Judicial Determination of Sellers’ Legitimate Source Defense in Patent Infringement Disputes Published in the Electronics Intellectual Property (4th Issue, 2017) (Written by Tao Guandong [1]) Abstract: In cases concerning disputes over patent infringement, legitimate source, as a statutory reason for the seller’s exclusion of compensation liability, is often cited in judicial practices. But the courts’ opinions on whether and how to determine the legitimate source and the liability determination, etc. vary. The reasons in it are worth thinking. Key words: Patent Law; Seller; Legitimate Source; Compensation Liability Article 70 of the Patent Law is the direct legal basis of legitimate source defense. According to the article, if any person sells a patent-infringing product without knowing that such product is sold without permission of the patentee, he shall not be liable for compensation provided that the legitimate source of the product can be proved.[2] Although the Patent Law provides that the seller should cease the infringement and compensate economic losses, it also sets a legitimate source system to exempt the seller from compensation liability under certain circumstances, which is out of the consideration for legal value. I. The Value of Legitimate Source Defense System (I) Safeguard the normal circulation of technical products in the market A major reason for the Patent Law to provide the rule of legitimate source to exclude sellers’ compensation liability is to protect the normal circulation of products in the market and ensure normal market operation without the influence of patent infringement disputes. A seller contending legitimate source has to prove he sold the products without the knowledge of the infringement. But as to what is “without the knowledge”, different people have different opinions. Patent right is a statutory right obtained by the applicant upon the approval of the national patent administration. The materials for patent review, review opinions and relevant references are open to the public. Particularly, the system requires that a patent for invention has to be published in advance. Therefore, the public has enough time to know the technology involved in the patent, the application field and relevant products. This is also a major ground for the opinion that strict standards should be applied to seller’s unawareness.[3] The seller of the allegedly infringing products should bear civil liability for the products within the scope of its capacity. Its capacity for civil liability should be given full consideration, or such liability will render the system value of law meaningless. In actual market operation, sellers may sell, in terms of product nature, one or several kinds of products or, in terms of technology nature, products to which one or several technologies are applied, or, in terms of technical level, ordinary-tech or high-tech products. If imposing the same civil obligations on sellers without distinction, the principle of fairness and justice will undoubtedly be violated and the implementation of patent system will be impeded. As the actual controllers who direct the flow of products to end users, sellers indeed bear certain liability for the allegedly infringing products flowing to the market, the aggravation of patent infringement and the increase of the patentees’ economic loss, but sellers should be discriminated from manufacturers in bearing civil liability. Different from manufacturers, sellers are not the producers of the allegedly infringing products. They differ from manufacturers on professional qualification, expertise and identification ability. Their focus in daily operation is on product sales rather than technological comparison or product analysis. Unlike trademark right or copyright, patent right protects patented technologies including the inner structure, circuitry and other parts of products, whose technological nature is difficult to be determined without professionals’ analysis or expertise. Under such circumstance, imposing strict duty of care on sellers in essence denies the value of legitimate source defense system. Accordingly, imposing harsh legal obligations on sellers and forcing them to pay excessive attention to discrimination and identification of patented products will be harmful to market operation and the facilitation of technology circulation via patent system. The provision on legitimate source makes the patent system more reasonable and can better balance the interests of patentees and the public. (II) Help ascertain facts in cases Inventors apply for patent to gain economic benefits by contributing technological innovation to the society. As the technological characteristics, thoughts and actual ability vary, patentees get return from technology in different ways. They can directly produce and sell products by themselves, or permit others to use the technology in return for money. Whether produced by patentees or licensees, patented technological products have to turn into economic benefits through sales. In patent law, patent infringement consists of manufacturing, offering for sale, sales and import. Among them, manufacturing is the basis of offering for sale, and sale and import have the same nature as manufacturing as both of them are the source of the infringing products entering the market and patent infringement. Sellers, as a channel for the products to enter the market, undoubtedly have the information of the suppliers of the products they sell. [4] However, due to lack of market knowledge, ability, time or energy, etc., patentees most often cannot get manufacturers’ information. As a result, they spend lots of labor, human and financial resources to collect evidence to prove the sellers’ infringement, and hope crackdown upon the channels through which products enter the market will reduce their economic loss. The Patent Law stipulates that sales of patent-infringing products constitutes infringement and meanwhile sets the legitimate source system to