I have said many times that China is now the best place in the world to enforce patents. While the Chinese system is very good and getting better every day, there are some limitations. All three of these should be obvious, but in recent conversations with folks at IPBC Global in San Francisco, I realized that it may be worth pointing these out.
Specifically, in China, you will win if you have all three of these. Also, you will still likely win if you have two out of these three (and that ain't bad). But if you have only one or none of these, even China cannot save you.
1. First, you should have good patents. Note I did not say perfect, or even near-perfect patents. As long as you can make a reasonable argument to a judge regarding infringement and validity (which are adjudicated separately in China), you should be fine. I could go on for hours about a quality patent is, but suffice it to say the bar is far lower in China than it is in the US or Europe.
2. Second, you should have good counsel. For foreign companies, executives, and in-house counsel, this can be difficult. Language barriers are compounded by cultural obstacles and unfamiliarity with Chinese law and procedure. One way to deal with such challenges is to hire foreign counsel (eg, US companies hire their typical US litigation counsel) to manage local Chinese counsel. However, in addition to increased costs and inefficiencies, such an approach can lead to mistrust among the legal team. Further, the foreign legal team is usually no better equipped to deal with either the language and cultural differences or the lack of understanding of the Chinese legal system.
Because of these problems, more and more companies are bypassing foreign firms and hiring Chinese law firms directly. Although this solves the lack of coherency and trust among the legal team, there is still a cultural, linguistic and legal understanding gap. Plus, without the help of an international law firm, choosing a Chinese law firm can be confusing due to lack of data and connections. For patent litigation, there are still only around ten firms I would trust. These are good firms technically and legally, but the passionate "win at all costs" attitude of top US lawyers is generally not there. Further, the levels of service even at top Chinese are lower than at foreign firms. Do not expect an answer overnight, and do not expect anyone to work on a holiday. There are exceptions, as some firms (including mine) are hiring experienced foreign patent litigators for their strategy prowess as well as for case and client management. Nonetheless, no Chinese firm is up to the quality of my former firms Weil Gotshal or McKool Smith or other top foreign law firms. They will get there, but it will take a few years.
One trap for the unwary involves how most Chinese law firms are organized and how their attorneys are compensated. First, it is important to understand that the titles of ‘partner’, ‘senior partner’ and similar designations can mean little to nothing. It is very easy to hire an attorney into a Chinese law firm as a so-called ‘partner’, because most partners draw no salary. Indeed, many firms in China have doubled in size overnight simply by adding names at no additional expense. Therefore, many partners are not experienced lawyers and do not have high-quality experience. This dovetails with the other issue: how most Chinese firms compensate their lawyers. Most Chinese law firms pay their partners on an extreme eat-what-you-kill system. Partners receive no salary, but keep between 70% and 85% of the business they bring in. This is great for lawyers with a lot of business, as it enables them to get rich fast. However, if a partner needs help from associates or staff, he or she must pay them out of his or her own pocket. This structure creates an incentive for partners in Chinese firms to:
This is especially true for contingency fee cases, because the partner must pay for any extra work himself or herself upfront, but will not receive revenue until much later, if at all. The result is that many companies which believe that they are hiring a firm with a plethora of lawyers are hiring only a single partner who refuses to work with other lawyers or staff. I have been involved in cases when I was in-house where the Chinese attorney was significantly overburdened, but refused to seek help because of what this would cost. Obviously, this can be a serious problem and adversely affect a case.
Clients should obtain a written explanation of how their Chinese counsel are compensated. If this is not forthcoming, they should seek other counsel. If the firm uses an extreme eat-what-you-kill model, then the client should contract not with it, but with the specific attorneys it wishes to work with, including associates. The client can also contract with attorneys from multiple firms – although this may lead to inefficiencies and unwillingness to work together. Alternatively, the client can simply refuse to hire any firm with such a system. Some Chinese firms have adopted a more team-oriented approach, but they are hard to find.
3. Third, if you want to win (or just stay sane) you should have plenty of patience, especially before filing. Like US law on declaratory judgments (DJs), Chinese law allows a party that has been threatened with an infringement action to file a pre-emptive lawsuit to prove non-infringement. This procedure is rarely used in China, largely because of the prerequisite actions that are generally required before filing such a declaratory judgment action. No specific act or regulation has set clear rules for non-infringement declarations. However, the Supreme People’s Court has issued guidelines and judicial interpretations on this subject. These provide that the following conditions should generally be met before bringing proceedings to obtain a declaration:
Unlike under US law, this effectively gives a patentee time to file a litigation after sending a warning letter. This area of law is likely to evolve over the next few years; but for now, a declaratory judgment action is difficult to use by an accused infringer without a tactical mistake by the patent owner. Importantly, this provides no disincentive for the patent owner to contact and negotiate with the accused infringer before filing a lawsuit.
