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Chinese Supreme Court brings about sea change for patent litigation in China

13 February 2012

On December 16, 2011, without much fanfare, the Chinese Supreme People’s Court (“the SPC”) issued judicial guidelines for IP infringement adjudication entitled “Opinion on Several Issues Relating to Sufficient Utilization of IP Adjudication to Foster

Evident from the title, the Opinion is permeated by political rhetoric on strengthening China’s IP enforcement to promote self-reliant innovations. Politics aside, the SPC set forth new goals for the Chinese judiciary which include procedural transparency and safeguards, judicial predictability and consistency, and lower costs of IP enforcement. Significantly, the SPC stressed the importance of ensuring correct rulings by first instance courts to provide prompt judicial relief. First instance courts should achieve a high rate of acceptance of their rulings (by the parties) and reduce the rate of appeal.

Besides the aspirational goals, the Opinion prescribed important substantive principles for adjudication of patent, trademark and copyright infringement disputes, as well as unfair competition claims (including trade secret misappropriation). The Opinion not only reiterated the continued vitality of certain existing rules but also enunciated new ones for IP adjudication. Some of the new principles represent significant changes in the law.

In the patent litigation arena, the SPC for the first time introduced the concept of patent abuse and created a private cause of action for malicious assertion of invalid patents. In an effort to facilitate method patent enforcement, the SPC broadened the applicability of burden-shifting in infringement proof. The Opinion further elucidated applicable principles for claim interpretation and infringement determination, such as the dedication rule, the all elements rule, the estoppel principle, and the doctrine of equivalents.

China is the most litigious country in the world for patent litigation with about 6000 patent cases filed in China in 2011, which is twice as many as that in the U.S. The Opinion is one of the most important judicial guidelines for patent practitioners in China.

China’s judicial system consists of four levels of courts: (1) the Basic People’s Court; (2) the Intermediate People’s Court; (3) the Higher People’s Court; and (4) the Supreme People’s Court. The SPC is the highest court in China. Along with handling appeals from Higher People’s Courts, it also serves an administrative role, in which it issues judicial interpretations and opinions that are legally binding upon lower courts. China has a “two instance” judicial system—the decisions of the court of first instance can be appealed to the court at the higher level, which makes what essentially is a final decision. Due to the complexity of patent cases, the SPC has designated about 70 courts (mostly Intermediate People’s Courts) around the country to be first-instance courts for patent infringement claims.

China is a civil law country and has adopted some aspects of the German patent system. For example, like Germany, China has a split system, with infringement claims heard solely by the courts and invalidity claims solely by the Patent Reexamination Board of the State Intellectual Property Office of China.

In China, infringement generally is determined in the following way: (a) construing the scope of the patent in suit; (b) analyzing the relevant technical characteristics of an accused product or process; and (c) comparing all technical features of the patent claims with those of the accused product or process.

Claim Interpretation
Under the Chinese patent law, the scope of an invention or utility model patent is determined by the terms of the claims. The descriptions and drawings may be used to interpret the claims.

In the Opinion, the SPC emphasized a balanced approach to claim interpretation— the claim language must be balanced against the object of the invention. The object of the invention limits the scope of a patent; inferior inventions, ie inventions that do not fulfill the object of the invention, are not within the scope of the patent. Pioneer inventions are entitled to broader protection, including a broader scope of equivalents; conversely, incremental inventions lesser protection.

The SPC reiterated the principle for claim interpretation: disclosed but unclaimed technical features are dedicated to the public and hence are not within the scope of a patent. Moreover, the estoppel principle is alive and well. A patentee is estopped from asserting a claim interpretation that covers any subject matter surrendered during prosecution or invalidation. Prior cases suggest that an estoppel can arise with a narrowing amendment, regardless of the reason for such amendment. An argument can also give rise to an estoppel. As such, estoppel, coupled with the dedication principle, operates to limit the scope of a patent in China. This is consistent with most Western approaches.

Infringement Determination
In determining infringement, courts must follow the all elements rule: each technical feature (ie an element) in a patent claim must be met by an accused process or product, either literally or equivalently. There can be no infringement if one technical feature and its equivalent are absent.

