China: International Licensing - March 2015

The Influence of Licensing Contract on Determination of Infringement in China

Article 11 of the Chinese Patent Law (2001) generally provides to what extent a patent can be protected under the Chinese law and, on the other hand, what actions are determined to infringe a patent right. Further, a recent court decision by the Supreme People's Court (SPC) demonstrates that for issues other than those provided in Article 11, the licensing contract shall be the final word on whether an infringement has occurred.

Qianping AO v. Shenzhen DNS Industries Co., Ltd., Philips (China) Investment Co., Ltd., [Civil ruling (2012) Min Shen Zi No.197 by the Supreme People's Court, Dec. 12, 2012] relates to invention patent No. ZL 96107072.2 of the patentee, Qianping AO. After issuance of the patent, the patentee issued a license to Shenzhen DNS Industries Co., Ltd. (DNS Industries) agreeing that DNS Industries can further permit a third party to exploit the patent in a manner of commissioned processing such as OEM or ODM. DNS Industries did not have production capacity, so the patented product had been made by the subsidiary of DNS Industries, Huizhou Hehong Wire and Cable Co. Ltd. (Huizhou Hehong). Afterwards, Philips (China) Investment Co., Ltd. (Philips) authorized DNS Industries to be its brand agent to provide production, sale, and after-sale service for sockets with the Philips logo. DNS Industries modified the original mold by adding the Philips logo, and permitted Huizhou Hehong to produce the sockets using the modified mold and to sell the produced sockets with the Philips logo.

Qianping AO sued both Philips and DNS Industries, alleging they infringed its patent. The first instance court held that both Philips and DNS Industries infringed the patent. However, the second instance court held that neither Philips nor DNS Industries infringed the patent. Qianping AO appealed to the SPC for a retrial.

The SPC Applies Chinese Patent Law

In the ruling, the SPC states that the Chinese Patent Law only provides the patentee the right to exclude others from exploiting his patent without his authorization, but does not authorize the patentee the right to exclude the licensee from marking the patented products, which have been produced under license, with another vendor's logo.

Applying this rule, the modification of the original mold by adding the Philips logo and the production of the sockets marked with the Philips logo by DNS Industries were not actions that infringed the patent. The SPC also states that, for the invention or utility model, "make the patented product" means to produce or form a product with all the technical features of a claim of the patent. In the case of a commissioned processing of the patented product, if the commissioning party requires the commissioned party to produce the patented products by providing the patented technical solution or the patented products are formed based on the commissioning party's technical requirements, it can be determined that the commissioning and the commissioned parties jointly committed the action of"making the patented product." In this case, the technical solution that Huizhou Hehong used to produce the alleged infringing products was completely from DNS Industries. Philips provided Huizhou Hehong with neither the technical solution nor technical requirements. Therefore, Philips was not the manufacturer of the patented products under the Chinese Patent Law.

As an intangible property right, intellectual property is significantly different from the basic rights of natural law. It should be clearly bounded by the law. As one kind of intellectual property, patent rights should be in such a situation. The opinions of the SPC have clearly states this view. Article 11, Paragraph 1 of the Chinese Patent Law (2001) reads:

After the grant of the patent right for an invention or utility model, except where otherwise provided for in this Law, no entity or individual may, without the authorization of the patentee, exploit the patent, that is, make, use, offer to sell, sell or import the patented product, or use the patented process, and use, offer to sell, sell or import the product directly obtained by the patented process, for production or business purposes.

According to Article 11 of the Chinese Patent Law (2001), without authorization and exploitation of patent are the essential elements of patent infringement. If there is no exploitation, no patent infringement exists. If the exploitation is limited in the authorized scope by the patentee, for example, the scope recorded in the license, there is no patent infringement either.

Article 11 of the Chinese Patent Law (2001) expressly lists the particular actions of exploiting patent, but does not explicitly provide the particular manner of "the authorization by the patentee." Usually, the patentee would limit actions, region, and period of the exploitation in the license. If the licensee exploits the patent in a manner beyond the limitations agreed in the license, the exploitation is without authorization of the patentee and the patent is infringed. In this case, the tort liability and liability for breach of a contract occur; the patentee can pursue the tort liability under the Chinese Patent Law, or pursue the liability for breach of a contract under the Chinese Contract Law.

As mentioned above, "exploitation of patent" is a premise of infringement. But the actions of" exploitation of patent" are limited to those provided in Article 11 of the Chinese Patent Law (2001).

Points to Consider when Licensing Patents

Specific attention should be paid to two points. First, if the patentee intends to constrain other behaviors than those of "exploitation of patent," the constraints shall be clearly recorded, for example, in the license. If the licensee violates the constraints, the liability for breach of a contract can be pursued under the Chinese Contract Law. Second, as to the action "making patented product" among those "exploitation of patent," the role of a relevant party shall be considered in producing or making the products with all the technical features in a claim of the patent.

In this case, DNS Industries obtained license from the patentee, Qianping AO, and commissioned its subsidiary Huizhou Hehong to produce the patented product. DNS Industries provided the patent technology, and Huizhou Hehong produced the socket according to the technology. Because the production of the patented products was authorized by the patentee, the patent was not infringed.

Philips authorized DNS Industries to be its brand agent to provide production, sale, and after-sale service for sockets with Philips logo. According to the identified facts, Philips was not involved in producing or forming the products with all the technical features of a claim of the patent. So, the SPC determined Philips was not the manufacturer under the Patent law, and did not infringe the patent.

As for marking on the alleged infringing products with Philips logo by authorization of Philips, it is not an action infringing a patent under the Patent law. If the patentee intends to restrain such behavior, the restraints shall be expressly recorded in the license.

Qiang Lin is a Patent Attorney & PRC Attorney-at-Law with Beijing East IP Ltd. Mr. Lin has an MS in computer technology and application, BS in Optical Engineering & Photoelectric Instrument and specializes in patent drafting, prosecution, and litigation in the fields of communications, computers, optical technology, and electronics. Dr. Jia Xie is a Patent Attorney with the firm who specializes in patent drafting and prosecution in the fields of communications and computers. (End)

Originally published in Licensing Markets, March 2015

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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