentee and the infringer in advance.

[Case No.]

Supreme People’s Court (2013) MTZ No. 116

[Brief of Case]

Utility model patent infringement dispute

[Keywords]

Utility model patent infringement, compensation, concurrence

[Relevant Legal Provisions]

Article 122 of the Contract Law of the People’s Republic of China and Article 65 (1) of the Patent Law of the People’s Republic of China

[Basic Facts]

Zhongshan Longcheng Daily Use Products Co., Ltd. (“Longcheng”) is the patentee of the utility model (“Patent at Issueat Issue”) named “Wheel Alignment Device”. In April 2008, Longcheng filed a lawsuit to Wuhan Intermediate People’s Court against Hubei Tongba Children Ltd. (hereinafter referred to as Tongba) on the grounds of patent infringement, and the court ordered Tongba to cease the infringement and compensate. Tongba refused to accept the judgment and filed an appeal. During the appeal, the Parties reached a mediation agreement and Hubei High People’s Court made a civil paper of mediation ([2009] EMSZZ No. 42), main contents of which included: Tongba should promise not to infringe the patent of Longcheng any further, and in case of any further infringement on the utility model of Longcheng, Tongba should voluntarily indemnify Longcheng in the amount of RMB 1 million. After that, Longcheng found that Tongba was still engaging in business activities that infringed on the Patent at Issue, and thus lodged another lawsuit with Wuhan Intermediate People's Court in May 2011, requesting the court to rule that Tongba should compensate Longcheng in the amount of RMB 1 million, and bear the litigation costs. On first instance, after interpretation by the court, Longcheng made it clear that it was lodging this lawsuit on the grounds of patent infringement rather than breach of contract, but it requested the court to calculate the amount of compensation according to the amount agreed by both parties. The court of first instance held that, in accordance with Article 122 of the Contract Law of the People’s Republic of China, the injured party should have the right of choice in the event of concurrence of tort liability and liability for breach of contract. Longcheng expressly chose to lodge the lawsuit for infringement, so the amount of compensation would be determined according to the Tort Law. If the standard for compensation were subject to the agreement in the civil mediation paper of the previous case, this would conflict with the above provisions of the Contract Law. Longcheng lodged the lawsuit for infringement, the lawsuit concerning breach of contract could not be included in the investigation and debate, and the court need not to decide on the breach and liabilities therein, thus it would have been inappropriate to apply the amount of compensation for the breach as agreed by both parties. Therefore, the court of first instance applied the statutory standard of compensation, and ruled that Tongba should compensate Longcheng RMB 140,000. Longcheng refused to accept this ruling and filed an appeal. On appeal, Hubei Provincial High People's Court held that the rights and liabilities between Parties of the case at issue should be whether the infringement in fact took place. The model of the allegedly infringing baby buggy involved in the previous case was different from the model of the allegedly infringing baby buggy involved in this case, and thus the amount of damages agreed in the mediation agreement could not be applied to this case. Therefore, the court dismissed the appeal and upheld the ruling of the trial court. Longcheng still refused to accept the ruling as final and applied to the Supreme People’s Court for retrial. The Supreme People’s Court determined to review this case, and on December 7, 2013, ruled that the judgments made in the first instance and second instance should be overruled, and that Tongba should compensate Longcheng RMB 1 million.

[Judgment Results]

On October 24, 2011, Wuhan Intermediate People’s Court made (2011) WZCZ No. 467 Civil Judgment, ordering Tongba to compensate Longcheng RMB 140,000 and rejecting other claims of Longcheng. Longcheng refused to accept the ruling of first instance and instituted an appeal before Hubei High People's Court for overruling the judgment and amending the judgment according to law. Hubei High People's Court made the judgment of second instance on May 11, 2012, rejected the appeal and upheld the first instance judgment. Longcheng refused to accept the judgment of second instance and applied to the Supreme People’s Court for a retrial. The Supreme People’s Court determined to review this case, and on December 7, 2013, ruled that the judgments made in the first instance and second instance should be overruled, and that Tongba should compensate Longcheng in the amount of RMB 1 million.

[Juridical Opinions]

After the retrial, the SPC held that: I. The effect of the mediation agreement made by both parties in the previous case.

The mediation agreement is made by both parties on their free will, the contents do not involve penalty concerning private rights, social public interests and third party interests, there is no other circumstances under the law which would render the agreement invalid, and Hubei High People’s Court made the civil paper of mediation after reviewing and confirming the mediation agreement, thus the mediation agreement made by both parties in the previous case should be legally valid.

II. With regard to whether this case could apply the way of determining damages as agreed by both parties in the mediation agreement entered into in the previous case, firstly, the civil liabilities that Tongba should have borne did not fall within the scope of concurrence between tort liability and liability for breach of contract. The premise for concurrence between tort liability and liability for breach of contract as stipulated in Article 122 of the Contract Law of the People’s Republic of China should be “the personal and property rights of the other party is damaged due to breach of contract by one party”. According to that provision, the premise for concurrence between tort liability and liability for breach of contract should be a basic transaction relation between the parties. Based on such a transaction relation, one party breached the contractual obligation, and such breach infringed upon the other party’s interests, incurring tort liability. Therefore, the ‘breach’ stipulated in such provision should refer to the fact that one party violates an obligation agreed in the basic transaction contract, and that violation infringes upon the rights and interests of the other party at the same time, rather than referring to the violation of the agreement concerning the way to assume the liabilities for damages concluded by the parties after the infringement has taken place. Subject to the contents, the mediation agreement made in the previous case was not a basic transaction contract between Longcheng and Tongba, but an agreement concerning how to assume the liabilities for damages for infringement (including calculation methods and amount) after occurrence of infringing act. Therefore, in this case, the civil liabilities that Tongba should have borne did not fall within the circumstance of concurrence between tort liability and liability for breach of contract as stipulated in Article 122 of the Contract Law of the People’s Republic of China. Secondly, the civil liabilities that Tongba should assume in this case should be the liability for infringement. On one hand, as afore-said, Longcheng and Tongba were not of a basic contractual relation; on the other hand, the legal significance and effect of the mediation agreement made in the previous case did not lie in the agreement on the contractual obligations of Tongba, but in the agreement on how to assume the liability for infringement. Even in absence of the mediation agreement, Tongba should bear the obligation of non-infringement according to the law. Both parties wrote the specific methods and amount of compensation for future infringement by Tongba into the mediation agreement only to specify how Tongba should assume the liability for infringement when infringing upon the Patent at Issue once again. Thirdly, the Tort Law, Patent Law and other laws do not prohibit the infringed party and infringer from making an agreement in advance on the method for assuming the liability for infringement, the amount of damages, etc. The substance of such an agreement is a simple method for calculating and determining losses of the patentee or benefits of the infringer as a result of any future infringement, as agreed by both parties in advance. Considering such factors as the difficulty in furnishing evidence, the time-consuming litigation, etc., both parties concerned can definitely make an agreement on the amount of damages for infringement to the extent of the autonomy of private law, and such an agreement includes prior agreements before occurrence of infringement. Therefore, the application of the method for determining the amount of compensation as agreed by both parties in the mediation agreement in this case did not conflict with relevant provisions of Article 65 of the Patent Law of the People’s Republic of China. In conclusion, the method for determining the amount of compensation as agreed by Longcheng and Tongba in the mediation agreement of previous case could be applied in this case.