How to win a patent case in China as a plaintiff
There is a reason why patent litigation in China is surging: patent owners have some big advantages. However, there are differences from US patent disputes at every stage which plaintiffs need to know about
In IAM 81 (Jan/Feb 2017), I outlined why China is the new top place to file a patent case and proposed how best to defend one there (see “Defending a Patent Case in The Brave New World of Chinese Patent Litigation”). I noted that patent plaintiffs in China are so heavily favoured that it calls to mind the old saying about Michael Jordan in his prime: “You can’t stop him; you can only hope to contain him.” Although I provided some hints on how to try to manage a case from a defendant’s perspective, I concluded that the odds are stacked against defendants in Chinese patent litigation so greatly that the best you can do is try not to lose by a big margin. In this article, I set out a game plan for winning from a patent owner’s perspective.
Picking a good case
A patentee must do its homework before filing and take a long, hard look at whether the case is a good one for China. The sales market in China is huge, with the market for smartphones the largest in the world and growing its lead (see Figure 1).
* Emerging APAC: India, Indonesia, Kampuchea (Cambodia), Malaysia, Philippines, Thailand and Vietnam
** Developed APAC: Australia, Hong Kong, Japan, New Zealand, Singapore, South Korea and Taiwan
To compare with another favourable patent venue, according to the latest sales estimates from Apple, iPhone sales in Germany are less than 15% of those in China. Another way of putting this is that the sales market in China is almost seven times larger than that of Germany (see Figure 2).
While China has come a long way towards achieving its goal of becoming an innovation and consumption economy, as I described in my previous article, its attraction as a patent litigation forum lies in the ability to obtain virtually guaranteed injunctions, combined with the fact that these apply to exports from China. However, this magic works best if the accused instrumentality is manufactured in China. Continuing the Apple iPhone example, because 100% of iPhones are manufactured in China, an injunction in China can prevent exports anywhere in the world. Therefore, an injunction in China is a worldwide weapon.
The ideal patent case in China is one in which the defendant manufactures a meaningful portion of the allegedly infringing product in China. At the first settlement conference for my patent owner clients, the defendant – often represented by overconfident US or UK counsel – will usually ask about our damages model. As someone who has litigated high-stakes patent cases in the United States for over a decade, I am used to this. They want to explore how overreaching my client is and scoff at the idea that damages could be anything other than meagre. My reply is simple: “In China, we do not need a ‘damages model’ per se. Rather, our damages model is whatever your client will pay to continue selling its product anywhere in the world in about one year.” That usually wipes the smirks off their faces. Welcome to China.
However, you need some substantial in-country manufacturing to have this kind of fun. Otherwise, you will have to play the in-country sales/revenue game just like anywhere else. And because damages in China are still low (albeit increasing), it is not always worth filing a case unless a significant portion of the product is manufactured in China.
I learned how to be a trial lawyer from Sam Baxter at McKool Smith in Dallas. He drilled it into me that the plaintiff should be ready to try the case the day it is filed. It should have a significant head start which – with hard work and planning – it should never relinquish. The defendant should be kept on its heels from start to finish.
Baxter’s advice applies just as well in Beijing as it does in Texas. The patentee’s case should be ready to try at filing. This is even more important in China than in the United States because of the lack of formal discovery. In the United States, you must sometimes wait until you obtain some information or documentation in discovery before you can fully form your trial theme. Not so in China. Although – as discussed below – there are ways to obtain additional information through the courts, a litigant should never assume that it will be able to obtain any information that it does not already possess when it files the case.
Pre-trial preparation in China involves not only the familiar infringement and technical analyses, reverse engineering if necessary and the creation of claim charts, but also an inquiry into where the accused products are sold, a notarised sale and the gathering of evidence of manufacture, sale or export. In addition, the pre-suit investigation may include court-authorised raids to obtain or preserve evidence. Finally, the pre-suit investigation must include a determination of the venue or venues in which to file.
Using private investigators
The most important discovery tools in Chinese patent litigation are private investigators. As such, hiring a good investigator is one of the most important components of successful patent litigation in China. Engaging a well-connected, intelligent, quick-thinking investigator allows for a thorough yet stealthy investigation.
