A statutory damages system is indispensable to intellectual property protection in China. A draft of Shenzhen’s local government legislation, the “Regulations on the Protection of Intellectual Property Rights of Shenzhen Special Economic Zones” sparked many discussions in China’s intellectual property law community because of its proposal of maximum damages of 5 million yuan in cases where the proceeds of infringement are difficult to determine. Commentators praised the draft as the most stringent intellectual property protection regulation in Chinese history. However, the proposal was not included in the final legislation issued in early January 2019. The reason may be that a new approach is stipulated in the draft of the Fourth Amendment of Patent Law, issued in late December 2018, which regulates in Article 68 that the minimum statutory damages are 100,000 yuan and the maximum is 5 million yuan. Shenzhen’s move would probably be deemed as a prelude for the national overall increase of statutory damages for the patent as well as the thrust to enhance intellectual protection in China.
However, some academics view the attempt meaningless. They view that other countries with strong patent protection, like Germany and the U.S., do not have statutory damages. Therefore, they propose that China should follow their approach and abolish such regulation as well.
What approach is suitable for China? Would increasing statutory damages enhance intellectual protection in China? After comparing with the U.S. and Germany, which are jurisdictions without statutory damages, as well as South Korea and Japan, which are jurisdictions with statutory damages and discretionary compensation, this paper proposes that China should adopt statutory damages and discretionary compensation to form a two-pronged approach and thus work cooperatively to improve the level of intellectual property protection in China.
This article starts by discussing the weak patent protection conditions in China. It then explains the current four modes of calculating damages for patent infringement in Chinese patent law. The third section focuses on the reasons statutory damages are used as well as their abuse. The fourth section compares approaches to statutory damages in China, which has a statutory damages system, and the U.S. and Germany, which have no statutory damages, and have corresponding civil procedures to ensure strong protection to the right holder. The fifth section compares the practice in China with that in South Korea and Japan, which are states with strong IP protection and, although they do have statutory damages, they do not abuse it.
- General status of patent protection in China
2.1 Patent damages are important for patent protection.
The compensation system for patent infringement plays an important role in compensating for the losses caused by patent infringement suffered by the patentee by paying a certain amount of economic compensation by the infringer through legal enforcement. Also, the compensation is closely related to the economic interests of the infringer and the infringed party, and can effectively accelerate independent innovation, improve scientific and technological competitiveness, and promote industrial upgrading.
2.2 The status quo re patent damages compensation is unsatisfactory, and thus strongly criticized by foreign countries.
But the status quo re patent damages compensation system in China is unsatisfactory. The current average patent compensation is only about 80,000 yuan. Such a low level of patent protection has been criticized strongly both at home and abroad. The current average patent compensation in the U.S. is 5.5 million dollars on average. Many foreign countries blame China’s patent compensation on the problem of the burden of proof and low compensation because when Chinese companies infringed their patents, they could only get a low remedy. For example, on December 13, 2010, the US International Trade Commission issued an investigation report entitled “China’s Intellectual Property Infringement and Independent Innovation Policy” (hereinafter referred to as the “332 Investigation”). According to the report, there are problems such as “evidentiary hurdles” and “smaller awards” in China’s damage compensation system for patent infringement. Domestically, such low compensation also raises concern among government authorities. Especially, in an effort to propose to increase the number of statutory damages stipulated in the Patent Law, the legislation reflects concern about the low compensation status quo inside and outside of China.
2.3 Most people in China blame such unsatisfying condition on the abuse of statutory compensation.
In China, low patent compensation is not only a hot issue of social concern, but also a principal motivation for the revision of the 4th Patent Law in China. Among them, most scholars in China believe that such low-compensation situation is mainly caused by the abuse of statutory compensation.
- The current calculation mode of China’s patent infringement damages
3.1 The current amount of patent infringement compensation is low
According to a national survey based on 1598 cases from 1993 to 2013 involved with statutory compensation, cases where the patent infringement compensation is less than 200,000 yuan, accounting for 91.8%, and the average compensation amount was 88,000 yuan. Moreover, in a 12th five-year plan program, based on analysis on 405 samples, a conclusion was drawn that cases with statutory compensation less than 300,000 yuan constitute 93.33%, and the average amount is 94,400 yuan. However, turning our sight to the other side of the ocean, in America, according to research conducted by Price Waterhouse Coopers, during 1995 and 2013, the average amount is 5,500,000 dollars, over 60 times more than that of China.
