China patents: SPC proposes rules on litigation and SEPs

October 31 2014

China Supreme People's Court (SPC) recently released its proposal for public comments titled Interpretations of the Supreme People's Court on Certain Issues Concerning the Application of Law in the Trial of Patent Infringement Cases II. It is a further development of the SPC's judicial interpretation on the trial of patent infringement cases. The first part of the interpretation has been implemented since January 1 2010, and has been an important source of authority for lower courts to deal with patent infringement cases. This second part covers more aspects of patent litigation and could have a significant impact on patent litigation practice.

In this Part II proposal, the SPC proposes 37 rules covering procedural issues, claim construction, determination of infringement and tests for defence, which may be applicable to all invention, utility model and design patents. Some of the rules were drawn from the judicial practice of guiding cases in recent years; some have been heavily debated since the amendment of the current Patent Law; and some others are new rules, for example those dealing with standard essential patents, which may cause some controversies.

Secondary liability (Article 25)

Secondary liability has been heavily debated in the past decade. The Tort Law enacted in 2010 builds a legal basis of joint liability for courts to hear patent infringement cases involving secondary liabilities. In the draft judiciary interpretation, the SPC specifies criteria for finding contributory and inducement liabilities, that is, knowingly providing materials or technical supports without a patentee's authorisation to assist or induce patent infringement acts. However, the SPC leaves two major issues unanswered: whether the occurrence of direct infringement is the precondition of finding secondary liability and how courts will determine damages caused by secondary liabilities.

Permanent injunction (Article 30)

The SPC lists two circumstances for not issuing a permanent injunction: a permanent injunction would damage the social public interest or would cause a serious imbalance of interests between the parties. Not surprisingly, the issues of "serious imbalance of interests" or "public interest" are unanswered in the draft rules. In a recent case adjudicated by the SPC, Wuhan Jingyuan v Kubota Kasui ((2008) Min San Zong Zi Number 8), the judges ordered monetary compensation instead of issuing a permanent injunction based on the consideration of public interest. The judges stated that the shutting down of the power plant where the patented desulphurisation process and devices are used would have a serious impact on the interest of the local residents. Now the industries may be concerned if the same kinds of tests will be introduced to cases involving standards essential patents.

Standard essential patents (Article 27)

One of the most notable provisions relates to standard essential patents. The SPC allows the courts not to issue injunctions against a patent infringer, if the patentee violates the FRAND principle and negotiates in bad faith. However, the rules are not clear enough, which arguably may expose legitimate patent owners to the risks of reverse patent hold-up. The SPC also allows the standard implementers to ask the courts to determine the patent royalty if the patentees and the licensees fail to reach agreements. Businesses are concerned whether this will open the door for the potential licensees to convert any licensing negotiations into lawsuits.

Design patents (Article 17-21)

The SPC gives significant attention to design patents. The rules clarify that a design infringement needs to be determined based on the perspectives of an ordinary consumer. The ordinary consumer is defined as a direct purchaser of the accused infringing product. The rules also introduce the concept of "design space" when comparing designs for determining infringements. The SPC further sets out standards for determining infringement regarding a "set" of products, an assembled product and a product having variable states. Companies that rely on design patents for IP protection in China need to pay close attention to this area.

Prosecution history estoppel (Article 8 and 16)

The SPC makes efforts to refine the application of the doctrine of prosecution history estoppel. It proposes that the prosecution histories of two directly related patents (like parent and divisional patents) could be used to interpret claims of each other. On the other hand, the SPC clarifies that prosecution history estoppel does not apply where the patentee proves that the amendment or statement was not accepted by an examiner or had no causality with the grounds under which the patent was granted or maintained. If such rules are accepted, we expect that litigants may fight over the file history much more rigorously.

The SPC may issue the final version of the Part II by the end of 2014, unless the Court believes the current version has generated excessive amount of controversy. There have been policy messages that China intends to step up protection of IP. Local courts have been issuing more preliminary injunctions in patent cases than before. It is an interesting moment to see how these new rules will make the patent trials fair and consistent.