United States: Intellectual Property Quarterly Newsletter, Fall 2011 (Part 2)

4. Do Consider Filing for Software- Related Inventions

Compared to the USPTO, the SIPO is much more conservative on the patent eligibility of inventions relating to business methods and computer software. However, contrary to common perception, it is possible to seek patent protection for softwarerelated inventions in China. Article 25 of the Chinese patent law categorically excludes rules and methods for performing mental acts. Thus, business methods and computer programs are unpatentable per se. However, under Article 2 of the Chinese patent law, a software-related invention can be patentable if it constitutes a "technical solution." According to the SIPO Guidelines for Examination, a technical solution is formed when a technical measure is adopted, a technical problem is solved, and a technical effect is achieved. There is no clear and full explanation of these three technical elements, and therefore these determinations are often left to the discretion of the Chinese examiner. In our experience, Chinese patent examiners tend to accept a software-related application if the description includes a description of the algorithms including flow charts and functional blocks sufficient to demonstrate the technical nature of the invention. Also, method claims as well as apparatus claims (or "virtual device" claims) comprising functional modules or functional components are acceptable in most cases. Therefore, U.S. applicants should consider patent filings to protect their inventions relating to computer software.

In addition to 1-4 above, new developments in Chinese patent law may impose further challenges and require changes in practice. For example, a Third Amendment to the Chinese Patent Law, which came into effect on October 1, 2009, has introduced a higher patentability standard that defines prior art as "any technology known to the public in this country or abroad before the date of filing." Previously, prior public use in countries other than China was not considered to be prior art. The Third Amendment also has removed the "first filing in China" requirement for inventions made in China by Chinese entities. Instead, the Amendment provides that "any entity or individual may file a patent application in a foreign country for its/ his invention-creation made in China." However, filing a patent application first in a foreign country for an invention made in China by any entity is subject to a national security review and clearance by the SIPO, which usually takes time. Thus, foreign entities should consider strategically when and where to file patent applications for their inventions made in China.

Patent procurement in China requires strategic planning as well as the consistent investment of resources. It is important for any U.S. company to form an early and comprehensive patent strategy commensurate with its business plans in China. Key issues related to initial filings, translations, and amendments should be addressed in a timely manner to expedite the process of patent procurement. As a foreign applicant, a U.S. company should choose local counsel wisely and work with them closely to ensure a smooth delivery of good quality work throughout prosecution. Building a solid patent portfolio in China will help position a company in the increasingly competitive Chinese market for potential licensing and enforcement of its patent rights.

II. PATENT LITIGATION IN CHINA: AN OVER VIEW

Patent litigation in China is frequently characterized as a black box. The uncertainties associated with litigation procedures, along with relatively unpredictable results, have deterred many foreign entities from filing patent lawsuits within China. However, as an increasing number of foreign entities doing business in China find themselves in the shoes of defendants in patent infringement actions, it is becoming increasingly important to become familiar with what to expect from patent litigation in China.

The statutory patent law in China on litigation is largely modeled after U.S. statutory patent law. However, in practice, fundamental differences exist between the U.S. and China on how patents can be enforced and how defenses can be raised. Below, we review the two primary systems of patent enforcement in China: administrative and judicial systems. We then discuss practical considerations and strategies for asserting, and defending against assertions of, patent rights in China.

A. Administrative Enforcement

As in the U.S., a patentee in China does not have to file a civil lawsuit to enforce patent rights. Instead, a Chinese patentee can bring a complaint to an administrative body. Unlike enforcing patents before the ITC in the U.S., an administrative action in China is much less formalistic (and less costly) than a civil lawsuit in China.

