In April 2014, the Weifang City Intermediate People's Court made decisions in two of five patent infringement lawsuits between GoerTek Acoustics and Knowles (Suzhou) Electronics. In both decisions, the Weifang Court ruled in favor of the plaintiff GoerTek Acoustics (hereinafter, “GoerTek”), issuing an injunction against Knowles (Suzhou) Electronics (hereafter, “the Knowles (Suzhou)”), and awarding damages of RMB 74.4 million.[1]
This is truly a spectacular figure, even as patent cases are constantly breaking records of damages. As I learn more details about the case, I cannot help being reminded of Malcolm Galdwell’s latest book, David and Goliath: Underdogs, Misfits, and the Art of Battling Giants[2], which tells stories in which an obscure small man beats a giant. Knowles (Suzhou) is a subsidiary of Knowles (U.S.), who has been a leader in the industry for more than a decade. GoerTek started as an OEM company only a few years ago. Knowles (Suzhou) is represented by Fangda Partners, a top-tier law firm in the region, while GoerTek is represented by Beyond Talent IP law firm, which was founded no more than two years ago by two partners. In view of the firms’ respective reputations, it is no wonder that the Court’s ruling came as a big surprise.
After a close analysis of the case, I believe the Weifang Court has made some innovative (and probably controversial) efforts in deciding certain issues, such as damages and injunction. I’d like to share my knowledge and comments of the case in this article.
I. Summary of the Lawsuits
The lawsuits before the Weifang Court are only a part of a global dispute between GoerTek and Knowles (U.S.). They compete in the market of micro-electrical-mechanical systems (MEMS). As part of their respective businesses, they both supply MEMS microphones to Apple and Samsung. Knowles (Suzhou), being a Chinese subsidiary of Knowles (U.S.), manufactures and sells MEMS microphones in China. According to Nomura’s 2012 Smartphone Guide,Knowles (U.S.) has a 15-20% market share. GoerTek initially started its OEM business by manufacturing Bluetooth earphones, but has gone through an incredible growth in the past few years. In 2013, for the first time, GoerTek became a supplier making Apple’s iPhone.
On June 21, 2013, at the request of Knowles (U.S), the U.S. International Trade Commission (USITC) launched a section 337 investigation against GoerTek and its California subsidiary. Knowles asserted that certain sealed products of silicon microphones provided by GoerTek had infringed three U.S. patents: Patent No.27,439,616, Patent No. 8,018,049 and Patent No. 8,121,331. On the same day, Knowles (U.S.) also filed a patent infringement lawsuit in the Northern District ofIllinois alleging infringement of the the same patents. The lawsuit has been stayed, pending the conclusion of the 337 investigation.
GoerTek fought back immediately. On July 12, 2013, it raised five patent infringement lawsuits against Knowles (Suzhou) in Weifang City,where GoerTek has its business headquarter. GoerTek asked for an injunction and damages of RMB 170 million. The five Chinese patents are CN200820187748.7, CN201020515145.2, CN201020180613.5, CN200510115448.9, and CN201020001125.3.
Knowles (Suzhou) tried to invalidate two of the five patents by filing invalidationrequests to the Patent Reexamination Board (the PRB). None of these requests succeeded. Patent CN200820187748.7 was held to be valid by the PRB, and the invalidation request against patent CN201020515145.2 was voluntarily dropped by Knowles (Suzhou). On July 31, 2013, Knowles (U.S.) filed a lawsuit in Suzhou city, asserting that GoerTek had infringed the Chinese counterpart (ZL 200580028321.1) of U.S. Patents 8,018,049 and 8,121,331. This patent, however, was later invalidated by GoerTek. Accordingly, the Suzhou Intermediate People's Court rejected Knowles(U.S.) infringement claim on April 16, 2014.
The cases before the Weifang Court moved quickly. After a two-week court hearing, the Weifang court rendered judgments as to patents CN 20082018748.7 and CN 201020515145.2. The court’s rulings are summarized as follows:
- The first defendant, Weifang Sanlian Home Electronic Appliances Co., Ltd. (hereinafter, “Weifang Sanlian”) shall immediately stop selling Samsung cell phones (model GT-I9500) containing the infringing products;
- The second defendant, Knowles (Suzhou), shall stop selling or manufacturing microphone products infringing GoerTek’s patents CN 20082018748.7 and CN 201020515145.2; and
- The second defendant, Knowles (Suzhou) shall pay RMB 74.4 million as damages to GoerTek.
