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China: the where, who and how of enforcing patents

Sources from Siemens, Nestlé, Thyssenkrupp, and a medical device company reveal how to find the best courts and law firms to protect IP in China and give insight on how enforcement there is changing

Sources from Siemens, Nestlé, Thyssenkrupp, and a medical device company reveal how to find the best courts and law firms to protect IP in China and give insight on how enforcement there is changing with the Fourth Amendment to the Patent Law

In-house sources say one of the most important considerations for foreign companies wishing to enforce their IP in China is to choose the court that best serves their corporate strategy.  

China, unlike the rest of the world, has administrative and civil branches in its judicial system. Depending on the goal of the company, one branch may be better suited than another.

The administrative courts have the advantage of being cheaper than the civil courts, and they are a good choice if the only aim is to reach a settlement with a local company. Rulings from the administrative courts are enforced by local IP offices.

“We used the administrative route against a company that was copying our product, but it was a small company,” says Oliver Pfaffenzeller, principal counsel for Siemens in Germany. “It was not hurting our business, so we chose the administrative route because it was inexpensive and we got the infringer to agree to change the product.”

For more serious acts of infringement, Pfaffenzeller says he prefers the civil courts because they are more competent and have more experience with IP.  There is also a specialised appellate court for IP that can award damages on second instance.

“Civil courts are my preferred way. They are less biased and more competent than the administrative courts. For an important case, you will always go for the civil route, even if it’s more expensive,” he says.

“When I say expensive, of course, I have to qualify that because the UK is really expensive,” he jokes. “Chinese civil courts are cheaper than Germany, and Germany is cheaper than the UK.”

The vice president of IP at a European medical device company advises foreign companies to explore courts outside of the main cities. “My first piece of advice is to go forum shopping. You need to keep in mind China is a huge country.

“There might be better courts than the ones in key eastern cities. There are other relevant courts in the eastern part of China, although a little more to the west – again, it’s a huge country. Have a broader look at courts in other jurisdictions of China,” he says

This advice comes with an important caveat. China offers two options in procedural law; to sue in the jurisdiction where the infringement took place or in the infringer’s home province. The best option is to always avoid the local jurisdiction of the infringer, says the vice president of IP.

“If you get an order against a party that is a strong local business in the jurisdiction, in my experience, there is a higher risk the judgement is less predictable,” he says.

Every guideline does have exceptions. Pfaffenzeller notes: “If the infringer resides in the area that has a good professional court system such as Shanghai or Beijing, those courts are in good shape and there’s a good chance of getting a good judgement.” He adds that even if a lower court grants an unfavourable decision in the first instance, companies can appeal to a specialised IP tribunal in Beijing. 

“It is the case that if there is a local defendant, there is a chance of getting an unfair ruling. But now this is different because you have a chance in the second instance to have the judgement reversed. This change from the beginning of the year helps you with this problem of local protectionism,” says Pfaffenzeller.

Sources say one drawback of the IP court in Beijing is that due to a heavy caseload, decisions might be delayed. The court has made strides to improve efficiency and in the first half of 2019 closed 66% more cases than the year before.

Get good help

Hiring the services of a good law firm is always essential, but that is even more the case when litigating in a foreign territory where the rules of the game an unknown. Choosing external counsel with solid experience in the desired sector is an important first decision for any foreign business new to China.

“My first piece of advice on hiring outside counsel would be to find someone with experience with these types of proceedings in China,” says Olivier Corticchiato, patent lead for nutrition at Nestlé in Switzerland.

“The second would be about communication. Find someone who can brainstorm with you in English and make sure your business objectives are well understood.”

Pfaffenzeller at Siemens agrees, adding that gaining the loyalty of your firm is another essential aspect to maintaining a good relationship. He adds that smaller sized companies should consider going with smaller sized firms.

“For a small company, looking at one of the top firms might be difficult. These firms have much bigger clients. If you are an Apple or a Samsung, they will do good things for you, but it might be more difficult for a smaller firm,” he says.

“And the better you explain your technical invention to the attorneys, the better. It helps if you explain it well and provide other arguments. The communication aspect is very important.”  

Enforcement change

While getting a favourable ruling is cause for celebration, it does not go very far if the ruling cannot be enforced. One quirk of the Chinese legal system is that an injunction cannot be enforced on a first instance decision if the infringing party appeals the ruling.

“In Germany, you can immediately enforce an injunction coming from a first instance judgement. In China, you are not able to enforce the judgment if it is appealed,” explains Pfaffenzeller at Siemens. “You have to wait until the appeal case is over and go through two instances. But I would say the second instance is fast.”

The good news is that enforcement is becoming easier after amendments to the patent law that allow for higher damages that are more in alignment with those granted by foreign countries. The Fourth Amendment to the patent law raises damages for wilful infringement to up to five times the right holder’s loss.  

“The authorities are getting more professional. Over time, the problem with enforcement is getting better,” says Corticchiato at Nestlé.

“What I can say is that I would not hesitate to start an enforcement action if the need arises. I’m pretty confident you would get a fair judgement within a timeframe that is compatible with economic considerations,” he adds.

Jeff Yu, head of IP for ThyssenKrupp China, agrees that the recent amendments will make enforcement easier for foreign companies. “In general, it's a positive development to punish the patent infringer. And if the party wilfully infringed, the total amount can be up to 10 times the statutory damages. This will protect the interest of the public rights holder and encourage companies to protect their IP in China.”  

While these changes are a good step forward, more could be done to make sure local companies abide by the law in China. One way local companies bypass an injunction is by physically moving the factory from one province to another.

“A ruling to stop an infringement is pretty narrow in China. It is only to stop a certain act of infringement. That means the other side could move their factory or change their product, which means your judgement doesn’t work anymore,” says Pfaffenzeller.

“That’s too obvious and should be an offence, a very strong offence. This should be sanctioned and I would provide for criminal means to fight this kind of behaviour.”

Striking the right balance between stopping the infringement and allowing a company to remain in business is a consideration of local authorities when deciding to enforce a ruling. “There appears to be some kind of feeling among the authorities that businesses which have been issued penalties should be allowed to continue their business,” says the vice president of IP.

“Enforcement might happen, but you don’t know if it’s being done properly or if it’s just enough to give the impression the authorities are doing something.”

Impressions aside, China has made huge strides to protect IP over the past few years. Their improvements are even more remarkable when taken into consideration that their IP system is only 30 years old.

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