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May 28, 2013 Articles

Rise of Remedies in Chinese Courts

Do recent changes indicate a trend toward better enforcement of patent rights in China?

By Kenneth S. Chang and Jeffrey M. Connor

Compared with its 5,000 years of history, one richly filled with innovation and creativity, China's intellectual property system is relatively young—less than 40 years old. In its infancy and adolescence, China's development of protection for IP has been motivated by extrinsic forces—China's need for inclusion in the global economy and acceptance into international bodies such as the World Trade Organization.

However, spurred on by its National Medium- and Long-Term Plan for the Development of Science and Technology (2006–2020), China has been striving to become a leader in the global IP marketplace and has attained a significant level of success. In 2011, China became the number-one patent filing country in the world. Concurrent with the explosion in patent filings, in 2008, Chinese patent law underwent its third revision to improve "China's capacity to create, utilize, protect and administer intellectual property, making China an innovative country." State Council of the People's Republic of China, Outline of the National Intellectual Property Strategy (June 21, 2008); EU-China Workshop on the Revision of the Chinese Patent Law, Sept. 24–25, 2008. The revisions were a significant overhaul to China's system for judicial enforcement of patents and, coupled with China's rise to becoming the world's second-largest economy, made companies think hard about obtaining and enforcing patents in China.

This article focuses on an issue of interest to clients and practitioners alike: Remedies in Chinese patent litigation. While patent filings in China remain robust, and notwithstanding the changes in China's patent laws, Chinese courts suffer from a reputation of inconsistent application of law, inadequate damages to dissuade infringement, and unwillingness to enforce patent rights. This reputation, regardless of whether it is justified, continually dissuades companies from obtaining and/or enforcing patent rights in China. In recent years, however, both the Chinese judiciary and the central government have instituted changes designed to encourage enforcement of patents in China. Recent trends show that damage awards in Chinese courts are increasing, and China has adopted statutory damages exceeding the previous norm established by court rulings.

Concurrently, preliminary injunctions are now codified and a recent Supreme People's Court decision has opened the door to allowing judges discretion to determine whether a permanent injunction should issue. These changes seem intended to create a more favorable environment for enforcing patent rights in China. But are they working?

How Much Can We Get? Patent Damages in China
Previous iterations of Chinese patent law lacked statutory guidelines for the amount of compensatory damages a patent holder could be awarded. Prior to the 2008 amendments, courts frequently awarded damages between 5,000 renminbi (RMB) and 50,000 RMB. The 2008 amendments, however, codified the range of damages and increased to 1,000,000 RMB the upper limit of damages that a court may award when a patentee proves infringement but is unable to reasonably quantify the harm suffered. Patent Law of the People's Republic of China, art. 65 (promulgated by the Standing Comm. of the Nat'l People's Cong., Dec. 27, 2008, effective Oct. 1, 2009). The 2008 amendments also readopted the four-step analysis (discussed below) found in the previous version of the patent laws to determine how damages should be calculated.

Under the four-step analysis, Chinese courts first look to the actual losses suffered by the patentee because of the infringement. Where the patentee cannot prove what the actual loss was (if any), the court awards damages based on the profits the infringer has earned because of the infringement, but the patentee must establish a nexus between the infringement and the profits earned by the alleged infringer. If the nexus between the infringer's profits and the patent infringement is unclear, damages may be assessed on the basis of a reasonable royalty.  In situations where the patentee is unable to prove its own loss, prove the profits earned by the infringer from the infringement, or establish a reasonable royalty, the People's Court may award statutory damages ranging from 10,000 RMB to 1,000,000 RMB. Id. To determine damages within this range, the court considers the type of the patent, the nature and circumstances of the infringing act, and the seriousness of the case. In addition, the amount of damages also includes the reasonable expenses the patentee incurred for stopping the infringing act. 

