Insider Analysis From Heller Ehrman LLP: How China’s Courts Determine Damages in Patent Infringement Cases

By Jason Ma, Heller Ehrman, San Francisco/Hong Kong and Michael Phillips, Heller Ehrman, Hong Kong

Patent protection has played an important role in bringing new products to market, particularly in the pharmaceutical industry. As more and more U.S.-based pharmaceutical companies set up their R&D centers in China, it is reasonable for these companies to ask the following question: How strong is patent protection in China and what are the current patent protection trends?

The strength of patent protection in any country may be assessed by an examination of many factors, including whether the system of patent prosecution is well-established; whether timely injunction orders are available and can be effectively enforced; whether significant damages are available; whether presiding officers of intellectual property tribunals have the requisite technical expertise; and whether the burden of proof on the plaintiff is too onerous to discharge.

This article summarizes how patent infringement damages are determined in China and provides an analysis of the factors that may limit the availability of patent litigation damages in China.

Available Compensation

Pharmaceutical companies doing business in China should be aware of how patent infringement cases are dealt with in China, and how proceedings differ from those in the United States.

No Punitive Damages Available

Under Chinese law, the aggrieved IP owner should be compensated for the loss he has suffered. This is the 'complete compensation principle,' which holds that the victim should be placed in the position in which he would have been had the infringement not occurred.

Therefore, punitive damages will not be granted in patent litigation in China, even if the infringement is established to have been willful.

Damage-assessment Methods

Chinese Patent Law provides that a patent holder may choose one of two methods to assess damages after a patent infringement has been established: (1) the loss sustained by the patent holder or (2) the profits derived by the infringer.

In choosing between these two methods, it is important to note that the plaintiff bears the burden of proof. In method one, losses consist of a decrease in sales volume due to the infringement, which usually are very hard to prove. As such, method two - profits derived by the infringer - is chosen more frequently to assess damages by the patent holder. Such profits may be calculated by simply multiplying the number of infringing products by the profit rate.

This calculation should take into account the premise that patent infringers usually derive a higher profit rate when selling infringing products than when selling only their own products. However, the Chinese Supreme People's Court has ruled that the profit rate of the whole business of the defendant, instead of that of the infringing operation, should be used in calculating the profits derived by an infringer, unless the defendant has engaged solely in infringing activities.

Chinese law does not provide the parties with analogous procedures available in pre-trial discovery proceedings in the United States. Rules on the admissibility of evidence are not well developed in China and there are many uncertainties as to whether an item of evidence may be admitted by the court or not. Patent owners usually find it difficult to produce evidence of the number of infringing products they reasonably believe to have been sold.

Assessment with Reference to Reasonable Royalties

Because it generally is not easy for a patent owner to satisfy the burden of proof in any of the two basic methods for assessing damages, the Chinese Supreme People's Court provided in a judicial interpretation that if it is difficult to quantify damages using either of these two methods, an alternative measure can be used. This calculation may be one-to-three times the reasonable royalty fee for the relevant patent, with the trial court determining whether a royalty fee should be the reference point and whether the amount of damages should be one, two or three times the royalty fee.

Assessment by Exercising Discretion

If it is challenging to calculate both the losses the patent holder has suffered and the profits the infringer has gained - and if it is not possible or appropriate to determine the royalty - the trial judge may determine the amount of damages between 5,000 Chinese yuan ($714) to 500,000 yuan ($71,400) depending on the circumstances of the case. This means the trial judge cannot grant damages above those maximum amounts if the patent owner fails to provide sufficient evidence to support his claim and the court does not consider it appropriate to use the royalty principle.

Court Fees and Attorneys' Fees

In China, the courts charge a court fee in all civil actions, which are based on the amount of the monetary claim made by the plaintiff. For example, if the damages the patent owner claims are 1,000,000 Chinese yuan ($142,800), the court fee will be 13,800 yuan ($1,930). The court fee usually is borne by the unsuccessful or losing party.

Chinese law allows a plaintiff in a patent claim to recover reasonable costs for necessary investigations. However, no statutory law has indicated attorneys' fees should be recovered in litigations. Although there have been cases where the courts granted reasonable attorneys' fees, claims for attorneys fees usually are rejected by the Chinese courts in patent litigation cases. Even in the few cases where attorneys' fees were granted, the amount allowed represented only a small portion of the actual attorneys' fees.

On the other hand, because there is no discovery procedure in China and the hearing usually lasts no more than one full day, attorneys' fees in patent litigation matters are much lower than those in the United States.

Other Factors Affecting Damages

The lack of a legal discovery process and other procedural differences in China are a major departure from the United States' process for handling patent infringement cases. These differences have an impact on several aspects of the proceedings, including fact finding, expert testimony and the expected duration of any lawsuit.

Fact Finding

In the absence of a discovery process in China, both parties have to rely on private investigators to collect evidence. However, the Chinese courts often refuse to accept or regard as credible any evidence obtained by private investigators. As a result, it is often the case that patent owners request a notary public to accompany their representatives when they purchase infringing products in the market. The notary will then issue a statement confirming that the goods presented as evidence in the proceedings were purchased from the defendant.

Under Chinese law, the patent owner may request the court to take measures to preserve evidence. This is limited to evidence which the plaintiff has knowledge of and which is under the control of the defendant.

Evidence and Experts' Opinions

The rules regarding the evidential burden of proof and findings of fact in China originate in the civil law. However, these rules are much less developed than in other civil law jurisdictions, such as France, Germany and Japan. China has not yet enacted an evidence law; the rules on evidence are contained in provisions of the Civil Procedure Law and several interpretations issued by the Supreme People's Court. As a result, trial judges have a great deal of discretion in deciding issues relating to the admissibility of evidence and whether judicial measures should be taken to preserve evidence.