3.2 Methods to determine the amount of patent infringement compensation under the Chinese Patent Law are hierarchical
The legal source of the statutory compensation system in the Chinese Patent Law derives from Article 65 of the Patent Law. According to this article, there are four calculation modes. Instead of being applied randomly, these four methods have a hierarchy. The first is the actual loss of the patentee (hereinafter referred to as “actual loss mode”). Secondly, when the actual loss is difficult to determine, the amount should be calculated pursuant to the infringer’s interests (hereinafter referred to as “infringer’s interests mode”). Thirdly, when the loss of the patentee or the benefits obtained by the infringer are difficult to determine, a reasonable multiple of the patent licensing fee may be considered (hereinafter referred to as “patent licensing fee mode”). Fourth, when the above methods are all difficult, the court shall apply statutory compensation (hereinafter referred to as “statutory compensation mode”). “The people’s court may determine compensation for less than one thousand yuan but not more than one million yuan according to the type of patent right, the nature of the infringement and the circumstances.”
3.3 In practice, the Chinese court abuses statutory compensation by applying it frequently and casually.
Although it should be used as the final resort, statutory damages are frequently applied by courts. Moreover, the amount awarded by courts is quite low. According to an empirical study based on 318 judgments, since the implementation of the revised Patent Law in 2009, the number of cases where statutory compensation was widely applied accounted for 94.34% of the total number. Among them, most cases have an amount below 300,000 yuan. On the one hand, there were only 2 cases with statutory damages more than 500,000 yuan, accounting for 0.67% of the total number and only 7 cases more than 300,000 yuan, accounting for only 2.23%. While on the other hand, there were 309 cases in which the number of statutory damages was below 300,000 yuan, which accounts for 97.10% of the total number.
- Reasons that the statutory compensation approach is abused.
Although the Patent Law stipulated four calculation modes, the first three methods are not applied in practice.
The first reason for the abuse of statutory damages in China is some patentee’s low consciousness of patent right protection, especially those small and medium-sized companies. They do not preserve their transactional documents well. Moreover, they even tend to forge accounting vouchers for the purposes of tax evasion. Therefore, owing to the lack of evidence, the actual loss mode, and the infringer’s interests mode cannot apply.
Additionally, the inapplicability of the actual loss mode is also owing to the right holder’s reluctance to disclose evidence.  Since the decrease of the sale of product might result from multiple causes, like business management status, advertising status, product positioning accuracy, product defect status, replacement product status, competitors’ competition status and so on, the actual cause between the right holder’s damages and the infringement is hard to find. Therefore, the actual loss mode requires some sensitive statistics from the patent holder, like cost and profit, which tend to be confidential information. Under such circumstances, the holder tends to refuse to disclose such necessary evidence.
Second, the patent license contracts are irregular, and thus the patentee cannot prove that they had already paid the license fees. Therefore, the patent licensing fee mode cannot apply.
Third, the amount of statutory damages stipulated in Chinese Law is very low. In fact, it is always below the number of actual benefits the alleged infringer gets from infringement. One of the reasons was that the upper limit of statutory damages was decided by the legislator in 2008. Afterward, the patent right has taken a more and more important role in the domain of technology and economy. Nowadays, it is not uncommon that the infringer would benefit over 10 million yuan from infringement, which would have been hard to imagine at that time. Additionally, there is no “discovery” procedure in Chinese Civil Procedure. Since the alleged infringers would always get more than the upper limit of statutory damages, they have no incentive to provide evidence of infringement, and they also cannot be forced to.
- Comparison with the U.S. and Germany Approach
As countries with strong intellectual property protection, both U.S. and German laws do not stipulate statutory damages. Therefore, some scholars called upon China to follow the approach in those jurisdictions and abolish statutory damages.
5.1 Statutory damages as stipulated in TRIPS is discretional.
It is generally accepted that the provisions of statutory compensation are derived from Trade-Related Aspects of Intellectual Property Rights (“TRIPS”), which is a multilateral agreement under the WTO. For example, when China National Intellectual Property Administration (“CHIPA”) interprets the amendments to the 2008 Patent Law, it emphasizes that the main basis for statutory compensation lies in Article 45 of TRIPS, “Each member may authorize the judicial authorities to order the infringer to pay statutory compensation.” The basis cited by CHIPA lies in Article 45(2), but it is merely a suggestive clause, rather than a mandatory one. Member states are free to choose statutory compensation, rather than obliged to. The fact that many developed countries do not have consistent statutory compensation and yet the lack thereof does not cause international controversy also explains the correctness of this understanding. Moreover, the wording of this sentence is put in a cautious way, limiting statutory compensation to “appropriate occasions.” How to understand “appropriate” depends entirely on the domestic law of member states. Therefore, the statutory damages compensation system varies largely among countries.