Perhaps the most famous case for patent damages in China involved a patent litigation between the Chint Group and Schneider Electric Low Voltage (SELV). Chint is one of the largest producers and sellers of electrical apparatuses for industrial use in China. SELV is a joint venture established by Schneider Electric, a multinational company that focuses on electrical distribution, automation, and control. In July 2006, Chint filed suit in China alleging that SELV's "miniature low-voltage circuit breaker" infringed one of Chint's utility model patents. Chint Grp. v. Schneider Elec. Low Voltage (Wenzhou Intermediate People's Ct. Sept. 26, 2007) (China).

In the 13 years preceding this litigation, Schneider had filed nearly 20 lawsuits globally against Chint. Chint alleged that Schneider filed these suits in retaliation for Chint's continued refusal to accept Schneider's proposal to acquire a majority percentage of Chint's equities. At the time, legal counsel for Chint stated that "Schneider would sue Chint in any country for infringement every time [Schneider's acquisition proposal] was refused by Chint" and claimed that Schneider was using its intellectual property rights as a "weapon to contain or press Chint [to accept the proposal]." Harry Yang, "Chint v. Schneider on Patent Infringement," IP China, Feb. 1, 2008. Chint responded to Schneider's tactics by filing the patent infringement suit against SELV. On September 26, 2007, roughly three months after Chint first filed suit, the Wenzhou Intermediate Court entered judgment in favor of Chint and awarded damages of 355,939,206.25 RMB (about $57,000,000). Id. The court based the damages amount on the operating profit of SELV from August 2, 2004, to July 31, 2006.

The question remains whether the Schneider case is an outlying exception or indicative of a trend toward increased patent damages in China. In a later case, Holley Communications, a Chinese wireless chipset developer, sued Samsung on a patent concerning cell phone technology. The court in Hangzhou, a city some 170 kilometers from Shanghai, found infringement and issued a damage verdict for about $7.4 million in damages. Holley Commc'ns v. Samsung (Hangzhou Intermediate People's Ct. Dec. 19, 2008) (China).

Although China does not rely on stare decisis as a doctrinal basis for adjudicating cases, in 2008 the Supreme People's Court incorporated into its Annual Report on Intellectual Property Cases 50 "typical cases" concerning the adjudication of intellectual property issues by Chinese courts. Repeated in 2009 and 2010, the publication of these "typical cases" provides a guide both to the Chinese judiciary and to practitioners as to how Chinese courts should approach intellectual property issues. An analysis of patent litigation damage awards in these "typical cases" shows that in 2008, the average amount of damages was 110,000 RMB, or about $17,700 at recent exchange rates. In 2009, the average amount of damages was 246,667 RMB, or about $40,000 at recent exchange rates. In 2010, the average amount of damages for patent litigation damage awards in "typical cases" reached some $1,116,000, although one judgment for 20,000,000 RMB likely skewed the number upward. In 2011, the average dropped to 510,000 RMB, about $82,000, but this amount remains higher than 2008 and 2009 amounts, and only four "typical cases" rendered patent damage awards. Although the above data are anecdotal, certainly there seems to be a trend toward larger patent damage awards in China.

The Schneider case remains an outlier in terms of the amount of awarded damages, but the recent judgments, combined with the recent increase in the maximum allowable statutory damages to 1,000,000 RMB, indicate that China is encouraging enforcement by increasing the value of its judgments.

Shut Them Down . . . All the Way Down
Under current Chinese patent laws, a patentee may petition the Chinese courts to adopt measures to enjoin infringing acts in a manner similar to a motion for a preliminary injunction. To be afforded such protection, the patentee must have evidence that the patent is valid, that the other party is infringing or will soon infringe his or her patent rights, and that the infringing act will likely cause irreparable harm to the patentee if it is not prevented. Patent Law of the People's Republic of China, art. 66 (promulgated by the Standing Comm. of the Nat'l People's Cong., Dec. 27, 2008, effective Oct. 1, 2009).

To file a petition, the patentee must provide a security to the court, which will then make a ruling within 48 hours, unless special circumstances require a delayed ruling. Id. If the court rules in favor of the patentee and adopts measures to stop the infringing acts, the court's ruling is enforced immediately. Any interested party may apply for reconsideration of such a ruling once; however, the enforcement of the ruling is not suspended during reconsideration. It is important to note that the patentee must institute formal legal proceedings within 15 days after the court issues its ruling. If the patentee fails to do so, the court will lift the measures to stop the infringing acts. If a petition is made in error, the petitioner must compensate the respondent for the losses caused by stopping the relevant acts. Id.

