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Article: July 2019: Understanding the Unique Features of China’s Rapidly Expanding Patent System

Business Litigation Reports

China is probably now the third most important (after the United States and Germany) venue for patent prosecution and enforcement, and it is critical for companies doing business there to understand how the system works. Patent applications in China have exploded in recent years. In 2018, approximately 1.54 million patent applications were filed with the recently renamed and restructured China National Intellectual Property Administration (“CNIPA”), formerly the State Intellectual Property Office. This was a year-over-year increase of 11.6%, and was by far the most applications filed in any country in the world. The United States Patent and Trademark Office, by comparison, received approximately 640,000 applications in 2018. And while the number of patent applications has remained relatively steady in the United States in recent years, China has seen a 50% increase in just the last four years.

A significant increase in patent litigation in China has followed. Civil patent lawsuit filings in China increased 30% between 2016 and 2017 to over 16,000, exceeding United States patent lawsuits by fourfold. And while Chinese patents themselves share many similarities with their U.S. counterparts, the patent litigation systems have a number of important differences.

There Are Different Processes for Obtaining Different Types of Patents. China has a first-to-file system for three types of patents: invention, utility model, and design. An invention patent in China is valid for 20 years from filing; the application and review process typically takes three to five years; and issuance is subject to requirements of novelty, inventiveness, and practical application. Chinese utility model patents, which last ten years, protect new technical solutions relating to a product’s shape, structure or a combination thereof. But they are not substantively examined before issuance, i.e., they are not compared against prior art, and are usually granted within eighteen months of the application. Design patents in China cover the original appearance of a manufactured product and currently last ten years, but this could increase to fifteen years upon the passage of draft amendments to China’s patent laws, which are expected to go into effect by the end of this year. All three types of Chinese patents protect against manufacture, use (not applicable for design), offer for sale, sale, and importation of the patented item.

Jurisdiction in Patent Litigation Is Based on the Defendant’s Domicile. Patent infringement suits must be filed in the court where the infringer is domiciled or where the infringement occurred. Because some courts located outside of major cities are less predictable, plaintiffs often include as defendants distributors and/or other related parties based in major cities. The statute of limitations for an infringement claim in China is two years from when the plaintiff knew of or should have known of the infringement, compared to six years in the United States.

There are four levels of courts in China (in ascending order of authority): the Local People’s Court, the Intermediate People’s Court, the Higher People’s Court, and the Supreme People’s Court. Until a few years ago, most patent infringement suits were heard by the Intermediate and Local People’s Courts. Today, most are heard by specialized intellectual property courts based in major cities like Beijing, Shanghai, and Guangzhou, as well as regional IP tribunals located in cities such as Nanjing, Suzhou, and Chengdu. Similar to Germany, China has a split patent litigation system in which courts make infringement determinations, but invalidity challenges are heard in the first instance by the CNIPA, often in parallel proceedings with infringement suits.

Discovery Is Very Limited. Perhaps the most obvious and significant difference between patent litigation in China as opposed to the U.S. is the neartotal absence of compulsory discovery and the narrow rules of admissibility. Courts may, in their discretion, undertake their own evidence collection or order the parties to engage in discovery, though it is uncommon. As a result, plaintiffs often need to build much of their cases on evidence obtained through private investigators, which means they need to be careful not to violate China’s data privacy laws—which could render the evidence inadmissible and subject the plaintiffs to criminal liability.

There are signs, though, that courts in China are becoming more willing to order the preservation and disclosure of relevant evidence, though the burden to obtain such an order often remains high and the party seeking the order is typically required to post a bond. Once obtained, an evidence preservation order could allow for a party to be questioned, its premises to be inspected, or the production of documents and samples of the allegedly infringing products.

The use of experts is limited as well. Although courts in some instances may allow the parties to present expert witness testimony at trial, courts more commonly use their own expert witnesses. Even when courts do allow party experts in addition to court-appointed experts, testimony from the court-appointed experts is given far more weight.

Claim Construction Occurs at Trial. Unlike United States courts, Chinese courts conduct claim construction at trial rather than in a pretrial hearing. Completely new inventions are entitled to broader interpretation of claims, whereas improvement patent claims are construed more narrowly. Claims are also subject to prosecution history estoppel, whereby any ground surrendered during patent application (prosecution) is completely barred and the patent holder cannot assert that the patent covers the surrendered ground. This is stricter than in the United States, where only those changes linked to patentability are irrevocably surrendered.

