A Chinese patentee was convicted in a Shanghai lower court on September 30 in connection with extorting pre-IPO enterprises by forcing them to pay to settle patent infringement lawsuits, leading to a sentencing of over four years. The case has attracted a lot of attention and is considered the first case in which a non-practising entity (NPE) was convicted of extortion for patent lawsuits.
Li Xingwen, a prolific inventor who has applied for hundreds of patents involving a wide range of technical fields such as wireless communication, touch screen and laser receiver, was charged with four counts of extortion. According to the prosecution, Li "never actually implemented the patents, but filed patent infringement lawsuits against targeted victim enterprises threatening to influence their operation, IPO and financing, and forced the victims to pay for settlement." This has caused a stir among IP practitioners who are left wondering if filing a patent lawsuit in the event that the asserted patents are not implemented, or when the defendant is in a weak position, such as at the time of an IPO, could be deemed extortion.
Fortunately, the court judgment offers relief to IP practitioners as Li was found guilty on only one count in connection with a victim named iReader. At the beginning, Li successfully collected royalties of RMB 800,000 from iReader through a patent lawsuit. However, having been irritated by a patent invalidation challenge later raised by iReader, Li fabricated a patent exclusive licence contract with another company named Budao that was also under his control and filed another patent lawsuit asserting the same patent before the court, complaining before the China Securities Regulatory Commission under the name of Budao. Under pressure of an IPO, iReader had no choice but to settle with Budao, with an additional RMB 800,000. Li was convicted of extortion because of the fabrication of a patent exclusive licence contract and for repeatedly charging the same victim royalties. The court held that the other counts did not constitute extortion because the evidence could not prove that the patent royalties or compensation fee obtained by the defendant from the victims was for the purpose of "illegal possession", or that the acts of threatening were enough to force the victims to feel fearful and dispose of property. Dismissing other counts, the court further commented that based on the available evidence here, it could only be found that the defendant filed a lawsuit or negotiated royalties against the four companies when he believed they infringed his patent rights. We cannot assume that the defendant has the purpose of illegal possession just because he filed a lawsuit or negotiated with the relevant company at a sensitive point i.e. the time of marketing or financing."
Both Li and the prosecution are reported to have appealed the judgment. Some arguments of the prosecution are highly controversial, including that most of the patents belonging to the defendant are a simple modification of prior art or a simple combination of prior art with a few R&D costs, and thus lack the basic conditions for patent enforcement, that the defendant has never won a patent litigation, nor has he ever made any preparation for litigation, and that the real purpose of the patent litigation is to bring the accused enterprise into court proceedings for the purpose of extortion rather than patent enforcement.
Thanks to its notable progress in IPR protection and the availability of patent bans, China is increasingly becoming the preferred venue for international NPEs. On the other hand, it has come to the attention of IP practitioners that many patentees are seemingly abusing patent rights, using unstable or junk patents which are usually utility model patents, which have not undergone substantive examination. We believe that this case will help to clarify the boundary between rightful patent enforcement and criminal extortion by patent abuse.
AnJie Law Firm
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