Tactics for Initiating Intellectual Property Litigation in China ----Taking Infringement on Exhibitions for Example

Tactics for Initiating Intellectual Property Litigation in China ----Taking Infringement on Exhibitions for Example

2014/1/22

BACKGROUND OF THE CASE:

Spain INDAL S.L. (hereinafter referred to as “INDAL”) is a famous European company which mainly engages in the design, manufacture, and sale of all kinds of lamps. Most of its products are designed in Europe and then INDAL commissions some Chinese companies to manufacture them (this is called as OEM model). All the OEM products are manufactured for exports and none is sold in China. Meanwhile, INDAL has applied for design patents for most lamps in both Europe and China. In 2010, during the visit to China Import and Export Fair (hereinafter referred to as “Canton Fair”), INDAL found out that a Chinese company (Company A) based in Yuyao, Ningbo City had copied its lamps and even displayed and sold the counterfeits on Canton Fair. The issue is how INDAL should do in order to protect its IP rights and stop the infringement. STRATEGIC ANALYSIS:


As INDAL doesn’t sell products in China, at the beginning INDAL always turns a deaf ear to the copycats appearing on the Chinese market. But when it discovered that Company A displayed and sold counterfeits on Canton Fair (a worldwide and famous fair and most visitors are foreigners), INDAL realized that the counterfeits may be exported to the foreign markets and then threaten its European business. Therefore, INDAL came to realize that it is necessary to stop Company A’s infringement and had determined to take the legal actions against it.


TACTIC ANALYSIS:

1. Choosing the remedy model


2. It is known to many foreign companies that in China, except bringing the case to a court, there are some other methods to initiate legal actions in China, such as filing a complaint to the Intellectual Property Administration, the Administration for Industry and Commerce, and the Administration for Copyrights. These administrations can execute administrative penalty, which is kind of fine to infringers, but no compensation to the plaintiffs (IP owners). The administrative remedy model is a kind of special solutions to IP infringements with China characteristic due to the huge amount of IP infringement cases. According to my experience, generally speaking the administrative complaining procedure is effective in cases like trademark counterfeits and pirated software, while it is less effective in dealing with patent or trade secret infringement. For the latter cases, filing a complaint to the court is the most effective way against the infringement rather than administrative model.


As for the infringement appearing on the exhibitions, the easiest and most direct way is to file complaint to the organizers of such exhibitions. Currently, there will be special organizations set up by the exhibitions organizers and composed of the local administrative authorities of patent, trademark and copyright for dealing with the IPR complaints. However, the best result of these complaints would be the removal of infringed products out of the exhibitions without no penalty or compensation, which is not enough for the IP plaintiffs. If the infringing company is registered and located outside the place where the exhibition is held, the administration located in the exhibition has no authority to go outside to deal with the manufacturers. In our case, because Company A is not registered in the place where the exhibition is held, INDAL decided to bring the case before the court, expecting to obtain the official court decision to stop Company A’s infringement.


3. Evidence notarization

After making the decision to take the legal actions, it is in urgent need to fix the evidence of the infringed products on the exhibition. And the most common method is notarization. In China, notarization should be done by the public notary office. Usually, attorneys always have various connections with notary offices and will request a notary office to take photos and videos of the exhibitions, namely the display of the exhibition stands and infringed products. According to my experience, it requires the purchase of at least one infringed product from the exhibition stand and requires the notary to notarize the whole process, including the purchased infringed product, promotion brochures, business card and the sale invoice and so on. The purchase of the counterfeits on the exhibitions would have great impact upon the jurisdiction of courts and compensation amount in the judgment. That’s because the act of exhibition is only an act of offer for sale in law. The existence of sales shall be proved through the purchase of the infringed products. Sale and offer for sale are two different infringing activities.


Except the notarization of the sales on the exhibition, the plaintiff shall always notarize the web pages of the defendant’s website, the introduction or advertisement of the infringed products appearing on other websites such as Alibaba. The notarization will be very useful to prove the intention of infringement and the scope of the sales. If the plaintiff only provides the infringement evidence on the exhibition, it would be easily considered as imminent infringement, which would result in very limited compensation amount. For example, most Shanghai courts will only rule the compensation for the plaintiff’s reasonable costs to stop the infringement but would exclude any business or profit loss arisen from the defendant’s infringement. Hence, it is of great importance to notarize the relevant web pages of the defendant.


4. Preservation

Under Chinese laws and regulations, the plaintiff may apply to the court for preservation and freezing on defendant’s bank account, cars and other assets (“Property Preservation”). Also the plaintiff may petition for preservation on the infringing products, equipment, sale invoices, and books and records related to the infringement “Evidence Preservation”). However, according to our experience, the actual effect of Evidence Preservation is relatively limited, because the executing judge on site would just make a transcript of interrogation instead of actively searching for counterfeit products in the defendant’s production line or barn and maybe most judges are not familiar with the counterfeit products as well. So we do not place high expectation on the evidence preservation. In view of the property preservation, it sometimes works very well. Once the account of the defendant is frozen, the defendant’s normal business will be more or less affected, which will force the defendant to settle the problem with the plaintiff as earlier as possible. As a result, the property preservation has become an important tactic adopted by foreign plaintiffs for initiating IP litigation in China.


