The Disgorgement Damage System in Chinese Law
© Springer International Publishing Switzerland 2015Ewoud Hondius and André Janssen (eds.)Disgorgement of ProfitsIus Comparatum – Global Studies in Comparative Law810.1007/978-3-319-18759-4_22
22. The Disgorgement Damage System in Chinese Law
College of Comparative Law, China University of Political Science and Law, Beijing, China
Xiang GaoDean and Professor of Law (Corresponding author)
The disgorgement damage or gain-based damage is a relatively new term in Chinese law. The disgorgement damage system was first introduced in China’s company law. It was later expanded to other topical laws including intellectual property, securities, torts and the contract law. We can also find cases where Chinese courts have cited rules or jurisprudential basis of disgorgement damage to recover the damage of the injured parties in some of their opinions. This reflects that such provisions have to some degree become an important instrument for private relief and compensation in practice in China. However, it is pity that the practice of the system has lagged behind the expression of the law itself. Also, we do not have a general theoretical legal basis for the system. Besides, existing rules in intellectual property, torts and securities law only assume a supplementary role. To fully develop the functions of Chinese disgorgement system, we need to have a general theoretical basis, establish an internal structure with rich layers, strengthen the criteria for proving the gains, and return to the idea of putting the parties at the center of the system, as required in private law.
KeywordsDisgorgement damage (gain-based damage)Loss-based damageTheoretical basisInternal structureProving criteria
The authors are grateful to Professor Hu Che for his assistance of this chapter.
BA, Beijing Foreign Studies University, LLM, China University of Political Science & Law (CUPL), LLM & Ph.D., University of New South Wales, Australia, is Dean of the College of Comparative Law of the China University of Political Science and Law in Beijing, and Editor-in-Chief for the Journal of Comparative Law in China.
is Professor of Law in the College of Comparative Law of the China University of Political Science and Law in Beijing.
Chinese Laws of damage mainly aim at compensating the injured party for loss suffered. The remedies are therefore in most cases compensatory in nature rather than punitive. The calculation of indemnity is based on the actual loss suffered by the injured party, who will be entitled to an indemnity for damage that is equal to the actual loss. Where there is no actual loss or such loss could not be proven, the court normally will not support the plaintiff’s claim for damage. However, social development and legislative reforms have brought about changes to this. In some Chinese cases and legal practices, the loss of the injured party is calculated on the basis of the gain of the infringer or wrongdoer. This is called disgorgement damage or gain-based damage, a relatively new term in Chinese law. The disgorgement damage system was first established in China’s company law.1 It was later introduced to other laws including that of securities,2 intellectual property3 and torts.4 This chapter will have a comprehensive study and analysis of the disgorgement damage system in the PRC by examining the relevant provisions in the statutes and cases to provide our views to make it more practical and effective in protecting parties’ rights and interests.
Relevant Provisions in the Statutes
Relevant provisions with regard to disgorgement damage system mainly appear in four areas of law – company law, securities law, intellectual property law and tort law.
Provisions in Company Law
In the Company Law of the People’s Republic of China (hereinafter referred as “Company Law”), there are four articles which are about corporation disgorgement damage.
First, Article 61 of the Company Law, which is related to the gains in the violation of prohibition of business strife, provides “A director or the general manager may not engage in the same business as the company in which he serves as a director or the general manager either for his own account or for any other person’s account, or engage in any activity detrimental to company interests. If a director or the general manager engages in any of the above mentioned business or activity, any income so derived shall be disgorged to the company. Unless otherwise provided in the articles of association or otherwise agreed by the shareholders’ committee, a director or the general manager may not execute any contract or engage in any transaction with the company”.
Secondly, Article 147 of the Company Law, which is related to promoters and administrators’ gains from improper shares transfer, provides “Shares of a company held by its promoters shall not be transferred for a period of 3 years commencing from the date of the company’s establishment. Directors, supervisors and general manager of a company shall report to the company the number of the company’s shares held thereby, and shall not transfer such shares while they are in office”.
Thirdly, Article 214 (2) of the Company Law governs company management improper personal gains, providing “Where a director or the general manager misappropriates company funds or lend company fund to third parties, he shall be ordered to return the company fund and shall be disciplined by the company, and the gains derived from such transaction shall be turned over to the company. Where such action constitutes a crime, criminal liability shall be imposed in accordance with the law. Where, in violation hereof, the directors or the general manager use company assets as security for personal debt of any director of the company or any other person, the security arrangement shall be ordered to be canceled, and such persons shall be held liable for damages in accordance with the law, and the gains derived from the illegal provision of security shall be turned over to the company. Where the circumstance is serious, such persons shall be disciplined by the company.”
