Rapid changes in the Chinese legal system, an increasingly attractive venue for IP litigation

EDITORIAL NOTE: The author, Jeffery Langer, will be joining us for a free webinar on Thursday, May 24, 2018, at 12pm EST, to discuss patent and patent monetization in China. To register please visit Navigating the Patent Monetization Landscape in China.

For many years, foreign companies were reluctant to seek and enforce intellectual property protection in China.  A combination of challenging litigation with low damages, the lack of ability to effectively enforce judgments, allegations of protectionism by the courts; a lack of ability to patent certain subject matter, a lack of transparency on legal matters and other factors made China a less desirable jurisdiction.  The Chinese intellectual property legal system has matured rapidly, however.  From improvements in the scope of allowable patent subject matter to enhancements of litigation options, and a strong desire by China to be seen as having a level playing field for all parties, China deserves a second look.

A patent system addressing 21st-century issues

Patent protection begins with filing and for many years China was not seen as a critical country in which to seek protection.  This has changed.  Approximately 1.3 million applications were filed at the State Intellectual Property Office of China (SIPO) in 2016, more than received at the US, Japan, Korea, and European patent offices combined.    Moreover, Chinese applicants are demonstrating increasing interest in pursuing rights outside of China in contrast to historic trends.  Of the 10 largest PCT filers, China’s ZTE, Huawei Technologies, and BOE Technology now collectively file more than the US and Republic of Korea’s Qualcomm, Hewlett-Packard, Intel, LG Electronics, and Samsung Electronics.  Overall filings of PCT applications increased 44% by Chinese applicants in 2016 and they are now the third largest filers behind Japan and the US.  As a further comparison, China was only behind Japan, the second largest filer, by roughly 2,000 filings.  Given the sharp increase in PCT filings by Chinese applicants, it is expected that China will exceed Japan in the number of filings in 2017.  If the historic filing trends continue, China will be neck-in-neck with US applicants’ use of the PCT system in 2017.

Admittedly, quantity does not necessarily correlate with quality.  However, other internal changes in China may also be driving the increase.  In 2015, there were substantial changes to China’s patent laws that expanded permitted subject matter eligible for patent protection.  Perhaps reflecting the increasing influence of BAT (Baidu, Alibaba, and Tencent, three of the largest firms in China), software patents are now permitted in China.  Business method patents, so long as they are tied to a technical innovation, are also permitted.  In an era where some US companies struggle to effectively protect their software products, Chinese companies are laying the groundwork for years to come in emerging technology areas such as artificial intelligence, big data, VR/AR, and IOT software connectivity.

China has also worked hard to improve its court system and implemented changes at a breathtaking pace.  Since 2014, three specialized IP courts in Beijing, Shanghai, and Guangzhou hear all first instance IP matters in these regions.  These courts include judges with IP training and background to facilitate the proceedings.  Based on the successful establishment of these courts, China’s government has continued to expand the specialized courts and opened IP tribunals in Wuhan, Nanjing, Suzhou, and Chengdu in early 2017 expanding opportunities for domestic and foreign parties to seek redress for IP matters.   By late 2017, an additional new IP court was established in Shenzhen, a technology and manufacturing hub in southern China, which issued a decision in January of this year.

Increased transparency

One issue that has historically made Chinese litigation challenging was the lack of transparency with respect to legal proceedings.  This was more than an issue related to a language barrier or cultural differences. In contrast to the United States, Chinese courts did not routinely publish decisions in the past.  At most, appellate level courts would issue end-of-year summaries of a limited number of cases that were of considered particularly relevant by a specific court.  While such guidance was extremely helpful, it typically only covered a single issue or factual situation.  Thus, Chinese attorneys were hampered in their ability to analyze matters including issues not expanded on previously by the higher courts, restricting their ability to predict how courts would interpret such issues.

Like many elements of the Chinese legal system, this has rapidly changed.  Since 2014, all judicial opinions are to be published on the China Judgments Online (CJO) with few exceptions.  Such transparency has fundamentally changed how attorneys practice law and the quality of the advice that they can now give.  Prior to CJO, Chinese counsel were often left to their own experiences as their only guideposts to interpret the probabilities of success when communicating with a client on the likelihood of success.  CJO allows for attorneys to review not only how different courts have addressed the issue, but even the more granular level of how a specific judge has ruled in the past on an issue.  In other words, this increased transparency is not only important as China legal system becomes more transparent to all observers but the attorneys that practice in China are now able to provide a much more accurate assessment to a client on the strengths and weaknesses of the client’s case.  In other words, Chinese attorneys can now provide a depth of analysis similar to what one would expect under international norms.

Favorable IP owner results with meaningful remedies

The CJO database has also allowed for more robust data compilation.  Analysis of this data is challenging a  number of widely-held beliefs regarding the Chinese legal system and foreign IP owners’ ability to enforce their intellectual property rights there.

First, that intellectual property cannot be effectively enforced in China.  No so based on research by Renjun Bian in her aptly titled “Many things you Know about Patent Infringement in China are Wrong.”  Ms. Bian’s research delves into all available decisions published on CJO decided in 2014.  Of the more than 1,600 cases analyzed, IP owners won more than 80% of the time and permanent injunctions were issued by the Chinese courts in more than 90% of the cases.  Ms. Bian highlights that the number of injunctions would have been higher except for the fact that in nearly 40% of the cases she analyzed where no injunction was granted, it was not requested.  Thus, an even higher rate of injunctions success is likely possible.