5.2 The status quo in the U.S.—multiple substantial means and procedures rather than statutory damages.
According to Article 284 of the current U.S. Patent Law, there are only two damages’ calculation modes for patent infringement, the lost profit of the plaintiff or the reasonable royalties, and there are no statutory damages. However, U.S. courts use both substantial and procedural means rather than statutory damages.
First, via substantial means, for the lost-profit method, the Panduit Test is applied by the courts. The patentee must prove in specific cases:
- demand for the patented product;
- the absence of acceptable non-infringing substitutes;
- the manufacturing and marketing capacity to exploit the demand;
- amount of profit he would have made.
Alternatively, the reasonable-royalties method considers the Georgia-Pacific factor, which are the 15 factors listed in the Georgia-Pacific Corp case, to determine what is meant by a “reasonable” license fee. American scholars call the method of calculating the reasonable license fee the “Hypothetical Negotiation Approach,” which is “assuming the license fee that the parties may reach at the moment before the infringement occurs.” In order to achieve this purpose, the court would “try to imagine the scenarios of negotiations between the two parties and the final possible agreement.”
Secondly, in terms of procedures, before the trial, the US discovery procedure forces both parties to produce evidence while the Markman hearing enables the judge to interpret the claims in the patent application to determine the scope of the patentee’s rights. After these two procedures, the two sides are likely aware whether the infringement has occurred. This system not only provides many opportunities for the parties to reconcile but also incentivizes the parties to offer expert testimony, authoritative algorithms, etc. to ensure that they obtain sufficient damages or to reduce their compensation. The court also has the opportunity to participate in this interactive process and finally hands over the final award to the jury.
5.3 The status quo in Germany—the burden of proof system rather than statutory damages.
There are three methods for calculating damages in Germany, including reasonable licensing fees, plaintiff losses, and the defendant’s benefits. There is also no statutory compensation system. The burden to prove infringement lies with the patentee. However, after the infringement is determined, the responsibility for the calculation of infringement compensation is shifted to the accused, i.e. the infringing party. The defendant is required to provide relevant data on the infringement for calculation within the specified time, including sales channels, sellers, production time, production volume, sales volume and sales price, advertising volume and advertising cost, total cost, total profit and so on. If the defendant has not submitted in time (usually around 4 weeks), he is at risk of being fined. Also, if the accused submits relevant information, according to the data, the plaintiff i.e. the patentee, can choose the compensation method that is the most beneficial to him. After the infringement is determined, the burden of proof shifts to the infringing party, which is undoubtedly more conducive to the protection of the right holder. At the same time, reconciliation is also encouraged by the system.
5.4 Owing to large distinctions between legal systems in China and in the U.S. and Germany, abolishing statutory damages is not advisable.
Comparing the two damage compensation calculation modes in the U.S. and China, the plaintiff’s loss profit method is similar to the first calculation mode in Chinese Patent Law, and the reasonable license fee is similar to the licensing fee mode in China. However, more than 80% of U.S. patent infringement litigations apply the reasonable-license-fee method. The reason lies in the relative complexity of the profit-loss method. Especially in those cases where a large number of alternative products exists, it is difficult to establish causation between the infringement and loss. Moreover, the calculation mode involves sensitive data such as the cost and profit of the parties, and thus the right holder is unwilling to use it. This is similar to the situation in China where the difficulty of proof is emerging. Therefore, the key issue is whether the reasonable-license-fee method can replace the statutory compensation system in China.
According to the previous analysis, in Georgia-Pacific Corp, the U.S. court lists as many as 15 factors to determine what constitutes a “reasonable” license fee. According to a study of 405 Chinese court decisions, factors considered by the court in applying for statutory compensation mainly include the type of patent, the nature, and impact of the infringement, the duration of the infringement, the subjective fault of the infringer, and reasonable expenses. Actually, the considerations taken by Chinese judges greatly overlap with the above factors in Georgia-Pacific Corp. However, since the U.S. has discovery procedures, a Markman hearing procedure, and a jury system to assist with the calculation mode, the interests of the patentee are better protected.
The calculation modes of patent infringement damages compensation in Germany are similar to the first three in China. In Germany, more than 75% of the infringement lawsuits apply the calculation mode based on infringers’ benefit. Such application benefits from the provisions of German tort procedures. First of all, Germany separates the infringement determination and the calculation of damages. The infringement trial and the compensation for damages do not need to be pronounced in the same case. The compensation for damages is usually carried out through another procedure different from the infringement trial. Secondly, the burden of proof often lies with the defendant, so the defendant’s profit through infringement can be more easily calculated. Thirdly, the three calculation modes in Germany are not hierarchical but can be chosen by the plaintiff in the lawsuit. It seems like the story of two people sharing wine—one person pours the wine into two cups and the other picks it first. Therefore, the interests of the infringed person can be protected to the greatest extent.