5. Jurisdiction of the court

First, we need to be aware that not all courts have jurisdiction over IP cases. Copyright and trademark infringement cases often go under the jurisdiction in the lowest trial courts designated by higher courts for the first trial. In Shanghai only six district courts have jurisdiction over trademark/copyright cases but totally Shanghai has 17 district courts. Lawsuits regarding patent and anti-competition shall be under the jurisdiction in the intermediate courts designated by higher courts for the first trial. Secondly, level jurisdiction shall apply to the courts due to the amounts appealed by the plaintiff in different cases. Taking Shanghai for example, as for the trademark and copyright cases involved by foreign people or companies, if the amount appealed is below 5 million, the lowest district courts shall have jurisdiction over such cases for the first trial; between 5 and 100 million, the intermediate courts applies; over 100 million, Shanghai High Court the higher court shall apply. As a result, locating the most applicable court of first trial and court of appeals is the priority for initiating litigation in China. For the two-tier trial system adopted in China, if the first trial court is Shanghai Highest Court, the appellate court shall be the Supreme Court of China.


Apart from the level jurisdiction mentioned above, we need to pay attention to territorial jurisdiction. Due to the unbalanced development in different parts in China and the existence of local protectionism, many foreign companies do not intend to bring the lawsuits to the courts located in the defendants’ domicile. They would rather divert them to the courts located in some bigger cities like Beijing, Shanghai or Shenzhen where the judges are well trained and the results might be fairer for foreign plaintiffs. Actually these ideas can be realized through the choice of forum. In accordance with Chinese laws, either the courts of the place where the infringement takes place or where the defendant has domicile have jurisdiction over IP infringement lawsuits. Therefore, some foreign companies choose to purchase infringed products in a different city and then commence the lawsuit in the place where the distributor or seller is located. As such the forum choice can be realized. As of the exhibition, if the notarization of the evidence regarding the exhibition and sale of infringed products is executed, the plaintiff can bring the lawsuit in the place where the exhibition is held.


As for the INDAL case, design patent infringement cases are usually under the jurisdiction in intermediate courts due to the small appealed amount. But it needs to be decided whether to bring the case under the intermediate court in Ningbo City (the manufacturer is located) or Guangzhou City (the exhibition is located). Relatively speaking, the plaintiff felt more confident to bring the lawsuit in Guangzhou. Please be noted that the courts have jurisdiction over the design patent infringement cases shall not include courts where the offer for sale occurs. If there is only exhibition but no sales of infringed products on the exhibition, INDAL can not sue against Company A in Guangzhou. That is a big difference between design patent and utility model or invention patents.


6. The overlap of patent litigation and patent invalidation

After the plaintiff initiates a patent litigation, the defendant will usually apply for the invalidation of the patent, which is a common tactic for defense. The validity of a patent must first be heard by the Patent Reexamination Board. If not satisfied with the first verdict from the Patent Reexamination Board, a lawsuit can be brought to the Beijing First Intermediate Court as the first instance court and then Beijing Highest Court as the appellate court. The local courts hearing the infringement issues will suspend the litigation after the defendant files the invalidation application and await the final verdict for the validity of the patent. It takes about 1-2 years to finish the procedure of patent invalidation. That is the reason why the whole litigation procedure is always dragged. In order to avoid such delay, when representing the plaintiffs, we always advise our clients to adopt the Property Preservation. If its bank account is frozen, the defendant will hesitate to delay the procedure. In the INDAL case, Company A applied for the patent invalidation after being sued. Fortunately, the Patent Reexamination Board issued a verdict to maintain the validity of the patent in six months and Company A failed to appeal.


7. The compensation for losses

The final compensation to be issued by courts in IP litigation shall be calculated according to the losses suffered by the plaintiff or the benefits gained by the defendant pursuant to Chinese laws. If the actual amount can not be ascertained, the judge has the authority to rule damages up to 1 million RMB from case to case on the basis of the specific circumstance, which is called the statutory damages. Nowadays, the damages of most cases are not high enough because it is difficult to produce evidence for the losses and the statutory damages are always applied. For example, in a design patent infringement case, if the plaintiff can not produce evidences of the sales volume, the sale price and the gained profits from the sales of the counterfeit products, Guangzhou Intermediate Court usually rules the damages to 80,000 to 100,000. Though the damage is not very high, the court can render a judgment that the defendant must stop the infringement. Of course, there have always been some exceptions. For example, in Shanghai Panati Wine Company vs. Castel Freres SAS, the damages for trademark infringement are as high as 33.73 million. That’s because the plaintiff had obtained evidence regarding sales of products from the Customs and calculated the losses according to the average profit margin of the same industry. Hence, it is very important to obtain the Customs statistics on import and export if such record is available.


To summarize, there is no discovery process in Chinese civil litigation which is totally different with the common law system. Therefore, the plaintiff and its attorneys shall produce all evidences at the beginning, such as the origin of rights, the acts of infringement and the losses suffered. Compared to the defendant, the work of the plaintiff’s attorneys will be much harder and they need to do more work. In a word, IP litigation is really complicated in China and professional attorneys are always required to be involved into the whole strategic planning and tactics arrangement for the litigation. Without such involvement, there will never be an ideal outcome.


By Simon Fang (Grandall Law Firm)

[This article is just for academic exchange, and shall not be considered as any legal opinion. Should you have any questions, please contact the author at simonfang@grandall.com.cn]




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