Authored by Lily Lim and Ningling Wang
Multinational corporations are increasingly feeling the pressure from products manufactured in China, and Chinese companies are increasingly finding they need to secure and enforce patents in China to defend their global and Chinese market shares. This article considers how IP owners can employ defensive strategies within the Chinese patent and court systems to protect against loss of market share and to mitigate the risks of injunctions and liability for damages. These strategies include securing strong patents worldwide–including in China–as a defensive strategy against litigation in China, employing invalidity proceedings against a competitor's Chinese patents, managing risks associated with alternative administrative patent infringement procedures in China, and designing around a Chinese patent.
Defensive Litigation
With the increasing costs of drafting, prosecuting and maintaining patents worldwide, many companies are asking themselves why it is necessary to invest in building and managing a global patent portfolio with strong patents that protect current and future products and that can survive validity challenges brought by competitors. The simple answer is that strong patents offer patent owners leverage and competitive advantages over their competitors. For example, a patent owner can use strong patents offensively, filing patent infringement lawsuits against competitors for injunctions and monetary damages or extracting royalties through licensing.
Many sophisticated patent owners have also found that they can use their patent portfolios defensively as a deterrent to litigation. For instance, IBM, a company known for using its extensive patent portfolio offensively to obtain licensing revenues from many companies, also uses its portfolio defensively as a deterrent against patent lawsuits. Those who might consider bringing a patent infringement action against IBM may reconsider when they realize that IBM may dig into its portfolio and launch a countersuit for patent infringement.
Because many companies compete in various national markets, strong patent portfolios operate as a particularly effective deterrent against lawsuits when the portfolio contains patents in multiple countries, especially in countries where large market shares and manufacturing are expected. Such portfolios then protect against loss of market share from unlicensed competitors in countries where sales are made as well as from erosion of market share caused by competing manufacturers, such as in a large manufacturing country like China, even if those manufacturers are not direct competitors. With a multinational patent portfolio, a company has additional defensive leverage against a patent infringement lawsuit because it can choose in which nation it should bring a countersuit, taking advantage of, for example, the established and expensive patent court litigation system in the US, court proceedings in China (which your competitors may fear more than litigation in the US), as well as administrative proceedings in China (discussed below).
Moreover, a defendant in a Chinese patent suit who owns a patent portfolio that includes Chinese patents also gains leverage in settlement negotiations if it can show that its patents are a threat to its competitor. This encourages the competitor to reduce its settlement price or royalty demands, or agree to enter a cross-licensing arrangement that would protect both companies from future lawsuits.
In addition, some companies have used patent portfolios in a more passively defensive manner that is less sophisticated. Instead of using patents to protect exclusive areas that the company is exploiting, some companies use patents as a medium for public disclosure, preventing others from claiming patent rights to the published information. However, this passive approach has often been associated with poorly drafted patents with insufficient disclosure to support viable products, thereby offering only weak protection at best. Thus, this passive approach is generally considered a less desirable defensive use of a patent portfolio.
In summary, to protect market share and reduce risks of injunctions and monetary damages, building a strong patent portfolio that includes Chinese patents is a proactive defensive step that should be taken by companies that expect strong market penetration in China or suspect that competitors may manufacture competing products in China.
Invalidity Proceedings
Even when patent infringement countersuits are not an option, there are ways to attack a competitor's Chinese patents that threaten your company. It has become almost a common practice for an alleged patent infringer to challenge the validity of a patent as a counter measure when that patent is asserted in a patent infringement suit, especially after the famous Viagra case in China. In contrast to the US patent system, in China the validity of a patent is not challenged in a court, but is challenged exclusively through invalidation proceedings before the Patent Reexamination Board (PRB) of the State Intellectual Property Office (SIPO). Any person can file a request with the PRB to invalidate a patent. The invalidation proceedings before the PRB generally last about one year. The decision of the PRB can be appealed to the Beijing First Intermediate People's Court, which has sole jurisdiction for appeals from the PRB; and can be further appealed to the Beijing Higher People's Court, which usually issues the final decision.
The grounds for filing a request to invalidate a patent with the PRB include, for example, lack of novelty, lack of inventive step (obviousness), insufficient written description support, non-enablement, and nonpatentable subject matter. In the famous Viagra invalidity proceedings, the requesters alleged that the claims in Pfizer's Viagra patent did not have sufficient written description to support the scope of Pfizer's claims.
