Claiming disgorgement of profits for trademark infringement in China can allow for a greater recovery than other methods by applying equitable principles to compensate for unjust enrichment. Under this approach, trademark owners should observe that the law uses a highly technical process to disgorge an infringer’s profits as a proxy for the trademark owner’s lost sales; this means grappling with China’s unique ecommerce landscape. Key business evidence for this method includes sales volumes for infringing goods, profitability, and the contribution of trademark goodwill to those profits.
Contents
Overview of Profit Disgorgement
How Courts Determine How Much Profit to Disgorge
The Highly Technical Requirements to Establish Profit Margins
Overview of Chinese Profit Disgorgement Law
China Trademark Act §63 authorizes claiming profit disgorgement where appropriate (for other damage bases, see our other article.) Though complex, the disgorgement method is often superior to other recovery methods for a few reasons.
Disgorgement involves less subjectivity and uncertainty, as the rules allow for unjust enrichment to be calculated based on sales volumes and profit per unit. The infringer’s profits are typically used, but if not available, can be substituted using the trademark owner’s own or third party product profitability data. (See China Supreme Court Trademark Case Interpretations §14)
Disgorgement also deters potential infringers, thus better legal protection is provided by legal policy that aims to make trademark infringement unprofitable, with penalties for violations exceeding the owner’s actual losses.
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In order to effectively use this method to maximize recovery, trademark owners need to collect and analyze evidence of sales volumes and profit margins within China, and weigh the contribution of trademark goodwill to these factors. Care must be taken when collecting this evidence, however, as Chinese courts will refuse to consider any data deemed insufficiently relevant.
Using Chinese Ecommerce Platforms to Find Sales Volumes for Infringing Goods
Identifying sales volumes for infringing goods can be done through publicly available sales data on Chinese ecommerce sales platforms like Alibaba’s Taobao. In practice, Chinese courts are familiar with these platforms and often rely on their sales totals and volumes, which are often reported with much greater transparency than international sales platforms. Failing to present this data to the courts can restrict the amount of damages awarded to a trademark owner.
The court judgment in Case 0115-cv-53351 (2018) is illustrative of this reliance (CBL’s translation):
“The Plaintiff provided WeChat platform sales data of 1,500 units, alongside evidence from the Defendant’s other sales channels, including factory direct and trade show sales, that show sales covering a much longer period than the WeChat sales data alone. This court finds that the actual sales volume must have been much greater, and the 1,500 should be taken as a reference point to be multiplied to arrive at an appropriate figure.”
This holding has been echoed in other cases and jurisdictions. In Guangzhou Case 0111-cv-5836 (2020), the court accepted the number of online reviews posted as a basis for calculating sales volumes, since it was higher than the reported sales volume.
Likewise, the court also used the number of online reviews posted as the basis for calculating damages in Jiangsu Civil Appeal 1316 (2019), a case involving the Xiaomi and Pentium trademarks. The judge noted that reviews on Chinese ecommerce platforms can only be left after a purchase, thus reviews can serve as a reasonable indicator of total sales.
How Chinese Courts Determine How Much Profit to Disgorge
Chinese courts generally prefer looking at profit margins over per unit sales, but Chinese law does not provide for calculating profit per unit of goods sold or how to account for overhead expenses. Moreover, China’s evidentiary system makes this difficult compared to jurisdictions that allow expansive discovery. Therefore, litigants often find it more expedient to use the representative industry profit margins when calculating unjust enrichment.
Enrichment from infringement = infringing goods’ sales volume x (unit price x profit margin)
Or, more simply:
Enrichment from infringement = Income from infringing sales x profit margin
Both net and gross profit margins can be used as a profit margin, although Chinese law generally uses the operating margin to calculate damages in business cases. Profit disgorgement is imposed where necessary as a deterrent for willful infringement and business misconduct (See generally Beijing Upper Appeals Court IP Infringement Damages Guidelines) (2020))
Chinese courts typically follow one of two approaches to profit margins:
A straightforward calculation is used when the underlying facts are clear. In the HDMI trademark dispute in Guangdong Appeal 36087 (2021), the trial court found total sales of 21,210 units amounting to 1,629,862,000 CNY, with net and gross profit margins of 1.52% and 17.41% respectively, and calculated an award of 250,000 CNY. The appellate court affirmed this decision, reasoning that the award was well supported by the net profit margin evidence.
When evidence on specific profit margins is unclear, the court may look at the typical industry profit margins. In Zhejiang Appeal 294 (2021), Wyeth sued three separate companies for infringing on its brand. As part of its evidence, the plaintiff submitted an investor prospectus from one party that showed a gross profit margin of 28.23%. Since each defendant was similarly situated, the court imputed this figure to each party.
