IP Litigation in China Navigating Complexities of the Dual-Channel Chinese System and Avoiding Infringement Claims

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TUESDAY, FEBRUARY 28, 2012

Presenting a live 90-minute webinar with interactive Q&A

Paul D. Jones, Principal, Jones & Co., Toronto, Canada

Xu Jing, Partner, King & Wood, Beijing, China

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IP Litigation in China 中国知识产权诉讼

Paul Jones Jones & Co. 钟保禄律师事务所 Джоунс и Ко. Toronto www.jonesco-law.ca 徐静 (Xu, Jing) 金杜律师事务所 (King & Wood) 北京市 (Beijing) http://www.kingandwood.com/ Strafford Webinars and Teleconferences February 28, 2012

6

简介 - Introduction

One morning you receive a fax from your company’s WFOE in China Its all in Chinese with a big seal on it, but your local staff tell you that it is a

notice that a lawsuit has been filed against the WFOE.

They also tell you that it says that you have 30 days from the date of the notice (almost a week ago) to submit evidence.

Are you prepared?

7

简介 - Introduction

With relief you discover that extensions are available – but then you are told: -

- that usual time to trial in Chinese courts is under 6 months;

- there is no discovery – each party is responsible for its own evidence; and

- there is little oral evidence, documents etc. should be notarized, and if

evidence is from outside China, it must be legalized!

8

简介 - Introduction

Basic Facts: -China is a civil law system, modeled primarily on Germany

-The World Bank “Doing Business” survey on enforcing a contract ranks the PRC courts 16th out of 183, on the basis of time, cost and procedures.

- The U.S. ranks 7th, Canada is 59th

-The PRC Civil Procedure Law mandates trials within 6 months, appeals within 3 months, although patent trials are generally longer. This does not apply to foreign-related cases.

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简介 - Introduction

Costs: -Actual costs vary widely, but some common estimates are:

-For a simple trademark infringement trial - $15,000 to $20,000 USD for the Chinese legal fees

-For a simple patent infringement trial – $50,000 to $150,000 USD

-This does not include the cost of the collection of the evidence, or time spent by foreign based counsel

10

简介 - Introduction

Other Differences: -Judges are assumed to know the law, and may make their own investigations. Civil law judges have less status and are supervised more than common law judges

-There are no juries

-Decisions are based primarily on documentary evidence, strictly authenticated according to PRC evidence rules; generally nobody testifies in person

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简介 - Introduction

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法院 - Courts

Four Levels:

最高人民法院 - Supreme People’s Court

高级人民法院 - Higher People’s Court – one in each province or centrally administered region

中级人民法院 - Intermediate People’s Courts – about 376 – usually in major cities

基层人民法院 - District People’s Courts – over 3,000 – further sub-divided into smaller units

13

法院 – Courts

Civil procedure in civil matters is governed by a national law:

中华人民共和国民事诉讼法 – PRC Civil Litigation Law

As in other civil law jurisdictions – sharp divide between civil and

administrative matters, and thus a separate law:

中华人民共和国行政诉讼法 – PRC Administrative Litigation Law

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法院 - Courts

Article 19 of the Civil Litigation Law – Intermediate People’s Courts have jurisdiction as courts of first instance over “major

cases involving foreign elements.” Courts have several divisions such as criminal, civil, administrative. Most Intermediate Courts and above have an “Intellectual Property Bench” made up

of judges who decide cases related to intellectual property rights, anti-monopoly cases and franchise cases.

IPR cases are broadly defined to include license disputes such as non-payment of

royalties The IPR Bench is considered the “elite” bench to which the better judges are allocated

15

法院 – Courts

Judges: - as in other civil law jurisdictions, being a judge is a career choice

made usually after completing a four year university degree in law. - Generally three judges from a division or bench will hear a case

Each court has an “Adjudication Committee” (审判委员会) made up

of the Court President, Vice-Presidents and other senior judges, that discusses, “significant, difficult or complex cases.”

- Civil law judges are less independent than common law judges

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法院 - Courts

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Territorial Jurisdiction: - Generally the defendant’s domicile

- However for foreign defendants – domicile of the plaintiff

- For contracts may also be where the contract was to be performed

- For torts (including IPR infringement) may also be where the infringement

occurred

民事诉讼 - Civil Procedure

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民事诉讼 - Civil Procedure

Limitation Period Statute of Limitation: Two-Year Period Exceptional Rule: claims against infringement beyond two year period but being

continuous when initiating the claims Refreshment of Statute of Limitation Cease and Desist Letter

Raising claims before authorities

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民事诉讼 - Civil Procedure

Filing, Acceptance and Service

- Initial filings include sufficient evidence to support case to the Case Filing Division （立案庭)

- Court has 7 days to accept or reject the case.

