Beijing stakes its claim as a litigation capital

Back in 2015, IAM published an article on China’s litigation environment, asking: could this be the next major forum for high-stakes patent battles? (“The people’s court”, IAM 71). At the time, the country’s three specialised IP courts were brand new and had issued no major decisions; few foreigners were bringing licensing cases to China amid regulatory questions around standard-essential patents (SEPs); and rumours abounded of Chinese tech firms preparing patent offensives.

Looking back, most of the predictions made then were, if anything, conservative. Some of the biggest current global patent disputes – such as the litigation battle between Apple and Qualcomm – involve China campaigns. Non-practising entities (NPE) activity is on the rise – as this article reveals, there may be more domestic NPE assertions happening now than anyone outside China realises. On top of this, foreign patent owners have secured sufficient wins to allay the concerns of their peers about obtaining a fair hearing in China.

The recent release of a comprehensive statistical report by the Beijing IP Court is a good opportunity to look at how much has changed in the last few years and to guess at what might be next on the horizon.

Plaintiff paradise

In September 2016 the Beijing IP Court published a statistical summary of its first two-and-a-half years of existence. Over this period it has emerged as China’s premier venue for patent litigation. However, there is no shortage of important cases to go round and the majority of these play out in the other two specialised IP courts or else in other key intermediate people’s courts, such as those in Shenzhen or Nanjing. However, there is a reason why more than one practitioner has compared the Beijing IP Court to the Eastern District of Texas (of pre-TC Heartland fame) – it has a lengthy docket and the numbers show that, so far, it is extremely plaintiff friendly.

Over the period measured – from November 2014 through June 2017 – the court heard just a few hundred cases. Given that courts and administrative enforcement bodies in China heard more than 150,000 cases in 2016 alone, the caseload of the Beijing IP Court is thus a mere drop in the ocean. However, there are a couple of reasons why the numbers that follow are still significant.

First, we have little granular, timely data on outcomes in Chinese patent litigation cases nationwide. One of the many ways that the Beijing court has shown itself to be ahead of the curve is through its transparency – it would be fascinating to see similar studies across all of China’s major jurisdictions, but we will probably have to wait a little longer for this.

Second, practitioners say that the trends evident in the Beijing IP Court seem likely to manifest themselves in the country’s other major patent venues in time, when there are sufficient cases to generate meaningful statistics. “I wouldn’t draw too big a conclusion,” cautions He Jing, senior consultant at Anjie Law Firm. But he believes that “the trends on damages and win rate are probably similar” for other venues. The fact that the IP courts are seen as a success in China, as evidenced by the programme’s continued expansion, suggests that those trends are the ones that China’s policy makers want to see.

Figure 1. Civil infringement cases, by resolution

Source: Beijing IP Court

The Beijing IP Court’s patent caseload is split between civil litigation – in patent cases it is almost always the court of first instance – and appeals of Patent Re-examination Board (PRB) decisions. While it has closed 1,813 total cases over the two-plus year timeframe, just around one-third of these were civil litigations. Most of the civil cases were disposed of without a judgment, suggesting either settlement or an invalidation of the patent-in-suit. Just 142 cases resulted in an actual verdict.

In that limited universe of cases, plaintiffs performed exceedingly well. The patent owner prevailed in 116 cases, for an overall win rate of around 82%. In He’s view, one of the most remarkable aspects of this statistic is how it applies to both Chinese and foreign plaintiffs. “We pretty much take it for granted that there’s a higher win rate for cases involving foreign plaintiffs,” He notes. After all, overseas parties are careful to do their homework and typically initiate legal action in China only where they are confident of the result. Yet while foreign patent owners won 12 out of 13 cases (77%), it was Chinese plaintiffs who set the overall pace, winning 109 of 126 cases.

