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Will China Become the World Leader in Patent Litigation?

Lexis Nexis China Legal Review
December 2007

Burns, Robert


Authored by Robert L. Burns

It is not often that patent litigation is on the menu for a Presidential State Dinner. But that is what happened on November 25, 2007, when French President Nicolas Sarkozy and Chinese President Hu Jintao turned their attention to Chint v. Schneider Electric, one of the most important cases to come out of China's legal system in recent time. The case involved a Chinese company winning a patent infringement lawsuit against its French competitor, resulting in a record-breaking 334.8 million yuan (approximately $45 million) damages verdict. Sarkozy was apparently concerned by the verdict and sought help from China's president in getting the matter resolved. Not only is France's president taking note of this case, but so are lawyers and corporations in the United States. With verdicts of this magnitude now possible, it is no wonder that China's patent system is on track to handle more patent infringement lawsuits this year than any other country.

A Chinese Company Fights Back and Wins—Chint v. Schneider Electric

Schneider Electric is one of the world's largest manufacturers of medium- and low-voltage electronic equipment. Starting in 1999, Schneider sought to protect its technological advantage and market share by initiating a flurry of patent infringement lawsuits against Chint in courts around the world, including in China. Chint apparently became a target of Schneider by becoming one of China's leading manufactures of low-voltage electronic devices. Rumors circulated that Schneider kept trying to acquire Chint and filed repeated lawsuits as a means to pressure or retaliate against Chint's refusal to join the corporate giant. Eventually, Chint decided to fight back, filing a lawsuit in East China's Zhejiang Province, the Intermediate People's Court of Wenzhou, asserting that Schneider and its distributor, Star Electronic Equipment Co. Ltd. of Zhejiang, were infringing Chint's Chinese utility model patent directed to a miniature circuit breaker.

During the pendency of the lawsuit, Schneider sought to invalidate Chint's patent in a separate proceeding with the State Intellectual Property Office. Schneider argued that Chint's patent was invalid because the technology had been publicly disclosed both in China and abroad before the patent was granted by the State Intellectual Property Office. Additionally, Schneider argued that it had been using the accused technology years before Chint filed its application, thereby rendering the patent invalid. Both arguments were apparently rejected, clearing the way for the trial to proceed at the Intermediate People's Court.

At trial, the Wenzhou court found that Schneider's products (C65a, C65N, C65H, C65L and EA9AN) infringed Chint's patent and ordered Schneider to stop selling them. The court also found that Schneider had earned 883.6 million yuan in selling the infringing products, resulting in an illegal profit of 334.8 million yuan. Schneider was ordered to pay Chint an amount equal to the profit within 10 days of the ruling.

The fight is not over. Schneider is appealing the case to the High Court and possibly to the Supreme Court, and says that it is also fighting the validity of the disputed patent in a separate lawsuit it filed in Beijing's No. 1 Intermediate People's Court.

Why This Case Is Important

There are two reasons why the Chint case is important. First, it symbolizes the improved consciousness of Chinese companies in protecting their intellectual property rights and the Chinese courts' capability in rendering a judgment that is on the international level. The large award in this case is expected to boost the confidence of other Chinese companies in seeking legal redress from the Chinese court system. Consequently, Chinese courts will likely see an even greater number of patent suits by Chinese corporations.

Secondly, because of the large award, this case might spur foreign corporations to file more patent suits in China as they become appreciative of the increased value of obtaining and owning Chinese patents. The advantages of owning Chinese patents can be explored both offensively and defensively. Offensively, China's speedier patent litigation process would permit a foreign corporation to strategically go after its competitor's manufacturing or R&D facilities in China as opposed to suing in the normally preferred courts of the United States. Defensively, if a company is sued in a foreign court such as in the United States, owning Chinese patents will provide that company leverage to counter-sue in China if its competitor has a domestic manufacturing base. Thus, having Chinese patents will give a corporation greater bargaining power and options in dealing with its competition.

General Thoughts on China's Patent and Court System

With sustained economic growth, fast industrial development, and recent entrance into the World Trade Organization, China has become the center of attention when it comes to the protection of intellectual property rights. As this case shows, exciting things are happening in China in the field of patents and patent litigation. There is a certain parallel that China's patent litigation system is going through to what was experienced in the United States during the 1980s with the creation of the United States Court of Appeals for the Federal Circuit ("Federal Circuit").

Patents in the United States did not become valuable as they are today until the Federal Circuit was created in 1982 to exclusively handle appeals concerning the patent law. As the Federal Circuit began to set uniform legal standards in patent litigations, judgments became more fair and consistent. More importantly, damages awards began to increase in size and Corporate America took notice of multi-million dollar verdicts. Since then, the number of U.S. patents issued by the United States Patent Office has greatly increased as the number of filed applications has skyrocketed. And the number of patent lawsuits in the United States has also steadily climbed. As a consequence, the U.S. patent system has progressed and matured over the past two decades into a very robust and a dependable forum.

Similarly, it appears that China has begun to see a flourish of patent lawsuits. This year, for example, China is expected to see a greater number of new patent lawsuits filed in Chinese courts than those filed in the United States. As the number of lawsuits and fair judgments in China increases, so will the awareness that China is a place to both obtain and enforce intellectual property rights.

For China's patent system to further strengthen and mature, transparency and consistency is a requisite of the litigation process. A litigant should have confidence that China's litigation process system operates objectively and fairly. In this respect, it seems ironic that the French President appeared to want China's President to intervene in the Chint ruling, while at the same time seeking "fair" trade.

It is unclear right now what impact the French President's actions will have on the perception of China's court system. If the Chint decision is reversed on appeal, others may wonder whether politics played a role. Yet, on the other hand, if the appellate court upholds the trial court's decision in the face of this spotlight, the international community may view this as an example that China's court system is operating independently when dealing with intellectual property matters. However, it may be that the case will settle at the urging of the French and Chinese governments.

While the outcome of the Chint case will be watched with great interest, this high-profile ruling has already sparked a surge of interest in China's patent litigation system, and may very well be a historical moment in China becoming the new battle ground for the competition wars of the 21st Century.

Copyright © Finnegan, Henderson, Farabow, Garrett & Dunner, LLP. This article is for informational purposes and is not intended to constitute legal advice. This memorandum may be considered advertising under applicable state laws.