The administrative agencies responsible for enforcing patents in China include the local intellectual property offices and the offices of Chinese General Administration of Customs. A patentee who has reasonable evidence to demonstrate patent infringement can bring a complaint to the appropriate local intellectual property office, seeking an investigation and administrative remedies. There is no uniform standard for determining the reasonableness of the evidence provided by the complainant, and the local intellectual property offices have wide discretion as to whether to investigate. Although monetary relief is not available through administrative enforcement, local intellectual property offices have the power to order injunctive relief, and/or mediate settlement. If an investigation is ordered, a local intellectual property office will also have the power to collect evidence on behalf of the patentee that may eventually be useful if the patentee later decides to file a judicial complaint to seek monetary relief. This can be a significant advantage given the lack of discovery procedures in China (as will be further addressed below).

During an investigation, the accused infringer will have an opportunity to raise defenses, and the parties will also have opportunities to present their respective cases at an oral hearing before the investigating agency. In the meantime, there is no strict prohibition of ex parte communications with the agencies, and the agencies may proactively advise mediation and/or settlement. Parties may appeal to the People's Courts any adverse decision or action by an administrative agency. The prevailing party may also thereafter seek judicial relief in terms of monetary damages.

Although administrative enforcement may be faster and less costly, a foreign patentee should consider local protectionism, especially if the seizure or injunctive relief sought may result in job losses in the local community. Furthermore, administrative agencies may be reluctant to investigate any complaints that involve more than a straightforward case of counterfeiting. In China, administrative agencies are not always required to provide written opinions of their decisions or actions, which sometimes can lead to a less transparent process. It should also be noted that customs seizures are more easily obtained in clear cases of design patent infringement. If the alleged infringement is of an invention patent, customs will typically carry out a seizure only if the patentee concurrently files a civil lawsuit within the judicial system and posts a bond of an appropriate amount (as provided under Article 23 of IP Customs Regulations Implementing Provisions).

B. JUDICIAL ENFOR CEMENT

If administrative enforcement is inappropriate or ineffective under the circumstances, then enforcement via civil lawsuit at the People's Courts is the only other legal alternative.

1. Overview of Civil Litigation in China Contrasted with the U.S.

Unlike the U.S., China has only one court system: People's Courts, which is composed of (from the top down) the Supreme People's Court, the High People's Courts, the Intermediate People's Courts, and the Basic People's Courts. Before examining patent litigation in China, it is worthwhile to first consider a few noteworthy differences in procedural practices between China and the U.S.

a. China Is a Civil Law Country Without a Jury System

It is important to note that China is not a common law country. Hence, courts are not legally bound by decisions of other courts, including courts of higher authority. The one exception is the Supreme Court, which will from time to time issue advisory opinions and guidelines on statutory interpretations. The lower courts are legally bound by those opinions and guidelines by the Supreme Court.

Furthermore, a jury is not a part of China's judicial system. All trials are bench trials, and the judges are interpreters of both fact and law.

b. Jurisdiction and Servicing of Court Documents

Chinese courts can exercise jurisdiction over any entities having residence or domicile within the court's jurisdiction. For patent cases, a court may also have jurisdiction if the alleged infringing act occurred within the court's jurisdiction (provided the court is preapproved to handle patent cases in the first instance; see below). As a defendant, a foreign entity not having residence or domicile in the jurisdiction may challenge jurisdiction on those grounds, even if the foreign entity conducts business within the jurisdiction. However, to the extent a foreign entity has a stake in the outcome of the case, especially where the patentee has also sued manufacturers and retailers to seek injunctive relief on the manufacturing and/ or sales of the foreign entity's products in China, submitting to jurisdiction in order to participate in the proceedings may be beneficial. This is especially true if the patentee has not alleged monetary damages, which typically requires a filing fee calculated as a percentage of the monetary relief sought.

In China, a plaintiff does not bear the burden of serving the complaint. Rather, once accepted, the court at which the complaint is filed will service the named defendant(s) within five days. For defendants who are resident in China, the complaint may be served personally, via mail, or via public announcement, which is deemed as proper service 60 days after publication.²³ Foreign entities not resident in China may be served through diplomatic channels or procedures deemed acceptable in the territory of the foreign entity.²⁴ For servicing purposes, whether a defendant is resident in China is dependent upon the nature of the entity as established, not whether the entity has a physical presence in China. Hence, a foreign entity with an office and business operations in China will not be subject to domestic service rules, despite having a physical presence in the jurisdiction. However, a subsidiary of a foreign entity, incorporated within China, will be subject to domestic servicing rules.

