Issuing warning letters to infringers has been a boilerplate means of enforcement in China for IP owners. Normally, except for the potential risk of a non-infringement declaratory action, there is little legal risk if a warning letter is sent to the primary infringer (a manufacturer of infringing goods in many of the cases). On the other hand, there would be much more considerations if the IP owner wants to send warning letters to the primary infringer's business partners or downstream customers, as doing so could carry potential liabilities for unfair competition or even commercial defamation.

The relevant issues are vividly highlighted in a judgment recently published by the Supreme People's Court's on an unfair competition/commercial defamation action filed by Shuanghuan (a now-defunct Chinese automobile maker) against Honda (双环汽车诉本田【(20147号】), as part of the protracted legal feud lasting around 12 years initially out of Honda's design patent infringement allegation against Shuanghuan.

In the judgment, Honda was found by the court to be liable for damages of RMB 16 million (about US$ 2.46 million) for having improperly issued warning letters. But there are comments that the damages may have been well exceeded by Honda's business gains from the warning letters in terms of Shuanghuan's sales (and its distributors' sales) that were thwarted or reduced by the warning letters.

Meanwhile, the judgment gives quite detailed explanations why the court finds some of Honda's warning letters improper while others proper. The explanations could be used as a guidance for IP owners in drafting warning letters in the future with the dual purposes of maximizing legal deterrence while minimizing risks of unfair competition or commercial defamation.

Relevant facts of the case

Honda owns Chinese design patent No. 01319523.9, and believes that the car manufactured and sold by Shuanghuan under the brand "LAIBAOS-RV" infringes this patent.

Honda has issued its various warning letters in two stages:

First stage

  • September 18 ~ October 8, 2003: Honda issues multiple warning letters to Shuanghuan and two Shuanghuan dealers. In the letters to the dealers, Honda primarily alleged that sales of Shuanghuan's cars would be infringing its patent.

Shuanghuan then modified its initial design in response to Honda's request during negotiation between the parties.

Second stage

  • October 15, 2003: Honda sent a fax to Shuanghuan stating that the modified design still infringes its patent.
  • October 16, 2003: Shuanghuan filed the subject unfair competition/commercial defamation action.
  • November 24, 2003: Honda filed a patent infringement action against Shuanghuan with a different court.
  • January 9, 2004: Honda issued warning letters to more than 10 dealers of Shuanghuan's in multiple provinces. These letters was focused on the dealers' act of sales.

Judgment and reasoning

The court finds that Honda's warning letters to Shuanghuan is proper but its warning letters to Shuanghuan's dealers, particularly letters in the second stage, are improper and constitute unfair competition, primarily .

After receiving Honda's warning letters, Shuanghuan delayed its production and modified its design while negotiation with Honda. Shuanghuan argued that Honda should be liable for its loss due to the delay and modification, but this argument was not accepted by the court. Instead, the court reasons:

Shuanghuan's behaviors (delay, modification and negotiation with Honda) indicate that the contents of Honda's warning letters (to Shuanghuan) are sufficient for Shuanghuan to realize that it could be infringing Honda's patent, and it was Shuanghuan's own decision and choice to negotiate with Honda and modify its design. In this sense, the contents of Honda's warning letters are definite to Shuanghuan. All possible loss due to the delay and modification arose out of commercial risks associated with Shuanghuan's own judgment call and Shuanghuan thus needs to bear the risks on its own.

Based on the above reasoning, the court finds Honda's issuing warning letters to Shuanghuan was a proper way of exercising its patent right.

The court however reached a different conclusion on Honda's letters to Shuanghuan's dealers, particularly letters issued in the second stage when the parties have filed formal lawsuits against each other. The court's reasoning in this regard comprises the following key points:

  1. Besides the manufacturer of the alleged infringing goods, the IP owner can also issue warning letters to sellers, importers or users of the goods (who are the IP owner's potential customers).
  2. Such sellers, importers or users usually have a weaker cognitive competence on whether infringement exists. Thus, the IP owner's warning letters to them are more likely to disrupt the manufacturer' sales, thus affecting the competition order of the relevant goods.
  3. Therefore, the IP owner assumes a higher obligation to disclose more details in warning letters to the sellers, importers of users.
  4. Honda's warning letters to the dealers failed to meet this higher obligation, particularly those in the second stage when both parties had filed lawsuits against each other. The warning letters included the same contents as those in letters to Shuanghuan, and only stated the title of the involved patent, the model name of the involved product and the possible infringing act of the dealers, but did not disclose the specific comparison and analysis why Honda saw infringement or the lawsuits filed by both parties, which information could have helped the dealers better determine whether it should stop the alleged act.

While the court finds unfair competition by Honda in issuing improperly-composed warning letters to Shuanghuan's dealers, the court did not find harm to Shuanghuan's right of honors or commercial defamation.

Takeaways for IP owners

As mentioned, despite the substantial damages the court awarded against Honda, there are comments that Honda still won the war in that it likely had stopped more extensive sales Shuanghuan could have made if Honda had not sent the letters to the dealers aggressively.

Learning from the court's reason, we may reach the following conclusions:

  1. If the potential business gain is justified, an IP owner (particularly a patent owner) can issue warning letters to the potential business partners and customers of an infringer (likely an infringing manufacturer).
  2. To avoid the risk of being held liable for unfair competition, the IP owner may choose to include more detailed information in such warning letters, specifically the following information:
  • the exact registration number and title of the IP right believed to have been infringed;
  • the exact model number of name of the infringing goods;
  • analysis why the IP owner sees infringement, where the extent of elaboration can be quite flexible but should include a minimum level of comparison of the IP right and the infringing goods;
  • whether there are ongoing legal actions between the IP owner and the manufacturer, whether there has been any ruling or decision from a government authority and if yes whether such ruling or decision has become effective or the losing party still has a right to appeal.

Imaginably, for the IP owner, the more information it discloses in such warning letters, while the lower the risk is for it to assume liabilities for damages of unfair competition, the lower the "chilling" effect the letters will carry toward the other party's business partners and distributors. The IP owner needs to carefully evaluate all relevant factors of the situation before making the best decision on how to draft the warning letters.