Pre-suit investigations are often the only way to prove that a defendant is selling an infringing product. This involves hiring someone to determine who is making the product and where it is being sold. A notarised purchase of the accused product must then be carried out. Clandestine tactics are an accepted practice in Chinese litigation – the investigator and the notary need not disclose their identities when making the purchase – and there is no issue with using the evidence obtained in court.
In addition to making a notarised purchase, investigators are required for many other purposes. For example, while in some cases it is common knowledge that a defendant is manufacturing the accused product in China, in other instances this is far from clear. For the full effect of the Chinese system to be unleashed, the product at issue should be made in-country. Further, knowing specifically where in China the product is made can affect venue choice – it is never wise to attempt to put people out of work in the venue where you are attempting to litigate.
Most top investigators are former law enforcement officers, while others are ex-employees of companies in the relevant tech sector. Any agent should have strong connections to the area and technology, and be experienced with legal and patent issues. It is also useful to have direct contact with the investigator; this is simply how information is obtained in the absence of discovery requests. A good investigation can yield information more quickly and efficiently than any discovery request or deposition. For instance, in one case one of my investigators not only found out that the product in question was being made in China, but also obtained internal photographs of the factory and technical documents detailing the process in under two weeks. He did this legally through his connections – an important point, as evidence which can be shown to have been obtained illegally is inadmissible. Bear in mind that the defendant has no reason to hide, mislead or lie until it knows that there is an issue in dispute. Again, this is a part of the head-start advantage that every plaintiff should maintain until trial.
Local partners are crucial when it comes to private investigations – they will know the best people and have connections which can solve a whole host of problems.
Another powerful tool in the plaintiff’s arsenal is court-authorised raids. These are excellent weapons, for two reasons. First, they can be used to obtain and preserve both evidence and assets for use in litigation. Second, they can be a powerful tool to force a settlement. In addition to the defendant itself having its assets, confidential information and financial and technical records seized, its suppliers and customers can be targeted. A customer or supplier may prefer to cut ties with a defendant rather than accept government intrusion into its business.
Court-authorised raids fall into two types: evidence preservation orders and asset preservation orders. Evidence preservation orders can be sought if it is likely that evidence may be destroyed, lost or become difficult to obtain after a lawsuit is launched. The process is similar to that of the saisie contrefaçon procedure in France. The plaintiff seeks a court order ex parte to preserve the described evidence. The court may require the requesting party to post a bond, but this is rarely more than a few thousand dollars. Many courts require the plaintiff to make a preliminary showing of infringement before issuing such an order. However, most courts approve evidence preservation orders, as these are extremely common in Chinese cases.
Such orders can be highly effective, as the affected party is generally given no notice of the raid and is often required to turn over the requested documentation or evidence immediately. The judge may also attend the raid or may question the affected party, order documents to be produced, take samples of the infringing product or conduct an inspection. Any evidence obtained from an evidence preservation order is admissible in court.
An asset preservation order is similar to an evidence preservation order, except that it is designed to preserve assets or cash in order to satisfy any later judgment. Even if injunctive relief rather than monetary damages is the primary goal of the litigation, the process can disrupt the defendant’s business and finances, as well as its suppliers and customers.
Where to file
Where to file is always an important strategic decision. Although generally there is no bad venue for a plaintiff in a Chinese patent case, some venues are better than others. Further, if the defendant is closely tied to an area or employs many workers there, it is usually a good idea to avoid litigating there.
Factors in deciding include the latest win rates, injunction rates, average damages amounts and time to trial. Of these, the factor that varies the most is time to trial. The dedicated IP courts in Beijing, Shanghai and Guangzhou are excellent courts with sophisticated judges. However, to some degree, they are becoming victims of their own success. Although the time to trial (usually between eight and 14 months from filing) is very quick compared to the United States, it has been lengthening as more and more cases are filed. For example, the Beijing IP Court received 16% more filings in 2016 (10,638) than in 2015.
Although the IP courts are still excellent venues in which to file patent cases, several other cities received approval in January 2017 to set up dedicated IP courts, including Nanjing, Suzhou, Chengdu and Wuhan. These courts are generally known to move more quickly. Patent infringement cases can also be filed in around 90 non-IP intermediate people’s courts (see Figure 3). Several of these are keen to prove that they are just as sophisticated as the IP courts.
