China's Revised Punitive-Damages Interpretation For IP Disputes

— Fa Shi [2026] No. 7, in force 1 May 2026

Part I — The Revision

On 7 April 2026 the Supreme People's Court promulgated a revised Judicial Interpretation on punitive damages in IP civil cases (Fa Shi [2026] No. 7), which enters into force on 1 May 2026 and supersedes Fa Shi [2021] No. 4. The two-limb test — willful infringement combined with serious circumstances — is preserved, as is the established hierarchy of calculation bases: the plaintiff's actual loss, the defendant's illegal gains or infringement profit and, failing those, a multiple of a reasonable royalty. The revised text tightens the timing at which a claim must be advanced, refines the criteria for willfulness and serious circumstances, and for the first time prescribes a workable methodology for constructing the damages base.

The revision arrives at a point when punitive damages have moved from the doctrinal periphery of Chinese IP litigation to its commercial centre. At its seventh-anniversary press conference on 28 January 2026, the Supreme People's Court IP Tribunal reported that since its establishment in 2019 it had applied punitive damages in 58 cases, with aggregate enhanced awards of approximately RMB 2.05 billion — of which 30 cases, accounting for aggregate awards of approximately RMB 1.13 billion and an average of close to RMB 38 million per case, were decided in 2025 alone, such that a single year's activity already surpassed the Tribunal's cumulative record from all prior years combined. The SPC's 2026 Work Report to the National People's Congress singled out, as illustrative of this trend, a CNC machine-tool trade-secret case in which the infringer and its affiliates were ordered to pay triple punitive damages of approximately RMB 380 million.

Background to the Revision

The 2021 Interpretation established the basic architecture of the punitive-damages regime, but five years of implementation left four practical issues unresolved. First, how to treat plaintiffs who advanced the claim late — on appeal, or by way of a fresh action after an unsuccessful first instance. Second, which measure of profit should anchor the damages base, the lower courts having split between net profit, operating profit and sales profit. Third, how to characterise willfulness where the defendant had interposed affiliates, nominee shareholders, changes of legal representative or indemnity side-letters in order to insulate the operating infringer from liability. Fourth, whether statutory damages could serve as a base against which a multiplier could be applied. The 2026 Interpretation addresses each of these, doing so in terms that materially narrow the room for argument. The drafting also reflects the broader message that the Supreme People's Court has pressed since 2024 — that the cost of IP infringement, and in particular of bad-faith, large-scale or repeat infringement, must be raised markedly. The 2026 text gives that policy its operational form.

Procedural Gates

The procedural architecture of the regime has been substantially redrawn. Article 2 still requires the plaintiff to specify the amount sought, the method of calculation and the supporting facts whenever a punitive-damages claim is made, but (unlike the 2021 text) it no longer tethers that specification to the filing of the complaint. The operative timing rule is in Article 3: first-instance additions made at any point before the close of oral argument must be allowed by the court, while punitive-damages claims raised for the first time on appeal may be mediated only with the parties' consent and, where mediation fails, are dismissed outright. The effect, compared with the 2021 text, is a pronounced tightening: under the former regime a plaintiff whose appeal-stage mediation failed could still fall back on a separate action; the 2026 Interpretation withdraws that safety net. Article 4 closes the last remaining avenue: where the plaintiff sought damages at first instance without advancing a punitive-damages claim, was expressly prompted by the court to do so, and nevertheless declined, any subsequent action on the same facts will not be entertained. The two provisions together confine the effective window for asserting punitive damages to the first-instance proceeding.

Article 5 narrows the substantive perimeter for unfair-competition claims. Outside trade-secret misappropriation, punitive damages are not available for any claim under the Anti-Unfair Competition Law — whether founded on the specific provisions (passing off under Article 6, false or misleading advertising under Article 8, commercial disparagement under Article 9, or inauthentic online reviews and like conduct under Article 11) or on the general clause in Article 2 — save where another statute provides otherwise.

Willfulness and Seriousness

Article 6 preserves the inferential approach to willfulness but broadens it. The enumerated categories expand from five to seven (eight including the residual catch-all), with two substantively new grounds. The first is the infringer who settles, undertakes to cease and then resumes the same or materially similar conduct — a response to the familiar pattern in which a settlement is treated as a transactional cost rather than a binding cessation. The second is the concealment of actual control through affiliated entities, nominee arrangements, changes of legal representative or controlling shareholder, or indemnity side-letters used to shield the operating infringer from liability. Courts are now entitled to treat such structures as prima facie evidence of intent, which substantially diminishes the tactical value to defendants of restructuring mid-dispute. The existing “piracy and counterfeiting” category is further expanded to include patent counterfeiting alongside copyright piracy and trademark counterfeiting, and the chapeau now states expressly that the presumption may be rebutted by contrary evidence — a clarification that confirms rather than alters the position under the 2021 text.

Article 7 delivers a quieter but arguably more consequential change. In the general factors clause, “the infringer's conduct in the proceedings” has been replaced by “the infringer's recognition of, and attitude toward, its own infringing conduct” — a broader lens that captures out-of-court as well as in-court behaviour. More consequentially still, the chapeau governing the enumerated serious-circumstances categories has been changed from “the court may find” to “the court shall find”: what was a discretionary finding is now mandatory once the triggering conduct is established — repeat infringement following administrative penalty or prior judgment, unjustified refusal to comply with a preservation order, spoliation or concealment of evidence, operating an infringing business, substantial infringement profits or serious damage to the rights holder's goodwill or market share, and infringement that harms or may harm national or public interests. Read together with Article 10, an obstructive defendant now faces a threefold exposure: spoliation or refusal to produce accounts triggers the mandatory serious-circumstances finding under Article 7, permits the court to fix the damages base by reference to the plaintiff's figures under Article 10, and supports a higher multiplier under Article 11.

