Piracy and IP conflicts in China

[Len]

Speaking of intellectual property (IP) protection, lawyers generally represent the rights holder, assisting him in establishing his IP rights in China and using such means as litigation, anti-counterfeiting actions, etc. to protect those rights. However, in numerous circumstances, the client may be in an unfavorable position in an IP conflict. For example, a foreign company has yet to enter the Chinese market but its trademark has already been pirated by another; when the foreign company’s products are about to enter the Chinese market, the pirate applies for customs seizure on the strength of the pirated trademark, or even institutes an infringement action as a means of demanding that the foreign company satisfies his monetary or business claim. Furthermore, a third party may claim that the client’s products or services constitute patent or copyright infringement. If such infringement claims are inadequately addressed, they could pose a fundamental obstacle to the development of the client’s business in China. Accordingly, responding to an IP conflict under adverse circumstances is also a subject of utmost importance.

Generally speaking, responding to an IP conflict under adverse circumstances may be approached from a legal or business perspective. From a legal angle: once an IP conflict occurs and the other party asserts his rights, not only is it necessary to consider the IP itself that is embroiled in the conflict, but also to consider the response plan from multiple dimensions, such as other types of IP owned by the client, unfair competition, etc. In addition to passively responding to a suit or mounting a defense, a legal action to confirm non-infringement, or a countersuit or other manner of legal action can be considered in the response plan.

For example, as mentioned above, when a customs seizure occurs or an infringement action is instituted after the pirating of a trademark, it is necessary to first analyze whether all of the client’s products are destined for export; if they are, consideration can, in light of the perspective recently expressed by the Supreme People’s Court on original equipment manufacturers, be given to mounting a non-infringement defence on the grounds that use as per the Trademark Law is not constituted. If the pirate has only carried out customs recordal, runs interference and stretches out the matter without instituting a legal action, consideration can be given to actively instituting a legal action to confirm non-infringement so as to squelch any future problems.

In addition to responding to the infringement claim, it is also necessary to consider how to eliminate the basis on which the other party asserts the rights – for example, collecting evidence on the client’s prior rights and the other party’s bad faith in pirating the trademark so as to have the other party’s trademark invalidated on such grounds. If the other party has only registered the trademark without actually using it, consideration can also be given to the submission of an application for cancellation of the trademark on the grounds that it has not been used for three years. If the trademark has been registered for less than three years, a claim may be made in the other party’s assertion of rights for exemption from damages on the grounds that he has not actually used the trademark. In addition to the above mentioned responses addressing trademark rights, consideration can also be given to whether other IP rights owned by the client have been infringed by the other party and instituting the corresponding infringement claim to set off the other party’s claim.

Of course, when in an adverse position in an IP conflict, in addition to considering the approaches set forth above, consideration can also be given to an unavoidable settlement. If other IP rights at hand as well as claims can be used as strong bargaining chips, compelling the other party to offer relatively favorable settlement conditions, this should not be frowned upon as an unfavorable outcome. Even in the absence of a persuasive bargaining chip at hand, as a legal action or other manner of dispute resolution process is time and energy consuming for both parties, bringing the amount of time, energy and expenses that will be spent during the procedure to the attention of the other party in negotiations may also result in a relatively acceptable settlement outcome at an earlier stage.

In addition to legal solutions, commercial solutions will sometimes have an unexpected effect when responding to an IP conflict under adverse circumstances. In judicial practice, the parties in a substantial number of cases are inextricably linked to a greater or lesser extent. While considering a legal solution, designing a solution that takes into account a balancing of the business interests of the client and the other party can at times generate a result that far exceeds that of a unitary legal solution.

The author once acted as counsel for a certain foreign client, the defendant, in a patent infringement case. Although the infringement was not deliberate, because the scope of the other party’s patent claims was relatively broad, the client had lost in an infringement action at first instance before the author took over the case. The client had sought to invalidate the patent, but this claim had also been dismissed and the client lost in the administrative procedure at first instance. After analyzing the client’s potential legal defences and solutions, the author concluded that pursuing further litigation under such a circumstance was unlikely to result in a better outcome. Also, as the client’s products had been subjected to preservation by the other party, the loss that would result from unsuccessful litigation would be unbearable. Thereupon, the author set to work based on the previously existing and future potential business cooperation relationship between the client and the other party in the Chinese market, designed a business negotiation plan for the client and guided the negotiations with the other party. Finally, as the business plan proposed by the client would be beneficial to both parties in future, the other party ultimately withdrew its infringement action and licensed its patent to the client until the expiration of the patent term at a very low rate.

In short, for an enterprise to establish an effective IP system in China, not only does it require sound rights establishment, protection and infringement pursuit mechanisms, but it also needs to guard against infringement claims made by others and have a plan to respond to an IPconflict under adverse circumstances.