One of the best-known Chinese patent infringement cases regarding preliminary injunctions was between Actions-Semiconductor Co. and SigmaTel Co.. On September 13, 2006, Actions brought an action for an injunction against SigmaTel in the Xi'an Intermediate People's Court, accusing the U.S.-based company of infringing a key digital audio processing technology patent owned by Actions. Actions-Semiconductor Co. v. SigmaTel Co. (Xi'an Intermediate People's Ct. Sept. 15, 2006) (China). The court granted the preliminary injunction. The court viewed the preliminary injunction as having existential significance to Actions in view of the fact that patents are a primary mechanism for protecting innovations resulting from the massive resources integrated circuit design companies such as Actions devote to research and development, and the fact that Actions would be irreparably harmed if SigmaTel's infringing activity was not stopped. Subsequently, China further codified the availability of preliminary injunctions in patent infringement cases with its 2008 amendments, which directly include the relevant portions of the Civil Procedure Law of the People's Republic of China. Patent Law of the People's Republic of China, Art. 66 (promulgated by the Standing Comm. Of the Nat'l People's Cong., Dec. 27, 2008, effective Oct. 1, 2009).

Since the 2008 amendments to the patent laws, Chinese courts have shown an increased willingness to grant and enforce preliminary injunctions. An example of this is the June 2012 litigation between Picanol NV, a Belgian company, and Guangdong Fengkai Machinery Co., Ltd., a Chinese company. In this case, Picanol NV filed a petition for a preliminary injunction, alleging that Guangdong Fengkai Machinery was infringing Picanol NV's design patents by selling products at a nearby exhibit having substantially similar appearances to those covered by Picanol NV's design patents. Picanol NV v. Guangdong Fengkai Machinery Co. (Shanghai No. 1 Intermediate People's Ct. June 12, 2012) (China). The Shanghai No. 1 Intermediate People's Court reviewed and granted the petition for injunction on the day it was filed.

The judges who entered the injunction then went to the exhibition to personally serve the order on Guangdong Fengkai Machinery. Upon learning several days later that Guandong Fengkai Machinery had not ceased its infringing behavior, a group of more than 10 judges and bailiffs assembled to go to the exhibition and enforce the order. Denning Jin King & Wood Mallesons' IP Litigation Group Shanghai Office,"Shanghai Courts Adopt New Methods to Compel Compliance of Preliminary Injunctions in Intellectual Property Infringement Disputes," China Law Insight, Sept. 17, 2012; Yiliang Dong,"Three Interim Injunctions Against Design Patent Infringement in China Successfully Enforced," World Services Grp., Sept. 2012. Employees of Guangdong Fengkai Machinery obstructed the enforcement of the injunction. The company and these employees were then taken to court and punished through fines and, in the case of some of the employees, detention. Denning Jin King & Wood Mallesons, supra; Dong, supra. This case is significant because it was the first time a court in Shanghai took such measures to compel enforcement of a preliminary injunction, and it is notable because the court was enforcing the rights of a foreign company. The Picanol NV case is also important because it illustrates the speed with which preliminary injunctions may be granted and the lengths Chinese courts will go to enforce the injunctions.

Overall, the codification of preliminary injunctive relief has increased the rate of preliminary injunctions granted by Chinese courts. According to data provided by the Supreme People's Court, between 2002 and 2009, local courts considered a total of 808 applications for pretrial preliminary injunctive relief in IP-related cases. During this period, the courts issued the preliminary injunctions at a rate of 84.18 percent. But in 2011, of the 130 applications for preliminary injunction considered, Chinese courts granted the requests an astounding 98.23 percent of the time. The reader should note that the relatively high rate of preliminary injunctions results from the requirement that the patentee present almost the entirety of its case at the complaint stage of litigation and little to no discovery occurs during the litigation. Thus, the judge possesses most of the evidence needed to adjudicate the case.