As within the U.S., a defendant has the option to challenge whether a complaint was properly served. However, because the court, not the plaintiff, serves the complaint, any challenge to the service of the complaint is effectively a challenge to the court's authority and may cause the court to "lose face." In China, courts have wide discretion on a variety issues throughout the course of a lawsuit, including ordering evidence production. An unsuccessful challenge to the service of a complaint by the court may still result in the defendant appearing before the same court and being subjected to a hostile of that court going forward. Hence, it is typically not recommended to challenge the servicing of the complaint without good reason, though such a challenge may serve a legitimate reason to seek leave from the court for additional time to respond.

Once the complaint is properly served, defendants have 15 days to respond. In the case of a foreign entity defendant, a responsive period of 30 days is provided. In China, it is not mandatory to answer the complaint, and failure to answer does not result in a default judgment before trial occurs. Nonetheless, it is good practice to answer the complaint to show respect for the court.

c. Discovery, or the Lack Thereof

Another significant difference in civil procedure between China and the U.S. is that there are no discovery proceedings in China. This is perhaps the most significant difference between the litigation practices of the two countries. Although the plaintiff is responsible for producing all evidence required to prove an alleged wrongful act, a plaintiff does not have the benefit of interrogatories or document requests to assist in the collection of evidence. Rather, a plaintiff needs to rely on the collection of evidence and documents outside the courtroom, sometimes using private investigators. Although Chinese courts have discretion to order evidence preservation by the defendant or even the production of requested evidence that would otherwise be difficult to obtain by the plaintiff, such orders are not common and are unlikely to be issued absent compelling reasons.

d. Evidence Exchange – Setting the Stage for Trial

A significant procedural event in any Chinese civil litigation is evidence exchange. Specifically, before pretrial hearings take place, an evidence exchange hearing is scheduled, at which time the parties present evidence intended to be used at trial. The evidence exchange is also an opportunity for parties to challenge each other's evidence. The type of evidence accepted by a court in China is similar to the evidence accepted by a U.S. court. However, in China, documentary and physical evidence are given much more weight than witness testimony. Furthermore, Chinese courts have stringent requirements for authenticating documentary and physical evidence. In particular, any document or physical evidence presented to the court, such as the purchase receipt of an accused product at a local store, must be notarized to demonstrate authenticity. Also, any foreign documents produced outside of China must be translated into Chinese, notarized, and also legalized before being presented. If the foreign documents are also available in China, e.g., could be accessed in a library in China, the notarization and legalization requirement could be waived. Legalization involves verification by a Chinese embassy or consulate to attest to the authenticity of both the document and the notarization.²⁵ As with many things in China, the submission of evidence should take into consideration any possible political issues. For instance, a document that includes content referring to Taiwan as a sovereign nation (including government documents from Taiwan), or a passport stating the birthplace of the individual as the country of Taiwan (or "Republic of China"), may face challenges on political grounds. Finally, expert-related evidence, while accepted, can be of relatively little probative value unless it is from a government agency or an expert agreed upon by both parties and approved by the court beforehand.

e. Ex Parte Communications

In China, it is not forbidden to conduct ex parte communications with the court. In fact, courts often initiate ex parte communications in an effort to mediate or settle a case. This is both an advantage and a disadvantage. The advantage lies in that each party can have a direct line of communications with the court without having to coordinate with the other party's schedule. The disadvantage, of course, is the non-transparent nature of such communications and the unpredictability of any possible influences that may be exerted.