Calculation

Articles 8 to 12 address the most intractable gap in the 2021 text. The default measure of profit is operating profit; where the defendant's activity satisfies the “infringement as a business” test, sales profit applies, with correspondingly less scope for the deduction of common expenses. Where the defendant's own accounts do not yield a reliable margin, the court may have recourse to an industry-average rate published by the relevant statistical authority or trade association, or to the rights holder's own margin. Article 10 reinforces the rule by providing that, where a defendant without justification fails to produce its books and records or produces records demonstrably false, the court may fix the base by reference to the plaintiff's figures and the evidence already on the record. The third paragraph of Article 8 expressly provides that statutory damages may not serve as the base for a multiplier, foreclosing the former practice of “enhanced statutory damages”. Article 12 caps the aggregate enhanced award at five times the base, with reasonable enforcement costs falling outside the cap, and Article 11 confirms that multipliers need not be whole numbers — giving the court genuine granularity in calibrating the deterrent to the facts. Taken together, these provisions materially improve the claimant's ability to construct a defensible damages model before filing and diminish the tactical value to the defendant of presenting obstructive or incomplete financial records.

At a Glance

Part II — Enforcement in China: Practical Considerations

The practical effect of the revision is to shift more of the work into the pre-filing stage. The points below set out what we expect to be the priorities for in-house counsel running China IP portfolios over the coming year; each matter will of course turn on its own facts.

Plead punitive damages at the outset. Article 2 requires the plaintiff to specify the amount sought, the method of calculation and the supporting facts whenever a punitive-damages claim is made. Although Article 3 permits additions throughout the first instance up to the close of oral argument, Articles 3 and 4 together effectively foreclose every post-first-instance route: a claim raised for the first time on appeal will invite only voluntary mediation with dismissal on failure, and a separate action after first instance is barred where the plaintiff has declined an express judicial prompt. Litigation templates and damages-modelling protocols should be recalibrated so that a punitive-damages component — with a working base, a proposed multiplier range and a pleaded willfulness theory — is built into every first-instance IP complaint in which the facts support it, rather than deferred for later addition.

Build the willfulness record before filing. Much of the willfulness case is won before litigation begins. A cease-and-desist letter that is dated, evidenced and capable of proof as to delivery continues to anchor the post-warning category under Article 6. Confidentiality undertakings, NDA registers and access logs covering distributors, licensees, OEMs, JV counterparties and former employees furnish the documentary basis for an inference of knowledge. Where repeat infringers appear to operate through related entities, corporate-registry searches, shareholder histories and common-director analyses are worth commissioning as standard pre-filing diligence; they translate directly into the new Article 6 ground on concealed control.

Choose the cause of action with Article 5 in mind. Where the facts support both an IP claim (patent, trademark, copyright or trade secret) and a parallel unfair-competition theory, the IP framing is now materially more valuable — particularly in look-alike and signage cases that have often been pleaded under Article 2 of the AUCL. The change also strengthens the business case for investing in a defensible trade-secret programme, so that trade-secret claims are genuinely litigation-ready when the need arises.

Invest in the profit case. The new rules on profit computation reward claimants who come to court with a disciplined damages model. Forensic-accounting support should be engaged at an early stage and should address both operating-profit and sales-profit constructions, together with industry-average fallbacks. Where the defendant's accounts are opaque, Article 10 remains a powerful tool: the court may order production, and non-compliance or manifest falsification permits the court to proceed on the plaintiff's figures. Because statutory damages can no longer anchor a multiplier, a non-statutory base must be developed in every case.

Draft settlements as future-infringement instruments. With re-infringement following settlement now an express willfulness ground, settlement agreements should be negotiated on the footing that any further dispute is already in contemplation. Specific non-repetition covenants, audit rights, liquidated-damages clauses and representations as to corporate structure and ultimate beneficial ownership shift the ground for any subsequent action onto Article 6.

Preserve the record of the infringer's litigation conduct. The attitude factor introduced by Article 7 makes it worth placing on the record any spoliation, non-compliance with preservation orders, obstructive conduct in the course of evidence production and implausible denial of facts already established. Those elements, properly preserved, feed directly into the serious-circumstances analysis and, under Article 11, into the multiplier.

Concluding Observations

The 2026 Interpretation does not reinvent the punitive-damages regime; it consolidates what has developed under the 2021 text and, on the procedural side, tightens it. Between now and 1 May 2026 foreign rights holders have a practical window in which to revisit litigation templates, pre-filing evidence workflows and settlement documentation in anticipation of the next tranche of Chinese IP matters.

Viewed over a somewhat longer horizon, the principal change is positional rather than textual. Punitive damages — until recently a supplementary claim appended to the pleading for form's sake — are becoming the central commercial question in high-stakes IP disputes before the Chinese courts. The stricter treatment of willfulness, the penetrating scrutiny of corporate structures used to dilute liability and the clearer calculation rules together mean that, in any substantial Chinese IP matter, the decision whether to seek punitive damages now calls for an affirmative answer rather than for omission or deferral. For foreign rights holders whose competitive position in China turns on their IP, the extent to which that IP is in fact vindicated in court will depend less on the availability of the remedy than on whether pre-filing management, litigation strategy and settlement architecture have kept pace with the rules now in force.

Looking further ahead, as the case-law becomes more granular and awards continue to rise, punitive damages appear set to play a progressively larger part in incentivising innovation, deterring infringement and reinforcing the rule-of-law element of China's business environment — providing rights holders whose commercial position rests on intellectual property, in the Chinese market and in cross-border competition alike, with a firmer judicial foundation on which to stand.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.