Fourthly, Article 215 of the Company Law, which also governs gains in violation of prohibition of business strife, provides “Where, in violation hereof, a director or the general manager engages in the same business as the company either for his own account or for another person’s account, in addition to turning over any income so derived to the company, such person may also be disciplined by the company.”
Provisions in Securities Law
There is only one article in the Securities Law of the People’s Republic of China (hereinafter referred as “Securities Law”) on corporation disgorgement damage. Article 42 of the Securities Law provides that majority shareholders’ gains from “short-swing trading” shall belong to the company, saying: “Where any director, supervisor and senior manager of a listed company or any shareholder who holds more than 5 % of the shares of a listed company, sells the stocks of the company as held within 6 months after purchase, or purchases any stock as sold within 6 months thereafter, any gains therefrom shall belong to the company. The board of directors of the company shall obtain the gains from these transactions for the company. However, where a securities company holds more than 5 % of the shares of a listed company, which are the unsold stocks that the securities company has purchased from the company for resale, the sale of these stocks will not be limited by a term of 6 months. Where the board of directors of a company fails to implement the provisions as prescribed in the preceding paragraph herein, the shareholders concerned have the right to demand that the board of directors implement them within 30 days. Where the board of directors of a company fails to implement them within the aforesaid term, the shareholders have the right to directly file a law suit with the people’s court in their own names for the interests of the company. Where the board of directors of a company fail to implement the provisions as prescribed in paragraph one herein, the directors in charge shall be jointly and severally liable according to law.” Compared to regulations in the Company Law, this provision is technically designed better. However, the provisions in the Company Law include more instances of corporation disgorgement damage and thus cover a wider regulatory area.
In addition, there are similar provisions in two special laws relating to securities. They are the Trust Law of the People’s Republic of China (hereinafter referred as “Trust Law”) and the Law of the People’s Republic of China on Funds for Investment in Securities 5 (hereinafter referred as “Securities Investment Fund Law”). Article 26 of the Trust Law provides that “the trustee must not take advantage of the trust property to seek profits for his own except getting remuneration according to the provisions of this Law. If the trustee violates the provisions of the preceding paragraph to take advantage of the trust property to seek profits for his own, the profits he obtains shall be brought into the trust property.”
Article 130 of the Securities Investment Fund Law provides that “a fund management institution or fund custodian which commits any act as set out in items (1) to (5) and item (7), paragraph 1 of Article 74 of this Law or violates paragraph 2 of Article 74 of this Law shall be ordered to make rectification and be fined from 100,000 Yuan up to one million Yuan; and the directly responsible person in charge and other directly liable persons shall be warned, with their fund business qualifications suspended or revoked, and be each fined from 30,000 Yuan up to 300,000 Yuan. Any property and income obtained from the utilization of fund assets by a fund management institution or fund custodian committing any act prescribed in the preceding paragraph shall become part of the fund assets, except as otherwise provided for by any law or administrative regulation.”
Provisions in Intellectual Property Law
The laws on intellectual property have been revised multiple times. But the provisions on disgorgement damages have stayed largely unchanged.
Article 49 of the Copyright Law of the People’s Republic of China (hereinafter referred as “Copyright Law”) provides that “if a copyright or copyright-related right is infringed, compensation shall be paid according to the actual loss of the right owner by the person who made the infringement; if the computation of the actual loss is difficult, compensation may be paid according to the illegal gains of the person who made the infringement. The compensation shall also include the reasonable expenses of the right owner for preventing the act of infringement. If the actual loss of the right owner or the illegal gains of the person who made the infringement could not be ascertained, the people’s court shall judge the compensation not exceeding 500,000 Yuan depending on the circumstances of the act of infringement”.
Article 65 of the Patent Law of the People’s Republic of China (hereinafter referred as “Patent Law”) provides that “the amount of compensation for the damage caused by the infringement of the patent right shall be assessed on the basis of the actual losses suffered by the right holder because of the infringement; where it is difficult to determine the actual losses, the amount may be assessed on the basis of the profits the infringer has earned because of the infringement. Where it is difficult to determine the losses the right holder has suffered or the profits the infringer has earned, the amount may be assessed by reference to the appropriate multiple of the amount of the exploitation fee of that patent under a contractual license. The amount of compensation for the damage shall also include the reasonable expenses of the right holder incurred for stopping the infringing act”.
