9 August, 2016
Earlier this year, the Supreme People’s Court of the People’s Republic of China (“Supreme People’s Court” or “Court”) put an end to a 10-year plus patent war between a leading Japanese auto maker (“Patent Owner”) and Chinese auto maker Shuanghuan Automobile Limited Corporation (“Shuanghuan”). The Court held that the Patent Owner had violated China’s unfair competition laws by the manner in which it had conducted its cease-and-desist letter campaign against Shuanghuan and its dealers.
The war began in late 2003 when the Patent Owner sent Shuanghuan a series of cease-and–desist letters demanding that Shuanghuan concede that it had infringed the Patent Owner’s design patent, to apologize, and to immediately cease production and sales of its SUV car model. Shuanghuan responded that its SUV model was still in the design phase and that it had not infringed the asserted design patent because no models had been produced or sold.
Shuanghuan further indicated that it would redesign its product and, as a courtesy, send the redesign to the Patent Owner for comment. When Shuanghuan sent its redesign to the Patent Owner, however, the Patent Owner responded that the redesign was still infringing. Accordingly, Shuanghuan petitioned the Shijiazhuang City Intermediate People’s Court (“Shijiazhuang Intermediate Court”) for a declaratory judgment of non-infringement. The Patent Owner countered by filing an infringement action against Shuanghuan in the Beijing Higher People’s Court (“Beijing Higher Court”). In response, Shuanghuan petitioned the China Intellectual Property Office (“China IP Office”) for a declaration of invalidity, resulting in a stay of the court proceedings.
After several years, the China IP office declared the patent invalid. On appeal, the Beijing Intermediate People’s Court affirmed. The Patent Owner then appealed the decision to the Beijing Higher Court, which declined the appeal.
With the decision of the China IP Office made final, the stay was lifted in the Shijiazhuang Intermediate Court.
Shuanghuan then amended its complaint to seek damages against the Patent Owner for the costs of the redesign and retooling, as well as lost profits caused by its delayed release date. The court awarded Shuanghuan 25.79 million Yuan in damages. On appeal to the Hebei Province Higher People’s Court (“Hebei Higher Court”), the appellate court petitioned the Supreme People’s Court to hear the dispute. The Supreme People’s Court vacated the decision of the Beijing Higher Court and the China IP Office holding the asserted patent invalid, and remanded the case to the Shijiazhuang Intermediate Court for a determination on infringement. What ensued was a jurisdictional dispute that again brought the case to the Supreme People’s Court, which ruled that infringement and declaratory judgment action should be consolidated and adjudicated by the Hebei Higher Court.
The Hebei Higher Court held that Shuanghuan’s SUV did not infringe the asserted patent, finding many notable differences in both the overall shape of the vehicle and its specific features. For example, the Hebei Higher Court observed that the car design in the asserted patent was rectangular at the base and trapezoidal on top, while Shuanghuan’s design was trapezoidal with contoured edges. The court further observed that the design patent featured a windshield of similar height as the hood of the car, resulting in a more proportionate look. In contrast, in Shuanghuan’s design, the windshield was only half the height of the hood, giving the front end of the car a “thick” look.
The Hebei Higher Court further held that the Patent Owner’s conduct violated China’s unfair competition laws. The court based its holding on the following actions: (1) the Patent Owner sent a series of cease-and-desist letters to Shuanghuan threatening high damages; (2) sent numerous cease-and-desist letters to dealers of Shuanghuan vehicles demanding that they cease sales immediately; (3) sent letters to various governmental agencies accusing Shuanghuan of infringement and requesting that they stop Shuanghuan’s sales activities; and (4) conducted a media campaign accusing Shuanghuan of infringement. The court emphasized that these actions were taken before any court had rendered an opinion on infringement and were based solely on the Patent Owner’s subjective belief. Moreover, because the timing of its conduct coincided with the release of its own SUV model, the court found the Patent Owner had acted in bad faith. Finally, the Court awarded Shuanghuan 50 Million Yuan in damages, for lost sales, the costs of the redesign and retooling, and reputational damage.
On appeal, representing the third time this case has come before the Supreme People’s Court, the Court affirmed on the issues of non-infringement and unfair competition. The Court explained that while a patent owner has a right to protect its intellectual property, it must do using reasonable means and in a manner that respects the rules of fair competition. In other words, a patent owner must avoid abusing its patent rights in a way that suppresses fair competition. Whether a cease-and-desist letter constitutes a normal assertion of a patent owner’s rights or unfair competition depends on the facts and circumstances, where the primary considerations are: (1) the comprehensiveness of the letter; and (2) the accuracy of its infringement allegations. Prior to sending a cease-and-desist letter, the patent owner must conduct an infringement analysis and have proof of infringement. A cease-and-desist letter must disclose, with specificity, the patent, the patent owner, the basis for the patent right, the asserted scope of the patent, and the basis for and proof of infringement. Furthermore, the purpose of a cease and desist letter must be to enable the recipient to evaluate and assess the patent owner’s infringement allegations. The patent owner need not repeatedly threaten suit.
The Court further affirmed that a patent owner’s right to send cease-and-desist letters is not limited to the product maker/manufacturer, but extends to retailers, dealers, importers, and users of the allegedly infringing product as well. However, in communicating with these individuals, the patent owner is held to a higher duty of care than in its communications with the maker/manufacturer of the accused product. Unlike the maker/manufacturer of the accused products, these individuals have a diminished ability to evaluate the strength of the infringement allegations. Moreover, because dealer/retailers tend to be more risk adverse, merely receiving a cease-and-desist letter could cause them to pull the accused products off the shelves altogether. Since sending a cease-and-desist letter to a dealer/retailer could result in the maker/manufacturer being unable to sell its products, a cease-and-desist letter to one of these individuals must provide sufficient information to allow him or her to make a reasonable assessment of risk. Letters must be detailed, comprehensive, lay out the scope of the patent, specify the factual basis of the alleged infringement, set forth factual verifications, and include the specific action requested. Anything less could upset the normal order of a competitive market, the Court explained. Finally, based on evidence the parties submitted regarding damages, the Court reduced the damages award from 50 million Yuan to 16 million Yuan.
In this case, the Court held that the Patent Owner had not satisfied its duty of care to Shuanghuan’s dealers because its letters did not identify which similarities underlied its infringement allegations, did not disclose Shuanghuan’s non- infringement action before the Shijiazhuang Intermediate Court, and did not disclose other information that would impact the dealer’s assessment of the infringement allegations. Accordingly, the Court held that the Patent Owner exceeded its rights as a patent owner, and was therefore liable for the resulting harm to Shuanghuan.
This case illustrates an interesting intertwining between China’s patent and unfair competition law. Owners of Chinese patents should take care not to be overly aggressive in asserting their patent rights, especially when dealing with a retailer, dealer, or importer. So long as the patent owner’s conduct falls within normal business practice, a patent owner will not be responsible for the alleged infringer’s economic harm, even if the patent is ultimately held by a court to be non-infringed.