Figure 2. Judgment results, civil patent litigation

Source: Beijing IP Court

Zhang Hui, a partner at ZY Partners in Beijing, says that the high win rate for cases which made it all the way to a judgment is in line with expectations. She maintains that it is important to remember that the vast majority of cases do not make it to this stage, having been dismissed for other reasons. Litigation is nearly always accompanied by an invalidation request and if the PRB decision goes against the patent owner, the civil case is dismissed; so any case where the plaintiff’s patent was thrown out will not be taken account of in the 82% figure. In addition, Zhang points out that “if a plaintiff feels they are unlikely to win, they will settle”. Chinese patent cases are decided on highly objective criteria and the technical determinations made by the bench’s technical assistants are crucial. As a result, it becomes readily apparent if a plaintiff’s case is going nowhere.

In suits that make it all the way to a verdict, Zhang argues that, “these cases have been carefully considered and strategised before being brought to the court”. Indeed, He thinks that the 82% winning rate might tell us more about defendants than about plaintiffs: “It probably shows a certain lack of sophistication on the part of many infringers.” He suggests that some cases may come down to simple copying of the sort that has long plagued the market. Put simply, if you are bringing a complex infringement case against a sophisticated opponent, it would be a mistake to think that you have an eight in 10 chance of victory.

When it comes to damage figures, the court appears to have awarding these at a fairly consistent level over the past two years. While the Beijing IP Court has awarded record damages in specific cases, the average level of monetary reward remains meagre by international standards.

Figure 3. Average damages award in patent cases

Source: Beijing IP Court

The average damage award in patent cases has stabilised at around Rmb1 million ($150,000). It is hard to draw many conclusions from this based on the variety of patents at suit in these cases. However, in some specific cases, the Beijing IP Court has handed out awards that are quite large by Chinese standards. So far, the high water mark is a Rmb50 million ($7.6 million) judgment in favour of Chinese plaintiff Watchdata. In that case, the court used the calculation: defendant’s sales × plaintiff’s profit for patented products. Zhang argues that in many cases, low damages come back to evidential issues.

Foreign plaintiffs who prevailed in their cases were awarded more damages on average than their Chinese counterparts. One potential explanation is that these companies overwhelmingly asserted invention patents, while Chinese companies did so in only 30% of all cases.

The chief IP officer (CIPO) of a Chinese company expressed surprise at the high number of design cases before the Beijing IP Court and cautioned that although they are very rarely utilised by foreign companies, utility model patents should not be written off. “They are a poor man’s patent, but in some industries and some cases, they can have very low costs and potentially high benefit.” More granular stats revealed that plaintiffs asserting utility models won just 39% of cases – about half the overall rate.

Figure 4. Types of patent asserted by mainland Chinese plaintiffs

Validity in focus

Observing some of the high-profile patent suits which have played out in China over the past couple of years, it becomes clear that validity is at least half of the battle, as it is in other major jurisdictions such as the United States. This is not necessarily a surprise – insiders have long warned that the huge volume of patents being granted in China has the potential to generate big problems around patent quality.

Two recent big-name cases illustrate the centrality of the PRB – and thus patent validity – to Chinese litigation. WiLAN made headlines in November 2016 when it filed an SEP infringement case against Sony in the Nanjing Intermediate People’s Court. The Chinese invention patent – granted in 2013 to Nokia – was declared relevant to the long-term evolution standard. A few months later, Chinese media reported that the PRB had thrown out the patent. While this decision can be appealed, it signals the end to the promise of a quick win and injunction – so valuable to an NPE.

Spencer Shen

Chief IP officer, ZTE

Chris Dubuc

Managing partner, Longhorn IP

Meanwhile, the patent battle between Huawei and Samsung remains one of China’s most closely watched. With the Chinese telecom giant having initiated the conflict in 2016, it is seen as a significant coming-of-age moment for the country’s top patent power. Samsung’s response has been to assert 16 of its own rights against Huawei in China. However, as of October 2017 the PRB had invalidated 10 of Samsung’s Chinese patents, with one more decision pending. The survival rate of Huawei’s patents has not been reported.

