A Few Remarks on the Patent Infringement Case of Chint v. Schneider

2008/02/01,Liang Yong,[Patent]

Throughout 2007, the patent infringement case involving the Chint Group Corporation and Schneider Electric Low Voltage (Tianjin) Co., Ltd. heard by the Wenzhou Intermediate People's Court aroused wide concern among intellectual property circles because of the RMB 300 million award (approximately USD 44 million). On September 26, 2007, the Court decided in favor of Chint.  

I. Jurisdiction

Determining favorable jurisdiction for the plaintiff is a common phenomenon in IP infringement litigation.

Chint brought the action in the Wenzhou Intermediate People's Court on August 2, 2006. Initially, the amount of compensation claimed by Chint remained within the jurisdictional limitations of the court (RMB 50 million).  Chint increased the amount of res litigiosae to over RMB 300 million after it had successfully applied to the Court for the preservation of evidence within the time limits set forth by the Court. The question of jurisdiction was raised.

Several questions are brought forth if during civil litigation, the plaintiff increases the amount of res litigiosae; will the defendant be granted additional time to mount an adequate defense? Can jurisdictional objections be raised? How shall courts handle such objections? In the author's opinion, current laws do not apply. In order to guarantee equal rights for the litigants, the defendant shall be granted adequate preparation time for the amended claims. That is to say, in the event that defendant Schneider discovers new evidence to support an objection pertaining to jurisdiction, it may be raised. To analyze this issue further, let us read the followings:

Letter of the Supreme People's Court on How to Deal With Objections to Subject Matter Jurisdiction Raised by Litigants (Fahan No. (1995) 95) specifies that in the event that the litigant objects to the subject matter jurisdiction, the court that accepts the case shall carefully examine it, and shall refer the case to the court having the jurisdiction if such objection is sustained and notify the litigant, without any ruling given however. Where the court that accepts the case refuses to do so and the litigant reports the situation to the superior court and raises objections accordingly, the superior court shall make necessary investigations and careful studies, and make corresponding decisions. If the facts are correct and the reference is necessary, the superior court shall notify the inferior court to refer the case to the court with the jurisdiction. Where the inferior court refuses to refer and makes substantial judgment, the superior court may repeal such judgment and refer the case to the court with the jurisdiction. If Schneider had objected to jurisdiction, the court should have seriously reviewed its competency. In the event that the Wenzhou Intermediate People's Court persists on its right, Schneider may make a report to the Zhejiang Higher People's Court and lodge an objection. In this case, does jurisdiction fall under the Wenzhou Intermediate People's Court?

The Official Reply by the Supreme People's Court on Several Problems of Enforcing Subject Matter Jurisdiction Rules with regard to Lu Gao Fa Han No. (1994) 37 Request and Lu Gao Fa Han No. (1995) 74 Request expressly states that where the litigant adds litigant requests and increases the amount of res litigiosae to the degree beyond the court's competency, no changes will be made normally, except where the litigant intentionally evades the relevant subject matter jurisdiction rules. On this basis, to judge whether the Wenzhou Intermediate People's Court still has the subject matter jurisdiction after the increase of the res litigiosae amount, we shall figure out whether the plaintiff Chint intentionally evaded the subject matter jurisdiction rules. In fact, it is difficult to find intentional evasion in the lack of clear evidence. Therefore, according to the rule, "the burden of proof lies upon the one who claims". It was not inappropriate for the Wenzhou Intermediate People's Court to confirm its jurisdiction over this case at its discretion governed by the spirit in the official reply of the Supreme People's Court, since there is no evidence showing that Chint intentionally evaded the relevant subject matter jurisdiction rules. This also coincides with China's ongoing readjustment of subject matter jurisdiction. 

II. Issues on the defense of prior patent

The defense of prior patent in the broad sense has two scenarios: the first is that the publication date of prior patent is before the application date of claming patent (including the priority date). In fact, this is the defense of the existing technology widely accepted in the judicial practices of patent infringement judgment nowadays (or "the defense of the publicly known technology" in this case called by the court of first instance). The second scenario is reflected by a special situation of this case. The prior patent has an earlier application, but has the publication date after the application date of claiming patent.

The author does not fully agree with the scenario of prior patent defense in this case, because such defense, although not directly dealing with the effectiveness of patent, has gradually exposed the trend of function enlargement of the courts. Once such a defense pattern is accepted by practices, does it mean that someday, the suspected patent infringer is allowed to combine two or more existing technologies to "defense the free-combined technologies"? According to legal provisions, if these free combinations require no creative labor of technologists of the relevant field, the suspected patent infringer is permitted to combine freely and apply these existing technologies. Since the combined solution in itself shall not be granted patent right due to its no patentability, people applying this freely combined technology shall not be considered an infringement of the patent either. Further reasoning suggests that, Chinese courts are authorized to evaluate the creativeness of patents. Therefore, the author thinks that based on the current functional division of courts in China, courts do not have authority for directly judging a patent's effectiveness. For all legal problems where a patent's novelty or creativeness is concerned, the judgment shall lie upon the patent re-examination board. Under the present situation, it is a tough task for judges without the relevant technical background to determine whether two technical solutions are identical in the technical field, in the technical problems solved, in technical nature and in desired results. If in future, Chinese courts are granted the function of judging a patent's effectiveness, all evidence determining the ineffectiveness of the patent will naturally be introduced to defense patent infringement. 

