Lessons from the case law of China’s IP appeals court

On 26 April 2022, World IP Protection Day, the Supreme Court (SPC) issued a report that summarised the updates to IP protection in 2021 from various IP specialised courts and tribunals in China. The report not only introduced the highlights of IP protection in 2021 but also presented recent statistics.

In 2021, there were 4,335 newly accepted technical cases and anti-monopoly cases, constituting an increase of 36.4% from the previous year. Of those, 3,460 cases were concluded, constituting an increase of 24.1% from the previous year. There were also 3,460 civil and administrative cases, of which:

2,272 cases were maintained (65.7% maintenance rate);
509 cases were withdrawn (14.7% withdrawal rate);
198 cases were mediated (5.7% mediation rate);
468 cases are reversed (13.5% reversal rate); and
13 cases are concluded in other ways.

Since the SPC presides over the second instance, the statistics for appeal cases are also significant. In the past year, there were 2,023 second-instance civil cases, of which:

1,004 cases were maintained (49.6% maintenance rate);
440 cases were withdrawn (21.7% withdrawal rate);
198 cases were mediated (9.8% mediation rate); and
381 cases were reversed (18.8% reversal rate).

The SPC handled 971 second-instance administrative cases, of which:

862 cases were maintained (88.8% maintenance rate);
43 cases were withdrawn (4.4% withdrawal rate); and
64 cases were reversed (6.6% reversal rate).

The report outlined the characteristics of various IP cases. Regarding patent cases, the report highlighted six points:

Claim construction is still a major point of difficulty. The SPC further clarified the legal standards regarding the classification of technical features, the doctrine of equivalence, and the identification of functional and background features so that the scope and strength of patent protection can match the contribution of the patent over the prior art.
The defences raised were mostly the legitimate source defence and the prior art defence. The invalidity defence was raised in certain cases but was not approved.
The calculation of patent infringement damages has become more reasonable and scientific. With the flexible application of the evidence rule, the facts regarding losses and profits caused by infringement are being thoroughly examined. High damages have been awarded in more and more cases.
Ownership disputes on patent application rights constitute the highest proportion of service invention disputes. The major points of dispute include understanding of the concept of relevance between the patent at issue and the employee’s own job or assigned tasks and consideration of whether the patent has been created primarily using the materials and technical provisions of the former employer.
The mechanism for adjudication that connects civil and administrative cases has been further improved. A feedback mechanism has been established between the courts and the China National Intellectual Property Administration on patent infringement proceedings and the patent invalidity procedure so that adjudication on cases related to both infringement and invalidity can be synchronised.
Invalidity cases relating to pharmaceuticals, telecommunications, the internet, big data, e-commerce, artificial intelligence and blockchain have been increasing. Most arguments are related to evaluations on novelty and inventiveness.

In this chapter, we highlight three aspects of patent and trade secret cases.

Improving evidence production system

In China, there is no US-style discovery procedure, and the burden of proof is almost completely on the plaintiff in IP litigation. To establish the case, the plaintiff must provide evidence to prove the accused infringing acts, as well as related physical products and materials to support damages.

If the plaintiff wants to make a strong case, it should provide more evidence, such as a detailed description of the technical solution of the accused infringing products and claim charts to map the patent claims to the products. This may be easy to achieve in cases in which the targeted products are readily available from the market and detectable for the claim mappings.

In business-to-business scenarios, however, it is difficult to collect evidence directly from the factories of defendants since those factories should be ‘staff only’; therefore, it would be impossible for the plaintiff to obtain physical evidence or even to take pictures on-site. This is unfavourable for the plaintiff since if there is no proof of existence of the infringement, the defendants are likely to simply deny the allegations.

One way to overcome this obstacle is to request the court to conduct an on-site investigation and evidence collection, although the defendants may attempt to interfere with this judicial approach. Since the courts have generally had a tolerant and non-aggressive attitude in past legal practice, such interference or disturbance may disrupt the legal proceedings.

