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Patent infringement in China: Finding the source

Nov 1, 2017 By Yuanyuan Tian

Article 70 of the Chinese Patent Law, which came into effect on October 1, 2009, reads: “Any person who, for production and business purpose uses, offers to sell or sells a patent-infringing product without knowing that it was made and sold without the authorisation of the patentee, shall not be liable to compensate for the damage of the patentee if he can prove that he obtained the product from a legitimate channel.”

Article 25 of the Interpretation (II) of the Supreme People’s Court on Patent Infringement Disputes, which came into effect on April 1, 2016, clarifies that:

“Where a party uses, offers for sale, or sells infringing products which have been manufactured and sold without the authorisation of the patent holder, not being aware of this and for production and business purposes and proves the legitimate source of the products with evidence, shall be supported by the People’s Court if the patent holder requests the party to stop the acts of use, offer for sale or sale, with the exception that the user of the allegedly infringing products can prove he had paid a reasonable amount for the products.

‘Not being aware’ refers to actually not being aware and should not be aware[1].

The ‘legitimate source’ refers to the situation that the products were obtained through normal means of business including legitimate sales channels, normal sales contracts, etc. Regarding the legitimate source, the user, the party offering for sale, or the seller should provide relevant evidence in conformity with the trading habits. ”

“Not being aware” is opposite to “actually know”. “Should not be aware” refers to a presumption of awareness of infringement based on evidence. In practice, it usually requires a patentee to prove that an opposing party actually knows about the infringement. For example, if the party has received a notice from a patentee, or been given an administration punishment, or even filed an invalidation request against the patent, it proves that the party actually knew this.

To summarise: (i) a person who infringes a patent by offering for sale and/or selling an infringing product from a legitimate source with no knowledge that his acts constitute patent infringement is not liable for damages but should stop the infringement acts; and (ii) a person who infringes a patent by using an infringing product from a legitimate source with no knowledge that his act constitutes patent infringement is not liable for damages and may continue to use the accused product.

The source of infringement

In Sun Junyi v Zheng Ning (2014), the Chinese Supreme Court elaborated on the intention of the legitimate source defence and held that “the legitimate source defence is prescribed in article 70 of the Patent Law in order to maintain the normal order of the market and to encourage the fight against the source of infringement”.

Obviously, the legislators believe that tracing the source of the infringing product is very important to restrain infringement. And in practice, investigating the act of making the infringing product is rather difficult compared to the acts of offering for sale or selling. The legitimate defence encourages the defendant to confess to the maker of the infringing products.

The above provisions, however, might dramatically reduce the value of a patent in some instances. For example: a patent claims a special machine for manufacturing a disposable package. The patentee operates in the markets for the machine and for the packages. The patentee sold only three such machines in China. The patentee uses its machines to manufacture the packages and its profit mainly relies on the selling of the packages. A party buys several infringing machines from an infringer through a normal channel and uses them to manufacture the packages.

If the party is sued by the patentee for infringement, it could assert the legitimate defence against the patentee to continue to use the accused machines. The damages collected from the manufacturer of the machines are generally calculated from the sale price of the machines. It normally will not cover the losses caused by continuous use of the machines by the party, because the market share of the patentee’s packages may be significantly reduced and the patentee may suffer substantial profit losses on the sale of the packages.

In this circumstance, denying the patentee a damage remedy from the party would undermine the value of the patent monopoly and lead to unjust enrichment of the party. In an extremely serious circumstance, the party might instruct the manufacturer to commit a contributory infringement in order to seize the market for the packages. It is usually very difficult for the patentee to obtain adequate evidence for prepared contributory infringement. The awarded damages from the machine maker cannot compensate the losses of the patentee in this case.

In the above example, the total exemption from patent infringement liability of the user of the accused manufacturing machine is quite arguable. There may be a compromise. In 2005 the Guangdong Higher People’s court mediated two parties in a patent infringement dispute to reach a settlement that the defendant continues to use the infringing products by paying reasonable royalties. Likewise, the financial interests of the patentee in the above example may be adequately protected by awarding reasonable royalties which are calculated based on, for example, the licensing fee minus the damage remedy from the machine maker to avoid double rewards. The innocent party held liable for the reasonable royalties may have a contractual cause of action for breach of warranty to get some protection.

In summary, the courts should be cautious and take a “total circumstance” consideration in applying the legitimate source defence in practice, especially the consequence of granting a total exemption from the liability of infringement act of use under the legitimate source defence, although there is no literal exception to the defence prescribed in the articles. ( published on WIPR Septemble/October issue, 2017)