exempt sellers from tort liability of compensating economic loss, partly because the sellers actually don’t have the subjective elements to establish the liability for a civil infringement, and also because sellers when proving they sold the products “without the knowledge” of the infringement have to provide the information on the product purchase, including enterprise name, address, controlling entity, etc. of the supplier. Such information is of great significance for finding out the source of the alleged-infringing products, namely, the manufacturer or importer. As a matter of fact, in patent infringement suits, patentees bring actions against sellers because the sellers are usually the “connection points” of case jurisdiction. The sellers are sued for the convenience of litigation and fact finding.The sellers are not the object of litigation in a real sense. They are sued for finding out the manufacturers. [5] Due to the complexity of market circulation, patentees are hard to find out the true manufacturers of the infringing products by themselves alone. Actions against the sellers can help them get relevant materials as evidence for follow-up litigation, which is, after all, an effective way to get information. Therefore, as to patentees, the legitimate source system helps find out manufacturers’ information and relieve the burden of proof; as to sellers, the system helps reduce the burden of litigation and economic liability brought by negligence and avoid the influence on normal operation thus incurred; as to judicial organs, the system is conducive to ascertaining facts and determining the parties’ civil liabilities. II. Standards for Determining Legitimate Source According to Article 70 of the Patent Law, the establishment of sellers’ legitimate source defense requires subjective and objective elements, specifically, the seller didn’t know the infringement and the seller can prove the legitimate source of the products. Neither is dispensable. (I) Subjective element For determining the liability for “no knowledge”, the fault principle or presumed-fault liability principle is generally adopted. According to the former principle, the right holder should bear the burden of proof and accordingly the patentee is required to prove the seller has subjective fault; [6] while according to the latter, the urban of proof is assigned to the seller, and the seller is required to prove he has no fault for his “no knowledge”. [7] The above two opinions are quite influential in academic community and have great impact on legislation and judicial practice. Apart from scholars’ theories, we should also take full account of and study the courts’ opinions and practices in justice. This is reflected in the normative documents of the Supreme People’s Court, some normative documents for judges as well as academic research results. In respect of the meaning of “without the knowledge”, there are many understandings in judicial practices, which is reflected in individual cases and normative documents promulgated by some local courts. The Supreme People’s Court, in the discussion on relevant issues in 2003, held that “without the knowledge” included “impossible to know” and “should have known but actually didn’t know”. [8] Another view is that the circumstance of “without the knowledge” should correspond with Article 62 of the Patent Law which provides that for patent right infringement the period of limitation for action shall commence from the date when the patentee knows or should have known of the use of that patent by another person, and that the seller’s “without the knowledge” should only refer to “impossible to know” rather than “should have known but actually didn’t know”. A representative view in judicial practice is the “without the knowledge” should be understood as “impossible to know” and “there are no reasonable grounds to know”. [9] The value of the legitimate source system lies in the exclusion of compensation liability of faultless sellers. If limiting the meaning of “without the knowledge” to “impossible to know”, sellers who have reasonable grounds to know the products they sell infringe the patentees’ patent right will inevitably seek reason to evade liability. This is fundamentally against patent right protection. As a participant in market circulation which involves frequent product disputes, sellers play a significant role with respect to product quality liability and product infringement. As a participant, the seller should fulfil necessary duty of care, but as mentioned above, the seller actually cannot bear excessive duty of care. Therefore, interpreting “without the knowledge” into “impossible to know and there are no reasonable grounds to know” is reasonable and feasible in judicial practice. The circumstances of “impossible to know” are relatively definite and there are less controversies. But the determination of “there are no reasonable grounds to know” varies from case to case. It should be noted that, as to the judgement of reasonable grounds, the patent gazette should not be used to prove that the seller has no reasonable grounds. There are a wide variety of patent infringement disputes and different trading habits in different industrial sectors. Laws, regulations, and judicial standards can be unified, but to decide whether the seller has reasonable grounds for his unawareness of the illegitimate source of the patent-infringing products it sell specific circumstances should be fully considered in the trial of individual cases, such as patent type, technical proposal, field, industrial practice and trading habits. Specifically, when deciding “without the knowledge” we should make comprehensive judgment on whether the seller really sold the patent-infringing products “without the knowledge” according to the proof standard prescribed in statutory principle and in combination with specific circumstances of the case. (II) Objective element Compared with the different understanding of the rule and meaning of “without the