NVCA Today

by Michael Vella, Richard Hung and David Yang,
Of Morrison & Foerster LLP

As the Chinese economy continues to grow, investors are increasingly considering investments in or somehow related to China. Like any other high-tech investment, China-related investments require thorough due diligence into the company's technology to understand the patent landscape. But in China due diligence only takes you so far.  Although China has made significant progress in patent protection over the last decade, foreign companies continue to view the protection and enforcement of Chinese patent rights as inconsistent and unpredictable. This article provides an overview of China's patent laws and patent litigation system so that investors will have an idea of the risks that remain after the due diligence is done.

Overview of the Chinese Patent Law

China's Patent Law （专利法） was first promulgated in 1984. It has been amended twice (in 1992 and 2000) in an effort to bring the Patent Law in line with the requirements of the Paris Convention for the Protection of Industrial Property and the WTO Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS). Currently, a third amendment of the Patent Law is under consideration to bring the law further in line with international standards. As a result of these amendments, the Chinese Patent Law largely resembles, and will increasingly resemble, U.S. patent law.

Under the Chinese Patent Law, patent protection is available in three categories - invention patents, design patents and utility model patents. Invention patents last for 20 years from the date of application, while design patents and utility model patents have a shorter term of 10 years from the date of application.

Patent applications by foreign legal persons without a habitual residence or a place of bus iness in China¹ must be made through an authorized patent agent and filed with the State Intellectual Property Office (SIPO) in Beijing,² while SIPO offices at the provincial and municipal levels are responsible for the administrative enforcement of patents.

There are, to be sure, significant differences between U.S. and Chinese patent law. For example, China, along with most of the other jurisdictions in the world, follows the "first-to-file" approach. This differs from the "first-to-invent" approach in the United States. Under the "first-to-file" approach, whoever files a patent application first has priority to obtain a patent for the invention regardless of whether that person was the first to invent it. It should, however, be noted that a patent application may still be invalidated by evidence of published prior art.  

In short, although differences remain, most patent savvy investors will find the Chinese Patent Law to be more familiar than not.

Infringement Proceedings in China

While the Chinese Patent Law largely resembles U.S. patent law, the Chinese patent litigation system is a world unto itself. To help investors assess the risks of patent litigation in China, we provide the following summary of some of the distinguishing characteristics of Chinese patent litigation.  

The first thing to know about Chinese patent litigation is that it is fast.  In the United States, the average patent case takes approximately two years. In certain U.S. jurisdictions called "Rocket Dockets," the courts have reduced the case schedule to as little as nine months.  In China, however, a patent trial on the merits can take place within six months of the filing of the complaint.  

Second, there is no discovery in Chinese litigation - no document requests, no interrogatories, and no depositions. Thus, there is no way to compel the opposing party to produce evidence relevant to the case. It is possible to apply to the court to collect evidence from the other side. But that procedure is left to the discretion of the court, which often is reluctant to apply it.

Third, as in the U.S., the burden of proof is on the plaintiff. There are situations where that burden can be shifted to the defendant. But for the most part, a plaintiff seeking to enforce its patent rights must be prepared to shoulder the burden of proof based on its own independently developed evidence. Given the plaintiff's burden of proof, the lack of discovery, and the speed of litigation, it is imperative for patent owners to prepare thoroughly before filing suit.

Fourth, there is no opportunity to challenge the validity of a patent as a defense in a patent infringement lawsuit. To challenge the validity of a patent, a re-examination request must be filed with the Patent Re-examination Board (PRB) of SIPO, which is tasked with the responsibility of determining patent validity. Parties who are dissatisfied with the PRB's decision may appeal to the People's Court within three months of receipt of PRB's decision.  A stay of the litigation pending re-examination of the asserted patent may be granted by the courts. However, the courts have the discretion not to grant a stay and, in practice, they often decline to stay the case.

Fifth, the evidentiary formalities in China can be difficult for foreign parties who are not prepared. All documents created outside of China must undergo certain formalities to be admitted as evidence. Generally, the documents must be notarized by a notary authority in the country where the document was created and then authenticated by the Chinese embassy or consulate in that country. Additional formalities may be required for authentication of witness statements. Thus, inexperienced trial counsel can easily find their evidence barred from consideration.

Sixth, the Chinese patent trial is a unique experience that bears little resemblance to U.S. patent trials. There is no jury.  Instead, cases are decided by a court composed of a panel of three judges.  The court generally conducts a series of hearings.  For example, the court may hold an "evidence exchange" hearing. At this hearing, the parties exchange the evidence on which they will rely at the trial. This procedure is supposed to give the other side an opportunity to review the evidence so as to prevent unfair surprise at trial. Of course, because there is no discovery, this will be the first time that the parties get to see the other side's evidence. If, as can happen, the trial quickly follows the evidence exchange hearing, there may be insufficient time to respond to the evidence.

The trial itself is organized into several formal stages, which do not allow for the detailed exploration of factual issues to which most U.S. companies are accustomed. Instead, the focus of the trial is on explaining and disputing the written submissions and documentary evidence. While cross-examination of witnesses is permitted, it is subject to significant time constraints.  In fact, given the tight time constraints of trial, and the perception that party witnesses are biased, witness testimony plays a far less important role than it does in U.S. patent litigation. It is not surprising, then, that the decisions in Chinese courts also tend to focus on the written presentation of evidence, especially the complaint and evidentiary statements. This different focus once again highlights the importance of early and comprehensive preparation of evidence.

Finally, there remains a great deal of uncertainty in the outcome of patent cases.  Unlike the United States, the Chinese judiciary is not wholly independent of the civil authorities. As a result, many litigants worry that the authorities will influence the outcome of a patent case. This is less of a concern for litigants in courts located in large metropolitan areas such as Beijing or Shanghai. But in jurisdictions where the Chinese company's operations are important to the local economy, these political concerns are heightened.

Conclusion

In assessing tech investments related to China, bear in mind that any litigation is inherently unpredictable. Chinese patent litigation is perhaps more so because it is still in its infancy. To address this situation, experienced U.S. patent litigators are increasingly being asked to play a role in overseeing the substance of the case and shaping the overall litigation strategy. Of course, this is only possible if the U.S. lawyers have the Chinese language skills sufficient to communicate with the local counsel and efficiently analyze the important case documents. While U.S. counsel cannot appear in the Chinese courts or advise on the Chinese patent law, their participation on the litigation team can improve the presentation of the evidence while minimizing misunderstandings between U.S. clients and Chinese counsel.  

Michael Vella, Richard Hung and David Yang work respectively in the Shanghai, San Francisco and Los Angeles offices of Morrison & Foerster LLP where they manage China-related disputes in both China and the U.S.. They can be reached at: This e-mail address is being protected from spambots. You need JavaScript enabled to view it ; This e-mail address is being protected from spambots. You need JavaScript enabled to view it ;and This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

¹Representative offices in China are generally not considered to be habitual residences or places of business. 

²Application forms may be submitted to SIPO located in Beijing or its authorized local agencies.