The Tale of the $9 Million Birkin Bags

Earlier this year, a dispute related to the French luxury brand Hermès and its well-known Birkin bag drew the public's interest and soon became the focus of local Taiwanese news. At the wedding of an actress famous across Taiwan and China, she and her husband gave out canvas tote bags to guests. The celebrity's choice of bags, as one can imagine, soon became very popular in the fashion market, especially since the bag has images of the Hermès Birkin bag adhered onto its front, back, sides and bottom. This canvas bag was the idea of a Taiwanese manufacturer, Banana International, and is sold under the brand Banane Taipei for around $50. The sudden popularity attracted the French luxury brand's attention, and it was said that Hermès International took legal action against the Taiwanese brand owner and manufacturer, including a preliminary injunction and infringement litigation.

Three years ago, the Hermès Birkin bag also made local headlines when it won a sky-high damage award from its trade mark infringement litigation against an individual defendant who was found guilty of selling counterfeit Birkin bags. The defendant in that case sold only four counterfeit bags for which the defendant profited NT$2,050,000 ($71,900) in total. Based on the statutory threshold for damage awards regulated by the then Article 63I(3) of the Trademark Act, the Taiwan IP Court awarded Hermès International NT$256,250,000 ($9 million). This amount was a historical record for damages afforded to an individual IP offender; however, considering the number of actual sales, the damages led to a lot of controversy and discussion among legal professionals.

The old law

The huge damage award in the Hermès trademark infringement case was due to the then effective Article 63 of the Trademark Act. On May 31 2011, the Legislative Yuan passed an amendment to the Trademark Act, with a revision of Article 63. Up until this article was submitted for publishing, the promulgation date of the amendment was yet been determined.

The old provision of Article 63 provided that:

1. "When claiming for damages, a trade mark right holder may choose one of the following methods to estimate the amount thereof:

2. Damages may be claimed in pursuance with Article 216 of the Civil Code. However, in the event where evidence cannot be presented to prove the damages thereof, the trade mark right holder may use the profit normally gained from using whose registered trade mark to subtract the profit gained from the same trade mark after infringement, and claim the difference as the amount of damage;

3. Damages may be claimed in accordance with the profit gained from trademark rights infringement. However, where no evidence on costs or necessary expenses can be proved by the infringer, the total amount of sales from selling the infringing goods shall be regarded as the amount of profit; or

4. Damages may be claimed in an amount equivalent to 500 to 1500 times of the unit retail price of the infringing goods. However, in the case where over 1500 pieces of infringing goods are found, the amount of damage to be claimed shall be assessed based on the total sale price of the said infringing goods.

A court may, at its discretion, reduce the amount of damage in the case where the amount of damage assessed under the preceding paragraph is apparently unreasonable.

A trade mark right holder may claim for additional compensation in a reasonable amount in the case where whose business reputation has suffered any damage on account of such infringement."

In the Hermès case, the plaintiff requested the Court to apply the third method in the then Article 63 for the calculation of damages, which is the stipulation for statutory damage. The IP Court found that "500 to 1500 times of the unit retail price" indicated in Article 63I(3) referred to the unit retail price of the infringing goods rather than that of the goods of which the trade mark right had been infringed upon. As such, the damage award should be calculated based on the average price of the counterfeit Birkin bags. To restrain infringing activities, the Court considered that, in most situations, the infringing party will speed up the dumping of counterfeits into the market after becoming aware of the legal investigation, and that the infringed party's actual loss is generally hard to estimate or prove. Even though in this case only four counterfeits were seized, the Court believed that in terms of the fame of the well-known brand name, affording the defendant the average unit price of the counterfeits multiplied 500 times was adequate.

However, the principle of damage awards stipulated in the Trademark Act is to compensate an infringed party's actual loss. Punitive damages are not adopted, in order to avoid giving the infringed party a profit. As such, many professionals deemed the high damage award resulting from statutory damage estimation would be disproportional to the actual effects of minor infringements.

The legislative purpose for statutory damages in the old provision of Article 63I(3) was to exempt a trade mark holder's burden of proof in showing evidence of actual loss when the trade mark is infringed upon. In the meantime, the legislators granted the courts discretion to reduce the amount of damages in Article 63II, in case the compensation based on the lowest statutory threshold in Article 63I(3) ends up being unreasonable. Obviously the Court did not exercise this discretion in the Hermès case.

The new law

In light of the above, the amendment to the Trademark Act attempted to pursue a fair and balanced mechanism for the calculation of compensation for damages. By allowing the court more discretion in determining the amount of damages, the revised Article (Article 71 of the Trademark Act amendment) does not include the statutory threshold of 500 times the unit retail price, but still includes the maximum number of 1500 times the unit retail price. The amendment now also specifies "compensation for damages" in the last paragraph of Article 71 as a legislative purpose for damage awards, lest the actual amount of awards become punitive or prevent the possibility that the infringed party makes a profit from the awards. In addition to the original three methods, the legislators added a fourth method for damages estimation, which is the claiming of possible royalties the trade mark right holder may have from its licensing of the trade mark to others.

Moreover, the amendment abolished the claim for additional compensation for the trademark right holder's loss in business reputation. While a trade mark right is a property right that is independent to business operation, a trade mark 

does not necessarily need to be transferred along with the transfer of the business. Therefore, when considering a loss of business reputation, which belongs to the non-property right, it should be claimed under the Civil Code rather than the trademark law. 

The revised article is:

"When claiming for damages, a trade mark right holder may choose one of the following methods to estimate the amount thereof:

1. Damages may be claimed in pursuance with Article 216 of the Civil Code. However, in the event where evidence cannot be presented to prove the damages thereof, the trade mark right holder may use the profit normally gained from using whose registered trade mark to subtract the profit gained from the same trade mark after infringement, and claim the difference as the amount of damage;

2. Damages may be claimed in accordance with the profit gained from trade mark rights infringement. However, where no evidence on costs or necessary expenses can be proved by the infringer, the total amount of sales from selling the infringing goods shall be regarded as the amount of profit; or

3. Damages may be claimed in an amount equivalent to 500 to 1500 times of the unit retail price of the infringing goods. However, in the case where over 1500 pieces of infringing goods are found, the amount of damage to be claimed shall be assessed based on the total sale price of the said infringing goods.

4. Damages may be claimed in an amount equivalent to the royalty the trade mark right holder may collect when licensing the use of the trade mark to others.

A court may, at its discretion, reduce the amount of compensation in the case where the amount of compensation for damages assessed under the preceding paragraph is apparently unreasonable.

A trade mark right holder may claim for additional compensation in a reasonable amount in the case where whose business reputation has suffered any damage on account of such infringement."

Regarding the issue of the canvas tote bags with the Hermès Birkin images, it is interesting to ponder what IP rights Banana International infringes upon if we simply consider the look of the canvas bag. It is even more interesting to observe what amount of damages the Court will award, if any. If the litigation is now pending in the Court, it is likely that the old Article 63 of the Trademark Act before amendment will still apply, considering the date the case was filed. Lastly, we believe that the Fair Trade Act along with its punitive damage award may also play a role.