At the time of this judgment, neither the USITC nor the U.S. district court has made any decision. Thus, GoerTek gained the first big victory.
II. Legal Issues
1. Exception of Injunction
An unusual result in the case is that, in addition to stopping Knowles (Suzhou) from manufacturing and selling certain MEMS microphones, the court additionally ordered the local retailer Weifang Sanlian to stop selling Samsung smart phone GT-I9500 containing the infringing microphones.
I believe such an injunction against Weifang Sanlian will cause many concerns among smart phone manufacturers and retailers. Why? Let’s look at some data. According to the 2012 Smartphone Guide issued by Nomura in 2012, in a smart phone priced at $400 (which is close to the 3000 Yuan price of the Samsung phone involved in this case), the embedded MEMS microphone usually costs roughly $0.70-0.80. Isn’t it too harsh a judgment that a tiny component worth less than $1 might destroy the entire $400 value of a phone? Further, according to RPX Report 2011, one smart phone might contain technology implicating as many as 250,000 patents, which may coverthousands of components and functions.If any single component could kick the cell phone out of the market, the business risk faced by smart phone retailers and manufacturers would be terrifying. It would also be a tremendous waste of all non-infringing parts in a smart phone.
However, Chinese courts may have no choice. Pursuant to the Chinese Torts Law and the Chinese Patent Law, injunction is a default remedy for patent infringement. The current legal framework does not provide any statutory legal ground for a judge to withhold an injunction if infringement is found. It is true that Article 70 of the Patent Law provides a “legitimate source” defense, but it is quite limited in that a retailer is only exempted from damages.
U.S. courts have adopted a much more flexible standard regarding the issue of injunction. In 2006, when deciding eBay Inc. v. MercExchange, L.L.C,the U.S.Supreme Court reversed the CAFC’s ruling, which favored the frequent use of injunctions, and stated instead that the conventional four-element test should be applied in deciding on whether to issue an permanent injunction. That test requires a plaintiff to demonstrate the following four elements: (1) that it has suffered an irreparable injury; (2) that remedies available at law are inadequate to compensate for that injury; (3) that considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted; and (4) that the public interest would not be disserved by a permanent injunction.
The standard established in eBay gives judges sufficient discretion in deciding whether to issue an injunction or not. In 2007, when deciding Paice v. Toyota,the CAFC found Toyota to have infringed the plaintiff’s patent, but declined to issue an injunction after considering that the plaintiff’s patent covers only a small part of the Toyota engine. According to CAFC, a permanent injunction was found to be inappropriate because such an injunction would likely to have bankrupted Toyota.
It is worth noting that there are precedential cases in China that the court had withheld injunctions where “public interest” was involved. In Zhuhai City Jingyi Glass Engineering Co., Ltd. v. Guangzhou Baiyun International Airport Co., Ltd.,the court found the Guangzhou Baiyun Airport to have infringed the patent, but refused toissue an injunction due to the airport’s special nature as a public transport facility. The court commented that: “… Considering the airport’s special nature as a public transport facility, an injunction will hurt the public interest.” Following this line of reasoning, the court ruled that the Guangzhou Baiyun Airport could continue the infringing conduct as long as it paid a reasonable fee to the patent owner.
Recently, developments suggest that Chinese courts are likely to move another step towards the standard of eBay. In an internal draft document being circulated among Chinese IP professors as of June 2014, the Supreme People’s Court proposes that, in addition to “public interest”, “serious imbalance of interests between parties” mightalso justify an exception to injunction.
Returning to the present case, the Weifang Court’s injunction actually stops the retailer from selling a smart phone costing RMB 3,000 Yuan, while the infringing component is only about RMB 5 Yuan. Such a significant imbalance of interests between the retailer and the patent owner seems sufficient to establish an “exception to injunction”, assuming the Supreme Court’s proposed rule is adopted.
