How to Determine the “Reasonable Profit” of the Tortfeasor in the Cases Concerning the Infringement of Technical Secrets?
Article 17 of the “Anti-unfair Competition Law” provides that in the cases concerning the infringement of commercial secrets, where it is hard to ascertain the actual losses of the infringed party, the compensation could be determined in accordance with the gains made by the tortfeasor from the infringement (hereinafter referred to as the “GAINS”). In practice, it is very difficult to prove the actual loss of the infringed party in the majority cases concerning the infringement of commercial secrets. Therefore, it is not rare to determine the compensation in accordance with the GAINS.
Regarding the calculation formula of the GAINS, according to Article 17 of the “Supreme People’s Court, Several Issues Concerning the Applicable Laws in the Trial of Unfair Competition Civil Cases Interpretation” (Fa Shi [2007] No.2), the GAINS could be calculated with reference to the approach for determination of the amount of damages for infringement of a patent right. To be specific, it could be calculated with reference to Article 20 of the “Several Provisions of Supreme People’s Court on Issues Relating to Laws Applicable for Trial of Patent Dispute Cases”, which stipulates that the compensation could be calculated in accordance with the total quantity of sales of the infringing products on the market multiplied by the reasonable profit of each piece of patented product. However, there are no clear rules or guidelines on the determination of “reasonable profits”.
The determination of “reasonable profits” shall consider two factors, which are the sales price and the profit margin.
Generally speaking, since this is the calculation of the tortfeasor’s profit, it is appropriate to use the sales price and profit margin of the tortfeasor. In practice, the opinion has been applied in the majority cases. The tortfeasor or the infringed party may provide evidence to prove the tortfeasor’s sales price. The court may have the following tendencies when deciding whether such evidence could be applied.
(1) Evidence that is found to be less likely, which include the sales calculation[1] or financial accounts[2] provided by the tortfeasor;
(2) Evidence that is found to be more likely, which include the annual audit report of the tortfeasor issued by a third party[3], the sales pricedeclared by the tortfeasor in the bidding documents to a third party[4], the sales price or profit disclosed by the tortfeasor on its official website (such data might be required to be audited[5]).
However, where there is any evidence could prove that the tortfeasor has occupied the market with a low price, which is extremely lower than the sales price of the infringed party; or the tortfeasor’s low price behavior has crushed the infringed party, under such circumstance, it is unfair and unreasonable to use the tortfeasor’s sales price, then the infringed party normally would require to use its own sales price. However, in the majority cases, there are competitors in the relevant market, clients might choose other competitors instead of the infringed party, so the court would not directly adopt the infringed party’s sales price. In view of this, the court might adopt objective evidence, such as the sales price of a third party on the same products[6] or the data disclosed by the authoritative publications of the specific industry and etc..
In addition, in some cases, if a tortfeasor refused to provide any information related to the sales price, in consideration of the other facts of the case, the court often tends to determine that the tortfeasor had a serious subjective malignancy, and then adopt the infringed party’s sales price[7]. Or the court would comprehensively consider the subjective malignancy of the tortfeasor; the scope, consequence and duration of the infringement; the divisibility of the products; the sales quantity of the infringing products; the cost; average profit in the industry and other factors.
Regarding the profit margin, there are disputes on the adoption of the profit margin of the tortfeasor, the infringed party or other standards. Where the court did not adopt the tortfeasor’s sales price, normally it would not directly adopt the profit margin declared by any party, and it would decide the profit margin in consideration of the claims of parties, the market, and other factors, such as the R&D costs, the marketing costs[8].
Finally, in terms of the calculation of the tortfeasor’s profit, two issues deserve attention. First, according to the relevant judicial interpretations, the gains derived by the tortfesor from the infringement shall generally be calculated in accordance with the operating profits of the tortfeasor, where the entire business of the tortfeasor is the infringement, the gains derived by the tortfeasor from the infringement may be calculated in accordance with the sales profit. Second, the contribution of the infringing technology to the infringing products could be taken into consideration. In many cases, both the defendant and the court have ignored this issue, which is very important to the defendant.
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