We have observed a stark increase in the number of clients exposed to patent litigations in China. As China has become both an R&D and manufacturing base as well as one of the fastest growing consumer markets of multinational companies, the expansion of worldwide patent wars to the country is inevitable.

The stakes in such patent cases are high – they can result in the disruption of a product’s worldwide supply, exposure of confidential information and even the freezing of assets. Therefore, the risks must not be overlooked, especially if you are already entangled in patent disputes elsewhere. In this DechertOnPoint, we aim to provide some insight and practical suggestions on how to prepare for and navigate patent disputes in China.

Lesson #1: Evaluating the exposure to infringement

In recent years, one of our clients was engaged in patent infringement litigations with its biggest competitor in the United States, Europe, and the ITC. While preoccupied defending its cases in other jurisdictions, the client overlooked the risks of infringement claims in China. To their chagrin, a Chinese judge stormed into their plant one day to deliver a statement of claim (complaint) in person and to execute an evidence preservation order, demanding to collect confidential and/or proprietary materials including sales receipts, business records, technical documents, computer files, and other physical evidence.

While the suit was not contemplated by the client, the adversary had indeed planned to seek out the injunction as early as two years prior. The adversary had developed a strong IP portfolio in China, conducted notarized purchases of accused products and engaged a local judicial appraisal centre to conduct infringement analysis.

Suggestions

When facing potential or ongoing patent disputes involving a Chinese or foreign adversary, we suggest you assess the likelihood of your company being subjected to infringement claims in China:

• Determine the exposure in China, whether the company manufactures, sells or imports any related products in China.
• Conduct due diligence on whether an adversary has a claim against the company, e.g., by reviewing the adversary’s patent portfolio in China, searching for PRC counterparts of patents at issue in a foreign proceeding.
• Review the company’s patent portfolio for any potential counterclaims.

Lesson #2: Understanding the consequences of injunctions

Once it has been confirmed that an adversary has enforceable patents and that there are viable infringement claims against the company’s R&D, manufacturing and/or sales activities in China, the next step is to assess the chances and consequences of the court granting a pre-trial injunction and preservation order, and ultimately a permanent injunction.

In practice, awards for patent infringement in Chinese courts are low compared to the U.S. and Europe, and it is rarely worth litigating patents there with only a view towards recovering damages. An injunction is usually the more valuable goal for the patentee, e.g., to disrupt the global supply of accused products, obtain trade secrets of competitors, and add pressure on the global settlement. In addition, the significantly lower legal costs and fast-moving trials are also attractive elements that motivate patentees to initiate parallel infringement action in China.

Pre-trial remedies include evidence and asset preservation orders as well as preliminary injunctions. Since discovery in China is limited, a court may issue a pre-trial order against an accused infringer to preserve evidence. The patentee can make such a request on an ex-parte basis before any legal action is filed. The evidence preservation order usually takes only 48 hours to issue.

Similar to evidence preservation orders, a preliminary injunction can be issued within 48 hours after the patentee applies and before a legal proceeding is instituted. It can also be granted on an ex-parte basis. While a defendant may challenge the order, the enforcement will not be suspended during the process.

Suggestions

If an adversary obtains an evidence preservation order against your company, it may provide access to your sales records, distribution networks and other core know-how/trade secrets that are otherwise inaccessible in the litigation. This is especially problematic, since the concept of legal privilege is not well recognized in China. When potential infringement claims are identified, the company should:

• Properly maintain and protect sensitive business information and financial records during day-to-day operation, e.g., encrypting and/or performing periodic clean-up of records.
• Negotiate with the judge on methods of preservation when an evidence preliminary order is imposed, e.g., propose to turn in technical documents voluntarily and put them under seal until the evidence production stages, and request to redact confidential portions of relevant records.
• Engage a qualified judicial appraisal institution to examine accused products and prepare a preliminary appraisal report to address any technical non-infringement defences.

Lesson #3: Critical timing to file invalidation petition

Timing is critical to invalidate asserted patents. This is especially true under China’s bifurcated system, where issues of validity are determined by the patent office in administrative proceedings, while issues of infringement are determined by courts in judicial proceedings. In other words, an accused infringer cannot raise an invalidity defense in trial.

In addition, a request for a stay of the infringement proceeding the pending issueance of an invalidation decision is not always granted, and judges have absolute discretion in granting such requests.

In our experience, the chances a Chinese court will grant a stay of a patent infringement suit are slim, even in cases where multiple invalidation petitions based on various grounds and prior arts references are filed.

Suggestions

Once the risks of infringement are properly identified, a company should start preparing invalidation petitions:

• Immediately request the file wrapper from the patent office – prosecution history is not published and can take up to two months to retrieve.
• Note that an invalidation petition must be filed shortly after receiving the complaint in order to request the trial court to stay the infringement proceeding. To meet the tight deadline, a defendant may file a bare bones invalidation petition, which can then be replaced by supplemental petitions with formalized and/or translated prior art references.
• Submit multiple invalidation petitions based on different grounds and prior art references, and request the examiner to consolidate the oral hearings for all petitions.
• Search for prior art references in China. The Chinese patent office also provides prior art searching services.
• In the oral hearing, engage an expert witness to testify and prepare a written report to support and supplement assertions in the invalidation petitions.

