The article is published in ABA Landslide January/February 2014 issue (Article Link),

By Fanwen Kong and Yongbo Li , Unitalen Attorneys at Law

Enforcement of patent rights in China is a big headache for many foreign patentees. Most right holders are under the impression that, although they have valid patent rights in China, enforcement of these rights when there is infringement is practically difficult. Somehow they are afraid of taking action for enforcement. This is particularly true for cases involving chemical manufacturing processes and trade secrets, which are deemed the most difficult ones to be enforced by professionals and practitioners, because of complexity, nonobviousness, and difficulties in evidence preservation.

In spite of these difficult circumstances, in a patent infringement and trade secret case filed by American company Ashland Inc. against a Chinese chemical technology company, the parties have, on close cooperation between the plaintiff’s technical team, American attorney, and local attorneys of Unitalen, finally settled the dispute under mediation of court after a yearlong preparation and proceedings. The defendants agreed to: (1) respect Ashland’s intellectual property rights, (2) no longer use the patents and trade secrets in question of chemical manufacturing processes, and (3) pay the plaintiff ¥22 million ($3.6 million) with costs. This is a remarkable victory because it is the highest damages award paid to a foreign patentee among known patent cases in China.¹ This case is a good example of the strength of judicial protection for IP rights, the professionalism of judges in handling complicated patent cases, and the experiences of attorneys and technology teams in dealing with complicated infringement cases. This case promotes confidence among patentees in regard to judicial enforcement in China.

Facts and Findings of the Case

Ashland is a Fortune 500 company that provides specialty chemicals to customers from more than 100 countries and assumes a leading position in many industries, including the specialty chemicals for papermaking. It owns an advanced technology titled “water-in-water polymer dispersion,” which had been used by its subsidiary company in Beijing to produce the “K series” products. The K series products use water-in-water polymer dispersion as retention and drainage aids as well as flocculants in the process of papermaking; this approach could efficiently solve the environmental pollution caused by the papermaking industry. Ashland protects this technology in the form of both trade secrets (know-how) and patents.

In 2009, a former chief director of Ashland’s Beijing subsidiary joined another chemical company and established an industrial additives company (Suzhou Ruipu Industrial Additives Ltd.). The former employee was suspected of applying Ashland’s patented technology and trade secrets to manufacture a series of products similar to Ashland’s K series. The alleged infringing product directly competed with Ashland’s product and was eroding Ashland’s market share in China, which caused huge economic damages to Ashland’s Beijing subsidiary.

After preliminary analysis, Ashland believed that the former employee and the two companies had infringed upon its patents and trade secrets, and determined to enforce its legal rights. After almost one year of investigation and evidence preparation, Ashland filed lawsuits against the defendants before the Suzhou Intermediate People’s Court and the Beijing No. 1 Intermediate People’s Court, alleging patent infringement and trade secret infringement, requiring an injunction against the defendants’ infringing activities, and seeking ¥20 million ($3.3 million) damages for patent infringement and ¥7 million ($1.1 million) for trade secret infringement.

In light of the basic facts and liabilities found in the case, the court encouraged the parties to enter into a mediation agreement, where the defendants promised to no longer use the patented method and trade secrets and to pay damages in the amount of ¥22 million.

Complexity of Chemical Process Patents

Among Chinese IP rights enforcement cases, it is commonly recognized that cases involving process patents are the most difficult, especially those for manufacturing chemicals and pharmaceuticals. Infringement of such technology as trade secrets is even more difficult to prove if no criminal procedures were instituted. The Ashland case was very difficult in terms of evidence collection and technical explanation because the technology at issue was a complex method for manufacturing chemicals used in the process of papermaking.

First, it was difficult to construe the disputed product as a “new product” according to the patent law. Therefore, it was troublesome to prove that the alleged infringing process had fallen into the protection scope of Ashland’s patent. The evidence collection may only have been possible under a court order for retention of documents. However, before such order could be granted, the plaintiff needed to obtain preliminary evidence, which was difficult to obtain, to show a prima facie case by demonstrating a high likelihood of success on the merits.

Second, a comprehensive analysis over the patent claims needed to be done. Certain steps of the patented process, such as some raw materials and their additive amounts, might have been discovered through analysis. But the retention and drainage aids produced through the patented process were industrial chemical products used in papermaking and therefore could not be purchased directly in the open market.

Third, because the products were special, the majority of independent labs that the plaintiff’s attorneys contacted were incapable of rendering a comprehensive and accurate analysis of the alleged infringing product due to the lack of necessary examination devices or experience.

