Protecting Your China IP By Forum Shopping

Excellent article over at Managing Intellectual Property, entitled, "Forum shopping comes to China."  (h/t to IP Dragon).  It's written by four lawyers from mega law firm, Jones Day, Benjamin Bai, Tony Chen, Xiang Wang, and Peter Wang, with research assistance from Lisheng Hao.  The article's tag-line is "that sophisticated Chinese companies accused of patent infringement are beginning to understand that they can derail an IP owner's enforcement strategy if they launch an action for declaration of non-infringement." 

In other words, if you make a mistake, the infringer can sue you first in its hometown:

Imagine the following scenario: Company A obtained Chinese patents to protect its product in China. Company A discovered that Company B is making and selling a competing product in a remote area of China. Knowing that the statute of limitations in China for patent infringement is two years from the time the patent owner knew or should have known of the infringement, Company A sent a cease-and-desist letter to Company B, accusing them of patent infringement and demanding immediate cessation of the infringing activities. A short while later, to the surprise of Company A, Company B filed a declaration of non-infringement suit in Company B's home court. Company A immediately filed a patent infringement lawsuit in Beijing. Alas, the Beijing court declined to accept Company A's infringement suit and ordered the case to be transferred to Company B's home court, thus putting Company A in a disadvantaged position in pursuing its infringement claims against Company B.

The article goes on to talk about the seminal Supreme People's Court decision of Suzhou Longbao Bioengineering Industrial Corp. v. Suzhou Langlifu Health Products Co, Minsantazi No. 4/2001 (Supreme People's Court, July 20 2002), in which Suzhou Longbao Bioengineering Industrial (Longbao) brought a declaratory action seeking to have the court rule that it had not infringed upon Suzhou Langlifu Health Products's (Lianglifu) patent.  Longbao brought this action in Jiangsu Higher People's Court after Langlifu had sent warning letters to Longbao's distributors accusing them of suspected patent infringement. 

Upon receiving the filing in this case, The Jiangsu Higher People's Court sought a directive from the Supreme People's Court and the Supreme People's Court held that China would recognize such a declaratory action:

"In the present case, defendant Langlifu sent a warning letter to Longbao's distributors with patent infringement accusations. As a result, the distributors ceased the sales of Longbao's products, which inflicted injury to Longbao. As such, the plaintiff [Longbao]has a direct interest in the case. In the complaint, the plaintiff identified the defendant, alleged specific facts, and provided clear reasons and grounds for relief. It also falls within the scope of civil actions to be adjudicated by People's Courts, and the jurisdiction is proper. Therefore, the People's Court should accept this case."

Since the Longbao case, a number of declaration of non-infringement suits in China, involving patents, trade marks and copyright.

In 2003, Eli Lilly sued Changzhou Huasheng Pharmaceutical (Huasheng) Co. Ltd in Qingdao, for patent infringement.  However, before Eli Lilly's patent infringement suit was accepted by the Qingdao court, Huasheng had filed a declaration of non-infringement suit against Lilly in Nanjing, Jiangsu province, based on a warning letter sent by Eli Lilly.  The Supreme People's Court was asked which of the two lawsuits should go forward and it ruled the Jiangsu province suit should take precedence because it was the first case to be accepted by a court.  The court further ruled that the Qingdao lawsuit would need to be consolidated with the Jiangsu lawsuit and both would go forward in Jiangsu.  Consolidation of the two cases prevents duplicative litigation and potentially inconsistent rulings.

According to the article, though the Supreme People's Court "has unequivocally established declaration of non-infringement actions, it has yet to provide jurisdictional guidelines for such suits":

In particular, it is not clear what the threshold is for declaration of non-infringement. Recent cases have shown that a cease-and-desist letter that accuses infringement would trigger the jurisdiction. It is, however, not clear if a public statement, such as a press release, accusing infringement in a general way is sufficient ground for declaratory actions in China.

In a case involving Honda Motors, The Supreme People's Court stated that a declaration of non-infringement action constitutes an IP infringement cases and, therefore, venue for such actions "is determined in the same way as for IP infringement, i.e. where the defendant has domicile or where the product at issue is made, sold or offered for sale." This means accused infringers can establish "home court advantage against the IP owner by filing a declaratory action."

The article goes on to contrast China's patent declaratory judgment actions with those in the United States and in Europe:

In the US, a declaratory judgment action by an accused infringer is proper if the IP owner's conduct created on the part of the accused infringer a reasonable apprehension of imminent suit if it continues the allegedly infringing activity, and if the accused infringer has either produced the device or prepared to produce it.

In Germany, however, an infringer can file a lawsuit for a declaration of non-infringement so long as the infringer can show that he or she has a "legal interest" in this declaration. Usually, a person has the necessary legal interest if he has been accused by the IP owner of infringement, for example, in a warning letter sent to the infringer, in summary court proceedings brought by the patentee, or in other public statements.

The English courts take yet another approach: a declaration of non-infringement of a patent action is proper if it is shown that the applicant has asked the IP owner for a written acknowledgment for a declaration of non-infringement and has provided the details of the applicant's act in question; and if the IP owner has refused to give such acknowledgment.

The Supreme People's Court has issued draft rules that suggest China may adopt some of the German and English standards for declaratory actions. 

Because a letter accusing a potential infringer of IP infringement may be exactly what that infringer needs to sue you first and secure its home court advantage, companies must be very careful before sending potential infringers any sort of warning letter.  The Jones Day lawyers believe "a warning letter soliciting negotiation or a license is unlikely to trigger a declaratory action," and that if such a letter does not work, the party whose IP is being infringed upon should then sue in the venue of its choice.

This is a great article and should serve as a warning to companies who may think that quickly going on the offensive against IP infringers carries no risk.  IP Dragon sums up the differences between China's courts on IP issues, nicely, if perhaps a bit too mildly:

The people's courts of big cities are generally perceived as rather fair and having expertise in the field of IP, instead of some of the courts in smaller cities that may be prone to local protectionism and have a much lower level of expertise in the field of IP.

Bottom Line:  If you want to be litigating your IP infringement action in a place like Shanghai or Beijing, as opposed to somewhere like Liuzhou or Hefei, consult with your attorney before you send out a thing.