Strategies for Foreign Companies Initiating Intellectual Property Litigation in China
(Simon Fang,a partner of Grandall Law Firm (Shanghai))
Updated: 2013-12-09

A few days ago, a foreign colleague asked me about how to initiate intellectual property litigation in China by a foreign company. I tried to answer this question from the view of evidence collection, trial, enforcement of decisions, etc. But after a deeper thought, I realized that it is really worthy discussing this issue further. Regarding the IP litigation, it is necessary to focus on the minute details of evidence collection and argument. However, more attention should be paid to macroscopic strategies such as the effect of litigation and competition on the market which are more important in IP litigation. In this article the strategies for initiating IP litigation by foreign countries are discussed in a way that highlights these large-scale implications.

The first step for initiating IP litigation in China is to understand the state of China. As a whole, the overall conditions in China are as follows: vast territory, large population, a large but unbalanced market, and a fast growing market. Many foreign companies desire to enter into the Chinese market on the basis of such conditions. But at the same time, because of the large market and unbalanced development between different areas, counterfeits and copies are popular in most parts of China. Because of the diligence and hardworking nature of the Chinese, it is probable that the foreign products and technologies will be improved after being copied. This phenomenon can be seen with the development within the industries of clothing, household electrical appliances, and high-speed railway technology. Considering the current situation in China, foreign companies are required to get rid of the old and bring in the new; rather than sleep on the so-called advanced technologies. The current IP protection status quo in China can be understood within the following two trends: (1) IP protection is very popular in China and the number of cases is growing very fast; (2) it is easy for the complaint to achieve the goal to stop the infringing but the damages are not very high which may be connected with the skills of evidence collection and vary from court to court.

In order to understand the overall conditions of IP protection in China, I will take an overview at the major differences in litigation between China and foreign countries.

I. Cultural differences

The differences in the concepts of litigation between China and foreign countries are huge. The attitude of most Chinese people and companies’ view toward litigation is they generally tend to avoid lawsuits. On the contrary, in most foreigners’ opinions, litigation is naturally a fair method to resolve disputes. Most companies use IP litigation as tools for commercial competition. Such huge differences between the litigation concepts lead to different litigation strategies. In practice, leaders of Chinese companies would be very anxious and worry if a foreign company initiates litigation. Before the trial, the Chinese company would have already lost mentally and publicly. Due to the influence of this culture of aversion, many Chinese companies focus on how to settle the case with money instead of figuring out how to proceed with the litigation. Some companies even give up arguing and appearing in the courts because of mental and economical pressure. These acts of the Chinese companies have led to more litigation brought by many foreign companies who would like to capitalize on this aversion to litigation in order to achieve their own commercial purposes. Taking one of the cases I participated in as an example, a well-known American pharmaceutical company sued two Chinese pharmaceutical companies for patent infringement in Shanghai and Taizhou respectively. I represented the Shanghai company. Having done research on the patents and research about the foreign company, I tried to approach the Taizhou company along with the Shanghai one. The manager of this private enterprise in Taizhou talked to me the whole night and hesitated to take actions. From our conversation, I sensed very strong anxiety from this manager when we were discussing litigation. He felt he was innocent and did not earn profits from copying foreign technology. It was an outrage for him to pay expensive damages. In addition to his problems, he did not have enough money and energy to deal with the litigation. Finally he chose to give up and agreed to settle the lawsuit with money. I asked him the reason why he agreed to settle the case before conducting research about the opposition. He responded to me that this matter was a disaster for me from God which required me to get safety with money as soon as possible. I was shocked by his response and this is a great example of the huge gap in litigation concepts between China and foreign countries. It is my guess that there are a lot of people sharing the same or similar conceptions of litigation as this manager of private enterprise in China. It would be very helpful for foreign companies to understand this Chinese aversion to litigation concept and establish litigation strategies.

Political differences

China is a one-party state. The legislative, executive and judiciary branches are split but inter-connected to each other. This political system has its own advantages and disadvantages. In my opinion, the system tends to favor foreign companies in IP litigation. My foreign colleague asked me whether it is possible to sue against the Chinese state owned enterprises. My answer was yes. In China, you will always win if you discover infringement by state owned enterprises. There are basically two reasons. The first one is that most heads of state owned enterprises are worried about “losing face” during the litigation. The second one is that it is easier for the enterprise to settle the lawsuit due to the intensive connection with the government. In General Motors Corp. (“GM”) vs. Chery Motor Company (“Chery”), GM sued Chery for copying the same type of GM motor, but GM did not apply for design patent in China, therefore, GM brought an unfair competition lawsuit in view of infringement of trade secrets. The causes of actions and their evidences were not technically profound enough in the view of law. However, GM is so famous that the Chinese central and local governments paid much attention to this suit and finally decided to mediate it with the consent of the authorities from central government. As a result, Chery continues to manufacture and sell this type of automobile in China but GM also benefits from case settlement. It can be learned from this case that the integrated political system in China can actually be a benefit for foreign companies interested in litigation.

Another trend regarding the influence of political differences on litigation is further illustrated in the following example. The new administration of the Chinese Communist Party has developed the future goal and policy philosophy of “construction of harmonious society”. From the standpoint of national politics it is certainly a good policy. This new goal has caused the judicial branch to go through major changes. Specifically, the courts and judges pay more attention to settlement and mediation rather than bringing in a fair decision or rule according to the laws. It is compulsory to mediate in the filing of a case. During the trial, the judges will also force the parties to mediate. Finally, again in the enforcement, the judges will urge the parties to reach settlement. All of this mediation is to further the goal of “construction of harmonious society”. The judges behave more like peacemakers rather than fair and balanced judicators. The judicial branch is being taken advantage of by the plaintiffs who file cases on insufficient legal and factual grounds. These frivolous cases are based on the ground of some basic facts, thinking the mediation process will result in a win. Recently I discovered that some foreign companies are using this change in the judicial system to their advantage. In a case of a valid patent and a webpage with its product name on it, a foreign company notarized such a webpage and then filed a complaint against the Chinese infringer, regardless of whether the Chinese company has started the production or sales of the products or not. In either case, the court will try to mediate between the two parties. This trend reflects the adverse effect of political initiatives on litigation.

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