2. Overview of Issues Unique to Patent Litigation in China

As in the U.S., patent litigation in China falls within the category of civil litigation but differs from general civil litigation in some respects. The following paragraphs address certain key issues relevant and unique to patent litigation in China.

a. Subject Matter Jurisdiction

The Basic People's Courts do not have subject matter jurisdiction over patents. Rather, the first instance of a patent litigation trial occurs at the Intermediate Courts. Furthermore, only a subset of the Intermediate Courts can hear patent cases, including the majority of the Intermediate Courts in the major cities of China. Each Intermediate Court is composed of a panel of three judges (usually one senior judge as the chief judge and two junior judges as the associate judges). For patent cases, a technical master sometimes attends to assist the court with technical issues.

b. Claim Construction

In China, claim terms are interpreted according to the understanding of a person of ordinary skill in the art in view of the specification, prosecution history, and appropriate third-party publications.²⁶

Although there is no requirement to hold claim construction hearings in China, most Chinese courts will hold hearings for the parties to present tutorials and interpretations of key terms. This hearing may take place on or after the evidence exchange. During the hearing, the parties have the option to provide to the court what is effectively claim construction briefing. Because there are no strict mandates or guidelines for how to conduct claim construction hearings, courts may exercise wide discretion on whether to consider certain evidence presented by the parties at the hearing, such as third-party publications or dictionaries that may not be generally accepted as widely known or authoritative. However, while courts may consider a wide range of extrinsic evidence, such extrinsic evidence cannot be relied upon unless there is a lack of intrinsic evidence on the issue.²⁷ The practical recommendation here is to bring whatever evidence that may be deemed helpful, since the court's refusal to consider such evidence would typically not bear negative consequences.

c. Making a Case of Infringement

Once evidence exchange and claim construction hearings conclude, a trial may be ordered very quickly thereafter (sometimes within a week or even on the same day). As in the U.S., the burden of showing infringement is on the plaintiff. Although Chinese courts do not specifically define the level of burden required, effectively, the showing must be made beyond a reasonable doubt (or whatever doubt the court may have had).

Because there is no formal discovery, a patentee plaintiff must privately collect evidence to prove infringement. This can be particularly challenging for process patents, since defendants have no obligation to grant manufacturing facility access to the plaintiff. It is a common practice to seek an independent evaluation of infringement by a judicial appraisal institute before filing suit and submit as evidence any findings of infringement (or noninfringement in the case of a defendant). The Patent Review Board of the SIPO provides the service of infringement analysis for a fee that results in an "official report." Because there is no discovery, any adverse opinion by the SIPO need not be provided to the other side. For cases in which the technology is complex, the court may appoint a judicial appraisal institute, typically a third party, to analyze the issue of infringement and provide an opinion to the court (a technical appraisal). In such an event, the court will typically seek both parties' approval prior to the appointment of a judicial appraisal institute.

Finally, it is worth noting that joint infringement is recognized in China under tort law provisions,²⁸ though inducement to infringe is not widely recognized.

d. Infringement Under the Doctrine of Equivalents

Infringement under the doctrine of equivalents was first recognized in China by the Supreme People's Court in 2001.²⁹ The doctrine of equivalents in China applies to all three types of patents, and generally parallels the U.S. version in that equivalence of a particular feature can be found if the corresponding feature of the accused product or method performs substantially the same function, in substantially the same way, to provide substantially the same results in the eyes of an ordinary person skilled in the art.³⁰ As in the U.S., application of the doctrine of equivalents is feature-specific and cannot be used to vitiate limitations,³¹ and is subject to limitations created by file wrapper estoppel.³²

e. Defenses

The primary defense to any assertion of patent infringement is noninfringement or practice of prior art. Invalidity is not a defense because, in China, validity of patents must be separately challenged through reexamination at the PRB of SIPO (this will be covered in Part III of the series: Reexamination Process in China). Although the People's Courts will hear appeals of any adverse decisions by the PRB of SIPO, the courts will not adjudicate issues of validity in the first instance. In the meantime, courts are not likely to stay the litigation proceedings until if and when the asserted patent(s) is/are declared invalid by the PRB of SIPO.

