25 Aug 2017 in Newsletter
Some Practical Considerations Before Litigating in China
Since the creation in 2014 of three IP-only courts, located in Beijing, Shanghai and Guangzhou, there has been a dramatic increase in the number of foreign companies bringing suits (against both foreign and domestic defendants) in China. Increased damage awards and the awarding of attorney fees by these courts are also attracting attention from China intellectual property rights holders. For example, last December the Beijing IP court found for the plaintiff in a patent infringement matter. It issued a $7.5M USD damages award plus a historic order to pay an additional $150K USD for attorney fees, which stands in sharp contrast to historically low recoveries in China. However, there are a number of practical considerations that many foreign companies fail to consider prior to initiating litigation in China. Our experience with litigation in China has revealed at least three surprises to foreign companies, namely formality requirements, communication, and evidence collection, which are discussed below.
Once a decision has been made to initiate litigation in China, foreign companies are often unaware of the time it may take to actually begin substantive litigation. With respect to the formality requirements mentioned above, proving ownership of a patent (especially in cases where ownership has been transferred, or is held in an IP holding subsidiary, for example), involves translation of corporate documents, and legalization and notarization of those documents, which can take weeks to obtain. For complicated corporate structures, the challenges can be significantly greater, and threaten the ability to proceed with a lawsuit entirely. Moreover, changes to the requirements to authenticate documents do occur periodically, such as the change last year to the requirements for notary registration for authentication, and add unexpected hurdles for the unaware. It should also be noted that the comparatively straightforward use of Apostille authentication for documents for use in other foreign courts is not available for China (although this is may be an option if a Hong Kong or Macau based sub-entity exists).
In general, all documents submitted to the Chinese courts must be translated, notarized, legalized, and authenticated. When discussing the requirements with Chinese counsel, great care should be taken to understand exactly what documents are necessary, as Chinese counsel are often not aware of what types of corporate documents may or may not be available due to differences between the laws governing entities in China and other jurisdictions. In a specific example that we have dealt with, a patent was originally held by a partnership, and Chinese counsel asked us to obtain the articles of incorporation, which, of course, do not exist. In other cases, declarations, copies of passports, and other personal information may be required for relevant individuals who are empowered to sign on behalf of the company. Documents can also become “stale,” which causes significant amounts of duplicate time and effort.
Accordingly, clear communication between Chinese counsel and any foreign attorney is vital. From a US perspective this often involves having a fluent Chinese speaker involved, as the formality requirements often vary from court to court in China. Working with a Chinese firm that routinely tries cases in the specific court where the infringement allegations will be brought is also critical as this local knowledge of practice and procedures by a local court is helpful in reducing the complexity inherent in these proceedings. Regardless of the Chinese counsel chosen, if a US party is the claimant, US counsel should be involved to ensure that certain US legal requirements are met. For example, ensuring compliance with the Foreign Corrupt Practices Act, such as the need to provide detailed information about experts and invoices from Chinese counsel to show the validity of payments being made, is required. For publicly traded companies, a US attorney familiar with SEC reporting requirements may also be required in order to ensure compliant reporting with respect to the litigation. On both sides, a clear understanding of deadlines is important due to the time lag in obtaining the necessary certifications and translations.
Finally, as the burden of proof lies entirely on the claimant, and very limited discovery options exist in China, collecting evidence is a significant concern in China, especially for process patents. In contrast to US-style discovery, there is very little opportunity for evidence gathering following the filing of a suit and common forms of evidence gathering in the US, such as depositions, are rarely accepted by the courts as evidence in Chinese litigation. Instead, evidence is gathered in a pre-suit investigation that may run parallel with the formality proceedings discussed above. Most Chinese counsel have relationships with firms that exist to do this type of evidence collection. Nevertheless, this process can be a slow and cumbersome one, which must be finished prior to beginning a lawsuit. The requirement to obtain samples of allegedly infringing products, or products subject to patented processes, may also bring additional challenges, as these samples are also typically required before filing the lawsuit. As an example, one case involved a manufacturing apparatus that weighed several tons and was located in the alleged infringers workshop. Infringement could not be established without investigating the apparatus rather than the product. Creative investigation techniques and close communication with Chinese counsel directing investigators on the ground is critical in such circumstances. Even establishing which entity should be the target of an investigation may require substantial investigation given the opacity of some corporate structures with multiple sub-entities in different parts of China. Evidence gathering in China is further complicated by the requirement to have evidence notarized at the time it is obtained by a Chinese notary in order to ensure its acceptance by the courts.
In general, claims of infringement can be pursued and defended both administratively and judicially. In the administrative system, challenges to the validity of issued patents are handled by the State Intellectual Property Office’s (SIPO) Patent Review and Adjudication Board (PRAB). In fact, because Chinese patent suits are limited to the issue of infringement, the PRAB is the sole venue of first instance for validity challenges. Thus, China, like Germany, has a bifurcated system (splitting validity and infringement).
With the exception of appeals from the PRAB, Chinese courts are restricted to deciding the issue of infringement. Because Chinese patent suits involve relatively little discovery, they proceed quickly and generally reach a decision on the merits six to eighteen months after filing. The overall time period to a final first-instance decision may be longer if a court stays the trial until the validity of a patent right is affirmed by SIPO. That being said, stays are awarded with a much lower frequency for matters involving invention patents compared to a utility model or design patent. This is due to the fact that invention patents are substantively examined by SIPO, whereas utility model and design patents are given a more cursory initial review. As such, absent a clear showing of why the patent is likely invalid, Chinese courts typically are more inclined to initially presume the validity of an invention patent and not grant a stay.
In cases where infringement is shown, courts have broad power to award remedies, including damages and both pre-trial and permanent injunctions. It is important to note, however, that US and Chinese courts have historically not enforced judgements issued by the other. In other words, a judgment by a Chinese court is unlikely to be enforced by a US court, and vice-versa. While there are some recent exceptions to this, planning for the post-judgment recovery and enforcement of a Chinese’s court’s decision should also be considered early in the process.