Chic Sued Back After Successive Section 337 Investigations Against China’s Self-Balancing Vehicles

By Jody Lu, China IP,[Comprehensive Reports]

  2016 has been a restless year for China's rapid developing self-balancing vehicle industry. After a ban made by Amazon, on February 18, 2016, the US Consumer Product Safety Commission (CPSC) enforced all self-balancing vehicles sold in the US market to comply with the UL2272 safety standard. But before China's frozen selfbalancing vehicle industry had a chance to get out of predicament, an unprecedented blow came: during the less than half a year's period from March to August, three Section 337 cases had been filed, all with a general exclusion order. "This means that the America’s Section 337 investigations directed at China's self-balancing vehicle industry," said Liu Danyang, deputy director of the Trade Remedy and Investigation Bureau (TRIB) of the Ministry of Commerce of the PRC. As winter was coming, self-balancing vehicles were forced to slam on the brakes.
  For a time, this dark horse industry, estimated to have a market value of more than 50 billion Yuan and a total of up to 1,000 factories involved in the industrial chain, is haunted by the anxiety of collapse. And this time, many helpless vendors try to take Hangzhou Chic Intelligent Technology Co., Ltd, a small and medium-sized start-up company with owned patents but limited capital and talents and China's only one self-balancing vehicle production enterprise that has responded to and fought back in two Section 337 investigations, as a hope for the industry to break the predicament.
  Razor 337 case: patent counterattack after positive response
  On March 21, 2016, a big news shocked the whole self-balancing vehicle industry: the American scooter giant Razor USA LLC, Inventist and its founder and inventor Shane Chen jointly filed an application to the United States International Trade Commission (USITC) for commencing a Section 337 investigation, alleging that some of the electric self-balancing vehicl es exported to the US , imported into the US and sold in the US had infringed their patent (US Patent No. 8738278), and requesting that the USITC issue a general exclusion order and a permanent cease and desist order against 29 respondents, of which 10 mainland Chinese companies were involved, including Chic.
  A US lawyer explained to China IP that, as an effective means for the US enterprises to arrange for market layout and competition, the lethal penalties of a Section 337 investigation often appall foreign enterprises. As the most influential penalty of all, once issued, the general exclusion order, is directed against not only the enterprises involved in the investigation, including the manufacturers and importers to be known at present and in the future, but all similar infringing products, which are banned from entering the US regardless of the country of origin and the manufacturer. The general exclusion order is enforced by the Customs against the products that have not been imported to the United States, while the permanent cease and desist order is enforced by the ITC against the products that have been imported to the United States, banning their further sale, warehousing, promotion, advertisement, etc.
  "The moment we got the news, a sudden shock and confusion broke out among the legal department." Shen Zhu, a specialist of the legal department of Chic, told the China IP. After several deep conversations with the US lawyers, the company thought that, "as long as a positive response is shown, this crisis may turn into a rare opportunity." Encouraged by the words of Chairman Ying Jiawei that "Don't worry! I will provide support funds, so let's do the best to engage in the investigation", Li Lu, legal director of Chic, decided to respond to the case bravely. "We have every confidence in our own patents. After communication with the lawyers, we gradually laid down the burden in all aspects. When the case was formally placed on file, the company had completed the transition, and we were no longer worried about the Section 337 investigation. We did what should be done as usual. There was nothing special." said Li Lu.
  In the face of a Section 337 investigation that required several million US dollar attorney fee, this small and medium-sized start-up company, despite its limited capital, resolved to fight back against Razor, and quite surprisingly, chose Finnegan, Henderson, Farabow, Garrett & Dunner, LLP (Finnegan), a lawyer team that ranks in the same order as that of the opponent, one of the leading law firms in the United States. It's reported that, different from the common practice of general Chinese enterprises, Chic had its legal department to obtain evidence and communicate independently with the US lawyer team, without entrusting a Chinese lawyer team and a US lawyer team at the same time. Li Lu revealed to the China IP that, at present, the case was going very smoothly, the three-month period for evidence collection had been basically completed, and the communication with the US side was also very fruitful. "Although I'm not in the United States, the strong American lawyer team of the company will help me look at and overall consider the case, which makes me feel a lot easier and not feel out of control in the United States."
  In addition to positive responding, patent counterattack was another move made by Chic in the US . On May 19, 2016, only two months after the Razor application for the Section 337 investigation, Chic, only armed with an exterior design patent license, fearlessly and quickly started a patent counterattack and entrusted experienced Orrick Herrington & Sutcliffe, LLP to file a patent infringement lawsuit against Razor in the US District Court for the Central District of California alleging that Razor had infringed Chic's US D737,723 Exterior Design Patent. On August 24, 2016, three months after the first lawsuit was filed, Chic, which just obtained a US Patent license, filed a second lawsuit against Razor in the US District Court for the Central District of California, alleging that the Version 2.0 new products released by Razor had infringed Chic's US Patent for Invention No. 9,376,155. It is reported that the two cases have been placed on file and the first lawsuit has entered the judge scheduling stage.
