On April 13, the Beijing Higher People's Court announced Top 10 Innovative Cases on Judicial Protection of Intellectual Property Rights for 2015. Among the listed case is one won by LexField, Beijing Fareast Concrete Articles Co., Ltd. v. Beijing Si Fang Ru Gang Concrete Articles Co., Ltd. ( 北京远东水泥制品有限公司诉北京四方如钢混凝土制品有限公司 ). The case is about how to determine whether an infringement lawsuit filed by an IP owner is a malicious one and, if yes, how the victimized party should be compensated for damages.

The court judgment on this case provides useful guidance and clarification on how a lawsuit can be characterized as a malicious one. The Beijing Higher People's Court's listing this case among the top innovative cases could be taken as a policy signal, which hopefully will serve as a deterrence toward those who are contemplating a similar lawsuit, particularly those who may wish to enforce a "junk patent". On the other end of the balance, a legitimate business, when faced with such a lawsuit or the threat of such a lawsuit, may consider how to use guidance from this case to thwart the other party's plan and even obtain a compensation.

Facts of the case

Si Fang owns Chinese invention patent No. 03105335.1 with some product claims and some process claims. The patent survived an invalidation action filed by another company. Si Fang amended the claims and the Patent Reexamination Board ("PRB") upheld the patent based on the amended claims. The surviving patent has only product claims. The PRB's decision has become effective when neither Si Fang nor that company pursued further judicial review.

Later, Si Fang filed an infringement action with Beijing Intellectual Property Court against Fareast. Fareast responded and countersued that Si Fang was filing a malicious lawsuit, on the grounds that (1) Si Fang intentionally concealed the fact that the process claims of its patent had been invalidated, and (2) Si Fang should know, from the PRB's findings in the invalidation decision, that the surviving claims of its patent do not coverFareast's product accused of infringement.

Later, Si Fang applied to withdraw the infringement action and the court approved the withdrawal. Meanwhile, at the urge from the court, Fareast withdrew the countersuit from the infringement action and filed a separate civil action for damages, which led to the subject judgment. Fareast engaged LexField to defend it in the infringement action and as of the issuance of the subject judgment, has paid certain legal fees.

Judgment

In the absence of a direct legal provision regarding malicious lawsuits, the court first recognizes that Fareast's suit for compensation has a legal basis (indirectly) in 3 laws, which are:

Article 106 of the PRC General Provisions of Civil Law - A citizen or legal person shall assume liabilities if he due to faults aggrieves the state or the collective's assets, or aggrieves other's assets or personal rights.

Article 6, Paragraph 1 of the PRC Tort Liabilities Law - An actor shall assume tortious liabilities if he due to faults aggrieves others' civil rights or interests. Article 106 of the PRC Civil Procedures Law - Civil actions shall follow the principle of honesty and credibility. The parties have the right to dispose of their own civil rights and procedural rights within the scope provided by law.

Article 106 of the PRC Civil Procedures Law - Civil actions shall follow the principle of honesty and credibility. The parties have the right to dispose

The court then defines a "malicious lawsuit" as:

"an act intentionally filed by a party for the purpose of obtaining illegal or improper interests, which has no factual and legal basis and has caused damages to the other party in the lawsuit."

The court further breaks this definition down to 4 elements:

  1. the actor makes a claim in the manner of filing an IP lawsuit, or threatens with aclaim;
  2. the actor making the claim has subjective malice;
  3. the act has actual damaging result; and
  4. there exists a causation between the act and the damaging result.

Finding of the "subjective malice" of element (2) is the key issue.

The court first defines the "subjective malice" as:

The actor, when explicitly knowing that his claim has no legitimate basis, improperly exercises his procedural rights in a manner contrary to the objective for which the procedural rights are provided, with the intention to damage the assets or reputation of the other party.

The court further reasons:

"Generally, when one files a lawsuit, he should be clearly aware of the basis of his rights.If he files a lawsuit without a rights basis, likely he has subjective malice; otherwise he cannot be held as having malice. Since substantial uncertainty exists in the determination of a party's subjective intention, the court shall take into consideration factors such as the party's specific acts and his claims.

The court then finds Si Fang's malice based on the following facts and reasoning:

  1. Si Fang abandoned the process claims of its patent in the invalidation action, but asserted these claims against Fareast. Also, Si Fang amended the product claims of the patent, but asserted the original product claims against Fareast. Si Fang was essentially asserting claims that were abandoned or amended, which shows obvious malice.
  2. Si Fang's argued that it was not clearly aware of the change of its patent due to personnel changes and use of a different patent agency for the invalidation action. But this argument is not persuasive when Si Fang submitted not evidence to substantiate it and particularly when Si Fang is a company owning multiple patents. It would be unfair to Fareast if Si Fang was exempted from liabilities merely on the grounds of internal management negligence.

On the damaging result (3), the court holds that legal fees Fareast paid to counsel to defend it in the infringement action is a financial loss.

On the causation (4), the court holds that given the complexity of patent infringement actions, it is proper for Fareast to hire outside counsel to defend itself and thus there is a causation between Si Fang's lawsuit and Fareast's legal fees.

In the end, the court ruled that Si Fang is liable for damages half of the legal fees Fareast has paid to its counsel.

Impact on junk patents

Although there have long been academic discussion on malicious lawsuits in the IP area, actual court cases are rare. Before this case, the only reported case that can be found in various databases in one decided by the Nanjing Intermediate People's Court in 2007. The Beijing Intellectual Property Court's handling of this case is in line with the Nanjing case, on substance and procedures. And the Beijing Higher People's Court's promotion of this case may be taken as a policy signal, and given this court's national influence, it is expected that courts in future similar cases very likely will follow suit.

It needs to be pointed out that Chinese courts traditionally have been reluctant to find an IP lawsuit as a malicious one; it is possible that in some of the similar cases, the courts might have simply dismissed the patent owner's infringement lawsuit but did not grant damages to the other party, and cases handled this way more likely were not widely reported. This is another reason that the current case stands out where the court allowed the suit for damages to proceed and eventually granted a non-trivial compensation, and its superior court further publicly promotes the judgment.

This case may have an impact on how companies should respond when faced with a lawsuit or threat of lawsuit from the owner of an apparent junk patent.

Junk patents normally refer to Chinese utility model or design patents that obviously have no novelty. For example they could be pirating foreign companies' technologies or designs that have been publicly known, or they could be simply patenting a subject matter that has long been in the public domain.

The utility model patent in the Nanjing case is a typical junk patent. The Nanjing court finds the patent owner's malice on the grounds that the patent is simply patenting features in an earlier national standard, the owner as an industrial old hand should have known the standard and thus the owner has malice in registering the utility model patent and then enforcing it.

We hope that this case will enhance the public's awareness of the spirit from the Nanjing case, and will spread a deterrence message to junk patent owners who may be contemplating a malicious lawsuit against a legitimate business, which in turn would contribute to a benign development of China's patent system.

On the other hand, the Nanjing court and the court on this case both appear to take it as a condition that the patent in dispute has been declare invalid before the court is willing to find the patent owner's infringement suit is a malicious one. This is because in a sister case the court on this case did not find a malicious one on the grounds that the patent has not been declared invalid and the patent owner has duly paid its annuity. If this is also part of the court's policy position, it would still mean an onerous burden on the legitimate business operators. Appeal is still ongoing on the sister case and we will provide further information when available.