China: New guidelines harmonizing the calculation of illegal business turnover in administrative trademark infringement cases

We set forth below some key provisions of the Guidelines covering the calculation of illegal business turnover of infringing goods in different stages of commercial activities, including manufacturing, selling, business promotion, licensing and so on. The Guidelines’ clear and standardized method for calculating illegal business turnover, and the specific rules provided for a number of complex situations will make it easier and more transparent in practice for brand owners and administrative authorities to enforce trademarks, fix the amount of administrative fines and deter potential infringers.

Key provisions

Calculation of illegal business turnover for goods 

Articles 5 to 7 provide several ways to calculate the illegal business turnover for goods depending on the stage of the goods in the manufacturing and selling process.

• For infringing goods that are already sold, the illegal business turnover is calculated based on the actual sales price.

• For unsold infringing goods, the calculation is first based on the average sales price of the infringing goods that have been sold and verified, and if this cannot be determined, it is based on the indicated price on the goods. 

If neither the actual sale price nor the marked price can be determined, the calculation is based on the median market price of the infringed goods.

• For goods that have been manufactured but have not yet been affixed with the infringing trademark, if there is substantial and sufficient evidence proving that these goods will infringe on another's registered trademark rights, their value should be included in the illegal business turnover. This is a positive development for brand owners, as infringers currently often wait with this step of affixing the goods with the infringing mark until they have confirmed orders, thereby trying to escape their liability or reduce their liability for trademark infringement.

• For contract manufacturing (also referred to as “OEM”) and processing operations (article 7), the rule is that if the contractor uses goods that infringe on registered trademarks, the illegal business turnover is calculated on the actual sale price of the infringing goods. If the infringing goods are not independently priced, the calculation is based on the value proportion of the goods in the contract manufacturing and processing operations; if this proportion cannot be determined, it is based on the median market price of the infringed goods.

In particular, for the important concept of  “median market price”, according to the Guidelines, a cascade system is to be applied to identify this price: in general, the median market price of the infringed products is determined based on the retail prices publicly announced by the right holder for the same type of products. However, if no retail prices are announced, it is determined based on the average retail prices of the same type of infringed products sold by multiple merchants in the same market, or based on the median market price of similar products that are functionally, purposefully, and materially equivalent to the infringed products. 

Specific rules for complex infringement situations

The Guidelines also provide specific rules for a set of complex infringement situations, where the application of the general rules is not straightforward:

• Free Goods and Gifts (article 8): The calculation is based on the actual purchase price or production cost of the gifts. If these cannot be determined, or if the gifts are non-standard products, the calculation is based on the median market price of the infringed goods.

• Refurbished or Repaired Goods (article 9): The calculation is based on the total value of the refurbished goods. If only parts or components of the refurbished goods infringe, the calculation is based on the value of these parts or components.

• Intentionally Providing Facilities for Infringing Registered Trademarks (article 11): The calculation is based on the income obtained from assisting the infringement; if there is no income, it is treated as having no illegal business turnover.

• Renting Goods that Infringe on Registered Trademarks (article 12): The calculation is based on the rental income.

• Advertising that Infringes Registered Trademarks (article 13): It is treated as having no illegal business turnover, if actual infringing goods cannot be identified.

• Infringements jointly committed by a licensor and licensee (article 14): the illegal business turnover will be calculated based on actual sales prices or market value of the infringing goods (as per Articles 5 and 6). If the licensor is found to have facilitated the licensee's infringement, the licensor's illegal turnover is determined by their income from the licensing arrangement, unless the license was granted on a royalty-free basis, in which case no illegal turnover is attributed to the licensor. 

• False Sales Methods (article 16): If there is sufficient evidence that the sales volume of infringing goods was increased through false sales methods such as brushing orders, these amounts are not included in the illegal business turnover.

What if no turnover is verifiable or only partial turnover is verifiable?

Article 15 provides that if only part of the illegal business volume can be verified, then only the verified illegal turnover shall be considered, and if the turnover cannot be verified at all under the Guidelines, the case is treated as having no illegal business volume at all.

Authored by Grace Guo, Helen Xia, and Stefaan Meuwissen.