Taking On Patent Infringment In China

Yesterday, I did a post, entitled, "Taking On China Patent Infringment At Home," extolling the success of a U.S. company that sued a Chinese company in U.S. Federal Court for patent infringement.  Today, I came across a good article from law.com [subscription required] on a U.S. company, 3M, that successfully sued a Chinese company in Chinese court for patent infringement.  3M has been in China since 1984, when it became the first U.S. corporation to set up a wholly owned subsidiary (WFOE) there.

3M learned that Shanghai-based Dasheng Health Products Manufacture Company, Ltd., was selling look-alike respirators in Australia that "violated at least two of 3M's Chinese patents, one covering the design and a second on the structure of the mask."   Rather than pursue Dasheng directly, 3M went after the Australian mask importer, who agreed to cease importing the infringing product.  3M then decided to let the matter drop.  But after more infringing masks, traced back to Dasheng and two other Chinese companies, started appearing in Europe, 3M decided it needed to go after the source.

3M's St. Paul, Minnesota, based in house legal team wanted to sue Dasheng in civil court, but "the company's business side was wary."  The legal team eventually prevailed:

"This was not like the guy on the street selling DVDs," says Trussell, "This is an established business where we thought it would be more important to have what closely approaches a U.S. trial." After several weeks of wrangling, the company's legal and business managers agreed.

Before filing its lawsuit, 3M had to compile "a huge amount of documentation about its patents" and, as is standard for Chinese litigation, "many of these papers had to be authenticated by the nearest American consulate."   Once the Chinese court accepted the documents, the 3M China legal team drafted the complaint in English, which was then reviewed by 3M lawyers in St. Paul, and then translated into Chinese.

3M filed the complaint in August, 2005 in the Shanghai Intermediate People's Court.  Dasheng responded by denying infringement.  The Shanghai court's IP (intellectual property) division scheduled the case for a March, 2006 trial.  Trussell liked the speed of the trial, but did not like how in Chinese litigation matters "it's almost impossible to demand information from the other side."  This lack of discovery made getting Dasheng's financial records "needed to prove significant damages, like lost profits, nearly impossible."  3M had no trouble proving infringement but proving Dasheng sold the product would require an "unbroken chain of sale from Dasheng to the final distributor" in Europe."  3M requested the court inspect Dasheng's factory, where it found serial numbers coinciding with those in the catalog.  This convinced the judges of the connection between Dasheng's manufacturing and the European sales, but without Dasheng financial information, 3M could not prove the extent of the sales.

The trial took only two hours and within a month, the court issued its ruling finding the respirator Dasheng sold had infringed 3M's patents and awarding 3M approximately $31,000 in damages:   

The case is a lesson to foreign companies, many of which still neglect to file Chinese patents. It's also notable for having gone relatively smoothly: This wasn't the first patent win by a foreign company, but it was one of the easiest. There were no decrees passed down from the government, no high-powered IP specialists riding in to save the day. The case didn't grab headlines, like Pfizer's recent defense of its Viagra patent or Starbucks' January trademark win. And even though it involved a foreign company, the litigation was handled just like any other in the Shanghai court. That makes it a victory for all foreign companies operating in China, as well as one for the Chinese courts, often slammed for being weak enforcers of foreign IP rights.

After the ruling, Dasheng and 3M settled the case with Dasheng paying the damages and agreeing not to appeal to the Shanghai Intermediate People's Court, and with 3M covering its own legal fees.  3M rightfully describes this settlement as "so close to outright victory."  The "infringing masks have not since been found in Europe, China or Australia." 

3M laid the groundwork for its China court success with its China patent filings years ago:

Most importantly, 3M had well-written, straightforward Chinese patents. "A lot of companies may not have made the decision five or 10 years ago to build a patent portfolio," says Trussell. 3M had the foresight to file even before it had a significant business in the region. The key patents covering the respirator masks were filed in 1997.

The biggest problem faced by most companies in China is a lack of patents.  In China, the top foreign filers of domestic patents are mostly Asian businesses: Samsung Group, Matsushita Electric Industrial Co., Ltd., and Sony Corp. topped the list last year.  The only American company in the top 10 was IBM Corporation, which ranked sixth. 

Many of the midsize- and smaller-sized foreign companies either do not file their patents in China, or file "shoddily written patents with serious defects." 

Without patents, filing an infringement case is nearly impossible. When Intel Corp. patent counsel Hongbin Wang worked at GE Healthcare Bio-Sciences, the company discovered that a Chinese competitor was infringing a U.S. patent. "That's not a patent infringement," Wang remembers telling his managers. "There is no [Chinese] patent." The technology was originally owned by Amersham plc, which GE acquired in 2004, and Amersham hadn't filed any Chinese patents. Wang and his colleagues used the mistake to convince GE to file more in China.

Chinese companies happily exploit the thoughtlessness of their competitors. "Some Chinese companies tell me their slogan is: 'If you do not respect your IP in China, we will not either,'" says Jones Day's Wang. If the multinationals don't file patents, their Chinese competitors will. "[In] two cases here, the local companies filed our client's U.S. publication [at the Patent and Trademark Office] literally without even having any change," says Wang.

The article goes on to note that companies are increasingly filing their patents in China and the numbers bear this out; patent filings were up 36 percent in 2005 as compared to 2004. 

About a month ago, I did a post, entitled, "Whither The China Patent Filing," on the pros and cons of China patent filings for small companies doing business in China, in which I said the following:

I am less enthusiastic about filing for patent protection in China than I am about trademarks.  The decision on registering your trademark in China is easy.  If you have something valuable that can be protected by trademark, register your trademark.  It is that simple.  China's recent record on enforcing trademarks is already good and getter better and the cost of enforcing trademarks is generally relatively low.

Patents are a whole 'nother story. 

The cost of filing for a patent in China is usually more than for a trademark and the risk of rejection is also quite a bit higher and far less predictable.  China's courts are not particularly well educated on patent protection, nor are they terribly zealous in this task.  On top of this, I do think that filing a patent does increase the likelihood of someone being able to copy that which you sought to patent and the ease of their doing so.  The cost to enforce a patent in China, once violated, can be quite high. 

All of this means that the decision on whether to seek patent protection in China is anything but simple and it generally must be made on a case by case basis.  If you are Pfizer and you are looking at patenting something as valuable as Viagra, the choice is simple and clearcut.  You do it and you do whatever it takes to enforce it.  But if you are a small company with a product you hope will generate $1 million in profit from Chinese sales, and you know you are not willing to spend large sums protecting your patent should it be violated, you will need to fully analyze the situation before determining how to proceed.   

All this still holds true.