An equivalent feature refers to a technical feature that performs substantially the same function in substantially the same way and achieves substantially the same result as the feature recited in a patent claim. Moreover, an equivalent feature must be one that can easily be conceived by a person skilled in the art without inventive skills.

While acknowledging the continued vitality of the doctrine of equivalents, the SPC cautioned against mechanical application of the doctrine, especially to situations where it should not be applied. For example, the doctrine of equivalents cannot be applied to cover prior art. Additionally, subject matter surrendered during prosecution or invalidation cannot be recaptured by the doctrine of equivalents.

As shown above, the Chinese infringement analysis is similar to the U.S. approach, except that in the U.S. an equivalent need not be obvious.

Prior Art Defense
The third amendment to the Chinese Patent Law in 2009 codified the prior art defense. But it was not clear from the amendment whether an accused infringer must practice exactly what is in the prior art. The Opinion confirmed that practicing prior art is a defense to claims of both literal infringement and equivalent infringement. According to the Opinion, the prior art defense can be established by showing that an accused product or process is identical to prior art or constitutes an obvious variation of prior art. A single prior art reference can be combined with common knowledge to prove an obvious variation. The combination, however, must be obvious. As to the scope of prior art, the Opinion clarified that a conflict application (ie an application filed earlier but published later) also constitutes prior art for the prior art defense purposes.

The Opinion is silent on whether two or more prior art references can be used to raise the prior art defense. In a prior decision issued in December 2009, the SPC ruled that two prior art references could be combined to establish the prior art defense. Generally speaking, there should be a primary reference. A secondary reference can be combined with the primary reference. The combination must be obvious to a person of ordinary skill in the art. In other words, the missing technical features from the primary reference can be obtained by a person of ordinary skill in the art, without inventive labor.

The Opinion does not seem to conflict with the prior SPC decision. The Opinion and the SPC decision delineate the means to establish the prior art defense: identity to prior art must be shown by a single prior art reference. An obvious variation to prior art can be proven by a primary reference, combined with a secondary reference or common knowledge, so long as the combination is obvious. The SPC did not prohibit the use of multiple references; but using multiple references, by its nature, may indicate the weakness of the defense.

Patent Abuse
The concept of “patent abuse” was proposed but not adopted in the third amendment to the Chinese patent law in 2009. Nevertheless, the SPC introduced such a concept in the Opinion to rein in abusive patent enforcement. While the SPC did not define “patent abuse,” it singled out malicious assertion of invalid patents as a form of patent abuse that is actionable as unfair competition. Malicious assertion of invalid patents is defined as sending of warning letters or filing of infringement suits on patents that the patent owner knows to belong to prior art. In such a case, the patent owner is liable for damages suffered by the victims due to such assertion.

The Opinion is silent on what constitutes “knowledge” and “belong to prior art.” Presumably, it should suffice if evidence proves that the patent owner knows or is in possession of a novelty-destroying prior art reference.

The introduction of “patent abuse” is a healthy step toward a strong patent system. With the potential liability for asserting invalid patents, the value of seeking “junk patents” has been severely limited. Previously, there was no penalty for asserting patents known to be invalid. As such, numerous utility model patents were filed on what is already in prior art. Utility model patents are not substantively examined but can be enforced almost like invention patents (which are substantively examined). Sometimes, these utility model patents were used as harassment tools. Even some invention patents were used for that purpose. From now on, patent owners should be reluctant to assert patents that are clearly invalid. On the other hand, the Opinion enables an accused infringer to file countersuits based on patent abuse. Therefore, it may have opened the floodgate for retaliatory litigation for patent enforcement in China. Therefore, patent owners are well advised to evaluate the validity of their patents before launching attacks on infringers.

Preliminary Injunction
The Chinese patent law authorizes courts to issue injunctions before or during infringement actions. Upon receiving a request for a preliminary injunction, a court must make a ruling within 48 hours if it finds that all procedural requirements have properly been met. Once issued, the injunction immediately is enforceable. The patentee, if it has not done so already, then must initiate an infringement action in the courts within 15 days of issuance of the injunction, or the injunction automatically will be lifted.

