China: SPC Allowed Invalidity Defense In A Patent Infringement Action

Summary

Under Chinese law, invalidity is not an available defense to a claim of patent infringement. However, the Supreme People's Court (SPC) in a recent decision Zudian Intelligent Technology Co., Ltd. v. Simsukian Electronic Technology Co., Ltd. (2022) for the first time ever permitted invalidity defense to dismiss a plaintiff's complaint after the defendant has established：

(1) there is a “substantial likelihood” that the asserted claims are invalid; and

(2) a dismissal would not unduly prejudice the plaintiff given the defendant's promise to compensate the plaintiff's loss if the China National Intellectual Property Administration (CNIPA) were to subsequently find the asserted claims to be valid.

Background

China adopts a bifurcated adjudication system for patent litigation in which infringement and validity are decided by different authorities. Courts have exclusive jurisdiction over infringement matters, and the CNIPA decides patent validity. A defendant therefore may not raise an invalidity defense or bring a counterclaim challenging validity in the infringement proceedings. As a result, when a defendant argues that the asserted claims are invalid, the court usually may not dismiss the lawsuit, but would stay the infringement action pending the CNIPA's determination of the patent validity. This makes the infringement proceeding very lengthy and causes a waste of judicial resources.

Mr. Luo Dongchuan, Vice President of the SPC, proposed in the 2019 National People's Congress that, infringement and validity matters should be tried by the same court, just as the U.S. courts do. He suggested amending the Patent Law to allow invalidity defense during infringement proceedings. While China's Patent Law has not so far recognized invalidity defense, China's highest court has taken the first step to allow it under limited circumstances.

The Zudian Decision

Zudian sued Simsukian for patent infringement at the Shenzhen Intermediate Court (“trial court”). Simsukian moved to dismiss for invalidity, asking the Court to declare the asserted patent invalid or unenforceable:

(1) Simsukian argued that the asserted patent's family member CN Patent No. 201720131124.2 (the '124 Patent) was invalidated. The CNIPA made a decision invalidating all claims 1-7 of the '124 Patent on the ground of obviousness (CN204515850U “Zeng” and common general knowledge), and that decision was upheld by the Beijing IP Court on appeal; and

(2) Simsukian contended that the asserted patent should be invalidated on the same ground. The asserted patent and the '124 Patent share the same technical content; claims 1-7 of the asserted patent and claims 1-7 of the '124 Patent are essentially the same, except that one uses USB plug and the other uses AC plug, which are art recognized replacement for each other.

In effect, Simsukian argued that the invalidity of the family member patent (the '124 Patent) “infected” the validity of the asserted patent. The trial court granted Simsukian's motion to dismiss, determining that the asserted claims were invalid. On appeal, the SPC affirmed dismissal. In deciding whether to dismiss the action, it considered two factors:

(1) whether there is a “substantial likelihood” of invalidity of the asserted claims; and

(2) whether the dismissal would unduly prejudice the plaintiff.

With respect to the first factor, the SPC agreed with the defendant. It highlighted that the trial court erred in holding the asserted claims were invalid because infringement courts have no power to make a judgement of invalidity or not, which should be determined by the CNIPA. Instead, the SPC reasoned that an infringement court may only examine whether the asserted patent is likely invalid, and if so, determine whether to stay or dismiss the infringement action. When the court believes the defendant raises a “reasonable question” as to the validity of the asserted claims, it may stay the infringement proceeding; when the court finds the defendant raises a “substantial question” as to the validity, it may simply dismiss the plaintiff's complaint. The SPC concluded that the asserted claims were highly likely unpatentable as obvious over the prior art “Zeng”, and therefore, found this factor favors a dismissal.

Turning to the second factor, the SPC sided with the defendant. It stated that the plaintiff will not suffer undue prejudice or disadvantage if the court grants a dismissal because Simsukian promised to compensate the plaintiff's loss if the CNIPA were to subsequently declare the asserted claims to be valid.

Finding that both factors weigh in favor of a dismissal, the SPC affirmed the trial court's ruling.

Take Away

The SPC's permission of invalidity defense is good news for foreign companies as they are, most of the time, defendants in China. Notably, however, the burden for demonstrating “a substantial likelihood of invalidity of the asserted claims” is very high. To meet this threshold, a defendant usually must show that a family member of the asserted patent has been invalidated by the CNIPA, or it may try to argue that a foreign counterpart was declared invalid by the patent office of a different country, such as the USPTO, the EPO, etc.

The outcome of this case and the SPC allowing invalidity defense are positive signs towards improved patent protection in China.

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