Pharmaceutical companies also should be aware that the majority of judges in Chinese IP tribunals do not have any technical background and their understanding of technical issues depends very heavily on opinions offered by technical experts. Accordingly, technical experts' opinions can play an important role in evaluating the extent of an infringement and, consequently, the assessment of damages.

In the United States, a technical expert is appointed by one of the parties. However, in China, the appointment of an expert can only be made jointly by the parties or by the court; the appointed technical expert is required to be neutral and impartial.

Interruption of Nullity Action

As in the United States, defendants in a patent litigation case in China often will raise as a defense the notion that the underlying patent is null or invalid. U.S. law allows for issues concerning the validity of a patent and the existence of an infringement to be handled within the same proceedings. In China, these two issues are dealt with separately, by different authorities and on a contingent time frame. For example, an infringement action may be interrupted by a nullity action for two or more years.

The authority that decides actions for declaration of nullity is the Patent Re-examination Board in Beijing. In order to raise such a defense, the defendant must initiate a nullity action with the PRB and notify the court of the filing of the nullity action within the prescribed time for filing a response to the complaint of the lawsuit. The trial court may decide to suspend the infringement action until the decision on the nullity action has been made if the defendant can satisfy the court that it has a strong likelihood of being successful.

The Beijing No. 1 Intermediate People's Court has authority to review decisions of nullity actions made by the PRB. The trial court for the infringement matter does not have the authority to review PRB's decisions on the relevant nullity action. The decision of Beijing No. 1 Intermediate People's Court is subject to review by the Beijing High People's Court, whose decision on a nullity action is final.

Although the PRB's decision on a nullity action is not final, the trial court will usually continue hearing the infringement case if the PRB's decision is in favor of the patent holder. If the PRB determines that the patent is invalid, the trial court will wait for a final decision on the nullity action.

Because a nullity action may last for several years, if the defendant raises a defense that the patent is invalid and initiates a nullity action against the underlying patent, this can cause a delay in the proceedings relating to the patent infringement. Although such a delay will not have any impact on the amount of damages that may be awarded to the patent owner, it can both delay and indeed does discourage patent litigation in China.

Sanofi-Aventis Group v. Hengrui

Because of the above factors, patent damages in China remain insignificant in comparison to patent damages in the United States. So far, there have only been a handful of patent litigation cases in which damages granted to patentees were more than 500,000 yuan ($71,400). Because the amount of damages awards is relatively small, few patent infringement actions in China have involved pharmaceutical companies.

In 2003, France-based Sanofi-Aventis Group sued Jiangsu Hengrui Medicine Co. Ltd., one of the largest makers of anti-tumor drugs in China, both for infringing its process patent for docetaxel and for unfair competition. The court of first instance, Shanghai No. 2 Intermediate People's Court, took three years to find for the plaintiff.

Although the judgment issued in September 2006 favored the plaintiff, the damages granted were only 400,000 yuan ($57,000). The defendant appealed the case to the Shanghai High People's Court. In June 2007, the court overturned the lower court's finding of patent infringement. The ruling of unfair competition was upheld, but the amount of damages was reduced to 100,000 yuan ($14,300).

Recent Developments

Obstacles and limited damages notwithstanding, more recent awards in patent infringement cases in China seem to suggest that Chinese courts are becoming tougher on defendants that ignore patents.

In July 2006, Zhengzhou Intermediate People's Court granted damages of 29.8 million yuan ($4.4 million) to a patent owner. Even though the judgment was unenforceable because the underlying patent was subsequently declared invalid, this decision shows that the courts are upping the ante when it comes to patent infringement damages.

In September 2007, Schneider Electric SA, a French company with a significant business presence in China, was ordered by a local Chinese court to pay 335 million yuan ($44.6 million) in damages to a Chinese competitor for patent infringement. Schneider filed an appeal and this case is still pending.

Probably encouraged by these recent developments in China, Sanofi-Aventis Group sued Jiangsu Hengrui Medicine for patent infringement again in September 2007. This time, the underlying patent was the product patent and it was reported that the amount of damages claimed by Sanofi-Aventis Group was 100 million yuan ($14.3 million).

Conclusion

It is clear that China's economic and legal systems are changing. When examining the system of patent protection in China, pharmaceutical companies should consider the various factors that are important in assessing the strength of patent protection. More importantly, the pharma industry should pay close attention to the evolving trends of Chinese courts in dealing with these factors.

Chinese courts have historically not granted significant damages in most patent litigation cases. However, it is possible for patent owners to be awarded larger amounts of damages and it appears that the Chinese courts are now willing to award larger damages to patent owners than ever before.

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Jason Ma , an associate with Heller Ehrman in San Francisco, is a member of the firm's Asia Business Practice. Mr. Ma is a Chinese patent attorney and has significant experience in patent prosecution, design registration,, trademark prosecution and enforcement, trade name protection, copyright registration and enforcement, trade secret protection, and many aspects of intellectual property and unfair competition. Prior to starting his legal career, Mr. Ma practiced as a medical doctor in a city hospital in Guangzhou. He is going back to Heller Ehrman's Hong Kong office in August 2008. Contact Mr. Ma at [email protected].

Michael Phillips , a partner in Heller Ehrman's Hong Kong office, has a corporate finance, mergers and acquisitions, hospitality and regulatory compliance practice. Mr. Phillips' experience includes representing clients investing in or entering the China market, handling M&A transactions and advising these clients regarding their relevant regulatory compliance obligations. Contact Mr. Phillips at [email protected].