Injunctions Are Common but Monetary Remedies May Be More Limited. Successful plaintiffs in Chinese patent litigation will normally be awarded a permanent injunction and monetary damages. The relative ease of obtaining an injunction in Chinese patent litigation is a major factor driving patent actions filed against infringers, particularly competitors. However, monetary remedies are typically much less than those in U.S. patent litigation. Currently, courts award monetary damages based on actual losses to the patent holder, disgorgement of the infringer’s profit, the equivalent of a reasonable license fee, or statutory damages at the court’s discretion between RMB 10,000 and RMB 1,000,000 (between approximately 1,400 and 140,000 US dollars). In practice, it is often difficult to obtain evidence of actual losses and the infringer’s profit, and thus, parties often receive licensing fees or statutory damages that are far less than the damages that could be available in the United States. Successful plaintiffs are sometimes awarded court fees, but attorney’s fees are usually only awarded in cases where the defendant’s conduct was egregious.

Upcoming expected reforms to China’s patent system will significantly increase the amount of monetary damages available to successful plaintiffs by (i) reducing plaintiff’s burden of proving damages where the relevant documents and evidence are primarily in the possession of the defendant infringer, (ii) increasing the maximum statutory damage to RMB 5,000,000 (approximately 720,000 US dollars), and (iii) allowing the recovery of punitive damages in exceptional cases.

While Chinese courts are authorized to issue preliminary injunctions in patent infringement cases, in practice these are very difficult to obtain, largely because of the difficulty of obtaining early discovery (including expert discovery) to establish the necessary elements of infringement and irreparable harm. In considering whether to grant a preliminary injunction, Chinese courts weigh four factors that track the factors United States courts consider: (i) the likelihood of the plaintiff proving its patent was infringed, (ii) whether the patent holder will be irreparably harmed in a manner for which monetary damages are inadequate compensation if the infringing act is not enjoined, (iii) whether the patent holder has provided an adequate bond, and (iv) whether issuance of a preliminary injunction would prejudice the public interest.

Courts Cannot Invalidate Patents. Unlike in the United States, civil courts in China cannot invalidate a patent. Although patent invalidity is available as a defense in an infringement proceeding, only the CNIPA—the patent-issuing government body—has authority to invalidate a patent. A patent invalidation proceeding may be initiated by any interested party who files a petition to invalidate with the Chinese Patent Reexamination Board (“PRB”) of the CNIPA, including by a defendant after civil patent litigation has commenced.

The PRB can invalidate patents for many reasons, including lack of novelty, lack of inventiveness (similar to obviousness in the United States), insufficient disclosure to the CNIPA during the application process, and indefiniteness of claims. Procedurally, after a party submits a petition for invalidation, the parties exchange briefing and the PRB decides whether to hold an invalidity proceeding. Oral hearings are typically granted upon either party’s request. The PRB ultimately renders a decision of validity, partial-validity, or invalidity. PRB proceedings normally take between six months and two years, and decisions may be appealed to the Beijing IP Court in the first instance and then to an Intellectual Property Rights Court for Appeals, which is akin to the Federal Circuit in the United States.

Administrative Patent Infringement Proceedings. In addition to the infringement suits in civil court summarized above, patent-holders in China can also bring an administrative action before a local Intellectual Property Office (“IPO”). These proceedings have advantages and disadvantages relative to typical civil proceedings. A local IPO can issue fines and permanent injunctions, but damages are rarely available in the proceedings and the fines are usually too small to seriously deter infringement. Local IPOs may also lack the necessary expertise to assess technically complex patents, and thus may be reluctant to find infringement.

On the other hand, these administrative actions are usually much quicker than civil litigation, often reaching completion in three to four months. Even more beneficial to patent-holders, though, is that once the patent-holder initiates a suit with evidence showing likelihood of infringement, the local IPO is empowered to conduct its own investigation, including performing on-site inspections and seizing sample products for technical evaluation. This process can be extremely useful for a plaintiff because the record created by an IPO investigation can be used in later civil litigation, as plaintiffs may file a follow-on civil suit on the same patent regardless whether the local IPO finds infringement.

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Chinese patent law continues to evolve and is becoming an ever more important part of intellectual property litigation. Companies seeking to protect their patent portfolios worldwide, or who have been accused of infringement, are increasingly likely to see Chinese litigation feature prominently in their disputes.