5.5 Preliminary conclusion
In summary, although neither Germany nor the U.S. has a statutory compensation system, both countries have similar procedural rules to guarantee the interests of patentees. China’s legislation and the judiciary are quite different from them. Therefore, simply emulating them by abolishing the statutory damages system would not only increase the cost of trials, but may even lead to the problem of NPE (Non-Practice Entity) in the United States, which refers to some entities that never use patents, rather, they just buy patents from small entities like start-ups and sue for infringement.
- Comparison to the South Korean and Japanese Approach
Another group of countries famous for strong patent protection has similar stipulations as to China, and thus might shed light on our practice.
6.1 The status quo in South Korea—although stipulating statutory damages, it was not abused by the court in practice.
South Korea has stipulated statutory damages. This confirms from the opposite side that statutory compensation is not the root cause of the low level of patent protection in China.
The calculation mode of patent infringement damage in South Korea is similar to that in China, including the loss of the right holder, the profit of the infringer, the reasonable license fee and the statutory compensation. Although the first three calculation modes do not have a priority among each other, South Korea in practice does use statutory damages as a supplement to compensation via other methods. In practice, from 2009 to 2011, the proportion of application in practice is reasonable, accounting for only 41% of all the settled cases, especially compared to 94.34% in China.
According to Article 132 of the Patent Law in South Korea, in a lawsuit involving patent infringement or exclusive license, the court may order the accused to submit documents necessary for calculating the loss caused by the infringement. It shows that South Korea also stipulates similar rules of proof as Germany to protect the interests of patentees.
6.2 The status quo in Japan—stipulating discretionary compensation as a substitute for statutory damages.
As a strong protector of intellectual property rights, Japan has not listed “statutory damages” as a separate calculation mode, nor has it been stipulated together with the other three calculation modes in Article 102. However, it identifies statutory damages as a special computing method. The difference between calculation mode and computing method basically lies where computing method is a subordinate concept of calculation mode. More specifically, the calculation is statutory, like the four modes regulated in Chinese Patent Law and the three in Japanese Patent Act. While computing method is the way to calculate detailed numbers under each chosen calculation mode. For example, the actual loss of patentee can be calculated through the product of lost sales volume and unit profit of the patentee, or the product of the quantity of infringing products and unit profit. Article 105 stipulates that “in the case of patent or exclusive enforcement right, when the damage is indeed found to occur, if the necessary facts required to confirm the damage amount are extremely difficult to prove, the court can determine the number of damages based on the evidence taken during the oral argument and from investigation findings.”
The provision has been called “discretionary compensation,” which is different from statutory damages. According to the Japanese regulations, firstly, the application of the computing method of “discretional compensation” is strictly restricted, which means it can only be applied when “the damage does occur” and “the evidence is extremely difficult.” Secondly, the court would exercise discretion based on the evidence presented by the parties during the oral debate, which aims to limit the discretion of the judge and reduce the arbitrariness in the process of determining discretionary compensation.
6.3 China should draw the advantage of no maximum limit from Korea, and draw a discretionary compensation system from Japan.
Although China and Japan have different laws, the approach China is now applying is similar to that of discretionary compensation in Japan. In practice, China gradually realized the drawbacks of statutory compensation and developed a system of “discretionary compensation” similar to that of Japan. The so-called discretionary compensation system refers to the court exercising discretionary power to determine the fair and reasonable compensation amount based on certain facts and evidence. It is essentially a method of determining the amount of damages based on the loss of the right holder or the profit of the infringer, and is completely different from the statutory damages system, where it is not subject to the limit determined by the statutory damages system and could overcome its arbitrary and capricious shortcoming by basing the damage estimate on certain factual basis.
However, there are still some differences between China’s discretionary compensation system and Japan’s. First of all, judging from the current judicial practice and the guiding case announced by the Supreme People’s Court like the
Foshan Haitian Flavouring and Food Co., Ltd. v. Gaomingweiji Seasonings Food Co., Ltd. case, China’s discretionary compensation relies on two basic calculation modes, including the loss of the right holder and the profit of the infringer. According to the third paragraph of Article 105 in Japanese Patent Law, however, the basic calculation mode relied on by Japan’s discretionary compensation includes reasonable license fee in addition to the two modes found in Chinese law.