In China, unlike in many jurisdictions, it is not only possible but recommended that the filing party’s attorneys contact the court before filing. Although no party names are mentioned, it is useful to determine whether the court would like to take on the case. For example, many of the cases I file are high-profile, technically complex patent cases – and thus far from straightforward to adjudicate. Asking a court whether it is interested ensures that it will not delay the case out of fear or lack of time. Further, many courts – such as Nanjing – are tired of playing little brother to Shanghai and the other IP courts, and welcome headline-grabbing high-tech patent cases. Plus, if you file a high-profile case in a court that is trying to prove itself, your chance of winning increases: if the plaintiff loses, few new patentees will file subsequently. Again, having good, connected Chinese partners can help to guide you towards the optimal venue or venues.
In China, each patent and each defendant constitutes a different matter. Often, related patents or defendants may be considered by the same judge in a consolidated manner, but this is not guaranteed. It may make sense to spread out the cases among different venues for strategic purposes. For example, if a patent owner has nine patents and three are excellent patents with excellent infringement reads, three are good patents with good reads and three are fair patents with fair reads, it may make sense to file the excellent cases in one venue, the good cases in another and the fair cases in yet another. This is because the judge may look at the first patent and make a judgment about the case based on that patent alone. If the first patent that the judge considers is merely fair, the rest of the patents could be watered down subsequently.
Further, because it is more difficult for defendants to communicate and coordinate in China, it may make sense to spread out the defendants geographically. Also, one venue may be good for one defendant (eg, where a foreign defendant is a competitor of a local company), but not for another. There are endless strategies to consider.
Patent litigation complaints in China can be bare bones. Unlike in Germany, where proof of infringement and other details are required, little information other than the patent, the parties and the accused product are needed. However, just because little is required does not always mean that the plaintiff should not supply additional information. The complaint is the first opportunity for the judge to learn about the parties, the patent and the dispute. It gives the patent holder the opportunity to explain several things.
At a minimum, the patentee should tell the court that:
- it attempted to settle the dispute before taking the matter to court; and
- it was being reasonable in what it was asking.
The patent courts in China are extremely busy. Approximately 12,000 cases were filed in 2016. The judge wants to know that the patent owner did not rush to court without first trying to settle. The plaintiff, therefore, should set forth the timeline and general content of exchanges with the defendant. There is no specific length of discussion required. I have seen meaningful exchanges via email take place in a matter of days; but I have also seen negotiations take many months. The timing is not as important as the substance. All that is necessary is for the patentee to present a meaningful offer and for the defendant to indicate its refusal of this.
Also, unlike in the United States and other jurisdictions, where it may work in the plaintiff’s favour to hide the ball, in China it is crucial to let the court know that the offer made to the defendant was reasonable. This is especially true where foreign parties attack Chinese entities, as well as in standard-essential patent cases. However, even in other cases, it is recommended that the patent owner show that its offer is objectively reasonable. Ideally, this can be shown by comparing the offer to prior licences of the same patent or corresponding foreign counterparts. If the patent has not previously been licensed, then the comparison should be to similar patents in the same technical space. The analysis is much like that in US patent cases in which a damages expert analyses prior licences using the Georgia-Pacific factors. The goal is to show conformity with prior equivalent licences. This not only makes the plaintiff appear reasonable right out of the gate, but also can be used throughout the case to make the defendant look unreasonable.
Beyond these two items, the complaint should tell any story that the judge needs to hear. This is not an invitation to carry on for pages and pages – remember, judges are busy people. However, understanding the state of the art when the patent was filed and how the patent and inventor changed the technology is helpful. As always, a chart, graphic or picture is preferable to tedious text. If the defendant has a reputation for untruthfulness or bad actions, you may want to point this out to the judge.
As discussed below, any steps which the patent owner has taken to be a friend of China should also be highlighted. For instance, if the plaintiff has been working with Chinese universities to set up scholarships or to provide IP instruction for the next generation of Chinese innovators, the court should be made aware of this. Similarly, if the defendant has been in China for years, but contributed little, then this should be pointed out to the court. The complaint sets the tone for the entire case. There may be times when some – or all – of these items are better off left out, but they should always be considered.