  In cooperating with the US patent layout, the patent war in China was also waged in an intense and orderly manner. After more than one year's patent protection, on July 1, 2016, the Patent Reexamination Board (PRB) of the State Intellectual Property Office (SIPO) made an examination decision on Chic's request for invalidation, declaring that the utility model patent for two-wheeled electric vehicles (Patent No. 201320128469.4) held by the patentee Chen He would be invalidated. It is known that the invalidated patent, regarded as the industry's first basic patent that cannot be avoided, is exactly the Chinese counterpart of the subject patent (US Patent No. 8738278) in Razor 337 Investigation Case. Would this affect Chic's legal actions in the United States? Li Lu told China IP, "Although United States Patent Law and China's Patent Law fall into two completely different systems, the technical content of an invention is the same. Patent problems in China are more or less reflected in other cases. However, from a legal point of view, there may not necessarily be a direct effect, but there may be an indirect effect."
  In Razor 337 Case, China IP also learned from Chic an important incident: during the progress, Razor applied for a reissue of the subject US Patent No. 8738278: a surprising move. A US lawyer explained to China IP that, as a special procedure in the United States Patent Law, reissue of a patent allows the patentee to regret it later. Once considering that the issued patent containing defects or errors may invalidate all or part of the patent, the patentee may apply for a reissue of such patent under the prerequisite of admitting the errors, and the patent office will reissue the patent based on the newly revised application after the patentee has given up the original patent.
  "This procedure brings high risks to the patentee. Once the newly revised patent cannot be licensed, it means that the defects of the original patent have been made public." Li Lu told the China IP, "an important patent used in the Section 337 case is only found to have defects during the progress of the case, to the extent that the patentee has applied for a reissue of a new patent to replace the original patent. This is a very serious problem. Once the new patent is licensed and the original patent is invalidated, then where is the general exclusion order based on the original patent from? To us defendants, several million dollars may be spent for nothing." It is revealed that Chic has entrusted the lawyers to request the ITC that Razor choose either a reissue of the patent or the Section 337 investigation. Finally, Razor gave up the reissue and desperately followed up the Section 337 investigation, in a careless move that accidentally exposed defects of the patent. "Because the other side have submitted information on defects of the patent, such information may be used directly if we still have to proceed with the invalidation procedure." Li Lu said. Interestingly, the Razor 337 case happened to be the No. 1000 case of Section 337 investigation of the US, a number of great milestone significance that even delighted the ITC to specially pop the champagne for celebration, hosted by the oldest chief judge of the ITC. With the popularity of self-balancing vehicles, it can be foreseen that the attention and influence caused by this Section 337 case will continue to deepen in the future. "At the moment, we can only say that Chic will go all out to deal with the case. We will not retreat. This is our attitude. At least until now, the case is definitely going to continue." Li Lu said.
  Ninebot 337 case: Chic actively applied to join the respondence
  Before China's self-balancing vehicle industry had the chance to come back from the Razor 337 case, a second Section 337 case hit again. On May 18, 2016, Tianjin Ninebot, Segway, a US company acquired by Ninebot and the father of selfbalancing vehicles, and DEKA, the original parent company of Segway, filed to the ITC an application for the Section 337 investigation (Case NO. 337-TA-1007, abbreviated to Case 1007), naming 6 US electric self-balancing vehicle enterprises including Inventist as defendants and requesting that the ITC issue a general exclusion order. Different from the previous Section 337 investigation, this Section 337 case made Ninebot the first Chinese company that had init iated a Section 337 investigation against the US companies in the United States. It was praised by the media as a move whereby a Chinese company attacked its US rivals with the help of the ITC investigation procedure, which had even aroused a sense of national pride within the industry for a time.
  But it was not so simple. Li Lu said to China IP that, although the case did not direct at Chinese enterprises as it appeared, given the fact that almost all of the selfbalancing vehicle chain is in China and a general exclusion order had been requested against the infringing products rather than specific companies, it was China's self-balancing vehicle enterprises that took a beating after all. What was worse, no Chinese company was named the defendant, so they even had no right or chance to defend themselves. Soon, Chic, upon communication with Ninebot, requested to be named as one of the defendants in that Section 337 case. The industry peers found it difficult to understand, taking Chic as "a stupid parvenu asking for a second 337 investigation." "This product has been the life of Chic since the world's first piece was completed. Although Chic was not one of the defendants at first, the general exclusion order, once issued, is really about the existence of every enterprise within the industry." said Li Lu, "So we have to fight for our basic power of discourse, proving something we have been insisting on in a fair platform. If Chic remains inactive, we are just to await destruction."
  When Chic's request to become a defendant was consented to by Ninebot, the next day after the case was placed on file, Ninebot filed to the ITC a modified complaint, adding to the defendants several Chinese self-balancing vehicle manufacturers. To Ninebot , a general exclusion order was requested to generally exclude production and sales acts and, if Chinese producers became the defendants in addition to the US vendors, it would appear a perfect 337 complaint. However, to everyone's surprise, the judge finally decided not to approve Ninebot's request for increasing the number of the defendants, without any fair cause.