The court of first instance determined that the prior patent defense is legally supported.

In the author's opinion, even if the prior patent defense is legally supported, it must be on a major premise: the prior patent must be the one applied to China's SIPO by another person. If the patent is applied for by the patent holder himself or by another person to the relevant organizations in foreign countries, there is no possibility for it to conflict with the posterior patent application in China.

Furthermore, its prior publication also eliminates the least possibility of affecting the posterior patent's novelty. Only on this premise, can we analyze the legitimacy of the prior patent defense in this case. The defense of publicly known technology, however, is an exception to this restrictive condition.   

Regarding the "judging criterion of exercising prior patent defense", the court of first instance holds that only when the application text of the prior patent has disclosed "all technical features of the accused infringing product with respect to the patented technology", can we uphold the prior patent defense. Therefore, we shall refer to the novelty identification standard in the Guidelines for Patent Examination.

In the present case, the court of first instance considered that the special prior patent defense and the defense of publicly known technology share a common legal basis, the judgment of whether the prior patent defense is successful should adopt the same or similar criterion as that of the publicly known technology. Specifically, the court shall compare the accused infringing technology with the prior patent and Chint's patent involved in this case. The comparison with the prior patent is the one with the full text of the prior patent, which includes the paint claims, patent specifications (appended drawings of the specifications if available). After comparison, if the accused infringing technology is more similar to the technical solution disclosed in the prior patent, the court may judge the defense successful. On the contrary, if the accused infringing technology is more intimate with the technology through which Chint claims rights, the defense fails. If the three technologies are identical,  the defense may be deemed a success.

In conclusion, the author thinks that in this case, the problem of whether "exercising prior patent defense" will be recognized by China's judicial practices is awaiting further discussion and examination. The nature of this kind of defense is that "if the defendant puts forward a conflicting application, the involved patent by the plaintiff shall be deemed invalid". Such being the logic, the author may reach a conclusion that seemingly all causes for patent invalidity may serve as the guidance for patent infringement defense, which is not consistent with the current functions of courts. In the absence of explicit legal basis of "exercising prior patent defense", the Wenzhou Intermediate People's Court deserves commendation for its innovative spirit in its (2006) Wen Min San Chu Zi No.135 civil judgment in determining the legal basis of "exercising prior patent defense" through logical reasoning. 

III. Determination of "defense on the basis of obtaining the prior patent license"

The first instance judgment, recognized the defendant Schneider as a Chinese artificial corporation located in the Tianjing Economic and Technological Development Area. Schneider presented evidence 20-25 to prove that the accused infringing technology on C65 products manufacturing is obtained from foreign companies through acquiring the enforcement right of No. ZL97125489.3 patent license. Therefore, it has a "legal technological source", and the defense may be realized through obtaining the prior patent license. The judgment from the first-instance court held that the type of "defense on the basis of obtaining prior patent license" that is independent of "defense of prior patent" is in existence. The alleged "possession of legal technological source" by Schneider is of no significance to the patent infringement determination. In the author's opinion, the preceding determination by the first-instance court was ill considered.  
Pursuant to Article 2 of the Administration of Technology Import and Export Regulations of PRC (hereinafter referred to as the Regulations); cross-border patent exploitation license is within the scope of the Regulations. Article 24 (3) expressly defines that if the use of the technology provided by the licensor by the licensee of a technology import contract in accordance with the contract infringes upon the lawful rights and interests of another person, the responsibility shall be borne by the licensor.

China depends heavily on technology import. The provision in the above paragraph is a special protection over technology importers. Under this umbrella and in the process of technology import by Chinese enterprises from foreign enterprises, once infringement controversies similar to this case occur mainly because Chinese enterprises, due to lack of experience or insufficient knowledge, have not required the technology licensors to include related right defect warranty or tort liability assumption in the technology import contract, Chinese enterprises, as technology importers, are exempted from the legal liability for infringement governed by Article 24 (3) of the Regulations. The defendant Schneider is the licensee of a technology import contract. Therefore it is justified in applying to the effective technology import contract (the contract for licensing the implementation of a patent in this case) to take "exception liberatoria". The first-instance court was not correct in refusing to acknowledge so important evidence.       