One of the advantages of instituting an invalidity proceeding with the PRB against a competitor's patent is that any patent infringement suit in a Chinese court involving that patent may be suspended. The judge presiding over the patent litigation has the discretion to stay the litigation pending the outcome of the invalidity proceeding. When the patent-in-suit is a utility model or a design patent that was not subject to substantive examination by SIPO prior to the issuance, judges tend to suspend the court litigation until the validity issue has been resolved by the PRB. In contrast, when the patent-at-issue is an invention patent that was subject to substantive examination by SIPO, judges often continue the infringement litigation without waiting for the validity decision from the PRB.
Another advantage of requesting that the PRB invalidate a patent while a Chinese patent infringement action is pending is the leverage the invalidity proceeding gives to the alleged infringer, allowing the alleged infringer to force the plaintiff (that is, the patentee) to drop the litigation or to reach a favorable settlement. Under Rule 71 of the Implementing Regulations of the Patent Law in China, a person who requests the invalidation proceeding may withdraw the request so long as the withdrawal is prior to the PRB's decision on the validity. Furthermore, when the person who requests invalidation withdraws the request prior to the PRB's decision on the validity, the invalidation proceeding is terminated. As a result, because the alleged infringer who requests invalidation has the right to withdraw from the invalidation proceedings prior to the PRB's decision on validity, the alleged infringer may gain advantages at the negotiating table as the parties attempt to settle the litigation.
Thus, a key defensive approach that can be taken in response to a patent infringement action or instituted before any lawsuit has been filed is to request an invalidity proceeding with the PRB.
Alternative Administrative Proceedings
If a patent infringement lawsuit appears imminent, accused infringers should be prepared to defend themselves against infringement claims in the Chinese courts as well as before the local Intellectual Property Offices of SIPO.
A distinctive feature of the patent system in China is that, in addition to seeking remedies against an alleged infringer from a court, a patent owner can also file a patent infringement case with the local Intellectual Property Offices of SIPO. Under the administrative route, parties do not directly confront each other as in a court proceeding. Instead, the officers of the local Intellectual Property Offices serve like mediators to encourage the parties to settle. The proceedings are usually simple, prompt, and inexpensive. If the parties are already close to settlement, such a mediation setting could provide enough impetus to reach an agreement.
However, the administrative route has certain disadvantages. Because the administrative officer has the authority to impose injunctions but only small fines (often too small to effectively deter infringement), patent owners whose primary goal is to obtain injunctions, not monetary damages, often prefer the administrative approach. Moreover, on certain occasions, the officer who presides over the administrative infringement case may have the pertinent technical background to understand the technology involved in the dispute, as some officers of the local Intellectual Property Offices of SIPO were formerly examiners at SIPO. In such a situation, the accused infringer may be deterred from filing a request with the PRB to invalidate the patent-at-issue in view of the officer's oral, unofficial opinion on the validity of the patent. Thus, administrative proceedings may provide more advantages to patent owners than to accused infringers.
However, the administrate route holds a few more risks. For example, some people are concerned that local officials have a bias towards local protectionism or lack sufficient legal or technical training. In addition, others have raised concerns regarding the lack of comprehensive evidence rules.
Designing Around Patent Claims
In advance of a potential patent infringement suit or in parallel with any of the above defensive approaches, a company sued for patent infringement in China should investigate whether it can mitigate interruption of its business by designing around the patents that are the subject of the dispute. Like requesting an invalidity proceeding with the PRB, the internal actions involved in a design around are proactive steps that offer great benefits to an accused infringer with minimal or controllable risks.
The first step in assessing whether a design around is feasible is to understand the scope of the asserted patent claims with the assistance of Chinese patent counsel. In addition, it is also useful to assess the scope of claims of related patents issued to the opposing party in other countries so that the resulting design around is effective in China as well as abroad.
After developing an understanding of the scope of the claims to be avoided, patent counsel should interact closely with the accused infringer's designers and engineers to develop a feasible design around. The new, non-infringing design can be implemented as a new version of an old product or, if more convenient, implemented into a new product already in development.
In some cases, the design around is inexpensive and can be implemented almost immediately, thereby limiting the effect of any injunction and stopping any further damages liability. In other cases, the design around may be expensive and may take months or years to implement. The accused infringer must weigh the long-term benefits of implementing a design around compared to the risk of an injunction or damages liability.
In summary, effective defences against a patent enforcement action in China include securing strong patents worldwide, including in China, employing invalidity proceedings with the PRB, managing risks associated with China's alternative administrative patent infringement procedures, and designing around a Chinese patent.
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.