There has been change in the form of the strengthening of IP protection to boost the innovation-driven economy in China. A number of strict judicial measures have been applied in some cases, which have also been confirmed on appeal by the IP Tribunal of the SPC.

In Zhouqin v Wuxi Ruizhishun Mechanics, the infringing product is a drainage plate modelling machine, which is used to manufacture the drainage plate. The machine is rather large in size, difficult to move and sold to drainage plate manufacturers. This means that it was impossible for the plaintiff, Zhouqin, to collect evidence.

Zhouqin successfully convinced the court to go to the defendant’s factory to collect and seal the evidence. Ten pictures were taken on-site, and the judge told the defendant not to move or destroy the machine as sealed; however, when the court held the hearing to make a claims comparison between the patent and the sealed machine, the machine disappeared, with the defendant claiming it did not know from where the machine was shipped since the factory was demolished by the government.

The defendant’s denial angered the court, and the court of first instance directly inferred that patent infringement should be established since the defendant’s acts illustrated the dishonesty and bad faith of the defendant and thus greatly influenced the claim-mapping and fact-finding process. The defendant was fined US$35,000, and damages of US$160,000 were awarded.

On appeal, the IP Tribunal of the Supreme Court affirmed the first-instance judgment, reasoning:

it should not be considered as fair to the patentee if, regardless of specific circumstances, risks caused by an inability to do fact-finding in a technical perspective are ascribed to the patentee, who is not at fault on this, and if their allegations on patent infringement are rejected on this ground. Moreover, this is tantamount to condonation of the accused infringer who illegally carried out the act of hindering civil litigation, which is not consistent with the value that modern civil litigation should take into account both procedural justice and substantive justice.

This case shows that the SPC is striving to crack down on attempts by infringers to prevent evidence from being collected, in an effort to enhance the power of patentees. Nevertheless, the patentee must still thoroughly look for and collect evidence.

The interests of defendants could be protected if, in certain circumstances, the defendant eventually submits evidence to reverse the case. In Dongguan Yicheng v Shenzhen Xinhui, the plaintiff, Dongguan Yicheng, was successful at the first instance because the defendant refused to provide the password to run the accused infringing product when the judges conducted the on-site investigation. The court of first instance made a positive inference to accept the establishment of infringement in consideration of the defendant’s uncooperative acts.

On appeal, the defendant provided a video to show the operating process of the accused infringing product during the court hearing. The authenticity of the video was confirmed by the plaintiff. After reviewing the video, the SPC believed that, in respect of the technical problem at hand, the detailed technical methods of the patent and the accused infringing product were rather different.

The SPC, therefore, accepted the defendant’s arguments to reverse the first-instance judgment as non-infringement; however, it also sanctioned the defendant with a fine of US$35,000, reasoning that the defendant hindered the judges’ on-site investigation and deliberately, without justifiable reason, did not submit evidence.

In this case, although the evidence submitted by the defendant during the second instance helped it to reverse the case, a better strategy would have been for the defendant to actively raise non-infringement arguments based on that evidence at the first instance. This case shows the resolution of the SPC to force defendants to produce evidence, especially evidence of non-infringement.

New developments for enforcement on e-commerce platforms

With the developments of online business, IP enforcement on e-commerce platforms is becoming a key focus. Under the e-Commerce Law, IP rights holders have the right to send notice to e-commerce platforms and request them to take necessary measures, including the deletion, blocking and disconnection of infringing links (ie, the ‘notice-deletion’ rule); however, for patent infringement cases involving complicated technology, the threshold for effective notice is unclear.

In Alibaba v Guangzhou Youtuo, Alibaba raised a challenge on effective notice, claiming that effective notice should necessarily include effective court judgments or administrative decisions, and the detailed claim charts comparing technical features should be an advantage. It also cited a precedent of the SPC (Shuanghuan, 2015) that found that the duty of care of IP rights holders in issuing an infringement warning letter to the seller should be higher than that of the issuance of a warning letter to the manufacturer, and the information contained in the warning letter issued to the seller should be detailed with sufficient content, such as definition of the scope of the IP right to be protected, detailed information about the accused infringement and other necessary information related to the determination of infringement and injunction.