Article 63 of the Trademark Law of the People’s Republic of China (hereinafter referred as “Trademark Law”) provides that “the amount of damages for infringement upon the right to exclusively use a registered trademark shall be determined according to the actual losses suffered by the right holder from the infringement; where it is difficult to determine the amount of actual losses, the amount of damages may be determined according to the benefits acquired by the infringer from the infringement; where it is difficult to determine the right holder’s losses or the benefits acquired by the infringer, the amount of damages may be a reasonable multiple of the royalties. If the infringement is committed in bad faith with serious circumstances, the amount of damages shall be the amount, but not more than three times the amount, determined in the aforesaid method. The amount of damages shall include reasonable expenses of the right holder for stopping the infringement. Where the right holder has made its best efforts to adduce evidence but the account books and materials related to infringement are mainly in the possession of the infringer, in order to determine the amount of damages, a people’s court may order the infringer to provide such account books and materials; and if the infringer refuses to provide the same or provide any false ones, the people’s court may determine the amount of damages by reference to the claims of and the evidence provided by the right holder.”
Article 20 of the Anti-Unfair Competition Law of the People’s Republic of China (hereinafter referred as “Anti-Unfair Competition Law”) provides that “where an operator, in contravention of the provisions of this Law, causes damage to another operator, i.e., the injured party, the infringer shall bear the responsibility for compensating for the damages. Where the losses suffered by the injured operator are difficult to calculate, the amount of damages shall be the profit gained by the infringer during the period of infringement through the infringing act. The infringer shall also bear all reasonable costs paid by the injured operator in investigating the acts of unfair competition committed by the operator suspected of infringing the injured operator’s lawful rights and interests”.
Provisions in Tort Law
Article 20 of the Tort Law of the People’s Republic of China (hereinafter referred as “Tort Law”) governs the infringement disgorgement damage. It provides that “where any harm caused by a tort to a personal right or interest of another person gives rise to any loss to the property of the victim of the tort, the tortfeasor shall make compensation as per the loss sustained by the victim as the result of the tort. If the loss sustained by the victim is difficult to be ascertained and the tortfeasor obtains any benefit from the tort, the tortfeasor shall make compensation as per the benefit obtained. If the benefit obtained by the tortfeasor from the tort is difficult to be ascertained, the victim and the tortfeasor disagree to the amount of compensation after consultation, and an action is brought to a people’s court, the people’s court shall determine the amount of compensation based on the actual situation”.
Some Chinese legal scholars believe that this provision has its root in relevant provisions of the intellectual property law. Some other Chinese legal scholars believe that this provision is borrowed directly from similar provisions in the Netherlands Civil Code or German Civil Code. As early as 2001, before the Tort Law was even promulgated, the Supreme People’s Court of the PRC issued the Interpretation of the Supreme People’s Court on Problems Regarding the Ascertainment of Compensation Liability for Emotional Damages in Civil Torts “hereinafter referred as “Tort Interpretation”). Some of the provisions in the Tort Interpretation recognized the infringement disgorgement damage system to some extent. Article 10 of the Tort Interpretation expressly recognizes “circumstances regarding earnings gained through the infringement” as an important basis for calculating emotional damage. Though the Tort Interpretation is not a general rule for infringement disgorgement damage, it essentially recognizes the rule of disgorgement damage by using the infringer’s gains as calculation factor and method.
Practice of Disgorgement Damage in the PRC
The provisions on disgorgement damage in different legal subject matters are recognized and accepted by Chinese courts. We can find cases where Chinese courts have cited rules or jurisprudential basis of disgorgement damage to recover damage for the victim. This shows that these provisions have been to some degree implemented in China’s legal practice and become an important tool for granting private relief and compensation in practice.