knowledge”, the disputes arising from the interpretation of the seemingly objective element -- legitimate source in theoretical understanding and judicial practices are no less and even more obvious. It’s unanimously agreed in theoretical studies and judicial practices that “legitimate source” means legitimate commercial channel. There are no substantial disputes in this respect. The problem is how to choose and apply the standard of legitimate source. Courts, scholars and judges hold different and even opposite views, thus producing entirely different results in patent infringement disputes in similar cases. [10] Different understandings on this, especially different practices of judicial organs, surely will render patentees, sellers and the public confused. The main cause for the disputes is non-uniform standards at different places. According to the provision on the meaning of legitimate source in Article 25 of the Interpretation of the Supreme People’s Court on Several Issues Concerning the Application of Law in the Trial of Patent Infringement Cases (II), “The party who engages in use, offering to sell or selling shall proffer relevant evidence consistent with trading habits to prove said legitimate source”. This article requires that the evidence for proving legitimate source should be “in consistent with trading habits”. The Guidance on the Trial of Patent Cases issued by Jiangsu High People’s Court also has similar provisions and has defined the elements for determining legitimate source, including legitimate contract relationship, lawful purchasing channel and fair consideration, etc.[11] Compared with the Supreme People’s Court’s provision on legitimate source and the trial rules of Jiangsu High People’s Court, [12] Guangdong High People’s Court has made detailed requirements on the evidence for proving legitimate source in its guidance. According to the guidance, the seller not only has to meet all procedural elements, but also needs to prove substantial elements. This means the seller has to ensure the legitimacy of its transaction and meanwhile relates to such materials as the supplier’s behavior, qualification and documents. In case of incomplete supplier information, the seller’s legitimate source defense will not be adopted. Undoubtedly, the exacting requirements of Guangdong High People’s Court on evidence will make sellers who put the products on the market shoulder too heavy assurance responsibility, as their ability to know the above parties is doubtful. Legitimate sources are related to commercial transactions. Sellers, as ordinary and independent market participant, have no power to control others’ behavior. Hence, the Supreme People’s Court and Jiangsu High People’s Court’s relatively principled provisions on the evidence for legitimate source that allow the judges to decide the source legitimacy according to specific circumstances surely can better reflect the purpose of legislation and safeguard market and transaction stability. [13] In trial practices, some hold that when the seller furnishes relevant information of the manufacturer to the court and the patentee fails to prove the seller’s subjective intent, the legitimate source defense is established. [14] Such practice seems to be loose, as the seller’s urban of proof is only the provision of the manufacturer’s information while the patentee’s obligation to “prove the seller’s subjective intent” is more difficult. The legitimate source system is established based on the status quo of the country’s retail industry and trade practices [15]. The application of rules also should be based on the fundamental realities of the country, and in the meanwhile consistent with the fundamental objective of patent right protection. III. Requirements on the Evidence to Establish the Sellers’ Legitimate Source The sellers contend that they sold the products without the knowledge that they are patent-infringing products in order to show their good faith. But as the beneficiaries exempted from compensation liability for patent infringement, they are required to provide evidence for their burden of proof. In accordance with the elements of legitimate source, evidence is divided into subjective and objective evidence. (I) Subjective evidence The good faith of sellers, namely, they don’t know the products they sold infringe patent right, is very self-concious. In judicial practices, sellers provide no or very few evidence to prove their good faith. It makes sense that they don’t know the products infringe patent right, but determining no knowledge about the patent infringement only based on the sellers’ oral or written statement is hard to convince the patentees, the court and the relevant public. After all, “without the knowledge” is a subjective mental activity, and thus needs to be proved with other evidence. The institutional basis for legitimate source defense lies in the realities of retail industry. Sellers are unable to identify the patent property of the products they sell and whether they infringe patent. Furthermore, it’s a consensus within the judicial community that the patent gazette cannot be used as the basis for sellers’ knowledge of product infringement. The combination of “without the knowledge” and the patentee’s behavior can get relatively overall and real subjective state of mind of the sellers. For patentees, i.e. right holders, judicial means are important but not necessary choices. Before bringing an action, they often send a warning letter or lawyer's letter, or proclaim the existence of patent right by other means. The sellers’ response, such as voluntary cancellation of product sales, contact and communication with the patentee or bringing an action alleging non-infringement, can prove whether the sellers have the knowledge in an objective way. If the seller stops selling alleged-infringing products, the seller’s “without knowledge” can be further proved, but whether the products infringe patent is a substantial judgement. If the seller continues to sell