While the technologies in question in these cases are complicated and cannot be perceived directly, judges often need to refer to professional analysis and examination to determine whether there is any infringement. However, in certain chemical fields, finding a proper independent lab to handle relevant testing work is difficult. On the other hand, because China has no “discovery process,” the plaintiff carries an unusually heavy burden of proof. The litigation procedure can even be troublesome for the proprietors because the litigated chemical product is not a “novel product” in the patent law sense. Even if an infringement truly exists, the plaintiff may still have to struggle with production of evidence. Therefore, many patent owners, particularly those from countries that have discovery processes such as the United States, lament that China does not truly protect process patents and insufficiently protects trade secrets.

Although confronted with such difficulties, it is still necessary to collect evidence actively, to conduct a comprehensive examination, and to achieve preliminary evidence to prove infringement. In the Ashland case, it was also a critical precondition to seek a subpoena. By insightful analysis, the litigation team obtained a lot of evidence, which formed the foundation for the case to proceed smoothly.

First, the plaintiff’s attorneys contacted large independent labs in the polymer field both at home and abroad. After comparison, they chose Instrumental Analysis Center of Shanghai Jiao Tong University and an independent lab in Germany to get an entire set of sample examination methods that were complete, accurate, and repeatable. Second, a part of the defendants’ sample products in one of the defendants’ client factories was sealed under notarization and delivered to the labs in Shanghai and Germany for thorough examination. Third, the plaintiff’s attorneys and technique experts drafted a comprehensive preliminary infringement report in light of the patent claims and analysis report. Some steps of the patented method could be found directly from the analysis report, while other steps could be deduced from the analysis report by reading in combination with knowledge of the art. Though the infringement report provided no conclusive answer on certain patented steps of the method, the probability that the defendants applied the patented steps was much higher than otherwise in light of the quality of the allegedly infringing products and the fact that the defendants had actual knowledge of the plaintiff’s technology. Based on the findings above, the plaintiff filed a request before the Suzhou Intermediate People’s Court to preserve evidence and launched a patent infringement lawsuit. Through three evidence exchanges and three formal sessions, the defendants’ infringing acts were gradually revealed.

Pretrial evidence preservation, one of the major new additions to the Patent Law during its third amendment, is one of the key factors of a plaintiff’s litigation strategy. Under Article 67 of the Patent Law, as amended, to stop patent infringement, when evidence might be lost or might be hard to acquire thereafter, the patentee or interested party may, before initiating litigation, file an application with the people’s court for evidence preservation. If the people’s court takes preservation measures, it may order the applicant to provide bond. If the applicant fails to provide bond, the application will be rejected. The people’s court must make a ruling within 48 hours of acceptance of the application. If it rules to take preservation measures, such a ruling will be enforced immediately. If the applicant does not take legal action within 15 days of the ruling, the people’s court will lift such preservation measures.²

According to the above provision, the precondition for evidence preservation is that the evidence might be lost or hard to acquire thereafter. Note that unlike applying for a preliminary injunction, where a bond must be provided, whether the applicant must provide a bond when requesting an order for evidence preservation is within the discretion of the court. That is to say, if the applicant only applies for preserving evidence such as advertisements, contracts, invoices, and account books, the court may not require the bond.

In the Ashland case, the plaintiff’s attorneys applied for evidence preservation because, as in other process patent infringement cases, it was difficult for the plaintiff to obtain evidence that could prove that the defendants actually applied the patented technology in their manufacturing process; on the other hand, it was also easy for the infringing companies to hide or destroy related accounting books or production process records. The evidence preparation by the attorneys before filing the case, such as a notarized receipt of infringing products, selection of and analysis by independent labs, etc., had successfully persuaded the court to grant the pretrial evidence preservation to the plaintiff, which ensured the smooth running of the case later.

In fact, Chinese courts have been strengthening the protection for process patents. For example, Xi Xiaoming, deputy chief judge of the Supreme People’s Court of the People’s Republic of China, pointed out in his speech at the China IP Adjudication Conference that although a product obtained through patented processes is not a new product, where a patentee proves that an alleged infringer manufactured the same product, but not actual usage of the patented process by the alleged infringer, the patentee can discharge his burden of proving infringement by showing that the product was more likely to have been produced by the patented process under the circumstances in combination of known facts and conventional experience, and the burden then shifts to the alleged infringer, in accordance with relevant provisions of the civil procedure, to show that his process was different from the patented process.