Secondly, China and Japan have different considerations in the application of discretionary compensation. Although both tend to consider the infringement objects and infringement acts, there are two significant differences. On the one hand, the factors considered by China are not as specific as those of Japan. On the other hand, the disclosure of judges’ discretional evaluation of evidence is insufficient in China. For example, in the Beijing Founder Electronics Co., Ltd. v. Blizzard Entertainment Inc. case, the court simply stated that according to the facts at hand, considering the scale of infringement, the function the font played in the game, the defendant’s purchasing activities, the defendant’s intent to use, and so on, the damages should be 2 million yuan. In comparison, the Japanese court would give a more detailed analysis. In the trademark infringement case of Vig v. Fran, in terms of the scale of infringement, the court considers the advertisement fees spent by the accused, the column the advertisement appeared, and the effects of the advertisements. In terms of the defendant’s benefits, the court considers the number of subbranches operated by the accused and the business volume before and after the trademark infringement. Therefore, although both Chines and Japanese calculated from the perspectives of infringement activities and the object of infringement, the Japanese would consider and disclose more detailed factors.
Thirdly, Japan imposes more restrictions than China on the discretion of judges when applying for discretionary compensation, mainly through strengthening the admissibility of evidence during oral argument and evidence investigation.
6.4 Preliminary conclusion (2)
Consequently, both statutory damages and discretionary compensation should be adopted to form a two-pronged approach and thus work cooperatively to improve the level of intellectual property protection in China.
First of all, China can absorb the experience of Japan by improving and promoting the application of discretionary compensation systems. The main path includes merging “reasonable licensing fees” into the basic calculation method, refining the factors considered by judges, and limiting their discretions. On the other hand, since the legal system is lagging behind the social status quo, judges are accustomed to the dated law of the current discretionary compensation system, and the scope of its application is not wide. Therefore, starting from the existing statutory damages system, taking note of the South Korean example where it stipulates no cap to the number of statutory damages, as well as Chinese practice where the court applies discretionary compensation to break through the 1 million statutory damages ceiling, it would be advisable to raise the maximum amount of statutory damages.
Without the support of civil procedure and rule of evidence, it is unwise for China to simply abolish statutory damages and follow the track of the U.S. and Germany. However, it would be impractical to modify the Chinese Civil Procedure and Patent Law to adopt those beneficial procedures within a short time.
On the other side, the stipulation of statutory damages in South Korea suggests that statutory damages could work well with the compensation system for patent infringement if supported by the whole system of compensation. Further, notice that the statutory damages have encountered enormous difficulties in practice, Chinese courts have modified the system in practice, which happened to have the same view as the discretionary damages approach taken by Japan. Therefore, taking the experience of both South Korea and Japan, it is beneficial to keep the statutory damages and increase the upper limit while also adopting a system of discretionary damages and refining its application in practice.
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 The 15 factors include: (1) The royalties received by the patentee for the licensing of the patent in suit, proving or tending to prove an established royalty. (2) The rates paid by the licensee for the use of other patents comparable to the patent in suit. (3) The nature and scope of the license, as exclusive or non-exclusive; or as restricted or non-restricted in terms of territory or with respect to whom the manufactured product may be sold. (4) The licensor’s established policy and marketing program to maintain his patent monopoly by not licensing others to use the invention or by granting licenses under special conditions designed to preserve that monopoly. (5) The commercial relationship between the licensor and licensee, such as, whether they are competitors in the same territory in the same line of business; or whether they are inventor and promoter. (6) The effect of selling the patented specialty in promoting sales of other products of the licensee; that existing value of the invention to the licensor as a generator of sales of his non-patented items; and the extent of such derivative or convoyed sales. (7) The duration of the patent and the term of the license. (8) The established profitability of the product made under the patent; its commercial success; and its current popularity. (9) The utility and advantages of the patent property over the old modes or devices, if any, that had been used for working out similar results. (10) The nature of the patented invention; the character of the commercial embodiment of it as owned and produced by the licensor; and the benefits to those who have used the invention. (11) The extent to which the infringer has made use of the invention; and any evidence probative of the value of that use. (12) The portion of the profit or of the selling price that may be customary in the particular business or in comparable businesses to allow for the use of the invention or analogous inventions. (13) The portion of the realizable profit that should be credited to the invention as distinguished from non-patented elements, the manufacturing process, business risks, or significant features or improvements added by the infringer. (14) The opinion testimony of qualified experts. (15) The amount that a licensor (such as the patentee) and a licensee (such as the infringer) would have agreed upon (at the time the infringement began) if both had been reasonably and voluntarily trying to reach an agreement.
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