ZHONGSHAN LONGCHENG DAILY USE PRODUCTS
CO., LTD. V. HUBEI TONGBA CHILDREN’S APPLIANCES CO., LTD. (2013) MTZ No. 116, SPC
Cause of action: Dispute over infringement of a utility model
patent
Collegial panel members: Wang Chuang | Zhu Li | He Peng
Keywords: compensation, concurrence, infringement
of a utility model patent
Relevant legal provisions: Contract Law of the People’s Republic of China,
article 122 Patent Law of the People’s Republic of China, article 65(1)
Basic facts: Zhongshan Longcheng Daily
Use Products Co., Ltd. (hereinafter “Longcheng”) is the patentee of the utility model
named “Wheel Alignment Device”. In April 2008, Longcheng
filed a claim in the Wuhan Intermediate People’s Court against Hubei Tongba
Children’s Appliances Co., Ltd. (hereinafter “Tongba”) on grounds of patent infringement, and
the court ordered Tongba to cease the infringement
and to compensate Longcheng.
Tongba refused to accept the judgment and filed an appeal. At
second instance, the parties reached a mediation settlement and Hubei Higher
People’s Court prepared a civil mediation agreement
([2009] EMSZZ No. 42), the main contents of which included that Tongba should promise not to further infringe Longcheng’s patent and that, in the event of any
further infringement on the utility model of Longcheng,
Tongba should voluntarily indemnify Longcheng in the amount of RMB1 million.
Later, Longcheng found that Tongba was still
engaging in business activities that infringed upon Longcheng’s patent and hence, in May 2011, it lodged another lawsuit
with Wuhan Intermediate People’s Court, requesting that the court order Tongba to compensate Longcheng in
the amount of RMB1 million and to bear the litigation costs. At first instance in
this second case, after hearing the court’s interpretation of the case, Longcheng made it clear that it was lodging this lawsuit on
the grounds of patent infringement rather than breach of contract, but it asked
the court to calculate the amount of compensation due according to the amount
agreed by both parties during mediation. The court held that, in accordance
with article 122 of the Contract Law of the People’s Republic of China, the injured party
should indeed have the right of choice of remedy in the event of simultaneous
tort liability and liability for breach of contract. However, because Longcheng expressly chose to lodge the lawsuit for
infringement, the amount of compensation would be determined under the Tort
Law. If the standard for compensation were subject to the previous mediation
agreement, this would conflict with the provisions of article 122 of the
Contract Law. Because Longcheng had lodged the
lawsuit for infringement, the lawsuit concerning breach of contract could not
be included in the court’s investigation, and the court need not
decide on any breach of contract and consequent liabilities; thus it would have
been inappropriate to calculate the amount of compensation due in this instance
of breach on the basis agreed by both parties. Instead, the court of first
instance applied the statutory standard of compensation and ruled that Tongba should compensate Longcheng
RMB140,000.
Longcheng refused to accept this ruling and lodged an appeal. At second
instance in this second case, Hubei Higher People’s Court held that determination of the
rights and liabilities between parties of the case at issue should be based on
whether the infringement in fact took place. The allegedly infringing model of
baby buggy involved in the previous case was different from the allegedly
infringing model involved in this case and thus the amount of damages agreed in
the mediation agreement could not be applied to this case. On this basis, the second-instance
court dismissed the appeal and affirmed the finding at first instance.
Longcheng still refused to accept the courts’
rulings and applied to the Supreme People’s Court for permission to appeal. The
Supreme People’s Court reheard the case and, on December 7, 2013, it ruled that
the first- and second instance judgments in this second case should be
overruled, and that Tongba should compensate Longcheng RMB1 million.
Held: On October 24, 2011, Wuhan Intermediate
People’s Court delivered its judgment ((2011)
WZCZ No. 467), in which it ordered Tongba to
compensate Longcheng RMB140,000 and rejected Longcheng’s other claims.