In addition to the defenses of noninfringement or the practice of prior art, Article 69 of China's Patent Law also provides the statutory defenses of exhaustion of rights and temporary entry into China,³³ as well as scientific research, experiments, and clinical trials. Each of these defenses should be exhaustively explored by any defendant. Furthermore, an accused infringer may also consider raising the defense of antitrust violations or that the patented technology is a part of a technical standard adopted in China.

f. Remedies

China's patent law does not specifically address remedies. Rather, one must look to the General Principles of Civil Law for provisions of remedies, which apply equally to patent cases.³⁴ Generally, a finding of infringement entitles a patentee to injunctive relief and monetary damages. Although preliminary injunctive relief is available upon a showing of irreparable harm,³⁵ such relief is normally not granted absent a showing of clear acts of infringement.

Remedies in China remain problematic to obtain. Although injunctive relief is typically automatically ordered upon a finding of infringement, there are no contempt proceedings in China to hold the infringer accountable to the order of injunction. If the injunction will result in significant negative economic impact to the local region, such as shutting down factories, the patentee should expect some resistance by the local agencies to enforcing the injunction.

With respect to monetary relief, although a patentee may be entitled to monetary damages such as lost profits, illegal gains by the infringer, or a reasonable royalty, the lack of discovery can make it difficult for a patentee to collect the evidence necessary to prove damages. To prove any type of damages, the plaintiff bears the burden of providing evidence that shows sales volume by the infringer. Hence, unless the infringer is a publicly traded company and publishes earnings reports that detail such sales, the plaintiff may have a difficult time collecting the necessary evidence to show damages. In certain circumstances, courts may be willing to order evidence production by the infringer, but such instances are rare. If damages are difficult to determine, the patentee may ask the court to award statutory damages, which can total a maximum of 1 million RMB.³⁶ Once monetary damages are awarded, the patentee can seek seizure of assets (including bank accounts) if no money is voluntarily paid.

C. Practical Issues to Consider When Litigating Patents in China

Compared to the U.S., patent litigation in China holds different advantages and disadvantages for the parties involved. The advantages for a plaintiff include a much faster docket (typically less than a year to trial) and generally lower overall attorney's fees due to the lack of discovery. At the same time, the general fear by foreign entities such as American or Japanese consumer electronics companies of being dragged into a relatively nontransparent and unpredictable administrative or judicial system in China, coupled with the prospect of possible injunctive relief that can potentially disrupt not just sales within China but also manufacturing of the accused goods in China, provides compelling settlement leverage to the plaintiff. However, the lack of discovery also makes it much more difficult to collect evidence to prove infringement and establish damages. Furthermore, although the prospect of automatic injunctive relief can be good settlement leverage, the lack of contempt proceedings leaves the plaintiff no legal recourse in the event an injunction is not enforced. Finally, statistics in China indicate that, outside the few exceptional cases, large monetary awards are unusual. For a patentee considering enforcing patent rights in China, here is some practical Art of War advice to consider:

• Know thyself, know thy enemy. Because there is no discovery in China, collect as much evidence as possible before seeking enforcement, including obtaining a favorable infringement opinion from the SIPO. For every piece of evidence collected, strictly observe the evidentiary rules, including any necessary notarization, legalization, and translation requirements. Consider using experienced private investigation agencies to collect evidence. Part of the pre-suit investigation should also include an assessment of the strength of the target's patent portfolio in China, since a counteroffensive in China is common.
• Choose your venue wisely. Although Beijing and Shanghai are popular venues for foreign entities, the size of the dockets in these jurisdictions has caused a considerable slowdown in how quickly cases go to trial. At the same time, be sensitive to the political environment of the venue and take into consideration current events; certain venues in China are friendlier to certain foreign entities than others.