Apple’s China problem
Apple (which I do not represent and currently have no case against) provides a useful example of short-term versus long-term benefits to China. I often hear from people concerned as to whether large companies such as Apple could actually be enjoined from exporting products from China. I believe that the answer is absolutely yes. Apple’s problem is that it has never been a friend to China because the vast majority of the income it earns there leaves the country. Further, Apple’s business model prohibits it from doing what China wants foreign companies to do: cross-pollinate with Chinese technology companies. China needs foreign tech companies to share their intellectual property and technologies with Chinese businesses. However, Apple will not even share with other US companies. Because of its ultra-secretive proprietary model, Apple keeps all its know-how highly confidential. Such a model does not allow for partnerships such as that between Intel and Tsinghua Unigroup and similar combinations.
But what about all the people working for Apple directly and indirectly via Foxconn and others? Will they not lose their jobs if an injunction is issued against the tech giant? Yes. For about three weeks. And then they would move across the street or to another part of the same factory and start making similar mobile phones – for Chinese companies. Chinese handset makers such as Xiaomi, Huawei, ZTE, Oppo, Viivo, Meizu and many others reinvest their revenue in China, cultivating longer-lasting positive effects than foreign companies such as Apple. So an injunction against Apple (or any foreign player) would serve the national interest of benefiting Chinese players. There might be some short-term discomfort, but in the long term China and its people would benefit. And unlike the United States and most of the West, China does not set goals on a monthly or quarterly basis, but rather every five years – one of the chief reasons for its success. It is over this longer term that any foreign company must provide value.
This example is just the kind of information which the court should hear in a complaint so that it understands the big picture regarding the case.
Right after filing
Just after filing the case is a good time to seek a preliminary injunction. Although the preparation for any such motion should be carried out before initiating the lawsuit, filing for a preliminary injunction can be a potent tool. The success rate for preliminary injunctions filed at the start of a case is low – as it is in most jurisdictions around the world. However, such a filing accomplishes several additional goals.
First, it introduces the judge to your case. I want every case I bring to be the best case the judge has ever seen. Although the complaint introduces the court to your case at a high level, it is not wise to get too deep. Too much information in the complaint risks the judge ignoring all the details or even becoming annoyed over too much, too soon. A preliminary injunction, however, requires the judge to take a thorough look at the case. To this end, before filing the case, all necessary graphics, expert statements, analyses and other details must be complete and polished. This alone is another reason to bring a preliminary injunction request: to force yourself to be ready for trial at the time of filing.
In most cases a preliminary injunction is properly denied because there is no provable immediate harm and the defendant has not had a reasonable chance to defend its case. However, even in denying your preliminary injunction request, the judge will take note of the strength of your case and the quality of your arguments. So too with opposing counsel, as the defendant itself realises what it is up against. By being aggressive, you can show the defendant that you will outwork and just plain destroy its counsel.
In addition to advertising your case to the court and intimidating the defendant and its counsel, filing an early request for a preliminary injunction achieves a second goal. If the plaintiff loses, it can immediately inform the court (and the defendant) that it plans to renew this request once it wins at trial. In China, if the defendant appeals its loss, the (normal, virtually guaranteed) injunction is stayed pending appeal. However, a preliminary injunction will not be stayed, no matter when it is filed, although the plaintiff must post a bond – this is similar to the German process upon which the Chinese system is based. Unlike in Germany, where the amount of the bond is tied to the potential harm caused by a subsequently overturned injunction, in China the amount of the bond is linked to the amount of damages requested. In the past, when damages in China were minimal, this was a no-brainer. However, now that monetary damages awards are increasing, the question arises of whether to ask for low damages for bond calculation purposes. In addition, the case filing fee is a percentage (generally 0.5%) of the damages requested.
Obtaining a preliminary injunction – including a later-filed interlocutory request – requires showing a likelihood of winning and imminent harm. Since the patentee has already won, the first prong is achieved. Given the pace of technological advancement in China, the second is generally also provable. This later-filed preliminary injunction or interlocutory injunction tactic is something that I have created, but have not yet tested. However, I have spoken with many judges in China, as well as many scholars and jurists, and they all agree that it should work. In any case, even if it does not, the mere threat of a non-stayable injunction should create tremendous settlement leverage.
Unlike in some jurisdictions where losing an early preliminary injunction has a carryover negative effect, this is not the case in China. So fire away. You will likely lose right after filing, but the positive effects are worth it. Plus, you can warn the court and the other side that you plan to have a non-stayable injunction in about a year.
