Reflection on the Coping Strategies to Section 337 Survey

By Fan Li, Sun Haiyan, Yao Yun & Wang Zhiyong, Department of Chemical Innovations of SIPO,[Unfair Competition]

With the exports from China frequently being subjected to the Section 337 Survey, Chinese people are getting familiar with it. Statistics show that China has become the most frequent target of the Section 337 Survey since 2002. By May 2009, 91 investigations against China had been instituted, making Chinese companies the most singled out subjects of review eight years in a row. Recently, a growing trend emerges showing that products from China that are technology-intensive and which include high added value and export potential are most likely to be the focus of a Section 337 Survey. As a result, it has become the increasing concern of the Chinese government and enterprises that how to cope with the Section 337 Survey.
Coping Strategies
On the part of Chinese enterprises, they can formulate their coping strategies in the following four ways.
First, a system of intellectual property rights protection must be set up.
The current intellectual property rights protection system is usually made up of two or more factors such as having a proper patent, trademark, copyright, business secret and other IP element, and the ingredient systems that go with them. It is the bread and butter of an enterprise. A corporation with its own patents can stop infringements within the protection coverage to maintain its market share, and to snatch extra market share of its rivals via litigations. Moreover, when an enterprise is charged with patent infringement by a third party, it can undoubtedly evade or nullify the accusation by seeking and making use of the loopholes in others’ rights. However, if the enterprise owns patents on its products, it can also use patent cross-licensing agreement as a bargaining chip to reach a settlement. Hence, for a high-tech enterprise, the possession of a well-established intellectual property system can give it a lot of leeway in deciding whether to move forward or step back. If, however, the enterprise does not have its own patents, it will be in a dilemma and find it hard to take its place in the fierce market competition.
Section 337 Surveys are directed at acts of unfair competition, which is relatively broader in terms of scope. However, it is in practice generally targeted at the intellectual property field, the majority of which involve patent infringement and the minority of which concern trademark infringement. Therefore, all Chinese enterprises, in an effort to handle Section 337 Surveys, must establish an intellectual property rights protection system and formulate an intellectual property strategy.
High-tech enterprises need to pay special attention to patent applications and patent strategy implementation. As for patent strategies, there are basic patent strategy, peripheral patent strategy, patent network strategy, patent invalidation strategy, etc. To obtain patents, the enterprises should be flexible and take various measures based on local conditions. They can research and develop technologies on their own and then apply for patents. They can buy technologies or patents from others and make improvement on them before filing patent applications. Other options include obtaining technologies or patents through joint ventures, cooperation, mergers, capital reconstructions, to name a few.
Next, to cope with Section 337 Surveys, Chinese enterprises should file patent applications in large numbers within the territories of both U.S. and China and make sure they are granted patents. Filing patent applications and obtaining patents in the U.S. can protect their products from ungrounded charges and kick competitors from other countries via Section 337 proceedings. By filing patent applications and obtaining patents within China, Chinese enterprises can make use of domestic judicial resources as a bargaining chip or means of attack when coping with Section 337 Surveys. This is the fundamental reason behind the transformation of Japan and South Korea from their frequent initial failure in the U.S. Section 337 actions. Now they enjoy regular victories and finally have managed to make use of Section 337 Surveys to check and combat competitors from other countries and even frequently pushing the U.S. enterprises to the defendant’s dock. Japan and South Korea applied for and were granted large numbers of patents and thus constructed their own IP protection barriers and eventually gained an upper hand in the struggle for IPRs.
Second, an early warning system for patent is urgently needed.
As the name implies, a patent early warning system is a mechanism that warns enterprises in advance of potential patent risks through the collection, retrieval and analysis of patent and non-patent information so that enterprises can take precautions on their own initiative.
The significance of establishing a patent early warning system to cope with Section 337 Surveys lies in the following three points: (1) Since the main focus of Section 337 Surveys is on patent infringement cases, enterprises, through the study and analysis of their competitors’ information on patent distributions, can obtain protection scope and validity. When they know both their opponents and themselves, they can take the initiative to escape the competitors’ patent barriers, or take necessary preparatory measures in advance. They do not give their competitors the opportunity to initiate a Section 337 Surveys and avoid them to the maximum extent. (2) Even if a Section 337 action is initiated against a Chinese enterprise, it can rapidly formulate accurate and efficient responding strategies and plans because it has, during the process of establishing the patent early warning system, mastered large amount of information regarding the competitors’ patents and has become fully aware of their weaknesses and strengths and has taken preventative measures in advance. (3) There is a natural relationship between the establishment of a patent early warning system and intellectual property rights protection system. The patent early warning system makes patent applications more targeted and raises their validity and avoids the occurrence of blind, invalid or unstable patent rights. In other words, the patent early warning system enables an enterprise’s intellectual property rights protection system to become truly rigorous, stable and efficient.