Objectively speaking, the contract for licensing the implementation of a patent submitted by Schneider has no direct impact on the judgment of patent infringement by the court, but is of great importance to the assumption of infringement liability. Article 24 (3) of the Regulations is truly the justification of assumption of patent infringement liability, although not the justification of patent infringement. The author suggests the proper procedure that the court should have taken: The court shall first examine the validity of this licensing contract. If it is true and valid, and on the condition that the accused infringing technology used by Schneider is completely from a foreign licensor, Schneider is not liable for the damages in the light of Article 24 (3) of the Regulations, even if the court determines it a patent infringement. Therefore, the first-instance court's handling of evidence provided by Schneider was obviously a violation of the original legislation in the Regulations, which is to provide special exemption protection for technology importers in China.         

It is important to note that if the technological transfer or licensing is between both Chinese parties, Article 24 (3) of the Regulations shall not be guided for the defense. Under such circumstance, even if both parties have agreed in the contract of technology transfer that the licensor must assume the right defect warranty or tort liability for the licensed technology, the technology licensee shall not resort to this contract as the jurisdiction of exemption when it is accused of infringement when using the licensed technology. This is because in the absence of express legal provisions; rules on infringement liability shall not directly bind the third party. Therefore in this case, if the court finally decides that the licensee's use of licensed technology is an infringement, the licensee has to undertake the legal obligations first, then recourse against the technology licensor based on the technology transfer contract. 

IV. How to determine compensation

The concern of the public in this case is not its complicated legal problems, but its RMB 330 million claim, as well as the first-instance court's approval for the full sum of the claim. 

"Compensation principle" or the "principle of complete indemnity" has been the fundamental principle applicable for indemnities against infringements. The "principle of punitive damages" is usually not imposed on infringers. Therefore, the determination of compensation for patent infringement shall not be divorced from this fundamental principle. 

As for the calculation method of the amount of compensation for patent infringement, Article 20 (2) and (3) of the Several Provisions of the Supreme People's Court on Issues Concerning Applicable Laws to the Trial of Patent Controversies prescribe that The damages that the right owner has suffered from the infringement may be calculated by multiplying the reduced sales volume of the patented products resulted from the infringement by the reasonable profit of every patented product. Where the reduced sales volume is hard to determine, the damages may be calculated by multiplying the total sales volume of the infringing products in the market by the reasonable profit of every patented product. The profit gained by the infringer through the infringing act may be calculated by multiplying the total sales volume of the infringing products in the market by the reasonable profit of every infringing product. The profit gained by the infringer through the infringing act is usually based on the infringer's operating profit, or based on the sales profit of the infringer who is full-time engaged in infringing acts.    

Two concepts are involved: "patented product" in the second paragraph and "infringing product" in the third paragraph of this section. According to the author's understanding, "patented product" refers to the product itself directly obtained from exploiting relevant patent. If the patent related to the case simply involves one product part, this patented part, not the product containing the patented part, which we understand usually, is the "patented product". Similarly, "infringing product" is the same product as the "patented product", not the product containing infringing part.  

Most products sold in the market are comprised of several parts. The object under direct protection of most patents is simply one part of the product. To determine the profit gained by the infringer through the infringing act in the case of part infringement, it is inappropriate to take the profit or the profit rate of the entire product as the basis for calculating the amount of damages. Then, if the fact is that only a product part is involved in the infringement case, how shall we apply to the total profit of the entire product to determine the amount of damages? It has been a problem puzzling patent judicial practices for a long time. The author suggests that the court take an overall view towards the case and rationally exercise its right of discretion to make a comparatively impersonal judgment. At least, the following questions shall be comprehensively considered by the court in the determination of the amount of damages: Is the patented part the core part of the product? Is the patent of the type of layout design or utility model or invention? What is the main contributing factor for the profit of the infringing product, the use of patented technology, or brand of the product, or marketing policy? How does the patent right owner exploit the patent? Is it direct or indirect infringement? Does it constitute a literal infringement or an equivalence infringement? How is the infringer's commercial reputation going? Is the infringer full-time engaged in infringing acts? Is the infringing act based on subject intent? How many infringing products are sold, and where are they sold? What are the normal selling price and the profit rate of the patented product? What is the fee for the exploitation of the patent or the price for the assignment of the patent right, and so on?  

According to the international convention, the fee for exploitation of a patent is usually not more than 5% of the selling price of the "patented product" or the "patented part". As for a utility model that has a relatively low creativity, the exploitation fee is generally does not exceed more than 3% of the selling price of the "patented product" or the "patented part". If all of these factors were considered in this case, the first-instance court's use of 40% of Schneider's total sales amount of the infringing products as the calculation basis, no matter what criterion is consulted, is too high. 

It is also the author's belief that the court of second instance, or the court of retrial, will give a just decision on the issues.

Special note: The author is a law-agent of China's intellectual property litigations. He was invited by China Intellectual Property to give this special contribution. The viewpoints in this text are merely his personal opinions and are only for discussions.

About the author:

Liang Yong is a lawyer from the Unitalen Attorney at Law.

                                                                                     (Translated by Hu Xiaoying)

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