Given this lack of meaningful DJ jurisdiction, it is no wonder that Chinese judges expect that the patent owner has not just contacted the defendant before filing, but also reached a reasonable impasse in negotiations. For non-standard essential patent (non-SEP) cases, that impasse can happen very quickly. For example, if the alleged infringer simply does not respond after a few contacts, then the patentee has no choice but to file. Such a non-responsive party can also be quickly sued in a SEP case since there is no other option. If the accused infringer does respond and enter negotiations, then SEP and non-SEP cases differ. In non-SEP cases, if the patentee subjectively believes that the negotiations are not going anywhere, or the would-be defendant is lowballing them, then this is a sufficient impasse to file that patent litigation. However, for SEP cases, the bar is higher. China has seen two SEP plaintiffs seek an injunction, and both patent owners were granted the injunction. My colleague, Austin Chang, has previously summarized the IWNCOMM v. Sony case on this blog. See also this excellent IAM article for additional information on the IWMCOMM case. The second adjudicated SEP injunction case found Huawei being granted an injunction against Samsung. IAM also published another great article in which Allen & Overy Shanghai partner David Shen analyzed why the injunction was issued. Although there are many issues involved in both the IWNCOMM and Huawei cases (including that both companies are Chinese, as are over 90% of patent plaintiffs in China), the take-home message is simple. The party most at fault for the impasse in negotiations will likely lose the SEP injunction battle. Put another way, the more reasonable party will prevail. In IWNCOMM, although IWNCOMM did not provide claim charts to Sony, the court found that the patentee has no duty to provide claim charts if the intended licensee possesses sufficient documents to determine the likelihood of infringement. In this case, Sony had been uncooperatively asking IWNCOMM to provide claim charts since the parties began its negotiation in 2009 all the way through 2015 at the same time that Sony had, in its possession, sufficient documents to make a determination regarding infringement of the disputed patent. The court determined that such intentional delay warranted IWNCOMM’s request for an injunction.
In the Huawei case, the court found that Samsung employed delay tactics in the cross-license negotiation and took improper positions. Further, the court held that the license rate proposed by Huawei met the FRAND obligation since the offers were not excessively far above the global aggregate rate range (which was redacted by the court). Again, the message was to be reasonable and honest with the court.
Based on Huawei and IWNCOMM, it is clear that if an SEP owner wants an injunction in China, they must be patient and reasonable. These is no specific timetable for this. Many defendants will try to string the patent owner along for years. This is clearly unacceptable. But the defendant must have an objectively reasonable opportunity to analyze the patents involved and whether the offer by the patentee qualifies as FRAND. Note the word OBJECTIVELY. Although time will tell, common sense dictates that a party should need no more than a few months in this regard. That is, if the patent owner provides to the accused infringer claim charts and/or information about other licenses previously granted and also offers to have its technical staff discuss the patents, their reads, and the license offer, then a delay more than a 2-4 months is likely unreasonable on the part of the accused infringer. Other factors can also impact this equation, including the attitude of the defendant during discussions, how long it takes to schedule calls/meetings, and the life of the patents. However, like I said earlier, if a defendant simply will not respond or communicate with the SEP owner, then clearly an impasse has been reached and a lawsuit may be justifiably filed.
For SEP cases, patience is a required part of the triangle. For non-SEP cases, it is just advisable.
In conclusion, the rule of three is a triangle in which the strength or weakness of each corner can be offset by the others. The ideal case is one with perfect patents, top counsel, and a very patient client, but perfection is not required (or expected). To be safe, make sure you have two out of the three, or even better, a decent portion of all three.
Welcome to the China Patent Blog by Erick Robinson. Erick Robinson's China Patent Blog discusses China's patent system and China's surprisingly effective procedures for enforcing patents. China is leading the world in growth in many areas. Patents are among them. So come along with Erick Robinson while he provides a map to the complicated and mysterious world of patents and patent litigation in China.
Erick Robinson is an experienced American trial lawyer and U.S. patent attorney based in Beijing. He is a Partner at Porter Hedges LLP, where he manages patent litigation, licensing, and prosecution in China and the US.
The ideas and opinions at ChinaPatentBlog.com are my own as of the time of posting, have not been vetted with my firm or its clients, and do not necessarily represent the positions of the firm, its lawyers, or any of its clients. None of these posts is intended as legal advice and if you need a lawyer, you should hire one. Nothing in this blog creates an attorney-client relationship. If you make a comment on the post, the comment will become public and beyond your control to change or remove it.