- Criteria for acceptance or rejection set out in Articles 108 and 111 of the Civil

Litigation Law

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民事诉讼 - Civil Procedure

Article 108

- be a legal entity

- have a direct interest in the case

- must be a definite defendant

- must be a specific claim, facts and cause

- within scope of civil actions for the court and

- within territorial jurisdiction

21

民事诉讼 - Civil Procedure

Once the court has accepted the case: - court will serve the defendant within five days - defendant initially has 15 days to file a statement of defense - defendant initially has 30 days to file evidence, initial extension is readily granted - the judges will be selected for the panel

22

证据 – Evidence

Evidence Rules

- Most Critical Time Period: Evidence Production Date appointed by the Court

- Exceptional Rules for Evidence Submissions beyond the Court’s appointed

period

- Burden of Proof: Who asserts, who proves

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证据 – Evidence

Nature - Documentary Evidence vs. Testimony - Evidence from Third Party vs. Evidence originated inside the Company - Evidence being notarized vs. Evidence in plain form - Evidence in its original vs. Evidence of copies - Evidence originated outside of territory of mainland China

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技术评估 - Technical Appraisal – Technical Related IP Cases

- Commonly used in Invention Patent Infringement /Technical Information Misappropriation Cases - Court-Appointed Technical Examination Agency to Organize the Examination - Experts Panel Makes Interpretation of Technology, disputably inclusive of claim construction

- Court usually Follows the Conclusion of Experts, which in many cases are decisive to the Court’s judgment

25

技术评估 - Technical Appraisal – Technical Related IP Cases

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技术评估 - Technical Appraisal – Technical Related IP Cases

27

临时措施 - Interim Measures--Preliminary/Interlocutory Injunctive order

Test: - Likelihood of infringement? - Is damage irreparable? - Does it harm the public interest if the order is granted? - Will it cause the dramatic imbalance between the interests of the claimant

and the claimee? - Does the claimant has the bad faith in applying for injunction to prevent the

fair competition? Guaranty must be posted by Claimant: Loss of the claimee when the injunction is wrongfully granted Damage claim sought by the claimant being a reference

28

临时措施 - Interim Measures--Preliminary/Interlocutory Injunctive order

Procedural Steps:

1. Plaintiff files motion for preliminary/interlocutory injunction with Court

2. Court can either: a. Grant the motion b. Reject the motion c. Request a response from Defendant before rendering decision Note: 1. Injunction could be granted ex party 2.Injunction can not be lifted by counter-guaranty 3.Defendant or Plaintiff can file an request for review after the granting or rejection of a Preliminary/Interlocutory Injunction, but with a low likelihood of success

29

临时措施 - Interim Measures--Preliminary/Interlocutory

Injunctive order

- Evidence Preservation Order: Method applied to obtain the accounting books of infringer to support the

damage claims - Property Preservation Order: To ensure the enforcement of the damage award Arguable alternatives for Injunctive Order, if not available Guaranty required - Court Investigation Order:

30

民事诉讼 - Civil Procedure

Declaratory Judgment Action-Preemptive Course of Action Available when Warned of Infringement

Pre-conditions to File Patent Laws: -Receiving a Cease and Desist Letter; and -Patent holder neither withdraws the warning nor files a lawsuit within one

month upon receiving a Reminder in which the person warned urges the patent holder to exercise the right to action; or

-Within two months upon issuing the Reminder. For Other IP cases: -Receiving Cease and Desist Letter Or Facing Infringement Allegation; and

right holder does not file a lawsuit within reasonable time period

31

民事诉讼 - Civil Procedure

Stay of Infringement Proceedings

- Available in Patent Infringement Case

- Not normally granted by the Court

- Local Practice is worth noting

32

无效 - Invalidation

As in other civil law jurisdictions, there is a separate administrative procedure

for claiming that a patent or a trademark is invalid Only the Patent Review and Adjudication Board (“PRAB”) has the power to

consider the validity of patents Courts do not have the power to consider the validity of the patent other than

on an appeal from an administrative decision of the PRAB

33

无效 - Invalidation

Grounds for Invalidation set out in Article 65 of the Patent Law Implementing Regulations (2010): -Not an “invention” -Was not submitted for a confidentiality review -Was not novel, inventive or have practical utility -Was not properly described -Drawings were not complete or accurate - other grounds

34

无效 - Invalidation

Procedure: - Opponent files request - PRAB accepts or rejects application - Opponent has one month to file further supporting evidence - PRAB notifies the registrant – asks for evidence in one month - PRAB has the option to hold an oral hearing - Appeal from PRAB is to the Beijing No. 1 Intermediate People’s Court