Unlike Germany, which requires all evidence and proof of infringement to be provided upfront, China does not require this to be included in the complaint. Rather, evidence and proof of infringement should be presented during the evidence submission and exchange, which generally occurs between six weeks and six months after the complaint is filed. Both sides must provide all raw data, evidence and information that they intend to use at trial – although this does not include demonstrative evidence such as PowerPoint presentations.
One of the easiest and quickest ways to obtain evidence is through foreign documents, including websites. Because the China Securities Regulatory Commission is not as well developed as the US Securities and Exchange Commission (SEC), and because few Chinese companies (or Chinese subsidiaries of foreign companies) publicly announce discrete financial results, it can be extremely challenging to obtain the exact revenue amount tied to specific product sales in China. Further, few Chinese companies describe their technologies in any meaningful way or provide specifications or technical manuals on their websites.
Foreign websites and documents such as SEC filings can often provide a macro-scale picture of revenue.
In many cases, they can tie revenue to geographic regions and general product lines (eg, mobile devices). However, rarely do you see stock-keeping unit-level China-specific numbers. It is usually possible to build a reasonable damages model outside of China and then interpolate this to come up with reasonable estimates for China. Based on the burden-shifting provision in the Supreme People’s Court’s latest judicial interpretations, the defendant may then be required either to accept that estimate or to turn over documents or information to prove that it is incorrect.
Bear in mind that using evidence obtained outside of China is challenging. Although such evidence is admissible in Chinese courts, it must be notarised by a local notary public in the foreign country and then legalised by the applicable Chinese embassy or consulate. Further, any evidence in a foreign language must be translated into Chinese by a court-authorised translation company in China.
China does allow testimony of witnesses, including technical and financial experts. However, judges are often dubious, while some have clear biases. One judge I spoke with put his view of expert witnesses bluntly, calling them “paid whores”. As such, expert witnesses are of little credibility and should be used sparingly. However, in big cases, one side will usually use one. This means that the other side is essentially required to do so as well, in order to balance the influence. A good use of an expert is to present complex technical or damages evidence which needs some explanation to be clear. Unlike in many jurisdictions which require an expert report, many Chinese courts do not require a report. Instead, the expert can testify, with the judge cross-examining. Another difference between China and other jurisdictions is the cost of experts. In the United States, the cost of experts can easily exceed the cost of an entire case in China. The cost of Chinese experts rarely exceeds $25,000.
In addition to the parties’ experts, the court can appoint a technical adviser. This happens more frequently at the IP courts and may thus form a basis for picking a particular venue. In such cases, the parties are often trying to convince the technical adviser as much as the judge.
Mediation is an important part of Chinese patent litigation. Usually, there are multiple court-required mediations throughout the case. Much more so than in the United States, Chinese judges encourage parties to settle. This is why it is important from day one to teach the judge why your side is the sensible one and the other side is being unreasonable. If the judge believes that one party is acting unfairly or irrationally, he or she will have great power to make that party settle (or lose).
Hearing or trial
Trial in Chinese patent cases is much more concise than in the United States. Many trials take a single day and no trials take more than a couple of days. The important thing to remember at trial is to make the case simple. This is where western influence can really help. Most Chinese lawyers will use few, if any, graphics or visuals. Even if they use PowerPoint presentations, these usually consist only of text with an occasional figure from the patent.
Even the best Chinese firms and lawyers, as smart as they may be, have had no more than a year or two’s experience of large-scale, high-tech patent cases. This is because most of the cases in China thus far have been small domestic-on-domestic cases. The technologies have traditionally been relatively simple. However, this has changed of late with cases such as Huawei v Samsung, Qualcomm v Meizu and IWMCOMM v Sony. So you may want to consider adopting some courtroom techniques more common to US litigation.
The looks of shock and awe that my colleagues and I have received from the court (and the defence) when we play our animated graphics have been incredible. This is true at the beginning of the case during adjudication of the preliminary injunction request and even more so at trial. Combine the graphics and visual effects with a well-spoken, interested and venerable expert, and you have won the case.