As Zhang mentioned, almost every civil infringement suit is accompanied by an invalidation action at the PRB. Either party may then appeal this decision to the Beijing IP Court. Unfortunately the newly released statistics on decisions in such appeals provide little clarity on the invalidity system and its outcomes.

The Beijing IP Court decided on 576 appeals from the PRB during its first two-and-a-half years. About 40% of the original PRB decisions upheld the patent’s validity, while 60% were invalidations. After appeal, the overall validity rate for that set of cases rose slightly, with 42% of cases resulting in a valid patent. “That’s actually pretty harsh,” argues He of the low 40% validity rate. However, he does not believe that patent owners should be overly alarmed – this is not the overall validity rate but only the rate in cases where there was an appeal.

He says that the figure he tracks most closely is the frequency with which the Beijing IP Court reverses PRB decisions to invalidate. This gives clients an idea about their chances if one of their key patents is struck down. So far that metric has been around 12.8%. He admits that “it’s still low but not dismal”. Another practitioner argues that there appears no practice of presuming deference to the State Intellectual Property Office (SIPO) – good news for would-be appellants. “The Beijing Court has openly said that it is going to challenge more agency decisions,” He points out.

Figure 5. Types of patent asserted by foreign firms

As for the overall validity rate, it is a matter of conjecture. One Chinese CIPO tells IAM that he believes the picture to be substantially more optimistic for patent owners than the Beijing IP Court’s appeal statistics suggest. “To label that 40% figure as the validity rate is somewhat misleading, because it only encompasses cases that were appealed, not the overall picture,” he argues. “Overall based on historical data I would guess the overall validity rate is around 60% – whereas in the United States right now it is probably more 50-50. I still take the view that China is one of the major jurisdictions with the highest validity rate.”

Longhorn IP partner Chris Dubuc, who recently filed a litigation in the Beijing IP Court against HTC, agrees with that assessment. “From a validity perspective, we don’t think China is any worse for patent owners than other jurisdictions,” he maintains. “And definitely not compared to the United States.”

Figure 6. Results of Patent Re-examination Board decisions appealed to the Beijing IP Court

Source: Beijing IP Court

Inventor’s haven or a tide of trolls?

From a foreign observer’s perspective, probably the single most surprising figure in the Beijing IP Court’s report is the prevalence of individual plaintiffs in civil patent litigation. It turns out that individual patent owners are filing lawsuits at the country’s top first-instance patent forum at a rate that would be unthinkable in any other major jurisdiction.

As Figures 7 and 8 indicate, this is overwhelmingly a domestic Chinese phenomenon. Fully 35% of Chinese plaintiffs in civil litigation were individuals. Overall, that means that 31% of the docket consists of individual assertions. Although we have no further breakdown of what kinds of patent these individuals asserted nor their win rate, the fact that there are so many of them is significant in itself.

The Beijing IP Court’s report appears to welcome the trend. It makes reference to a policy slogan coined by Premier Li Keqiang at the 2014 Davos Conference: da zhong chuang ye, wan zhong chuang xin. This can be translated literally as “the masses do entrepreneurship, the multitudes innovate” and sums up an innovation policy in China that has included tax breaks and subsidies for domestic start-ups and small and medium-sized enterprises. In the Beijing IP Court’s view, the high rate of individual plaintiffs is “the embodiment of ‘mass entrepreneurship and innovation’ in the patent field”.

More cynical observers might see a surge in lawsuits by individuals as indicating a prevalence of patent troll-like activity. “It’s a product of the time, and of China’s very entrepreneurial society,” one Chinese in-house patent professional speculates. He says that people in China are becoming more adventurous in filing patents as individuals, but for major companies such filers pose only a slight nuisance.

Figure 7. Make up of Beijing IP Court patent plaintiffs – mainland China

Source: Beijing IP Court

Figure 8. Make up of Beijing IP Court patent plaintiffs – foreign

Source: Beijing IP Court

He agrees that this is a phenomenon unique to China. “I would be hesitant to assert that it’s exactly the same kind of troll you might find in the United States,” he concedes. “You do not have the same high damage award, and litigation costs, that could compel a large client to settle a case.” In his experience, not only individuals but also small Chinese companies are more interested in IP litigation than might be the case in other markets. “I think it’s probably premature to say that China has a big phenomenon of patent trolls, but small patent owners are indeed very active in enforcing IP rights.”

