Having received over 1 million invention patent applications last year, China has become the leading patent filing country in the world. Many people around the world are concerned with or interested in the strength of protection for patents in China. As Chinese patent attorneys, we are frequently asked with the questions such as whether it really is worth the effort to obtain a Chinese patent, or whether it can actually be enforced in China.

In a recent ruling in Dec. 2016, Beijing’s IP Court awarded damages of 50 million RMB (approximately 7.24 million USD) in favor of a patent right owner. This is the highest damage awarded by the IP court since it was founded in 2014. This article will look at this case, and especially, look at some of the recent changes in the relevant laws as well as the court’s interpretation, hoping to provide a very general idea of what’s happening now in China.

Background

In 2015, the Chinese courts had received about 11,607 new patent related IP cases in the 1st instance court, in which only about 1327 patent cases were foreign related. A Chinese patent can certainly be enforced in the court (Also worthy of note is that they can also be enforced administratively).

Bifurcated System

However, enforcement in the court could take a significant time to reach a decision. Like Germany, we in China have adopted the same bifurcated system where infringement and patent validity are determined in two different court systems. The court may suspend the infringement proceedings, waiting for a decision on the validity of the patent. The recently implemented Interpretation (II) of the Supreme People's Court on Several Issues concerning the Application of Law in the Trial of Patent Infringement Dispute Cases (hereinafter referred to as SPC’s Interpretation II) does not really offer any actual solution to this problem.

Low Damages

In addition, the famous (and anomalous) Chint vs Schneider decision notwithstanding, the damages awarded by the Chinese court are frustratingly low. One of the main reasons is that in China, there is no discovery procedure. Hence it is very difficult to obtain accounting or sales information from the infringer. As it is rather difficult to prove the sales volume of alleged infringing products, many patentees simply seek statutory damages (from 10,000 to 1 million RMB[i]). Hence in many cases, the statutory damages awarded by the judges are often very low indeed. This problem is partially mitigated by Article 27 of the SPC’s Interpretation II and Article 75 of another SPC’s judicial interpretation[ii]. The court may order the infringer to hand over such information. In case the infringer refuses to comply, the court may support the damage claimed by the plaintiff. In addition, another comforting fact is that in the proposed draft for the next amendment of the Chinese Patent Law[iii], the amount of the statutory damages are incased to from 100,000 to 5 million RMB, and punitive damages are also introduced for willful infringement.

Technological Competence of the Judges

One more problem is that a number of Judges lack a technical background. As a result, it is extremely important for the lawyers to make sure that the judges clearly understand the relevant technology, especially in administrative ligation cases. In a pioneering effort to tackle this problem, Beijing IP court established an office for Court Appointed Experts in 23rd October in 2015.

The USB Key Patent Infringement Case (Watchdata vs Hengbao)

In this case, the plaintiff is a Chinese company (Watchdata Co Ltd), which is a manufacturer of smart secret key products (USB keys) used as electronic authentication devices in financial services. USB keys are commonly distributed by banks to customers for digital authentication and transaction security. The plaintiff discovered an infringing USB product was being manufactured and sold by Hengbao and filed the lawsuit in February 2015.

The invention patent in suit is titled "a physic identification method and an electronic device" (Patent Number: ZL200510105502.1). Watchdata accused Hengbao of developing and selling USB key products using the patent without its authorization. The court found infringement of both the product claim on the USB key itself (claim 16) and the method claim (claim 1) for the authentication process when users perform an online money transfer.

The damages awarded by the court included 49 million RMB in civil compensation plus 1 million RMB in legal fees. The damages were determined by a judicial committee, and were calculated based on the defendant’s sales and profit of the patented products, by multiplying the actual sales volume of the infringing products by the reasonable profit of each patented product.

