1. Introduction

When it comes to the issue of apportioning damages in patent infringement cases, there is a major difference between the Chinese and U.S. patent law regimes. In the U.S., apportionment can be done at both the royalty base (through “smallest saleable patent practicing unit” , SSPPU) and royalty rate (i.e., a portion of the royalty base) level to determine the value of patented technology. In China, however, apportionment can be only done at the royalty rate level and the entire market value of the accused product is always selected as the royalty base. As the SSPPU doctrine has not yet been recognized in China, apportionment is conducted by multiplying a percentage and the selling price of the entire accused product. China's current judicial standards for determining an appropriate royalty rate/percentage are vague and incongruous. Courts have broad discretion to decide a royalty rate ranging from 1% to 100%. As a result, the patent damages in many infringement cases are unreasonably high.

In recent years, the judiciary and the industry have taken measures to address this issue. On the one hand, Chinese courts started to encourage litigating parties to perform quantitative analysis to buttress their proposed apportionment percentages. On the other hand, China's automotive association called for the use of SSPPU as the royalty base for SEP licensing in the automotive sector.

2. Chinese plaintiffs frequently relied on the infringer's profit to calculate patent infringement damages

In China, there are four general categories of patent infringement damages in descending order of importance:

  1. the patentee's lost profit; 
  2. the infringer's profit attributable to the infringement;
  3. a multiple of reasonable royalty; and
  4. statutory damages. Among the four categories, the infringer's profit is the most frequently adopted method by plaintiffs in damages calculation, and apportionment usually takes place by splitting the profit between that generated by the asserted patent and other assets. 

This is quite different from the U.S. approach, where the infringer's profit may not be sought in patent infringement proceedings. U.S. courts apply two principal approaches for measuring damages “adequate to compensate” for a defendant's infringement:

  1. lost profit and
  2. reasonable royalty.

3. Chinese courts stick to EMVR, not allowing apportioning royalty base

The Entire Market Value Rule (EMVR) and SSPPU are the two most frequently used tools to set the royalty base. EMVR refers to calculating royalties based on the market value of an entire accused product, and SSPPU proposes that royalty base should be the smallest unit – module, unit or component – that practices the patented technology.

EMVR is a U.S courts recognized exception to apportionment through royalty base, which states that the entire value of accused products can be used as the royalty base only where the patented feature drives customer demand for the entire product. When the conditions for invoking EMVR is not satisfied, e.g., if the patented feature does not motivate consumers to buy the accused products, U.S. courts generally use SSPPU as the royalty base.

Chinese courts have long used the entire market value of the accused product as the royalty base, not recognizing SSPPU. There are no statutes or reported court decisions applying SSPPU in royalty determination in China. Unlike the U.S., China places no requirement to invoke EMVR. In other words, regardless of whether the patented feature caused consumers to purchase the accused product, Chinese courts always applied EMVR for calculating damages, indicating that apportionment through royalty base is so far unviable in China.

Notably, the Guidelines for Standard Essential Patent Licensing in the Automotive Industry, recently published by China's automotive association, takes the first step to propose using SSPPU as royalty base for SEP licensing in the automotive industry. This may be an indication that Chinese courts might allow SSPPU in the future.

4. Chinese courts encourage quantitative analyses to determine a reasonable royalty rate/percentage

In the past, Chinese courts used to arrive at an apportionment percentage based on qualitative analyses, without specifying how quantitatively such a percentage was calculated. For example, a court typically would hold that it had considered a number of factors such as the type of patent-in-suit, the validity of the patent, the contribution of the patented feature to the sales and profit of the accused end products, and finally derived a 10% apportionment percentage. It usually would provide no reasoning or explanation as to why, and to what extent, these factors are connected to the selection of a 10 percent royalty rate.

Chinese courts recently started to encourage litigating parties to collect quantitative apportionment evidence to support their proposed royalty rate. In Appotronics. v. Dehao Electron (2021), the Supreme People's Court (SPC) conducted a mathematical damages calculation. It found that, among the accused products' 10 unique selling propositions acknowledged by the defendant on its own website, 3 selling propositions are related to the patented feature. As such, the SPC ruled that the patented invention accounts for 30% of the accused product's value.

In VMI Holland B.V. (“VMI”) v. Safe-Run Intelligent Equipment Co., Ltd (“Safe-Run”) (Jiangsu High Court, 2021), the plaintiff's expert performed a quantitative analysis to arrive at a royalty rate. In that case, the infringed patent covered a cutting device and the accused product is a tire building machine. The plaintiff VMI's damages expert argued that the patented feature can improve tire building machine's working performance with fewer failures and higher yields, and that compared with a tire building machine using the prior art, the accused machine can increase tire production by 7.89%-11.84%. Accordingly, VMI's expert argued that a 7.89%-11.84% royalty rate reflected the incremental value that the patented invention adds to the end product. The court employed the expert's method, finding that this quantitative analysis provided an adequate basis for arriving at the plaintiff's proposed royalty rate.

Takeaway

It is worth noting that precise apportionment through royalty rate with mathematical assessments is encouraged, not required, by the Chinese judiciary. For the vast majority of patent infringement cases, Chinese courts still arbitrarily derive a royalty rate without any quantitative or math-based foundation. This makes sense because determining a royalty rate is inherently imprecise, so the courts have more leeway. A better approach to restricting the court's discretion would be limiting the royalty base to SSPPU, and many legal scholars have called for legislative reform that China should permit SSPPU if some requirements are met, just like what the U.S. courts did.

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