Some Thoughts on the Necessity of Respecting IP Rights in Original Works Based on the Six Major Schools Precedent

Part III: An Analysis of the Determination of Compensation Amounts

Huayun Wang

Abstract: Currently, the determination of the amount of damages in copyright infringement cases is plagued by conservative judicial attitudes – strict rules of evidence and a high burden of proof (e.g., evidence submission requirements are rigid and too much emphasis is placed in the “preponderance of evidence” standard). Meanwhile, courts exhibit an excess of caution and prudence while ignoring common sense considerations, neglecting to exercise their discretionary powers, and generally abdicating their responsibility to flexibly determine actual damages.

In Part II, the Court ruled that developers of the mobile gaming app Six Major Schools not only committed copyright infringement but also engaged in unfair competition under Article 2 of the Anti-Unfair Competition Law, because it seized market share and expropriated player groups that belonged to the plaintiff, thereby disrupting normal market order. In Part II we analyzed the Court’s application of the principles of honesty and credibility under the Anti-Unfair Competition Law. In Part III we will continue to discuss how the compensation amount was calculated and determined.

During the trial proceedings, since the disputed mobile gaming app had already ceased running and since the relevant advertising content had already been deleted, the critical issue in the case turned out to be the amount of compensation. The Court ultimately awarded RMB500,000 in compensation by taking various elements into account, including the reputation of the disputed literary work, the operating period of the disputed mobile gaming app, the scale of use of the infringing elements of the disputed literary work in the mobile gaming app, and the infringing party’s bad faith.

Case Brief

P.R.C. civil law applies the principle of “compensation must equal damages”, i.e., compensation is designed to restore the plaintiff to the position that he enjoyed immediately prior to suffering the damages that led him to court in the first place.. Both the P.R.C. Copyright Law and the P.R.C. Anti-Unfair Competition Law apply alternative, prioritized means for the calculation of damages: (i) “losses suffered by the infringed party”; but if these are uncertain, then (ii) “profits gained by the infringing party”; but if these are also uncertain, then (iii) statutory damages determined in the court’s discretion up to a statutory cap. If the plaintiff wishes to rely on the first or the second calculation method, it must provide evidence of the related data and results; otherwise the compensation amount can only be determined by a court exercising its discretion in assessing statutory damages.

In our opinion, in this case the plaintiff’s losses arise mainly from a loss in royalties that would have been paid for a license from Jin Yong, as well as a loss in consumption from a diverted player group. The plaintiff’s actual losses should be the loss in royalties. Since the plaintiff acquired an exclusive license for the right of adaptation by paying royalties, and since this exclusivity was materially jeopardized by the defendant’s infringing acts, the defendant should be liable for the exclusive license royalties paid by the plaintiff.

On the other hand, revenue from the game should be a significant component of the defendant’s infringement profits. The plaintiff took into account a comprehensive set of factors including the number of users, the willingness to pay, the popularity of the game and the consumption level within the game, and worked out a formula for calculating the defendant’s profits. On that basis, the plaintiff came up with an estimate of damages based on the defendant’s profits.

Regardless of whether the calculation is based on the plaintiff’s losses or the defendant’s profits, the amount should be far higher than the cap for statutory for damages (i.e. RMB500,000) as stipulated under the Copyright Law.

In the end, the Court did not accept the plaintiff’s formula for profit calculation; nor did it exercise its discretionary power to determine an amount in excess of the maximum amount for statutory damages. This result is rather unfortunate.

Difficult Issues

According to the Several Provisions of the Supreme People’s Court on Evidence in Civil Procedure, if there is no evidence, or if existing evidence is insufficient to prove the facts asserted by the party or parties, the party that bears the burden of proof should bear any unfavorable consequences arising therefrom.

In this case, it is obvious that the business records under the control of the defendant should be more relevant and definite than the plaintiff’s claim for damages. However, if the defendant’s infringement profits were greater than the cap for statutory damages (i.e. RMB 500,000), the inherent human desire for profit will of course lead the defendant to frame the issue in a manner that is consistent with its own interests, i.e., by disputing the probative force of the plaintiff’s evidence while at the same time refusing to provide revenue and profit records related to the infringement. Moreover, neither the Copyright Law nor the Anti-Unfair Competition Law empowers the courts to “demand the provision of accounting records and materials”, as provided under the Trademark Law. As a result, it is difficult for a plaintiff to obtain evidence supporting the compensation claim that meets the “preponderance of evidence” standard.

Consequently the Court’s assessment of the probative value of the plaintiff’s evidence for damages was the decisive factor in determining the plaintiff’s final amount of compensation. The Court’s assessment of the probative value of evidence is reflected in the large gap between the plaintiff’s claim for compensation and the amount that the court actually awarded.

Reflections

In this case, the plaintiff invested huge sums in intellectual property, while the defendant was able to profit tremendously from its infringement with minimal investment. Moreover, the infringement also threatened the market distribution mechanism. Because of increasing consumption of cultural products in China, copyright royalties continue to increase, and the statutory cap for copyright infringement damages (i.e. RMB500,000) is gradually becoming insufficient to compensate right owners’ for their damages and curb infringement.

As Master Xiangjun Kong noted in his book New Thoughts on IP Rights Protection, it is true that at present certain conservatism prevails among the judiciary IP cases, e.g. strict rules of evidence and a high burden of proof (e.g. rigid evidence submission requirements and overemphasis on the “preponderance of evidence” standard). Meanwhile, courts are too prudent and cautious in their application of common sense and judicial discretion, at the expense of a flexible determination of actual damages.

We also note that considering the cost of enforcement actions in time and money, the plaintiff’s evidence collection in the Six Major Schools case was limited to the content of the first 30 Levels of the game roles only, because suspected infringing content such as the “Xiangyang Battlefield” and “Ancient Tomb Sect” existed merely in the form of maps and specific plots had not yet been made available by the time the lawsuit was filed. Consequently the Court held that the game Six Major Schools constituted an adaptation of the first seven chapters of the book The Swordsman, and thereby infringed the plaintiff’s exclusive right of adaptation; however, the game did not constitute an adaptation of the other three books, namely The Legend of the Condor Heroes, The Return of the Condor Heroes and The Heaven Sword and Dragon Saber. If the plaintiff had chosen to postpone evidence collection, it is likely that more evidence of the defendant’s infringement could have been obtained so that a more favorable compensation amount could have been awarded. Nevertheless, we believe that if the enforcement action had not been carried out promptly, various unforeseeable events might have intervened. Unnecessary delay is not encouraged under either the Copyright Law or the Anti-Unfair Competition Law.

Given usage ratio by the Six Major Schools out of The Swordsman as determined by the Court, the damages award may have been reasonable even though it did not exceed the cap on statutory damages.

In addition, we also note the possibility in the Trademark Law and in State Council Document No.71 that the caps on statutory and punitive damages in copyright infringement cases might be raised. We believe that the Court should apply a lower threshold and a more flexible method of analysis in order to strengthen the protection of copyrights and to uphold an honest and orderly market. In this way, respect for IP rights will become an inevitable and inexorable reality for market participants.