2. Calculation of damages
The court awarded damages of more than RMB 70 million yuan. This goes far abovestatutory damages, which are at most RMB 1 million yuan. It seems that the plaintiff made a good demonstration of losses caused by the infringement while the defendantfailed to provide rebutting evidences.
Under Article 65 of the Patent Law, there are four ways for calculating damages: 1) actual losses suffered by the patent owner from infringement; 2) profits the infringer has gained from infringement; 3) reasonable multiples of royalties of the patent; and 4) statutory damages of no more than RMB 1 million yuan. It should be noted that said four methods of calculation are applied in the order stated above. A later one applies only if any preceding ones are not available.
In the present case, the plaintiff applied the first method of calculation, losses suffered by the patent owner, which is the number of infringing products multiplied by the reasonable profits of each product. Specifically, to demonstrate the reasonable profitsof each product, the plaintiff provided evidence regarding the average profit rate in the industry. Next, the plaintiff deduced the number of infringing products on the basis of two sources: sales data disclosed by Knowles (Suzhou) itself, and import/export data from Chinese customs. Combining all this information, the plaintiff successfully established a prima facie showing of how much in losses it had suffered from the infringement.
The court’s ruling is consistent with the current judicial policy and legislative trend. In awarding damages in trademark, copyright or patent infringement cases, it becomes more and more common for a court to punish the party who refuses to disclose relevant information. Specifically, if a plaintiff has met the burden of proof regarding his losses, and if a defendant does not provide any rebutting evidence, a court is likely to accept the plaintiff’s claimed amount.
For example, in the recently revised Trademark Law (2014), Article 63(2) states:
“To decide the amount of damages, the people’s court may, where the patent owner has met his or its burden of proof, infringement-related account books and documents are in the hands of the infringer, order the infringer to provide suchinfringement-related account books and documents. If the infringer fails to produce or produce false such account books or documents, the people’s court may decide the amount of damages for the infringement according to the patent owner’s claim and evidence”.
In the third legislative draft of Copyright Act, Article 76(4) also says,
“If the infringer fails to produce or produce false account books or documents, the people’s court may decide on the amount of damages for the infringement according to the patent owner’s claim.”
The above legislative changes reflect a general IP policy that a defendant shall not be allowed to conceal or suppress information that is helpful to calculate damages. If adefendant is not cooperative, then a court will simply support the losses claimed and proved by the plaintiff, instead of applying statutory damages.
3. The frightening power of utility model patent
Lastly, this Knowles case is another vivid example about how powerful a Chinese utility model patent (hereinafter “UM patent”) can be. The five infringement lawsuits filed by the plaintiff are based on four UM patents and one invention patent. So far, based on two of the UM patents, the plaintiff has received an injunction and RMB 74.4 million. The other three lawsuits are still pending.
For a long time, people were skeptical about the value of Chinese UM patents. This was largely because UM patents are granted without substantive examination, and are typically considered to be of inferior quality as compared with invention patents. These factors explain why most foreign patent applicants have not historically shown a large interest (or any interest at all) in obtaining UM patents. According to statistics from the Chinese Patent Office, of nearly 900,000 UM applications filed in 2013, only 1% were filed by foreign applicants.
However, the following chart indicates how widely UM patents are currently used in China:
Table 1: Percentage of all types of patents involved in litigation, pledge and license
Please click on the original to view the table.
As is evident from the above comparison, UM patents are more common than invention or design patents in both lawsuits, which are highly related to invalidations,and transactions.
Moreover, as is apparent from the present case, as well as the RMB 300 million caseof CHINT v. Schneider, Chinese courts are unlikely to be reluctant to award huge damages for UM patent infringement.
Perhaps it is time for people to take UM patents more seriously and adjust their IP strategies in China.
III. Conclusion
Chinese companies will likely face more IP lawsuits as they grow bigger and stronger. GoerTek v. Knowles is a good example of how Chinese companies are learning how to use patents to compete globally. Meanwhile, the decision of the Weifang Court has reflected some recent trends in Chinese patent practice, especially with regard to exception to injunction and damage calculation. It will be interesting to see how Chinese courts’standards regarding these issues evolve in future.