The relatively low cost of litigation is one potential reason why there are so many individual patent litigants before the Beijing court. Practitioners estimate that if an individual engages a small and low-end local law firm, it could probably carry out an IP court case for between $10,000 and $20,000, an amount that would be unthinkable in the United States. In addition, practitioners report that smaller firms are willing to take patent infringement cases such as this on a full contingency basis. Major multinationals, on the other hand, will likely end up paying a large high-end law firm anywhere from $100,000 to $500,000 for a full IP court litigation, regardless of who their opponent is.

I had the opportunity to speak with one Beijing litigator who has represented a major multinational tech company against an individual inventor in a Beijing IP Court infringement lawsuit involving a patent related to instant messaging technology for smartphones. Although it is just one case, it sheds some light on potential strategies. The plaintiff is the original inventor of the patent in question and has a technical background rather than a legal one.

Zhang Hui

Partner, ZY Partners

Interestingly, the plaintiff requested no damages from the court. The defence counsel believed that this revealed the plaintiff’s true strategy: “If the court issues an injunction, he believes the defendant will approach him for settlement.” The individual had previously asked the company for up to Rmb100 million (approximately $15 million) – far more than he would likely have been able to obtain through a damages award.

The attorney for the defendant also described the aggressive, no-holds barred approach taken by the individual plaintiff. Dissatisfied with the technical appraisal presented to the court, he accused the neutral institute which conducted it of accepting bribes from the defendant. He also filed bogus complaints against the defence counsel in the case, the attorney told IAM.

In the attorney’s opinion, the infringement claim is an obviously frivolous one. However, the case will evidently go the distance, with the Beijing IP Court expected to hand down a judgment soon.

He Jing

Senior adviser, Anjie Law Firm

The Beijing IP Court is the premier first-instance venue for patent cases. As one lawyer told me a couple of years ago: “if I have a strong case and want a smart judge, I’ll file in Beijing – if it’s the opposite, I’ll file elsewhere.” If nearly one-third of all the civil infringement cases in this venue are being filed by individuals, one can only guess at what is happening in the many other intermediate-level courts in China. For companies of all nationalities, it is a critical trend to watch.

Beyond Beijing

Given the Beijing IP Court’s track record and the level of transparency, it is no surprise that many litigants – including foreign parties – like to file cases there. However, it could become a victim of its own success. Practitioners confirm that the court’s large docket and limited roster of judges has resulted in substantial delays. That undercuts one of the key advantages of Chinese patent litigation – not only is it relatively inexpensive, but trials typically move fairly quickly. We have seen some examples of companies who are sued in the United States and then countersue with a lawsuit in China. A big potential plus is that the original defendant is likely to get its countersuit verdict first. Those looking for a quick win are likely to look outside Beijing.

Chinese authorities are making this increasingly easy to do. The Shanghai and Guangzhou specialised IP courts are already good options, as they are not burdened by the large number of administrative appeals heard in Beijing. Shenzhen’s and Nanjing’s intermediate courts have also played host to major cases. In Spring 2017 judicial authorities announced that further specialised IP tribunals will be established in four key second-tier cities: Wuhan, Nanjing, Suzhou and Chengdu.

However, the biggest judicial change on the horizon could be the potential establishment of an IP appeals court just above the current Beijing IP Court, which is empowered to hear appeals from all of the country’s intermediate-level courts. A body that would resemble the US Court of Appeals for the Federal Circuit has reportedly already won approval at high levels and should be formally advanced by the Supreme People’s Court soon. Three years ago, the establishment of IP courts was seen as a pilot scheme. The fact that an appeals court is in the works indicates that Chinese leaders, who have seen all the statistics you have just read and then some, judge the specialised IP courts to be a success.