Litigation Strategy for Trade Secret Cases

One of the most conspicuous features of the Ashland case is that the plaintiff filed trade secrets and patent infringement litigation simultaneously. During the patent litigation process, the plaintiff’s attorneys concluded through analysis that because some chief officers in the defendant companies once assumed important positions in the plaintiff’s company, had access to the technology in question, and produced similar products in the defendant companies after resignation, there were already the essential factors of trade secret infringement. Thus, the plaintiff filed a separate trade secret infringement lawsuit before the Beijing No. 1 Intermediate People’s Court based on evidence concerning the operation process submitted by the defendants. By referring to evidence produced in the Suzhou Intermediate People’s Court, the trial of the trade secret case was relatively smooth.

The experiences and capability of the Suzhou and Beijing courts in handling IP trials are top-level in the country. In the Ashland case, the main reason that the plaintiff filed the trade secret case in Beijing was because Suzhou was where the defendants’ factory was located, and Beijing was the headquarters of the plaintiff’s attorneys. Bringing suit at a different location may place more pressure on the opposing party.

Generally speaking, criminal procedures are most effective in handling trade secret infringement cases. However, taking all factors into consideration, Ashland tended to resort to civil procedures first and kept the criminal procedures on hold. But to the patentee, there is less chance to win a civil lawsuit over trade secret infringement, and it would be more difficult to push the case forward than in a patent infringement case.

The innate features of process patents have determined that their application is reflected in a series of production processes. Without the intervention of public powers, it is hard for patentees to know the actual and complete manufacturing process on their own. What distinguishes trade secrets from patents is the technical numerical value: in a patent specification, the technical numerical value is a range, but in trade secrets it is a specific number. Compared with patent rights, the protection of trade secrets is practically more difficult in terms of both mechanism and management. Therefore, in order to maximize commercial profits, it is common for the right holders to adopt protection measures for their core technologies at multiple levels, including patent protection and trade secret protection. In the Ashland case, Ashland has valid patent rights in the disputed technology so it could get the major trade secret infringing evidence of the defendants through patent litigation smoothly and file a civil litigation over trade secrets thereafter. Eventually, it obtained all-around protection over its core technology. After two hearing sessions, the defendants’ infringing acts gradually came out of the water. When the plaintiff achieved preferable standing in both litigation procedures, the defendants offered to discuss settlement of the cases under the mediation of the court.

One of the most difficult issues in IP cases is the amount of damages. When it came to compensation claims, the plaintiff’s attorneys submitted to the court evidence and materials that reflected the plaintiff’s loss and the defendants’ profit and achievement, which were disclosed in media reports and other publicity materials.

After several trials and hearings and based on the facts, on January 18, 2012, Ashland and the defendant companies reached settlement on both cases under the mediation of the court. The defendants undertook to respect the IP rights of Ashland, to no longer use the disputed patent and trade secrets of chemical manufacturing method, and to pay the plaintiff ¥22 million as compensation. This case has the highest compensation so far among all IP infringement lawsuits in the same field filed by foreign companies in China. Ashland obtained complete victory in both patent infringement and trade secret cases.

Attorneys’ Thoughts and Suggestions

While the defendants stopped infringement and paid a relatively large amount of compensation, Ashland substantially fulfilled its purpose of the litigation and succeeded in the enforcement of serial infringement cases. The success came from both the determination of the plaintiff and the experiences of its attorneys, and from the consistent increase in IP protection from the Chinese judiciary. This enforcement safeguarded Ashland’s interests to the maximum and assured its investment interests in China, paving the road for further investments as well as introduction of advanced technologies in China.

Some important experiences of the case for IP right owners are: first, the protection strength and trial experiences of Chinese courts on IP cases are increasing. Right holders should, with determination and confidence, take positive measures to resort to legal actions to realize their legal interests when their IP rights are infringed. For example, in the Ashland case, the judges of the Suzhou and Beijing courts manifested their expertise and experiences on the issues. The American client and attorneys were amazed by and in high praise of the trial experience, efficiency, professionalism, and accomplishment of the Chinese judges. It is very impressive that the courts resolve such complicated patent infringement and trade secret cases in about one year’s time, which might take three to four years in the United States. In this regard, the judicial protection in China is by no means weaker than that in the United States. Finally, foreign parties should be fully prepared for the differences in substantive and procedural laws between their home countries and China, by choosing litigation teams with experience and expertise to strive for the maximum interests within the Chinese legal framework.

Endnotes

1. This case has been selected as the No. 1 case of Jiangsu Top 10 IP Cases of Year 2012, one of the Top 10 Model Cases of 2012 announced by the IP Committee of the All China Lawyers Association, and one of the 50 Model Cases of 2012 announced by the Supreme People’s Court.

2. Patent Law of the People’s Republic of China (promulgated by the Standing Comm. Nat’l People’s Cong., Mar. 12, 1984, effective Oct. 1, 2009), art. 67.