Chinese Courts Impose Highly Technical Requirements to Establish Profit Margins
Chinese courts operate under inquisitorial system that greatly prizes judicial economy over adversarial procedures, which complicates proving unjust enrichment damages. To deal with the difficulty of obtaining adequate evidence, some plaintiffs have introduced evidence taken from public companies, often leading to disastrous results.
There is a risk that the court will reject some of your evidence as irrelevant. In Hunan Civil Appeal 826 (2020), The Louvre Company introduced evidence that the defendant’s employee claimed 60 million in sales through reports pulled from four listed corporations that showed gross profits of 25%. However, the court held that this evidence was irrelevant because large corporations like these are a different kind of enterprise than the defendant’s small LLC.
The same judgment was followed in another province in Guangdong Civil Appeal 139 (2022), where Opple sued an unincorporated individual seller on Taobao for trademark infringement. To support its claim for profits disgorgement, Opple introduced disclosures from public companies showing profit margins ranging from 13% to 37%. As in the Hunan case, data from public companies was found inapplicable to a small seller like this.
These two cases illustrate how Chinese courts have taken judicial notice of how large, well-established companies beholden to stockholders operate differently from small companies, and deem them incomparable. While downloading public company reports may be easy and efficient, relying on this data can result in defeat in court.
There are several successful strategies you can use to bring evidence before a court. For example, in Jiangsu Case 05-cv-271 (2020), the court accepted the plaintiff’s evidence on average industry profit margins from market research providers, because the defendant failed to provide evidence rebutting it. The court therefore used the average industry gross profit margin of 14.05% for the period claimed as the basis for calculating profit disgorgement.
In Shanghai IP Appeal 73-cv-744 (2021), Wilo’s China LLC subsidiary sued a copycat, “Wilo Shanghai LLC,” for trademark infringement. The defendant was unable to produce books or records describing its sales in the trial court, thus the court allowed the retrieval of public records from the market regulator and tax administration, including filed financial reports, to determine the infringer’s total sales volume. Finally, the court referred to the average industry profit margin reported to calculate disgorged profits.
These successful cases illustrate how plaintiffs that identify sources of available, relevant market data are more likely to succeed in court.
Chinese courts calculating disgorgement of profits recognize that, while brand identity plays a central role in consumer purchasing decisions, factors like marketing and quality are also important and therefore must be weighted together. Courts weight these factors using the following formula.
Infringement enrichment = infringement sales income x profit margin x trademark contribution
In Beijing Appeal 662 (2020), the court held that condominiums are a unique class of fungible goods in that consumers primarily prioritize location and construction quality over brand identity when looking at comparable properties, and thus reduced weight of trademark goodwill in calculating profit disgorgement.
In Xiaomi Technologies LLC v. Xiaomi Trading LLC, (Guangdong Case 03-cv-7080 (2020)), the defendant was a merchandiser who provided a superior purchasing experience, despite infringing on Xiaomi. When weighing damages, the court found 50% of the profits to be attributable to the superior buying experience, 30% to the Xiaomi brand, and 20% to the use of Xiaomi’s business entity name.
In practice, trademark owners can maximize their recovery when making a claim for disgorgement of profits by following these recommendations:
- Identify sales volumes on Chinese ecommerce platforms like JD.com and Alibaba’s Taobao.
- Find profitability by looking at financial reports from similarly situated companies and impute it to the infringer.
- Maximize the trademark’s contribution weight by providing evidence of marketing, earned media, and awards.
Defendants can also use the following kinds of evidence to reduce damages:
- Actual sales data can be used to counter and reduce excessive sales claims.
- The business’s own financial statements, or those of peers, can be used to defend against excessive profit margin claims.
- Evidence of the defendant’s own sales and marketing can be used to diminish the trademark’s contribution in generating sales.
In this article, we’ve learned that Chinese law allows for profit disgorgement as a remedy for trademark infringement. The underlying jurisprudence is to prohibit unjust enrichment, and thus is a rule of equity. In China, this process is highly technical, and succeeding requires collecting financial and economic evidence specific to the infringer’s business model. China’s civil procedure rules make collecting evidence relativity difficult, and therefore trademark owners should carefully investigate and analyze how to bring forward disgorgement claims.
FURTHER READING
Get authoritative insights about Chinese foreign investment law from official government guidance in translation:
- Getting China’s regulators to stop trademark infringement
- How China trademark infringement litigation actually works
For a general overview of this topic, see also CBL’s China Trademark Law FAQ.