Second, that foreign patent owners are discriminated against by the Chinese courts and less likely than Chinese companies to prevail at litigation.  Again, Ms. Bian’s research does not support this conclusion.  In fact, foreign companies enjoyed a slightly higher success rate for both proving infringement and obtaining an injunction compared to their Chinese counterparts.  Ms. Bian is not the only source for such findings.  In a recent IAM article, Dr. Jacqueline Liu and her colleague Libin Jin found no evidence of bias against foreign parties when compared against domestic parties based on their analysis of decisions issued in 2016.  IAM article link.

Admittedly, both papers use small numbers of cases involving foreign parties compared to the total numbers of cases heard by the Chinese courts and there is the possibility that the success of foreign parties in China is, at least in part, driven by self-selection bias with respect to the foreign parties success.  Indeed, this point was made by the Wall Street Journal in their March 2016 article discussing the state of the Chinese legal system.  Nevertheless, the same article cited positive results for foreign corporations with the Chinese legal system including Double Robotic’s success at invalidating a Chinese rival’s patents at SIPO and Bayer AG’s efforts in combatting infringement.  Other evidence supports that the presumed foreign bias is no longer a reality at least in certain courts in China.  As noted by Judge Gang Feng of the Beijing IP Court in 2016, foreign corporations had a 100% win rate before that court in 2015.  While other elements of China’s IP policy may still draw objections from foreign corporations looking to do business in China, the increasing evidence against a presumption of bias against foreign companies in litigation is compelling.

Third, low damage awards do not make Chinese litigation cost-effective as an enforcement means.  Low damage awards by the Chinese courts historically have been a reason not to seek redress in China.  Ms. Bian’s research, which focused on the 2014 data, supports this finding as average awards in 2014 were only $12,368.47.  However, this also appears to be changing.

The Beijing High People’s Court recently upheld Xian Iwncomm’s award against Sony Mobile Communications of RMB 9.1 million (approximately $1.5M USD).  Although less than typical US damage awards that historically have been in the low millions, the higher damages appear to suggest a willingness by the Chinese courts to award higher damages.  Moreover, the average damage awards for both trademark and copyright infringement have also risen, not just for patent infringement.  One possible explanation for this shift is the strong push by President Xi Jinping’s to improve the perception of China as a country that is tough on intellectual property infringement.

Even ignoring the commercial leverage available to a successful patent owner where over 90% of the time a permanent injunction is available, costs of China litigation, and the almost certain co-pending invalidity challenges at SIPO, remain low compared to other jurisdictions.  With the increases in potential damages, the cost-benefit analysis of China as a litigation venue has changed significantly within the past several years.

Improvements to China legal proceedings

Evidence gathering in China has been yet another stumbling block for many patent owners in their enforcement efforts.  Undoubtedly, China remains a difficult venue from the evidence gathering perspective including numerous formal and procedural hurdles.  And because there is limited availability of discovery in China, proving damages has been a particularly challenging exercise.

Policy guidance by the Supreme Court of China may address such issues, however.  In the recent Watchdata case, the Beijing IP Court relied on Judicial Interpretation of Supreme Court with regards to the Applicability of Relevant Laws when Patent Infringement Cases are Handled of Article 27 of the Chinese legal code.  This interpretation states that:

Where it is difficult to determine the actual loss suffered by a right holder, the people’s court shall require the right holder to proffer evidence to prove the gains obtained by the infringer from the infringement… Where the right holder has proffered the prima facie evidence in relation to the gains obtained by the infringer but the account books and materials related to the acts of patent infringement are mainly under the control of the infringer, the people’s court may order the infringer to submit such account books and materials; where the infringer refuses to provide such account books and materials without justification or submits false account books and materials, the people’s court may determine the gains obtained by the infringer from the infringement based on the claims of the right holder and the evidence proffered thereby.  (Emphasis added).

In essence, the Supreme Court’s interpretation has opened the door to burden shifting for the notoriously difficult damages proof.  Under this interpretation, the burden is shifted to the defendant when the IP owner has exhausted available options to prove damages.  The defendant must refute the IP owner’s good faith damage calculations in such cases.  This change to Chinese procedure has potentially huge implications given that previously IP owners, even where infringement could be proven, struggled to gather sufficient evidence of damages.  Coupled with the likely changes to be implemented with respect to the statutory, the balance of power in IP litigation is shifting to IP owners.

Conclusions

China is not only becoming a critical country to file for patent protection, it is increasingly becoming a viable venue for all intellectual property enforcement.  More and more companies are looking to China as a stand-alone enforcement jurisdiction, as a cost-effective “second front” to open in conjunction with US or European litigation, and a country where supply chain integrity can be protected via its IP laws and not just contractual means.

In contrast to the United States, patent-eligible subject matter is more clearly defined in China and there exists a variety of mechanisms to inexpensively and rapidly obtain enforceable rights in China.  Contentious matter proceedings are also as fast or faster than US proceedings and available at a substantially lower cost than US litigation.  Chinese policymakers appear to already recognize what Director Andrei Iancu acknowledged in his recent remarks to the U.S. Chamber of Commerce – “when we write, interpret, and administer patent laws, we must consistently ask ourselves ‘Are we helping these inventors?’ . . . Are we incentivizing innovation?”  China is making a concerted effort to ensure its intellectual property protection and enforcement is accessible, fair, and quick.  While China’s legal system is not without its challenges, it is making rapid strides to protect inventors and innovation.