Longcheng refused to accept the ruling and instituted an appeal
before the Hubei Higher People’s Court, asking that it overrule the
first-instance judgment and amend it according to law. The second instance court
delivered its judgment on May 11, 2012, dismissing the appeal and affirming the
first-instance judgment.
Longcheng still refused to accept the judgments and applied to the
Supreme People’s Court for permission to appeal. The
Supreme People’s Court reviewed the case and, on December 7, 2013, it delivered
its ruling that the first- and second-instance judgments should be overruled,
and that Tongba should compensate Longcheng
in the amount of RMB1 million.
Reasoning: On appeal, the Supreme People’s Court held as follows.
I. On the effect
of the mediation agreement made by both parties in the previous case
The mediation
agreement that resulted from the previous case was made by both parties on the
basis of free will and its contents concern only the disposal of private
rights; they do not involve social public interests and third-party interests. There
are no other circumstances under the law that would render the agreement invalid,
and the Hubei Higher People’s Court delivered the civil mediation agreement
after reviewing and confirming the parties’ mediation settlement; thus the
agreement made by both parties in the previous case should be legally valid.
II. Whether
quantum of damages in this case could be based on the calculation agreed in the
previous mediation agreement
First, the civil
liabilities that Tongba should have borne did not
fall within the scope of simultaneous tort liability and liability for breach
of contract. The premise for determining such simultaneous liability, as
provided under article 122 of the Contract Law of the People’s Republic of China, is that “the personal and property rights of the other
party are damaged due to breach of contract by one party”. According to that provision, the
principle in instances of simultaneous tort liability and liability for breach
of contract should be based on a transactional relationship between the parties.
When one party breaches a contractual obligation and such breach infringes upon
the other party’s interests, the first party incurs tort
liability. The “breach” stipulated in that provision should
therefore refer to the fact that one party has violated an obligation agreed in
the basic transactional contract, and that the violation simultaneously infringes
upon the rights and interests of the other party, rather than refer to the
violation of an agreement concerning the way in which the parties will
calculate liabilities for damages after an infringement has taken place. Subject
to its contents, the mediation agreement made in the previous case was not a
basic transactional contract between Longcheng and Tongba, but an agreement concerning how to apportion
liability for damage in the event of infringement (including calculation methods
and amount) after occurrence of an infringing act. Therefore, in this case, the
civil liabilities that Tongba should have borne did
not fall within the circumstance of simultaneous tort liability and liability
for breach of contract, as stipulated in article 122 of the Contract Law.
Secondly, the
civil liabilities that Tongba should assume in this
case should be only the liability for infringement. On the one hand, as noted, Longcheng and Tongba were not in
a basic contractual relationship; on the other hand, the legal significance and
effect of the mediation agreement that resulted from the previous case did not
lie in the parties’ agreement on the contractual obligations of Tongba, but in their agreement on how to apportion
liability for the infringement. Even in the absence of the mediation agreement,
Tongba should bear the obligation of non-infringement
according to the law. Both parties drafted into the mediation agreement the
specific methods of calculating the amount of compensation due in instances of
future infringement by Tongba only to specify how Tongba should assume the liability for infringement should
it infringe upon the patent yet again.
Thirdly, the Tort
Law, Patent Law and other laws do not prohibit the infringed party and
infringer from agreeing in advance the method by which they will apportion
liability for infringement and calculate the amount of damages, among other
things. The substance of such an agreement is to confirm, in advance, a simple
method for calculating and determining the patentee’s losses or the infringer’s benefits as a result of any future infringement.
Considering such factors as the difficulty in furnishing evidence, and the
time-consuming and laborious nature of litigation, among other things, both
parties concerned can certainly agree on an amount of damages that shall be
payable for infringement to the extent of their autonomy under private law, and
such an agreement may include both ex post remedies for actual infringement and
ex ante measures to be taken in advance of the occurrence of infringement. The application
of the method for determining the amount of compensation to which both parties
agreed during mediation in the previous 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 during the previous case could be applied in this case.