United States: Accentuating China´s IP Positives

Originally published in Managing Intellectual Property's China IP Focus, April 2006
Copyright © Finnegan, Henderson, Farabow, Garrett & Dunner, LLP

As every trial lawyer knows, beliefs and emotions are often far stronger than intellectual reasoning. Enforcement of IP rights in the People’s Republic of China (PRC) evokes strong emotions. What often gets lost is just how far China has come in a short period of time. If you are one of the many who believe that enforcement in China is problematic, permit us to try to change your feelings, or at least make you aware of the opportunities that exist.

We offer three perspectives. First, China does not share America’s Anglo-Saxon legal heritage and its abiding faith in the ability of lay juries to decide technical issues. Second, in contrast to the US and European systems, in which a single court is empowered to decide validity, infringement, enforceability, and damages, this authority is distributed among courts and various administrative agencies in China. This presents certain challenges, as well as opportunities. Third, China is huge, and the structure of its bureaucracy mirrors its geographic size.

China has established an extensive administration system for the enforcement of IP rights. The country has been managed by a bureaucracy, at times for better and for worse, for over four millennia. Bureaucracy has provided stability and enabled the Chinese government to secure the services of the most talented and effective people.

In developing its system for enforcing IP rights, China turned not to the US or to England for guidance but to Germany and to the administrative tribunals it has used to administer its civil law. Literally, in two and a half decades, China has built a legal system from the ground up. Twenty-five years ago, there was no system for enforcing IP rights in China. Today, in spite of the continual cries of its critics, China has put in place a judiciary and an operational administrative apparatus to enforce IP rights.

This system has several key features. The Chinese court system is multi-tiered. Excluding courts that deal with specialized issues (such as railway, maritime and military courts), China has a four-tiered court system: Basic People’s Courts; Intermediate People’s Courts; Higher People’s Courts; and the Supreme People’s Courts. Over 50 Intermediate People’s Courts accept patent litigation cases as courts of first instance.

Rules on venue are comparable to those in the US, namely, where infringement has occurred and where the alleged infringer is domiciled. The rules of evidence, however, are very different. Whoever claims a fact has the burden of proving that fact. Thus, if the plaintiff alleges infringement, the plaintiff bears the burden of proof on that issue. If the defendant asserts a particular defence, it must affirmatively prove it. Certain exceptions apply to patents for a method of making a product, or where the defendant has rebutted the plaintiff’s claim. In those instances, the burden can shift.

Unlike the US and European courts, where the parties introduce evidence, in Chinese courts, the court may also investigate and gather relevant evidence. This can occur where the evidence is kept by government authorities, where the evidence relates to a state secret, trade secret, or personal privacy, and where the parties cannot gather the evidence on their own. Although compulsory process is not available to private parties, the government itself retains the power to gather relevant evidence. The courts are also empowered to attach evidence that may disappear or be difficult to gather.

To institute a claim for infringement in China, the claimant must submit the following documents to the court:

• a copy of a business licence;
• certification of the legal representative;

• a complaint;
• a copy of the patent, receipts for annuity payments, and specification and claims;
• relevant evidence proving infringement and damages; and
• a power of attorney.

The parties are permitted to negotiate and the court decides the case. In most cases, the hearing lasts no more than half a day (four hours).

The hearing itself is broken into opening statements, a court investigation, arguments and a conclusion. Infringement may be direct or indirect. The doctrine of equivalents is also available. Similarly, the doctrine of prosecution history estoppel and prior art defences are available to the defendant.

Remedies includes injunctions, compensation, awards for litigation costs, and court fees. Both preliminary injunctive relief and permanent injunctive relief are available. The plaintiff may seek a preliminary injunction if they can establish that the infringement is already occurring or is soon to occur and that it will be irreparably damaged, unless the infringement is enjoined. A security bond is required and the court will decide whether or not to issue a preliminary injunction within 48 hours of receiving the request and relevant exhibits. If a preliminary injunction is granted, it will continue through the court’s judgment.

The procedure is fast and relatively inexpensive. In contrast to US patent infringement litigation, which can take years and cost millions of dollars, enforcement in China often takes months and typically costs only tens to hundreds of thousands of dollars.

In addition to judicial proceedings to stop infringement, administrative proceedings are also available. The procedures are simplified, and the remedies are more limited than those available from the courts.

In the US, all issues can be tried by the court. Once the patentee asserts infringement, the defendant is permitted to assert the invalidity or unenforceability of the patent. Damages can be litigated, as well as various counterclaims. The Chinese system, in contrast, is much more streamlined. The local Intellectual Property Bureaus have no authority to decide validity. Any challenge to validity must be brought to the State Intellectual Property Office (SIPO), under procedures that are similar to reexamination in the US Patent Office or opposition proceedings in the UK Patent Office.