Lesson #4: Understanding the civil procedures in Chinese courts

Once a complaint is filed, you can expect the case to move quickly, leaving limited time for the defendant to formulate defense strategies and prepare non-infringement evidence. The typical stages of patent litigation in China are: complaint; notification of acceptance; answer; case management hearing; exchange of evidence; pre-trial hearing on admissibility of evidence; oral hearings; and judgement. Jury trials are not available.

Civil procedure laws provide that in ordinary circumstances cases should be concluded within six months after they are filed. A straightforward patent infringement action generally takes only six to twelve months, and appeals are concluded within six months. On the other hand, an invalidity decision will take at least eight to nine months, subject to complexity of the patent and availability of examiners with the relevant background.

Suggestions

If an invalidation petition is filed about the same time or immediately after an infringement proceeding, it is possible that the infringement decision will be issued before the patent is invalidated. If the infringement decision has already been enforced, the infringement decision cannot be “reversed” in theory. In view of the above, a company should:

• Delay the litigation proceeding by filing motions, e.g., to challenge jurisdiction and request for stay of proceeding. It can also give a defendant more time to formulate litigation strategies and gather non-infringement evidence.
• Expedite the invalidation proceeding by making a request to the patent office to shorten the time for the initial formality reviews.
• Declaratory judgment actions for non-infringement can be filed in China if warning has been given by the patentee. If a corresponding infringement action is subsequently filed, both actions will be consolidated with the court that had initially accepted the first of the two actions claiming jurisdiction over the case. As outcomes of infringement litigations are not certain, declaratory judgment actions should be only considered for purposes of preventing patentee from litigating in a favorable venue (e.g., its hometown) and/or to reassure distributors (e.g., when likelihood of infringement is low).

Lesson #5: Prepare non-infringement evidence

In light of China’s fast-moving trials, a defendant should start constructing potential non-infringement defenses and preparing relevant supporting evidence. Useful non-infringement evidence includes (in the order of probative value): judicial appraisal report; documentary evidence, such as technical records and testing reports; and oral and written testimony offered by expert witnesses.

A judicial appraisal report refers to a special type of expert opinion offered by court-certified appraisal institutions based on lab test results. It has more probative value than expert testimony. In addition, documentary evidence used in litigation abroad can be recycled in the Chinese proceedings if it involves the same invention. One must ensure that doing so would not violate any protective orders issued by the foreign court.

Expert evidence and oral evidence, while admissible, are given relatively little weight. However, having experts testify in court can be useful as they may help counter the patentee’s technical arguments, educate the judge on the underlying technology, and answer technical questions posed.

Suggestions

Below are some points to note about the preparation and production of non-infringement evidence:

• The document production period is typically only 30 days from the case management hearing. Therefore, a defendant should start collecting documentary evidence and preparing technical reports before or in an early stage of the trial.
• Documents originated outside China must be properly legalized and translated to be admissible; failure to meet the formality requirement is a very common technical mistake and may cause important evidence to be excluded.
• Documents containing sensitive business information and/or trade secrets should be redacted before submitting to the court.
• Testimony from the same expert witness can be used in both the invalidation and infringement proceedings.

Lesson #6: Achieving settlement with claim preclusion

When the parties agree to reach a global settlement, the defendant must properly dismiss the infringement proceeding “with prejudice” to prevent the plaintiff from reasserting the claims later. A private settlement agreement executed between the parties will not be recognized and entertained, and will not be effective without completing a court-led mediation process, i.e., the parties file a petition to jointly manifest their intention to settle and enter into a court-led mediation, then a mediation agreement containing the settlement terms will be issued by the court. Finally, the mediation agreement must be signed by both parties to become binding and achieve the desired claim preclusion effect.

Suggestions

Some points to note when negotiating a settlement agreement:

• If the parties have agreed to any arrangement for handling future disputes (e.g., choice of law and forum), such arrangement should be recited in the mediation agreement.
• In case the mediation agreement makes reference to the global settlement agreement, the court may demand the parties to submit a copy of same under seal – which will be accessed by the court only under strict procedural rules.

Conclusion

This article highlights the challenges faced by foreign companies facing infringement claims in China and suggests some basic defense strategies. Given the pace of the trial, and considering its interplay with parallel foreign proceedings (if any), it is critical for a company to receive speedy and thoroughly-considered advice to make quick and informed moves. The client’s interest will be best served with an integrated team of experienced international and Chinese patent counsel – each taking different roles, e.g., one would handle technical issues and provide back-end support while the other would advise on litigation strategies (including coordinating overseas parallel proceedings) and evaluate substantive and procedural issues unique to proceedings in China, details that are essential to the success of the case.