As I noted in my previous post on China NNN agreements, for enforcement purposes you must make sure your China NNN agreement has teeth. To understand how enforcement works under Chinese law, we need to do a little work.
The first point to realize is that the standard approach for enforcing an IP contract under the common law (this is the law in the United States and the UK and most of the British world) has no application under Chinese law. In the common law system, lawyers are mostly concerned with two issues. First, the rule that disfavors liquidated damage provisions. Second, the law/equity distinction that allows only for injunctive relief when a law (damages) remedy is not available.
Experienced common law IP lawyers take the position that infringement of IP rights is inherently impossible to value monetarily. For that reason, the typical common law IP agreement will be carefully crafted to provide for injunctive relief as the sole remedy. Given the coercive power of common law judges, once the need for injunctive relief is established, this is a very effective system. Since it is effective in common law jurisdictions, common law lawyers instinctively use the same method for China. This is a mistake.
The fundamental reason is that the Chinese civil law system does not follow common law rules. Liquidated damages are not disfavored under Chinese law. In fact, contract damages are both well established in China and favored by statute. Second, there is no law/equity distinction under Chinese law. The powers of Chinese judges are not limited by antiquated common law legal distinctions. Thus, the fear of liquidated damages and the need to justify injunctive relief have no basis under Chinese law. Concern about these issues by common law lawyers is therefore a waste of time.
However, the power of Chinese judges is circumscribed in another way critical for understanding how the Chinese system works. Chinese judges have almost unlimited coercive power to seize assets to enforce payment of a monetary damage award. On the other hand, Chinese judges have almost no power to enforce an order that requires a party to take some action. So though Chinese judges are fully empowered to issue injunctive orders, they have virtually no power to ensure those injunctions are implemented. Chinese judges rarely issue orders they know will be ignored. They instead seek to convert every decision to an order to pay a sum certain in damages.
For this reason, a common law lawyer has to work hard to think about enforcement in a manner virtually opposite to what is normal to them. Instead of working hard to justify the almost exclusive use of injunctive remedies, the goal is the opposite. For China, the goal should be to provide by contract a specific monetary remedy for virtually every act of infringement or other violation of the terms of the contract and to never be in a position where injunctive relief is required.
That is what I call putting teeth into a China contract. You need to include a sum certain monetary penalty a Chinese court can and will enforce by ordering the seizure or freezing of the Chinese defendant’s assets. The Chinese system does not allow for punitive damages or for extensive consequential damages. It is therefore important to set the amount of the monetary penalties in your China contracts equal to a reasonable calculation of lost profits that results from an infringement.
If your contracts use this approach, there is no need to request an order from the Chinese court instructing anyone to terminate an infringing conduct. Instead, it is possible to set a specific contract damage amount that makes it easy for the Chinese court to make a decision it can enforce. This is an effective solution that accounts for the reality of Chinese law and the Chinese court system.