We Won! But Wait . . .
Historically, under Chinese law, permanent injunctions were a foregone conclusion once a Chinese court made a finding of infringement. Although China's patent laws do not specify the right to a permanent injunction upon a finding of infringement, such a right has been adopted from other Chinese statutes. For example, article 118 of China's Civil Law states that "[i]f the rights of authorship (copyrights), patent rights… are infringed upon by such means such as plagiarism, alteration or imitation, they shall have the right to demand that the infringement be stopped…." General Principles of the Civil Law of the People's Republic of China, art. 118 (Nat'l People's Cong., promulgated by Order No. 37 by the Standing Comm. of the Nat'l People's Cong., Apr. 12, 1986, effective Jan. 1, 1987; amended Aug. 2009). Likewise, the same set of statutes provides that one of the main methods of bearing civil liability shall be "cessation of infringements." Id. at art. 134. Under these provisions, courts have automatically entered permanent injunctions upon a finding of infringement, much in the same manner U.S. courts did prior to the eBay decision.

That said, at least one court has considered the impact of an injunction on the general public interest in deciding whether to issue a permanent injunction. In a case arising from the Fujian Higher People's Court, Wuhan Jingyuan Environmental Engineering Co., Ltd.  filed a patent infringement suit against Huayang Electric Industry Co., Ltd., and Fuji Water Co., Ltd., concerning technology relating to desulfurizing flue-gas using sea water. Wuhan Jingyuan Envtl. Eng'g Indus. Co., Ltd. v. Huayang Elec. Indus.Co., Ltd. & Fuji Water Co. (Fujian Intermediate People's Ct. Apr. 2001) (China). The Fujian court found infringement but also determined that use of the patented invention, which reduced sulfur output from thermal plants, was consistent with essential national environmental and industrial policies of China and was conducive to establishing a safe environment. The court also found that maintaining the power supply had a direct beneficial impact on the local economy. Balancing the interests of the patentee and those of the general public, the Fujian court denied Wuhan Jingyuan's request for a permanent injunction and entered a reasonable royalty from the time the operation commenced to the expiration of the patent-in-suit.

The judgment was appealed to the Supreme People's Court, which rendered its final decision in December 2009, affirming the denial of the permanent injunction. Wuhan Jingyuan Envtl. Eng'g Indus. Co., Ltd. v. Huayang Elec. Indus. Co., Ltd. & Fuji Water Co. (Supreme People's Ct. Aug. 2008) (China). The Court found that "ordering [Huayang Electric] to cease infringement would have a major impact on local public interests, with full consideration of the interests of the patentee and those of the general public." Id. This case represents the first time Chinese courts specifically stated that the public interest is a consideration in ruling on a request for a permanent injunction. Previously, when a determination of patent infringement and a subsequent injunction would have a significant societal impact, a finding of noninfringement tended to be the outcome of the litigation. With the Wuhan decision, courts have the ability to find infringement, levy damages, and yet avoid the potential social unrest associated with a permanent injunction. This decision increases the ability of patentees to enforce their patents in China, as courts are now more comfortable issuing findings of infringement without the public backlash.

Is It Working?
By awarding significant monetary damages, issuing (and enforcing) preliminary injunctions in an effort to protect the rights of patent holders, and giving local courts the discretion to deny requests for permanent injunctions, the Chinese judiciary is evolving into a legitimate venue for enforcement of intellectual property. These developments underscore China's efforts to be taken seriously in the global IP market, efforts welcomed by the international IP community. Companies, either by necessity or choice, are increasingly filing patent suits in China. According to data from the Chinese judiciary, the number of IP cases filed in China grew by 40.18 percent from 2009 to 2010 and by another 38.86 percent from 2010 to 2011. The changes described above, most of which occurred in 2008 and 2009, are having a profound impact on the filing of patent cases in China. As China's economic prowess continues to grow, and China's judiciary expands its experience in IP litigation, companies can expect to spend more resources fighting patent disputes in China.

Keywords: litigation, intellectual property, damages, infringement, permanent injunction, case law, Chinese courts, patent disputes

Kenneth S. Chang and Jeffrey M. Connor – May 28, 2013

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