Functional Claim (Means plus Function)

Functional language is involved in the claims for this case. When it comes to the interpretation of functional language, there is currently a difference between the State Intellectual Property Office (SIPO) and the court. SIPO would view the functional language to cover all the technical solutions that can perform the function. However, the court previously would hold that the functional language only covers the embodiments and its equivalent. As functional language is in itself an equivalent, the court wanted to avoid giving the patentee an equivalent scope based on an equivalent language (so called “double equivalent”). Hence in Article 8 of the recently implemented SPC’s Interpretation II, the scope of protection for the functional language is slightly scaled back (However, the change does not really matter for functional language. Hence it is not substantive at all).

Determination of Damages and Lawyer Fees

Determination of Damages

This case marks significant progress in terms of both the calculation of damages and the principle for determining lawyer fees.

The court traced the specific sales volume (4,814,200) of the infringing products to 12 banks nationwide, which led to actual damages of about 48.1 million RMB. However, the plaintiff found that Hengbao had provided infringing products also to three other banks: Bohai Bank, Zhejiang Rural Credit Cooperatives (United Bank) and Hubei Bank. However, because Hengbao refused to hand in profits related data, the court was unable to acquire the actual sales data from the company. Hence the court upheld the damages claimed by the plaintiff, which was based on common practice in the industry. In detail, the court presumed that the illegal profit from selling the devices to these three banks was at least 2 million RMB, and awarded 858,000 RMB in damages as claimed by the plaintiff. The legal basis for the court’s this decision was a judicial interpretation on refusals to supply evidence as mentioned earlier, i.e. Article 75 of Some Provisions of the Supreme People's Court on Evidence in Civil Procedure. In accordance with this Article, where the plaintiff can prove that the defendant is in possession of relevant evidence, if the defendant refuses to hand in the evidence without a justified reason, the court may support the claims of the plaintiff.

Determination of Lawyer Fees

The court also supported the claim of the plaintiff for reasonable expenses, i.e., the lawyer’s fee, based on the principle of “the necessity of hiring lawyers, the difficulty of the case and the actual work done by the lawyers”. For the first time, Beijing IP Court recognized the above three factors as the principle factors in judging attorney fees.

In this case, on necessity to hire a lawyer and the difficulty of the case, the court stated the following in the written judgment: it was a complicated invention infringement case in the telecommunication field, the plaintiff claimed infringement of both product and method claims, detailed and persuasive evidences were needed to support the high damages claimed by the plaintiff.

As for the actual work done by the lawyers, the court stated the following in the written judgment: the plaintiff’ lawyer attended notarized evidence collection four times, submitted hundreds of pages of written evidence and written opinions, attended five trials, attended multiple preservation of evidence on multiple occasions and conducted three series of investigation, in addition, the lawyers needed to analyze and compare two independent claims with many technical features, the lawyers also spent a lot of time to acquire evidence and calculate the profits made by the infringer. Finally, the court also reviewed the “Work Diary Between January and April in 2016” and the “Detailed Sheet of the Working Hours of Patent Infringement Lawyers” for Watchdata, and confirmed that the stated data on time spent by the lawyers was real and held that there was no evidence of falsification. Hence the court recognized that the lawyer fee claimed by the plaintiff is reasonable. As the court recognized that hourly rate can be used to calculate the lawyers fee, the court upheld the plaintiff’s claim for an amount of 1 million RMB in compensation for lawyer fees.

Future Outlook

This may be the first time that the court has awarded legal fees based on the time a lawyer spent working on a particular case, and is also seen as part of continuing trends towards higher damage awards. The Chinese court’s determination to strengthen judicial protection of patent is fully demonstrated in this case. As a matter of fact, partly thanks to better invention and patent drafting, foreign patentees have always enjoyed a consistently high success rate for patent infringement lawsuits in China (likely above 70 percent in popular jurisdictions such as Beijing and Shanghai, according to a recent exchange with a judge from Beijing IP court). Looking ahead in the future, many of the above stated problems may still persist, but one can be certain about stronger patent protection in the future in China.

(This article was originally published in The Patent Lawyer Magazine Jan/Feb 2017)