China Patents: Supreme Court reforms patent lawsuit rules

The Supreme Court of China released a new set of judicial interpretations governing the patent infringement lawsuits in March, which has entered into force on April 1 2016. The new judicial interpretation is intended to further enhance and clarify the way patent infringement lawsuits are done in China. Before going into the details, it may helpful to note that the Supreme Court is taking active steps to ensure the courts are playing dominant roles in handling patent disputes, as the State Intellectual Property Office is openly calling for more powers to enforce patents through administrative routes. The dual-track enforcement system in China, which was never given too much attention the past, is somehow a topic in today's China patent world. Some aspects of the new rules clearly give the courts a bigger say in driving the patent litigation proceedings.

The new rules made by the Supreme Court addresses a wide scope of issues, such as claim construction, impact of validity proceeding, design patent protection, determination of damages, standard essential patents.

Like the German system, Chinese courts do not have powers to address validity issues in an infringement proceeding. The invalidity request needs to be handled by the Patent Review Board.It has always been a concern how the invalidity proceeding interacts with the infringement proceeding. The prior judiciary interpretation makes it clear that the courts do not have to stay the infringement proceedings after the defendant initiatives the invalidity proceeding.

In this new rule, the Supreme Court allows the court to dismiss the plaintiff's claims without prejudice, if the PRB invalidates the asserted claims. The plaintiff may refile the claim once the plaintiff successfully overturns the PRB decision in the judicial review. This arguably relieves the defendant of some pressure.

The new rule also allows the court to stay the infringement proceeding, if the claims could not be construed properly due to inherent ambiguity and the defendant indeed filed the invalidity action in time.

All these changes seem to provide more certainty for infringement and invalidity proceedings.

Some people have been asking for radical reforms to allow the courts to adjudicate patentability issues. This may not be possible any time soon. The judges may be willing to look at prior art defence, which could somehow let judges review the validity issues.

The amendments aim to reach a balance between the certainty and fairness in determining protection scope of the claim. Under the new court rules, the factors in claim construction include the elements recited in the preamble and characterizing portion of a claim, the use-environment feature defined in a claim, and the specific order of steps performed. In a way, the Supreme Court raises a higher standard about drafting of patent application documents while maintaining some limited flexibility in claim construction. The Supreme Court seems to be mindful of the level of professional capability in claim drafting in China.

Patentees should be aware of these amendments so as to avoid any unnecessary limitation of a claim when filing the patent application.

The new rules have a lot to do with design protection, which may be exciting to some industries. What is particularly useful is that the new court rule introduces a concept of "design space", which refers to the extent of freedom of creation in designing relevant features. The bigger the design space is, the less likely a consumer may notice those "small" differences between the accused product and the patented design. Put another way, if a product has very limited ways of designing ("small" design space), even small changes in the design may result in non-infringement defense.

Chinese IP judges have been openly agreeing to increase damages awards. The trade mark law was amended in a way that the burden of proof is shifted in favour of the plaintiff. The new rules followed the same approach: if the patentee provides preliminary evidence about the profits of infringer for patent infringement, but the defendant fails to provide evidence such as account books, the court may determine damages based on the patentee's evidence. This might offer something dramatically new for the litigants.

The Chinese patent community has been discussing the indirect infringement liability in the patent law for past two decades. It is of big surprise that the new rules endorse them earlier than what we all expected. The new court rules recognise contributory and induced infringement – any party who for commercial purposes knowingly provides materials, devices or components to others for their having committed the direct infringement should be liable. It seems clear that the Supreme Court does not require the direct infringer must be named as a co-defendant. We probably expect to see more cases involving indirect infringement soon.

The new court rules address injunctive remedies related to SEPs. While the issue of unwilling licensee is often at the centre of the debate whether or not SEP owners are entitled to injunctions, the Supreme Court seems to look at both sides. Under the new rules, the courts will look at (a) whether or not the licensor "intentionally" violates its FRAND obligations, which leads to failure in concluding the licence and (b) whether the licensee has no "obvious fault" – which appears to be somewhere close to a standard of gross negligence. No published decisions have been available to let us know the courts actually applied such rules or thinking underneath.

The same new rules allow the licensor and potential licensees to ask the court to decide on licensing terms, including the royalty rate, if the negotiation fails. The new rules states that the courts will look at (a) the "degree of innovation" of such SEPs and the role of SEPs in the standards – which reminds us of the rule of apportionment, (b) technical fields, (c) nature of standards and (d) how the standards are implemented and related licensing terms. It will be interesting to see if licensing parties are indeed willing to use courts to mediate on the royalty rates.

The Patent Law exempts a bona fide infringer from paying damages, if such a party has no knowledge about the infringement and discloses legitimate sources of the goods.

However, the new rules carve out a new exception to such a bona fide infringer: if the user of the infringing product has paid reasonable consideration, the user does not need to stop the usage of the infringing product. The Supreme Court has stated that the amendment is intended to maintain some balance of interest. The Court is convinced that the source of infringement is the manufacturer and not the users who have no knowledge of the infringement and have paid a reasonable price. This new exception may cause some concerns to patentees, for example those who wish to stop the use of the infringement products that are in the supply chain.

The new court rules provide various exciting changes to patent practice in China. We expect that a line of new decisions will come out soon based on the new court rules. Arguably, some of the language in the new court rules is not entirely clear. We anticipate the upcoming decisions will help clarify them soon. At the same time, it will be interesting to watch how the pending amendment of the Patent Law will adopt all the changes in the new court rules. The State Council has not increased the priority of the patent law amendments. We might not see any new draft of the amendments in new future.

He Jing	Liu Liangyong

AnJie Law Firm26/F, Tower D, Central International Trade Center6A Jianguomenwai Avenue, Chaoyang District, Beijing 100022, PR ChinaTel: +86 10 8567 5988Fax: +86 10 8567 5999wuli@anjielaw.comwww.anjielaw.com