Third, with respect to individual Section 337 cases, Chinese enterprises should respond sensibly according to the actual conditions and based on the principle of the supremacy of interests.
Upon being sued, an enterprise should act rationally according to the actual situations and based on the principle of the supremacy of interests instead of waiting passively or giving up litigation, i.e., different treatment for different cases based on facts and the principle of the supremacy of interests. Generally, there are four alternative courses of action to choose from.
1. The enterprises should be aware that it is unlikely to win a Section 337 case if they indeed committed infringement. In that case, it is better to strive for a good outcome through other means than pay a large amount of money to fight a lawsuit that they will never win. Sometimes, giving up is a wise choice.
2. If there is no infringement and the market prospect is good, the Chinese enterprises should actively respond to the lawsuit. At the same time, it is better for them to commence other proceedings in the U.S. to invalidate the opponent’s patents or charge, in China, the opponent’s products with patent infringement, which can not only control and check the opponent’s attacking momentum in Section 337 proceedings but also substantially reverse the balance of power between both parties.
3. Settlement. Chinese enterprises should comprehensively assess and evaluate the risks they are going to assume and the expenses they are going to pay and if necessary, resolve their disputes by means of settlement and seek weight for the settlement through litigation defense.
4. Take the initiative to launch an attack. Sometimes an enterprise is not a named defendant in a Section 337 action, but the result thereof may cause damage to the enterprise. If such a case arises, the enterprise, rather than waiting passively, should take the initiative to join the Section 337 Surveys. This strategy, if used properly, can not only protect the enterprise’s market shares but also consolidate its position as well as the position of the relevant industry in the world.
The typical case of taking the initiative to launch an attack is the JK Sucralose case, in which Yancheng JK Sucralose Inc. (JK), a Jiangsu province-based sucralose manufacturer, took the initiative to join an ITC investigation. This is the first case in which a Chinese enterprise voluntarily joined a Section 337 Surveys and finally won the case.
On April 6, 2007, Tate & Lyle Inc. (Tate & Lyle) filed a complaint with the ITC, requesting the ITC to institute Section 337 Surveys against three Chinese sucralose companies (not including JK) and issued a general exclusion order on the ground that the three companies infringed its multiple intellectual properties rights. After sizing up the situation, JK took the initiative to join the ITC investigation on July 5, 2007. After two years of litigation abroad, the U.S. ITC made a final determination in April 2009 that the manufacturing process used by Yancheng JK Sucralose Inc. did not infringe on Tate & Lyle’s asserted patents. Facts have proven that JK’s voluntary joining of the Section 337 Surveys and its victory in the investigation not only protected JK’s market shares in the U.S. but also improved JK’s image and reputation. After the case, The Coca Cola Company (TCCC) entered a supply agreement of 2010 with JK. At the same time, JK established its sucralose trading companies in New Jersey and Holland successively. The achievements can be described as brilliant. The victory of JK didn’t depend on its voluntary joining neither in the Section 337 Surveys itself nor on luck, but on its strength.
Through unremitting efforts, JK possessed the core technologies and patents of its own products. It had conducted a careful and in-depth research as to whether its products infringe on its competitors’ patents before pushing its products to the U.S. market. It also retained a very professional American lawyer team, who produced very comprehensive and powerful legal opinions on whether there was infringement on the part of JK. Therefore, JK’s initiative in joining the ITC investigation is more self-confidence based on strength than wisdom.
Fourth, Chinese enterprises should form an alliance, share information and cooperate with each other to deal with Section 337 Surveys.
Dealing with Section 337 Surveys involves high cost of litigation, submission of large quantities of evidence and collection of large amount of professional information, which is hard for a single enterprise to deal with. Faced with the grim reality that Chinese enterprises are the frequent target of Section 337 actions and their products are frequently subject to injunction, Chinese enterprises should unite and work together to fight their foreign competitors. It is particularly true in cases in which a general exclusion order may be issued. In that case, it is more necessary that Chinese enterprises of the same industry form an alliance to respond to Section 337 investigations and at the same time share information and experience as well as manpower, material and financial resources. The leading enterprises or the enterprises with rich financial resources and technologies of the same industry should stand up and play their role. If every enterprise acts like JK, Chinese enterprises will become bigger and stronger in the U.S. market.
In addition to the above four strategies available to Chinese enterprises, the Chinese government should establish a mechanism similar to the Section 337 Surveys.