35

其他辩护 - Other Defenses 现有技术 - Prior Art

Although the court cannot consider the invalidity of a patent, it can consider

prior art – if the prior art covers the alleged infringing product, no infringement will be found

2010 Supreme People’s Court Interpretation: “all the technical characteristics alleged to fall within the scope of

protection of a patent right are identical or without substantial differences”

Generally the defendant will not be allowed to combine prior art references

36

其他辩护- Other Defenses 反垄断法 – Anti-Monopoly Law

PRC adopted the 反垄断法 in 2007, came into effect in 2008

“Article 55: This Law shall not apply to the exercise of intellectual property rights by business operators in accordance with relevant intellectual property laws and administrative regulations. However, this Law shall apply where a business operator abuses his intellectual property rights to eliminate or restrict competition.” “abuse” not yet defined Patent Law Article 48(2) – if the enforcement of a patent right is an act of monopoly defendant can apply for a compulsory license

37

其他辩护 - Other Defenses – 标准的一部分 Part of Standard

2010 draft SPC Judicial Interpretation

Article 20 - If a patent is part of a standard it is deemed to be licensed

PRC has a separate law on standard setting, and a body that administers standards

38

民事诉讼 - Civil Procedure

Evidence Exchange - Evidence Exchange vs. Evidence Production Period

- What does the Court do when organizing evidence Exchange

- Local Practices Various: Beijing, Shanghai and Shenzhen

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民事诉讼 - Civil Procedure

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Mediation By the Court - Settlement out of Court vs. Settlement before the Court - China Court’s Mediation Preference - Importance of Settlement before the Court- Withdraw with Prejudice not available in China Courts system - Enforcement Effects of Court’s Mediation Order - A Newly Released Guidance Case by the Supreme People’s Court: Settlement Agreement reached out of Court between parties without the issuance of the Court’s mediation order cannot be the basis to request the Court to enforce

民事诉讼 - Civil Procedure

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Trial - Time Frame - Conducted by a collegiate panel of at least three judges (in odd numbers)

- Usually One Hearing for IP Infringement Cases

- Facts findings + Legal Arguments

民事诉讼 - Civil Procedure

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民事诉讼 - Civil Procedure

43

民事诉讼 - Civil Procedure

Appeal

China has adopted the “ two instances” trial system. - After a decision is made by the First Instance court, the party concerned may appeal

the Decision to the superior court (one level higher) as the Second Instance court and this court’s decision is the final Decision

Note: Re-Trials are granted by courts, if warranted. There is a tendency of the

Supreme People’s Court to re-trial the case in recent years. Time Limit for Filing Appeal Thirty Days for foreign individuals and entities Fifteen Days for domestic individuals and entities

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民事诉讼 - Civil Procedure

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救济 - Remedies

Civil Procedure Law – Article 134: 1. Cessation of infringement 2. Removal of obstacles 3. Elimination of dangers 4. Return of property 5. Restoration of original condition 6. Repair, re-working, or replacement 7. Compensation for losses 8. Payment of breach of contract damages 9. Elimination of ill effects and rehabilitation of reputation 10.Extension of apology

46

救济 - Remedies

Basic Four in IP cases:

a) Injunctions

b) Reasonable fee for pre-grant use (only available in Patent Infringement Case)

c) Damages

d) Extension of apology (only available in Copyright Infringement case and Anti-Unfair Competition Case)

47

救济 - Remedies

Damages:

Article 65:

The measure of damages for infringement of a patent shall be determined based on the actual losses incurred by the rights holder as a result of the infringement.

If the actual losses are difficult to determine, the measure of damages may be determined based on the benefits derived by the infringer from the infringement.

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救济 - Remedies

Damages

If both the losses incurred by the rights holder and the benefits derived by the infringer are difficult to determine, the measure of damages shall be reasonably determined at (a) multiple(s) of the royalties for a licence of such patent.

The measure of damages shall additionally include the reasonable expenditures incurred by the rights holder in halting the infringement.

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救济 - Remedies

Damages – Statutory

If the losses incurred by the rights holder, the benefits derived by the infringer and the royalties for a licence of the patent are all difficult to determine, the people’s court may, on the basis of factors such as the type of patent, and the nature and circumstances of the infringement, decide to award damages of not less than Rmb10,000 and not more than Rmb1 million.