Validity proceedings are brought to the Patent Reexamination Board of SIPO. A party dissatisfied with a decision of the Patent Reexamination Board may appeal to the Beijing First Intermediate People’s Court. Although Intermediate People’s Courts are located throughout the country, only the Beijing First Intermediate People’s Court has jurisdiction to hear appeals from the SIPO Patent Reexamination Board. A dissatisfied party may further appeal to the Beijing Higher People's Court. Decisions by the Beijing Higher People’s Court are final and no further appeal is provided.

The issue of infringement is resolved not by SIPO but rather through administrative adjudication by the local Intellectual Property Bureaus or through litigation in a court. Infringement cases may be filed in the local Intermediate People’s Court. A party dissatisfied with the decision of the local Intermediate People’s Court may appeal to the local Higher People’s Court.

This split of administrative authority between SIPO and the local Intellectual Property Bureaus offers certain distinct advantages. It is relatively low cost for the litigants. Initiation is fast. The proceeding is simple and straightforward. The parties have an ability to participate, and resolution of the dispute is prompt. If the patentee is seeking primarily injunctive relief, rather than substantial money damages, it is often the preferred approach.

It may also entail certain drawbacks. For example, some officers of the local Intellectual Property Bureaus may not possess sufficient legal and technical expertise to decide a patent infringement case. The local offices in areas such as Beijing and Shanghai, however, are better able to address these types of issues. The determination of the validity issue at SIPO may delay the decision on infringement and damages. In addition, although money damages are available, the administrative authority does not provide a level of compensation that most US or European companies would consider adequate. Although fines may be imposed, the fines are often too small to deter infringement effectively. Beauty, as always, is in the eye of the beholder. Fines can range from Rmb5,000 ($620) to Rmb500,000 ($62,000). To most Chinese companies, these can be substantial sums. To most US and European corporations, however, the thought of collecting this amount for the infringement of a valuable intellectual property right – that may be worth tens or hundreds of millions of dollars – often makes academic the decision whether or not to litigate.

As noted above, the Chinese system places great emphasis on the administrative authorities’ ability to determine validity and to adjudicate infringement. This should not be surprising, given China’s stable history of bureaucratic governance. Nor should this overarching trust in administrative specialization and expertise be surprising; all nine members of the Standing Committee of the Politburo of the Chinese Communist Party are engineers. China is the only country on the planet that can make that boast, or suffer that insult, depending on your perspective.

The structure of the Chinese legal system results in certain substantial differences in the way a case is handled and tried, relative to the US and Europe. First, in a US District Court, for example, the trial lawyer ignores at his peril the jury’s values, beliefs, and the emotions that can be aroused by the facts of the case. These factors are largely inconsequential in the Chinese legal system, which bases its decisions much more tightly on the technical evidence, much as the US or UK Patent Office would in a reexamination, reissue, or opposition proceeding.

Second, China is still learning how to administer a vast and complex judicial system. As a civil law system, little to no deference is given to prior decisions by judges facing the same issues. Each judge reading the same statute is expected to arrive at the same interpretation. Yet, as will be apparent to any observer of any legal system, this is rarely the case in practice. The lack of precedent results in divergent interpretations by different courts, even when interpreting precisely the same statutory language.

The sheer magnitude of the Chinese legal system exacerbates these problems. In the US, we have 96 US District Courts, whose decisions may be appealed to 13 Courts of Appeals (or to one Court of Appeals in patent appeals), and, ultimately, to the Supreme Court, the only court of last resort. In China, specialized intellectual property courts exist within each division of the courts. There are over 3,000 Basic People’s Courts; over 400 Intermediate People’s Courts, among which more than 50 Intermediate People’s Courts handle intellectual property cases; over 30 Higher People’s Courts; and nine tribunals in the Supreme People’s Court. These nine separate tribunals are each courts of last resort.

The large number of courts and divisions, the lack of reliance on precedent and the fact that decisions are not systematically published, result in a lack of consistency in decisionmaking. Chinese judges, in contrast to those in the US and Europe, are younger lawyers and non-lawyers at the beginning of their careers, not seasoned lawyers with a lifetime of experience. Although they are well-trained and dedicated, the substantial workload and limited resources available to Chinese judges create substantial pressures and, in some instances, adversely impact quality.

Nonetheless, substantial progress has been made. The PRC was established on October 1 1949. In 1963, the PRC abolished patent protection. It was not until June 3 1980, that China joined WIPO and March 12 1984, that China passed its first patent law.

Having joined the world patent community only 20 years ago, China moved quickly in acceding to the Paris Convention in 1985, to the PCT in 1994, and to TRIPs on December 11 2001. This blistering pace of progress in developing and implementing a system of IP protection should impress anyone. The sheer scale of the administrative effort required to accomplish that task in a country of 1.4 billion people is impressive.

It is important to keep these factors in mind when approaching the Chinese enforcement system. It is also important to realize that it is not the same as the US, UK, or other European systems. Instead of a common law system that relies on checks and balances, it is a civil law system that relies heavily on administrative expertise. In spite of all its flaws and the criticisms it regularly receives, China is making substantial progress and offers very real and substantial enforcement options.

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.