Just as the saying goes, “beat someone at their own game,” which, if used for dealing with Section 337 Surveys, is a very good equilibrating mechanism. This author believes that the Section 337 Surveys are in essence designed by the U.S. government for the purpose of protecting its trade and sanctioning its competitors. Thus, it is hard to find justice and fairness in such investigations. Merely depending on Chinese enterprises or a Chinese industry to solve problems is the same as using the force of Chinese enterprises and a Chinese industry to contend with a strong U.S. government. Consequently, China should establish a mechanism similar to the Section 337 Surveys for the purpose of protecting its trade and sanctioning its competitors as a reflection of the principle of fairness.
In this respect, a real case may give us some inspirations.
This is an international patent litigation between Actions Semiconductor Co., Ltd. (Actions Semiconductor), a Chinese company based in Zhuhai, and SigmaTel Inc. (SigmaTel), a U.S. company. At the beginning of 2005, SigmaTel filed a complaint with the ITC against Actions Semiconductor on the ground that Actions Semiconductor’s products exported to the U.S. infringed its patents. In March 2006, the ITC made its preliminary determination that Actions Semiconductor’s products infringed SigmaTel’s two patents. Dissatisfied, Actions Semiconductor appealed. On September 15, 2006, the ITC announced in its final determination that Actions Semiconductor infringed two SigmaTel’s patents: No. 6366522 and No. 6633187. The decision would take effect in November 2006 and Actions Semiconductor’s MP3 players exported to the U.S. would be seized or confiscated. It can be said that Actions Semiconductor’s situation at that time was rather passive.
In May 2007, Actions Semiconductor filed a complaint with Xi’an Intermediate People’s Court against SigmaTel for patent infringement requesting the Court to issue a pre-litigation injunction. On May 21, 2007, the Court rendered a written civil ruling [(Xi Li Jin Zi No. 001 (2007)], ruling that respondent SigmaTel should, upon the receipt of this ruling, immediately cease infringement of claimant Actions Semiconductor’s patent No. 01145044.4, namely, SigmaTel should immediately stop the sale of the products “over-sampling digital-to-analog converter with variable sampling frequencies” with the patent number 01145044.4 in China. Subsequently China Customs issued an order banning the importation of SigmaTel’s infringing products.
In June 2007, shortly after the Chinese court’s issuance of the pre-litigation injunction, SigmaTel accepted Actions Semiconductor’s cross-licensing agreement that both parties cross license their entire patents and thus settled the suit.
We can draw at least three inspirations from this case. First, the possession of patents is fundamental. Without patents, Actions Semiconductor could not have applied for and been granted a pre-litigation injunction, let alone the cross-licensing of patents. It can be said that a technology-based enterprise without patents or intellectual property is just like a tree without roots and water without a source. All responding strategies and skills will amount to empty talks. Second, for American enterprises who have entered Chinese market, especially for those who have taken Chinese markets as their main market, if they initiate Section 337 Surveys against Chinese enterprises in the U.S., the Chinese enterprises can apply for an exclusion order against the U.S. enterprises within the territory of China, which shall be a powerful counterattack to the U.S. enterprises and receive twice the result with half the effort. This is one of the 36 tricks in Chinese history, relieving the Zhao Kingdom by besieging the Wei Kingdom, or it is a mechanism of checks and balances. Third, although Actions Semiconductor filed a motion for a pre-litigation injunction and successfully held back SigmaTel’s attack, this case also exposed the deficiencies of the current relevant systems. In comparison with the U.S. 337 Surveys, China’s pre-litigation injunctions fail to assume the important task of protecting the trade interests of Chinese enterprises. We will illustrate this point by taking the pre-litigation injunction of patent as an example.
Article 66 of the Patent Law provides, “Where any patentee or interested party has evidence to prove that another person is infringing or will soon infringe its or his patent right and that if such infringing act is not checked or prevented from occurring in time, it is likely to cause irreparable harm to it or him, it or he may, before any legal proceedings are instituted, petition the people’s court to adopt measures to stop the relevant acts. When a petition is filed, the petitioner shall provide a security; if it or he fails to provide the security, the application shall be rejected. The people’s court shall make a ruling within 48 hours after receiving the petition. Where there are special circumstances that require a delayed ruling, the court may make a ruling within another 48 hours.”
In contrast with the Section 337 Surveys, China’s pre-litigation injunctions have the following deficiencies:
1. It is very difficult to be granted a pre-litigation injunction in China, whereas it is easier to institute Section 337 investigations in the U.S. Pre-litigation injunction is a civil remedy introduced after the implementation of the Patent Law (2001 Revision) and the Supreme People’s Court formulated relevant judicial interpretations on the application of this system. However, the relevant laws and judicial interpretations mainly solved procedural issues. Provisions on substantive issues involved in pre-litigation injunctions (for example, should the examination of the evidence produced by the applicant be based on form or substance? What is the test for “irreparable harm”? How to determine the method and amount of a security? And how should courts protect the public interests?) These issues are too general and abstract and it is hard to operate in practice, which resulted in many problems.