Chinese courts consider the following factors in determining whether to issue preliminary injunctions:

(1) whether there is infringement;
(2) whether the patent owner will be irreparably harmed in a manner for which monetary damages are inadequate compensation if the infringing act is not enjoined;
(3) whether the patent owner has provided an adequate bond; and
(4) whether issuance of a preliminary injunction would prejudice the public

In reality, obtaining a preliminary injunction in most patent infringement cases has always been and is becoming increasingly more difficult. Both infringement and irreparable harm must be clearly proven—a burden that is not easy to meet in China given the stringent evidentiary requirements and lack of discovery procedures. Moreover, the SPC has cautioned repeatedly against granting preliminary injunctions in cases involving non-literal infringement or complicated technologies.

In the Opinion, the SPC once again urged restraint in issuing a pre-suit injunction, a common form of preliminary injunction in China. It emphasized that the conditions for granting pre-suit injunctions are (1) facts are clear and (2) infringement is readily ascertainable. Cases involving complex technologies are not amenable to pre-suit injunction. Moreover, pre-suit injunctions should not issue where there is an invalidation decision on the patent in suit (even if the decision is under appeal). If practicable, courts should hear arguments from both sides in determining infringement.

Pre-suit injunctions have been a rarity in recent years for patent infringement cases in China. The Opinion spelled the death knell of such injunctions in complex patent cases. This is a disappointing development. A strong patent system makes preliminary relief readily available, for example, in most Western jurisdictions. China, however, is going in the opposite direction.

Method Patents and Burden of Proof
China’s legal system subscribes to the notion that those who assert a claim must prove it. As such, the burden of proof generally resides with the claimant. The Chinese patent law provides for shifting of the burden of proof for proving infringement of a method patent if the patented method makes a new product. In such a case, the patent owner needs to prove that an infringer’s product is the same as the product made by the patented method and the product is new. Then the accused infringer must prove that they use a different method.

The Opinion affirmed such shifting of the burden of proof. According to the Opinion, where a patented method makes a new product and the patent owner proves that (1) the product and the method are not known to the public before the priority date of the patent and (2) the defendant’s product is identical to the patent owner’s new product, the burden of proving non-infringement shifts to the defendant who must prove that they use a different method.

Significantly, the SPC stated that courts may also shift the burden of proof even if a patented method does NOT make a new product, if:

  1. the patent owner proves that the products are identical;
  2. the patent owner has made reasonable efforts but is unable to prove infringement; and
  3. the court concludes that there is a high likelihood that the accused infringer uses the patented method based on common sense and facts of the case.

The SPC stressed that in adjudicating method patent cases courts must balance the patent owner’s rights against the accused infringer’s legitimate interests in protecting their trade secrets. Courts should grant evidence preservation (ie a seizure order) when there are difficulties in collecting infringing evidence for method patents. At the same time, courts must prevent abuse of such procedures to safeguard the defendant’s trade secrets.

By judicial fiat, the SPC has effected a sea change in how Chinese courts will adjudicate patent infringement disputes. Creating a private cause of action for malicious assertion of invalid patents is likely to discourage junk patent filing and enforcement. Allowing discretion for judges to shift the burden of proof for method patents that do not produce a new product will undoubtedly benefit method patent owners. The balanced approach to claim interpretation seems to strike an appropriate balance between the patentee’s interests and the public interests. Rigorous application of the dedication rule, the all elements rule, the estoppel principle, the prior art defense, and the doctrine of equivalents further advances the objective of the balanced approach.

These changes are likely to make the Chinese patent enforcement system more robust. They may even bring some transparency, predictability and consistency in patent litigation in China. In some sense, China is slowly adopting some Western legal rules and rationales, while retaining unique Chinese characteristics. Regrettably, SPC’s rigorous restriction on the grant of pre-suit injunctions in patent cases unnecessarily dilutes patent owners’ rights and thus is counterproductive.