the products, as to whether to determine the seller “knows” the infringement, I would take it with a grain of salt. It’s difficult to determine infringement in modern commercial products, especially technologically-sophisticated products. In judicial practices, as technical facts are hard to be determined in trial, it’s normal to engage research institutes and accrediting bodies to determine patent infringement. And often the result is the products alleged of infringement didn’t infringe anyone’s patent right. Therefore, although patentees’ behavior is useful for presuming the seller’s subjective minds, excessive consideration should be avoided. (II) Objective evidence The only objective requirement of the Supreme People’s Court on legitimate source in pertinent judicial interpretations is “consistent with trading habits”, and [16] the so-called trading habits mean trading habits such as the price of subject matter, general trading means within an industry or a region, etc. of an individual, individually-owned business or company for determining the legitimate source of evidence in trial. Due to the vastness of country land, imbalanced economic development and different trading habits among regions, we should not prescribe requirements on the form of legitimate source or require sellers to provide complete invoices, bills, purchase orders or even online records, etc. In China, regions with jurisdiction over IP cases, especially cases concerning patent disputes, are often more economically developed, where transaction are made in more formal ways. However, the parties to a patent dispute do not always conform to modern trade rules in both form and meaning. Therefore, in practices, we should avoid asking all defenders of legitimate source to provide formal invoices.[17] In judicial practices, there are many legitimate source defenses, but most of them are not accepted by judicial organs. As far as the sellers are concerned, the main reasons are: 1. The evidence chain concerning infringing product purchase provided by sellers is incomplete. Only a few sellers can provide complete evidence such as contract and receipt. This is because commercial transactions are often random routines. As the bushiness is made based on mutual trust, cost saving and other factors, the parties to the transaction manage ordering, delivering and other processes in a casual way. Thus the transaction records are naturally not complete in a legal sense. 2. Correspondence between the alleged-infringing products and the patent involved. In commercial transactions, purchase contract, delivery note, invoice, receipt and other written evidence generally only record such information as product name, specification, price. Technical data including product specification, structure, design essentials, operation mode and comparison information are not shown in the aforementioned documents. Therefore, the sellers find it difficult to prove, the patentees are unlikely to recognize and judicial organs can’t make sure the products in the written materials are the alleged-infringing products. In my opinion, since most evidence for legitimate source cannot be recognized by courts in judicial practices, when we reflect on the sellers’ or patentees’ ability to adduce evidence and even hope to urge and warn sellers to keep complete transaction records through trial, should we note if the practice standards in trial are too strict for most transactions to meet judicial standards. Complete transaction records contribute to trial, and it’s ideal that the evidence including purchase contract, invoice, delivery note, receipt and sales records are complete and those evidence also reflects the technical data of the products, but as pointed out by the Supreme People’s Court in the judicial interpretation, the evidence for legitimate source should conform to trading “habits”, which refer to the trade practices of the public or most sellers rather than the “trading habits” in the textbook. Therefore, when it comes to the requirement on the evidence for legitimate source, instead of requesting complete records, we should find out if the sellers have concealed, destroyed or refused to submit evidence “conforming to trading habits”. When there is evidence or according to relevant trading habits we can affirm the seller could but did not submit pertinent evidence, it’s more reasonable to deny the legitimate source. IV. Bringing in the Supplier to the Lawsuit The system of legitimate source in patent law is designed help find out the final source -- the manufacturer of the products via the evidence provided by the seller. However, in actual transactions, the identity of the supplier has more than one possibility, as they may be the manufacturer, the distributor or even the importer. In trials, sellers’ legitimate source defense cannot be recognized mostly because the supplier, i.e. the counterparty, of the seller, doesn’t participate in the trial and the court cannot ascertain the truthfulness of relevant transactions. Certainly, from the perspective of case trial and fact ascertaining, it’s ideal and reasonable to bring in the supplier as a party or third party to the action. But in judicial practices, courts in different places have different understandings and practices in this respect. Some hold that we should bring in the supplier because it helps ascertain facts. Others hold the right holder’s opinions should be asked before deciding whether to bring in the supplier to the action. I hold a negative view towards this. I believe instead of making active move, we should limit the right holder’s request for bringing in the supplier to the action if necessary. On the one hand, not bringing in the supplier is out of respect for the litigation rights of the right holder. “no trial without complaint” is a basic principle in civil proceedings of China and even the world. As the facts involved in the disputes between the parties happen in certain period with limitation, and the patentee chooses to bring