Practice of Disgorgement Damage in IPR Infringement
The IPR law has the most influential provisions on the disgorgement damage system in China as well as their application in practice. The leading case on this point is Chint Group Corporation v Schneider Electric Low Voltage (Tianjin) Co., Ltd. and Ningbo Free Trade Zone Star Electrical Equipment Co., Ltd. Yueqing Branch,6 the so-called “the No. 1 case of compensation of China’s patent infringement” in 2007. In this case, Chint Group Corporation (hereinafter referred to as “Chint”) sued Schneider Electric Low Voltage (Tianjin) Co., Ltd. (hereinafter referred to as “Schneider”) and Ningbo Free Trade Zone Star Electrical Equipment Co., Ltd. Yueqing Branch (hereinafter referred to as “Star’s branch company”) for infringement of its utility model patent, and the Wenzhou Intermediate People’s Court expressively supported the plaintiff’s claim to calculate the damage on the basis of the standard of the operating profit gained by the defendant from the patent infringement and therefore ordered that Schneider compensates for the plaintiff’s loss of more than RMB 330 million Yuan. The court believes that “Schneider’s act of manufacturing and selling the patented product for the purpose of production and operation without the consent of patentee Chint and the act of Star’s branch company of selling the patented product for the purpose of production and operation without the consent of patentee Chint have constituted infringement of patent right and should therefore bear corresponding civil liabilities. Since Schneider is not an infringer who only engages in patent infringement, it should pay indemnity according to its profit from operations. Schneider’s sales volume of the infringed patented product during the infringement term shall be first of all determined with the data that Schneider provides; the smaller figure between Schneider’s average operating profit margin from selling all its products and the data in the sheet of Schneider’s operating profit margin from selling the infringed patented product (the sheet is submitted by Chint) shall be the final operating profit margin for calculating the amount of indemnity. In this way, Schneider’s operating profit from selling the infringed patented product from August 2, 2004 to July 31, 2006 is calculated as RMB 355,939,206.25 Yuan. As Chint has claimed for an indemnity of RMB 334,869,872 Yuan, we determine that the smaller figure shall be the amount of indemnity that Schneider shall pay.
In this case, the plaintiff filed an action against a joint venture of Schneider Electric, one of world’s top 500 largest companies. It attracted a lot of attention from both business community and legal community at home and abroad. Furthermore, the subject matter involved here is a utility model, usually called as petty invention while the damages claimed is over RMB 330 million, the highest amount ever supported by a court of first instance in a Chinese IPR case. That’s why it has won itself the name of “the No. 1 case of patent infringement in China”.7
On August 2, 2006, Chint filed law suit in Wenzhou Intermediate People’s Court against Schneider for the cause of patent infringement. In the beginning it just requested the defendant stop producing products accused for patent infringement and claimed compensation of RMB 500,000. Later in January, 2007, at the request from the plaintiff, the court chose a local accounting firm to conduct auditing on the sales and profits of circuit breakers from Schneider. According to the auditing report, the sales amounted to RMB 880 million while the actual profit was not ascertained. Base on pertinent evidence, Chint concluded that the profit margin of Schneider was over 30 % and thus raised the damages to over RMB 330 million. There is no doubt that without the support of patent infringement disgorgement damage rules and system, the plaintiff would never won RMB 330 million compensation, since the plaintiff could not prove that the loss amounted to such a figure. This is the very reason why the damages originally claimed was only RMB 500,000.
Practice of Disgorgement Damage in Tort Law
Legal practices of disgorgement damage for infringing right to personality began before the promulgation of the Tort Law. In the case of Wang Junxia v Kunming Cigarette Factory,8 which was handed downed in early 2001, the defendant used the portrait of the former Olympic Game champion in commercial advertisement without Wang’s permission. During the trial, Liaoning provincial people’s Court did not reject the plaintiff’s claim even though the plaintiff failed to prove the amount of pecuniary loss. Instead, on the ground that the defendant’s gains can be regarded as equivalency of loss for the plaintiff, the court ruled in Wang Junxia’s favor, awarding damages of RMB 800,000.
In the case of Mo Shaocong v Quanzhou Xinhuadu Co. 9 in 2005, the Quanzhou Intermediate People’s Court in Fujian made a similar conclusion, saying that “the trial court did not commit error to consider the agreement on remuneration for portrait use in advertisement contract and the plaintiff’ social reputation, the infringer’s degree of fault and the possible economic gains for the appellant, in determining the amount of compensation.” Though at that time in China the Tort Law had not been promulgated, these cases applied the method of tort disgorgement damages to calculate the loss of victims. The practices reflected in these cases provided support to the draft of Article 20 in Tort Law in 2010, and provided guidance for future practice.10