Choosing the right partners
As everywhere, choice of good counsel is crucial in China. For foreign companies, executives and in-house counsel, this can be difficult. Language barriers are compounded by cultural obstacles and unfamiliarity with Chinese law and procedure. One way to deal with such challenges is to hire foreign counsel (eg, US companies hire their typical US litigation counsel) to manage local Chinese counsel. However, in addition to increased costs and inefficiencies, such an approach can lead to mistrust among the legal team. Further, the foreign legal team is usually no better equipped to deal with either the language and cultural differences or the lack of understanding of the Chinese legal system.
Because of these problems, more and more companies are bypassing foreign firms and hiring Chinese law firms directly. Although this solves the lack of coherency and trust among the legal team, there is still a cultural, linguistic and legal understanding gap. Plus, without the help of an international law firm, choosing a Chinese law firm can be confusing due to lack of data and connections.
One trap for the unwary involves how most Chinese law firms are organised and how their attorneys are compensated. First, it is important to understand that the titles of ‘partner’, ‘senior partner’ and similar designations can mean little to nothing. It is very easy to hire an attorney into a Chinese law firm as a so-called ‘partner’, because most partners draw no salary. Indeed, many firms in China have doubled in size overnight simply by adding names at no additional expense. Therefore, many partners are not experienced lawyers and do not have high-quality experience. This dovetails with the other issue: how most Chinese firms compensate their lawyers.
Most Chinese law firms pay their partners on an extreme eat-what-you-kill system. Partners receive no salary, but keep between 70% and 85% of the business they bring in. This is great for lawyers with a lot of business, as it enables them to get rich fast. However, if a partner needs help from associates or staff, he or she must pay them out of his or her own pocket. This structure creates an incentive for partners in Chinese firms to:
- continue bringing in work; and
- not seek help from associates or staff.
This is especially true for contingency fee cases, because the partner must pay for any extra work himself or herself upfront, but will not receive revenue until much later, if at all. The result is that many companies which believe that they are hiring a firm with a plethora of lawyers are hiring only a single partner who refuses to work with other lawyers or staff. I have been involved in cases when I was in-house where the Chinese attorney was significantly overburdened, but refused to seek help because of what this would cost. Obviously, this can be a serious problem and adversely affect a case.
Clients should obtain a written explanation of how their Chinese counsel are compensated. If this is not forthcoming, they should seek other counsel. If the firm uses an extreme eat-what-you-kill model, then the client should contract not with it, but with the specific attorneys it wishes to work with, including associates. The client can also contract with attorneys from multiple firms – although this may lead to inefficiencies and unwillingness to work together. Alternatively, the client can simply refuse to hire any firm with such a system. Some Chinese firms have adopted a more team-oriented approach, but they are hard to find.
Be a friend to China
As I stated in my previous article, the number one rule for any foreign company in China is to be a friend to China. This is basically common sense. Point out what good the plaintiff has done or is trying to do in China. This can include:
- starting or contributing to Chinese technology incubators and scholarships;
- forming bilateral partnerships with Chinese companies; or
- helping Chinese universities, including law and engineering students, to foster greater innovation for China’s future.
Beyond overt actions, parties should form meaningful relationships with Chinese companies, agencies and government officials, and work with partners that have such relationships. This is not to encourage any form of corruption, quid pro quo or any other nefarious activity; the advice is simply to make friends. Such contacts can provide good advice and recommendations, and can vouch for the company. The patent owner should use any relationships with Chinese companies to provide leverage against the defendant. For example, if the plaintiff has a friend which is a supplier to the defendant, this can be used to an advantage.
Foreign companies should develop strong ties to China and its people, businesses and government to show that they are not just in China short term to obtain cash and then leave. Invest in China and its amazing resources. It is the right thing to do and will also likely serve you well in the long run, especially if you need to enforce patents at some point down the line.
Patent owners litigating in China enjoy significant advantages. To avail of these, plaintiffs should do the following:
Pick a good case for China by ensuring that the defendant manufactures a large portion of the accused product in-country.
Prepare the case completely before filing by conducting a thorough investigation and obtaining and preserving evidence and assets via court-authorised raids.
Choose a good venue or venues to file the case. It can be a good idea simply to ask courts whether they want to hear a case.
Include in the complaint the story of the patent and the case, including that the plaintiff attempted to settle the dispute before engaging the court and is being reasonable in what it is asking.
Consider filing for a preliminary injunction.
Use experts and other evidence to prove infringement and damages. Advanced graphics and visuals are not yet common in Chinese trials and can be persuasive.
Be a friend to China.