If you do find yourself being dragged into a court in China for patent infringement, here are some recommended steps to take and issues to be aware of:

• Think fast and move fast. Extensions in China are not guaranteed and the element of surprise is very much a part of the gamesmanship of patent litigation in China. Expected the unexpected and be ready to improvise and adapt. In China, everything is dynamic.
• Challenge the validity of the patent as quickly as possible through an invalidity submission at the PRB of SIPO. Although Chinese courts rarely stay cases pending outcome of reexamination (especially in instances where invention patents are in dispute), all courts will stay cases if the PRB of SIPO declares a patent invalid. While dockets at the Intermediate Courts can move quickly, reexamination proceedings at the PRB of SIPO can move even faster. Hence, the earlier the better when it comes to reexamination requests. To slow down the speed of the docket at the Intermediate Court, foreign entities may consider challenging jurisdiction even if the challenge is unlikely to succeed, as such challenges can push back the proceedings by a month or two.
• Diligently challenge evidence presented by the plaintiff during evidence exchange, and preserve issues for appeal. Be mindful that sometimes the court may allow evidence by the plaintiff in the absence of a challenge or crossexamination by the defendant.

For both plaintiffs and defendants alike, the following should be considered:

• Carefully select your local counsel. For the same reason an attorney in Los Angeles would not be considered local counsel in Texas, an attorney in Beijing is not "local" in other cities of China, such as Guangzhou, where people speak different dialects of Chinese. It is important that the local counsel be familiar with the judicial landscape. Sometimes it may be necessary to engage a Chinese attorney who is an expert in Chinese patent law and trial procedures, and also retain local counsel who is familiar with the local administrative agencies and judges. Having good local counsel on your side is an invaluable asset.
• Show up to all the proceedings. Unlike the U.S., where courts often never see the faces of the litigants and judges don't really consider it important for the actual parties to be present, some judges in China consider it important that representatives of the litigants attend the proceedings along with their attorneys. This can be especially true for venues outsides of Beijing and Shanghai, where homage may be important. In this regard, be mindful of the time it takes to obtain a Chinese visa.
• Retain bilingual U.S. attorneys familiar with both U.S. litigation practice and China legal practice to monitor the case. Although many attorneys in China are educated in English, not all such attorneys are accustomed to dealing with U.S. clients. In certain situations, it may be valuable to involve a U.S. attorney to bridge any communications gap that may exist and to manage the case proactively in order to minimize surprises to in-house counsel.

Footnotes

23. See People's Republic of China Civil Procedural Law, Articles 77-84.

24. Id. at Article 245.

25. Documents from Taiwan, Hong Kong, or Macau are treated under special evidentiary procedures since China considers them special territories.

26. Interpretation of the Supreme People's Court on Certain Issues Concerning Application of Law in Patent Infringement Disputes, Articles 2, 3 (2010).

27. Id. at Article 3.

28. See, e.g., People's Courts General Principles of Civil Law, Article 130; see also Supreme People's Court's Interpretation of General Principles of Civil Law, Article 148, ¶ 1.

29. See Supreme People's Court's Several Provisions on Issues Relative to Application of Law to Trial of Cases of Patent Disputes, Article 17 at paragraph 2 (2001).

30. Id.

31. See, e.g., Dalian Xinyi Jiancai Co., Ltd. v. Dalian Renda Xingxing Qiangti Bld. Material Factory, Supreme People's Court of China, Civil Third Division No. 1 (2005) (rejecting findings of infringement where asserted claim requires "at least two layers" of glass be inserted within the concrete wall components and the accused products included only one layer of glass, despite all other features being substantially similar).

32. Supreme People's Court's Several Provisions on Issues Relative to Application of Law to Trial of Cases of Patent Disputes, Article 6 (2001).

33. This refers to vehicles (such as ships and aircraft) that pass through China and does not apply to goods that are imported into China. See Patent Law of People's Republic of China, Article 69(3).

34. See Articles 118 and 134.

35. See Patent Law of People's Republic of China, Article 66.

36. Id. at Article 65, second paragraph.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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