The SPC believes that the notice-deletion rule has the advantages of convenience and fast-handling: if all effective notices are based on effective court rulings or administrative decisions, it would be difficult for e-commerce platforms to exercise their right to stop infringements quickly, and it will unnecessarily waste judicial resources.

As long as the notice contains the basic information of the right holder, the certificate of rights, the information of the alleged infringing goods or services that can be accurately located, the required measures on the e-commerce platform and preliminary evidence of infringement, the e-commerce platform operator should perform the obligation of notice-deletion, without examining the prima facie evidence of infringement.

The SPC clarified that the findings in Shuanghuan are aimed at the standard for sending warning letters to sellers. Although Alibaba is an e-commerce platform operator, there are special infringement rules that apply to ensure strong platform protection of IP rights, and it was not appropriate to equate Alibaba with ordinary sellers.

Based on this case, we believe that for patent infringement cases, it is convenient for patentees to enforce their rights since there is no need for detailed claim-mapping logic when the complaint is filed to the platform; patentees do not need to worry about disclosure of the entire mapping logic at too early a stage.

Trade secret cases as a hot topic

Trade secret cases have been booming in the past year in China. In 2019, 12 trade secret cases were accepted by the Supreme Court. In 2020, this number increased to 44 cases, and in 2021, it further increased to 79 cases.

The legal issues include how to identify the scope of the trade secret, how to calculate damages of trade secret infringement, how to identify the acts and secret-keeping measures in trade secret infringement, and how to evaluate whether the trade secret as claimed is unknown to the public.

Several representative trade secret cases have been issued by the SPC:

In a trade secret case regarding chip design and manufacture, remandment and preliminary injunction was first applied to expedite the application of enforcement and the effects of IP protection so that the infringing acts were effectively stopped to prevent the rights holders from “winning the case but losing the market”.
In a trade secret licensing contract case regarding diesel engines, a three-step method was applied to determine false intention, and the party at fault was ordered to return Rmb200 million.
In the Biwo trade secret case, the legal standard was clarified to connect criminal cases with civil cases, so that comprehensive relief was granted to the right holder.

A promising point is that high damages have been awarded in trade secret cases. In case regarding vanillin, damages of Rmb159 million were awarded – the highest damages ever awarded in a trade secret case. The following factors were considered by the SPC when deciding the damages.

First, the commercial value of the trade secret was considered to be the important element for global market share and the creation of high profits. The SPC concluded that the secrets involved in the case had huge commercial value after comparing the advantages of the technical secrets and traditional processes, comparing the production scale of the plaintiff before and after the development of the technical secrets and comparing the output and market share after the defendant obtained and used the technical secrets.

Second, the seriousness of the infringing acts and outcomes were evaluated. At the second instance, the SPC found the trade secrets illegally obtained by the infringer constituted a significant proportion of the trade secrets of the right holder:

The technical secrets included 287 equipment drawings and 25 process flow charts, and the infringer illegally obtained 185 equipment drawings and 15 process flow charts, accounting for 64.10%; and in 287 equipment diagrams, there are 60 main equipment diagrams, and the infringer illegally obtained 41 equipment main diagrams, accounting for 68.33%.

This is regarded as a serious infringement, and it became an important consideration in increasing the damages.

Third, the bad faith and dishonest behaviour of the infringers was viewed negatively. During the appeal, the trade secret holder used various measures to prove the bad faith of the infringer, including evidence that the infringer infringed third-party rights multiple times, continued to commit infringements after receiving warning letters and refused to execute effective rulings. This was deemed to successfully prove the infringer’s malicious intent and also contributed to the award of high damages.

Comment

In summary, the representative judgments of the SPC have become guidance in legal practice. These cases have been keeping up with the times and technological developments. Attorneys are sure to learn a lot from these cases, which will enable them to build much stronger cases in practice.