Wednesday, May 30, 2018

China: Does bifurcation mean patent validity has to be decided first?

Today I am pleased to publish a guest post by Jill Ge of Clifford Chance, on bifurcation and damages in China.

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Patent litigation is bifurcated in China, with infringement suits heard by infringement courts and patent validity decided by the Patent Re-examination Board (PRB).  It is usual for the PRB proceedings to run their course more quickly than the concurrent infringement case.  This has prompted some judges to wait for the outcome of the validity proceedings and then dismiss the infringement claims at a comparatively early stage where the PRB has declared the patent invalid.  The practice has been given further judicial encouragement following an interpretation issued by the Chinese Supreme Court in 2016, which formally allows courts to dismiss an infringement claim following a PRB invalidation decision.

Article 2 of the 2016 Judicial Interpretation II for the Adjudication of Patent Infringement Disputes (JI) says the following: "Where the rights asserted by a patentee in a patent infringement suit are declared invalid by the Patent Re-examination Board, the people's court adjudicating the infringement case concerning the invalidated patent may render a ruling to dismiss the infringement proceedings filed by the patentee."  The rule is meant to alleviate the backlog of cases in the infringement courts.

In practice, the courts will either dismiss the infringement suit or request the patentee to withdraw the suit.  As a result, a patentee facing an adverse PRB decision first needs to have the PRB decision reversed by going through the administrative appeals procedure.  It is only if the patentee is successful in overturning the PRB decision, that the patentee can then re-file the infringement suit.  In the interim, the patentee will be unable to take advantage of any measures restraining the defendant's acts. 

According to recent statistics published by the Beijing IP Court, the pattern of dismissal and/or withdrawal occurs in more than three-quarters of first-instance patent infringement cases.  Of the 668 infringement cases heard by the Beijing IP Court from November 6, 2014 to June 30, 2017, 522 cases were either dismissed or withdrawn, with decisions being issued in only 142 cases.  The four remaining cases were settled.  

Interestingly, the patentee had a high success rate of 82% in the cases decided by the Beijing IP Court, winning 116 of the 142 cases.

Article 2 of the JI contemplates that a patentee may refile an infringement suit.  However, it is unclear whether, and to what extent, the patentee may claim damages if successful.  If infringement is found, is a patentee entitled to damages for loss incurred from the earliest date of the infringement?

The answer seems to be "no", at least according to the recent case of Brother Industries, Ltd v. Ningbo Shupu Electromechanical Co., Ltd.   Brother holds a patent relating to sewing machine technology and twice sued Ningbo for patent infringement, first in 2010 and then again in 2016.  The timeline of the case is as follows:
·      Brother filed the first suit against Ningbo in the Suzhou Intermediate Court in October 2010. 
·     The PRB invalidated Brother's patent in May 2013 and the Suzhou court subsequently dismissed the infringement suit in August 2013. 
·    Brother appealed the PRB decision and the Beijing No. 1 Intermediate Court found in its favor. The Beijing High Court subsequently upheld the ruling in December 15, 2014, ordering the PRB to reconsider its decision.  *On October 21, 2015, the PRB finally upheld the validity of the patent.
·      Brother filed the infringement suit against Ningbo in the Shanghai IP Court in July 2016, claiming damages of RMB 34 million (approximately US$ 5.35 million).
·     The parties exchanged evidence in January 2017 and the trial took place in April 2017.
The accused sewing machines in the two suits were of the same models.  While the Shanghai IP Court found that Brother's patent had been infringed, it did not accept the plaintiff's damages estimate of Ningbo's illegal gains for the entire period from October 2010 to February 2017.  According to the court, Brother's estimate may not have reflected the actual sales of the infringing models.  This seems a departure from the Beijing court's recent practice where the burden shifts to the defendant to refute the plaintiff's damages estimate, see previous post.

Instead, the court focused its damages analysis mainly on the period from April 2015 to February 2017, for which the court had used its investigational power to obtain the relevant sales data from the local tax bureau.  The tax records show that Ningbo derived RMB 44,333,005 from selling the infringing models during this period.  Based on this, the court, in its discretion, ordered Ningbo to pay Brother damages of RMB 5 million (approximately US$ 800,000).  It is unclear from the decision whether any tax records were obtained in respect of the defendant's infringing sale prior to April 2015.

The RMB 5 million award is substantial by Chinese standards.  The Brother case has been published as an exemplary case of enhancing patent protection, given that the maximum amount of statutory damages is RMB 1 million.  It does however raise a question as to whether patentees are at risk of losing out under a regime where patent validity has to be litigated first, and where they are likely to be left without redress in respect of ongoing infringements when the validity proceeding is pending and on appeal.

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