As there is no discovery, this is often the measure of damages used

50

民事诉讼 - Civil Procedure

51

准备以及预防 - Preparation and Prevention

Product Clearance - Conduct patent and prior art searches in China

- Search all types of patents – invention, utility, and design

- Note the lower standard of novelty for utility patents

- Monitor your supply chain, conduct due diligence on suppliers, keep

records

52

准备以及预防 - Preparation and Prevention

Otherwise Comply with Chinese Laws - register licenses - obtain import permits - comply with scope of business license

- use your Chinese name consistently

53

准备以及预防 - Preparation and Prevention

Establishing IP Rights Portfolio –Pre-condition to enforce

Registable Rights in China:

- Trade Mark

- Copyright (optional but recommended)

- Patent - Three types:

- Invention,

- Utility Model

- Design

54

准备以及预防 - Preparation and Prevention

Monitor the Market - Use investigative services to shop for your products -When infringers are found – notarize the evidence promptly

-Join local trade associations

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准备以及预防 - Preparation and Prevention

Collection of Evidence is a Significant Element in Winning Litigation in China

-collect, file and notarize regularly evidence of use of trade-marks

-Inspect licensees regularly, design inspection reports that they sign, or consider bringing a notary

-Plan infringement detection procedures when negotiating the license agreement or the joint venture

56

- Preparation and Prevention

Prepare contracts and license agreements in Chinese, use all Chinese contractual formalities -The name of the Chinese party must be in Chinese, based on its business license. -Verify the business license

-Have the contract signed by the 法定代表人 or other duly authorized person

-Have the contract sealed!!

-Initial all pages

57

准备以及预防 - Preparation and Prevention

Special precautions for trade secrets

- Use an non-disclosure agreement designed for China – do not use your U.S. standard document

– identify the trade secrets that are to be protected

- Identify and record measures the measures used to keep them confidential

- Audit your confidentiality measures

58

商业秘密保护 - Trade Secret Protection

Elements to Establish Trade Secret Misappropriation Claim in China - A Qualified Trade Secret Confidential: Unknown to the Public Valuable and Practical Appropriate Measures have been taken to safeguard the disclosure of the Trade Secret - The Information Used by Defendant is Identical with or Substantially Similar to the

Trade Secret Claimed by Plaintiff - Improper Means Taken by Defendant in Obtaining Trade Secrets of Plaintiff Note: The Burden of Proof is on the Plaintiff

59

中国商业秘密保护 - Trade Secret Protection in China

Alternative Proof For “Improper Means” “Access and Substantial Similarity” Principle as a Substitute for Burden of Proof

regarding “Improper Means” borne by the Plaintiff Two Elements to be Proved by Plaintiff - The information used by Defendant is identical or substantial similarity to that of

Plaintiff; and - The Defendant had access to the Trade Secret. Shift of Burden of Proof Upon satisfying the above two elements, the burden of proof shall be shifted to the

Defendant for the specific means it has adopted to obtain the trade secret in suit

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商业秘密保护 - Trade Secret Protection

Level of Proof Concerning “Access”:

Actual “access” is preferred, for instance, the access of a trade secret through a

former employee; or Probability of “access” could be reasonably inferred through circumstantial

evidence produced by the Plaintiff High Level of Similarity (preferably Identical) Between the information of

Defendant and that of Plaintiff; The Accidental “Identical nature” of the Information could be Reasonably Excluded

by the Nature of the Information The Probable Access Avenue to Trade Secret by the Defendant

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商业秘密保护 - Trade Secret Protection

Available Defense Information Available to the Public Inappropriate measures to safeguard the trade secrets Reverse Engineering- “Clean Hands” Principle Available Capital contributions may be

in cash or in-kind

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Trade Secret Protection vs. Patent Protection 商业秘密保护与专利保护

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

Win Rate

Trade Secretinfrnigement winrate

Patentinfringement winrate

PatentInfringement pluspatent sustained

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Trade Secret Protection vs. Patent Protection 商业秘密保护与专利保护

Implication of the Statistics: Trade Secrets are very difficult to be enforce compared with patents High withdrawal rates for trade secret cases due to the heavy burden of proof Patent infringement cases have higher win rates than trade secret infringement cases

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总结 - In Summary

胡锦涛 – Hu Jintao 2010-06-08

科技创新推动创造更多社会财富，为促进社会和谐充实物质基础。

Promote scientific and technological innovation to create more social wealth, in order to enrich the

material basis for social harmony.

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提问 ？- Questions ?

Paul Jones Jones & Co. 钟保禄律师事务所 Джоунс и Ко. Toronto www.jonesco-law.ca 徐静 (Xu, Jing) 金杜律师事务所 (King & Wood) 北京市 (Beijing) http://www.kingandwood.com/

IP Litigation in China 中国知识产权诉讼