  On August 16, 2016, 3 months after Case 1007 was filed , Ninebot, Segway and DEKA again filed to the ITC an application for a Section 337 investigation, accusing 13 enterprises from China, the United States, Turkey and Holland of patent infringement and requesting that the ITC issue a general exclusion order and a permanent cease and desist order and hear the case in combination with Case 1007. Chic was among the 6 subject Chinese enterprises, as it had expected. Obviously, for this time, the threatening Section 337 investigation came as a blow. This was the first time that a Chinese enterprise had struck its domestic rivals with the help of the US’s Section 337 investigation procedure, resulting in a collapse of the previously boosted sense of national pride. Ninebot turned at Chinese enterprises with a borrowed opportunity, unintentionally sparking speculation of Ninebot's layout and ambition on the map of self-balancing vehicles.
  According to Chic, there is a total of 3 patents involved in the case at present and, compared to the Razor 337 case, this case is more complicated in terms of obtaining evidence. As far as China IP know, as a start-up company, Chic has an internal law team of only 4 persons, 3 of whom are rookies. Shen Zhu, a legal specialist of Chic, who graduated this year, is responsible for obtaining evidence in China. Newcomer as he is, with nearly a year's internship in contact with various law cases both at home and abroad, he is apparently no longer a green hand. Even so, he admits that he had been forced to cry for times at the beginning of his work. In charge of two Section 337 cases, Li Lu also told China IP bluntly the pressure she has been facing. To many of China companies, the moment a 337 investigation comes, it often means they have to deal with a lack of experience; Chic has chosen a tougher solution: directly communicating with the American law firm without a Chinese law firm for transition. Midnight telephone conferences and adapting to the jet lag are just routine; challenges largely come from experience accumulation. "I remember it was very difficult when I first received materials. As China and the US have completely different ways to collect evidence, several days are wasted once a mistake is made. The Section 337 investigation procedure is going very fast, so this may be very tricky." said Li Lu to China IP. In the early communication, although there was help from the lawyers, the legal department had some misunderstanding during the first exchange of evidence. Until later, with more accommodation and smoother exchanges, she began to understand the Section 337 investigation and the role of evidence, so as to deliver materials most needed by the other party, and sometimes even reason in turn whether the materials required are reasonable.
  As to whether the two cases will have a negative influence on Chic, Li Lu said that, so far, they have brought a positive, rather than adverse, effect on the company's sales. "Before, Chic did not have a very high reputation in foreign countries, but the two 337 investigation cases where we have held out to sue back have brought a good reputation to Chic. At first, I thought the Section 337 investigation could be a terrible crisis. It may also seem like an opportunity now. We want the industry to know that Chic does own patents and technologies and have the full confidence to sue back." said Li Lu, "Once a 337 investigation has the potential to enable us to gain some market shares from the rivals, it's worth suing back."
  Ying Jiawei: holding together for strength to resist the cold winter of the industry
  At the end of 2016 , Chic published an article in its official website saying Chic will gradually withdraw its related patent infringement lawsuits at home in order to work together generally to resist any general exclusion order. The news came as a shock to the industry. In fact, as early on the founding of Electric Balance Car Branch of China Chamber of Commerce for Import and Export of Machinery and Electronic Products (CCCME) on August 30, Ying Jiawei, newly elected chairman of the Branch and chairman of Chic, called for the industry to raise awareness and hold together to resist Section 337 investigations of the US.
  It is known that Chic had filed a total of 154 lawsuits and cooperated with the Customs on investigating 1 8 patent infringement cases at home in 2015. With such a large number of legal cases, Chic suddenly decided to withdraw lawsuits, a seeming sign of its sincerity to unify the industry and determination to respond to Section 337 investigations. "The year of 2015 was a year of patent protection to Chic. We felt wronged inside and were eager to sue for the company, fair judgements and our technologies and patents. But 2016 has a situation different from that of 2015. We start to find some partners to jointly deal with Section 337 investigations and also consider how to help the industry regain confidence. I think this is exactly what Chic should do." Li Lu said.
  Over year of 2015, flooding fake products, explosion and fire accidents of self-balancing vehicles around the world put "made in china" products in a quality dilemma again. Ying Jiawei pointed out bluntly in the meeting, "There is an urgent need of a voice of justice. The industry is good and can grow healthy and with secured quality." In view of the frequent fire accidents with respect to selfbalancing vehicles in the United States, Consumer Product Safety Commission (CPSC) specially came to China for quality investigations many times last year, demanding that the self-balancing vehicle manufacturers make technical clarifications with regard to the security issues. Chic has been China's first and currently the only enterprise to reply this question. Interestingly, when Chic was about to leave after its defense in the United States, a CPSC official offered to book a Chic twist car on spot, and the guard at the gate even wanted to act as an agent of Chic products.
  "In fact, there are some companies that really want to strictly control quality and have patent design around within the industry. We begin to think about how to extend the lifecycle of market from two years to five years, from five years to ten years. I think this is a normal and virtuous circle. We are willing to work hand in hand with such enterprises, even those that have been directed at during lawsuits, for cooperation and strength." said Li Lu. And she is currently active in making peace with such enterprises, and even paying visits to their offices for communications face to face. China IP will keep an eye on whether this unity works.

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