For example, (1) a judge must make a ruling in writing on whether to issue a pre-litigation injunction within 48 hours (at most within 96 hours). However, a patent involves high and complicated technologies. It is very difficult for a judge to accurately determine whether there is patent infringement and whether the infringement caused “irreparable harm” within such a short time unless there are very obvious infringing facts; (2) the patent law provides that providing a security is the precondition for obtaining a pre-litigation injunction. However, given the problems existing with the security of real object or real property, the court often requires the applicant provide cash as a security (often tens of millions Yuan), which rendered many enterprises unable to obtain pre-litigation injunctions. If the enterprise applying for a pre-litigation injunction is, at the moment, subject to a Section 337 Surveys, which entails very high cost of litigation, the requirement of providing a security for a pre-litigation injunction will often become the last straw that breaks the camel’ s back. Most importantly, a pre-litigation injunction is issued upon the unilateral application of an applicant without the procedure of court trial and it is of very powerful force.
The consequences will be very grave if it is issued wrongfully. Therefore, Chinese courts are very cautious in the issuance of pre-litigation injunctions, which determines that it is very hard to get a pre-litigation injunction even if it is applied for. In contrast, it is easier to institute and operate a Section 337 investigation because the intention of the U.S. government in establishing this system is to use it as a tool to implement trade protection and suppress competitors and moreover, this system has, after several revisions through the U.S. trade acts, formed a set of mature, concise and highly efficient integral systems including case filing, investigation and trial, during the process or at the end of which many types of injunctions (for example, preliminary injunction, limited exclusion order, general exclusion order) can be issued.
2. In China, applications for pre-litigation injunctions are entertained by courts of various places with jurisdiction. The professional level of the judges varies, which may result in inconsistency of the examination standards. However, the Section 337 Surveys are conducted by the ITC. Moreover, the judges and relevant personnel participating in the surveys are very professional and are of highly professional quality and have accumulated rich experience in intellectual property area, which can guarantee the high efficiency of the operation of Section 337 Surveys and the consistency of the examination standards.
3. China’s pre-litigation injunction is an order issued by a court upon the application of a patentee before litigation directing the alleged infringer to refrain from performing certain act so as to prevent in time the act that is being committed or is going to be committed to infringe on the patentee’s patent or act that may cause damages to the patentee. Its direction is of general application. That is, it is directed at all infringing acts that is being committed or is going to be committed within the territory of China, whereas the Section 337 Surveys are targeted at imports from abroad as well as the unfair methods of competition or unfair acts in the sales of such imports, which has the characteristics of pointing to foreign counterparts. China’s pre-litigation injunction obviously does not possess such attribute, which is what a procedure or mechanism needs for the protection of domestic trade.
Additionally, it should be noted that China’s pre-litigation injunction system was introduced into the Patent Law, the Trademark Law and the Copyright Law, which at present applies to cases involving patent, trademark, copyright, computer software and integrated circuit layout design. For other types of intellectual property cases, such as unfair competition cases, there are still controversies in practice as to the application of pre-litigation injunctions even if there are unfair methods of competition and unfair acts. Therefore, in terms of the scope of case acceptance, China’s pre-litigation injunctions are narrower than the US Section 337 investigations.
As a consequence, although Actions Semiconductor succeeded in checking and balancing Section 337 Surveys via pre-litigation injunctions, it does not mean that other Chinese enterprises can also succeed. Due to the deficiencies of the system itself, China’s pre-litigation injunctions are not powerful enough to compete against the Section 337 Surveys in an equal sense. As a result, Chinese enterprises, during the interest game with the U.S. enterprises, lack the proper remedies and checks and balances at the level of the domestic legal system.
It can be seen that China has a protection mechanism for intellectual property rights and trade, for example, the pre-litigation injunctions contained in the Patent Law, the Trademark Law and the Copyright Law, international trade law and other restrictive measures at the level of law. However, compared with the Section 337 Surveys, China lacks a domestic trade protection mechanism that is professional, efficient, and powerful and has the characteristics of working together to fight against its foreign counterparts. Hence, to establish in China a mechanism similar to the Section 337 Surveys is an issue worth considering.
To sum up, to deal with Section 337 Surveys, it is necessary to formulate a long-term plan for intellectual property strategies and trade protection strategies to protect the interests of domestic enterprises and establish an intellectual property protection system, patent early warning system as well as relevant checks and balances mechanisms, and at the same time a rational and proper strategy should be adopted in light of actual situations.
(Translated by Zhang Meichang)

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