a charge against the seller and demands the seller to assume liability, we can assume that it has certain awareness of the impact scope and acceptance degree of the case. So the court should respect the litigation right of the party. If the patentee doesn’t agree or is unwilling to bring in the supplier to the action during the trial, the court should not take the initiative to bring in the supplier as a party or third party to the action. On the other hand, not bringing in the supplier is the court’s control over its own work. Things happen at a certain period. Naturally, disputes are also solved at a certain period. The right holder chooses the seller as the accused to control the influence scope of the dispute. The court, which tries cases based on the evidence provided by the parties, facts ascertained and laws, is making arrangement based on its own work. As mentioned above, the supplier of the seller may be a manufacturer or importer and the source of the products. But in practices, it may also be a distributor, and the distributor may be a regional distributor, provincial distributor, greater area distributor or a national distributor. It’s a good idea to bring in the supplier as a party or a third party to the action, but the actual circumstances should be given full consideration. Deliberately bringing in the supplier without considering the specific circumstances will make the influence scope and trial period of the case undetermined for a long time, leaving normal trial unguaranteed. As a passive state organ, judicial organ has relatively limited liability in evidence collection. The evidence for trial is often furnished by the parties to the action. The patentee chooses the seller as the object of litigation. The court renders judgement and decides civil liability in given conditions based on facts, evidence and laws. All these conform to the law no matter if the seller’s legitimate source defense is established. If the seller’s legitimate source defense is not established, the court will determine the compensation liability according to relevant evidence, and the patentee will receive corresponding compensation for the impact of the patent infringement. If the seller’s legitimate source defense is established, the seller will not assume any compensation liability but the manufacturer’s information provided during trial will help the patentee find the accurate source of the infringing products, laying a good foundation for the following right protection. In accordance with Article 70 of the Patent Law, if the legitimate source defense is established, the seller will not bear compensation liability. In patent disputes, the compensation received includes economic loss and reasonable expenses. So the compensation liability from which the seller is exempted includes economic loss and reasonable expenses. Some people hold that the reasonable expenses should be borne by the seller. But in my view, though the patentee’s right is infringed and has paid for maintaining his rights, including attorney fee, notarization fee, and fee for buying the infringing products, the seller, as a bona fide trader, also has paid for exempting from liability. Thus as the parties to the litigation, both of them suffered economic loss. Therefore, if the legitimate source defense is established, the seller should not be liable for compensating for the reasonable expenses. The patentee may include such reasonable expenses into the following claims, and the court should give consideration to it if appropriate. Conclusion The value of legitimate source defense system is exempting bona fide sellers from compensation liability, safeguarding the stability of market transactions and finding out the source of patent infringement based on the evidence materials provided by sellers so as to put an end to patent infringement radically. In actual trials, due to the parties’ ability to adduce evidence, complexity of commercial transactions, and the master of practice standards, etc., the public have different understandings towards the application of legitimate source defense, which will inevitably reduce the sellers’ incentives to provide clues, prejudice the protection of patentees’ right and betray the original intention of establishing the legitimate source defense system. Hence, in order to achieve the real purpose of setting up the legitimate source defense system, courts should give full consideration to the role of trading habits, properly interpret and apply relevant provisions of the Supreme People’s Court instead of deliberately demanding completeness of evidence chain. [1] Tao Guandong, judge assistant of Shanghai Intellectual Property Court [2]Article 70 of Patent Law: where any person, for the purpose of production and business operation, uses, offers to sell or sells a patent-infringing product without knowing that such product is produced and sold without permission of the patentee, he shall not be liable for compensation provided that the legitimate source of the product can be proved. [3] Reference: Beijing High People’s Court’s Interpretation and Application of Guidelines for Determination of Patent Infringement, compiled by Intellectual Property Tribunal of Beijing High People’s Court, China Legal Publishing House, Edition 2014, Page 609. [4] In judicial practices, the product supplier may be the manufacturer or distributor. [5] Reference: Beijing High People’s Court’s Interpretation and Application of Guidelines for Determination of Patent Infringement, compiled by Intellectual Property Division of Beijing High People’s Court, China Legal Publishing House, Edition 2014, Page 609. [6] Reference: On Intellectual Property, by Zheng Chengsi, Law Press China, Edition 1998, Page 260. [7] Reference: On “Claims in Rem” and Claims for Infringement Compensation for Intellectual Property Right, by Wu Handong, Study in Law and Business, 5th Issue of 2001. [8] Reference: Article 53 of the Supreme People’s Court’s Provisions on Several Issues Concerning the Trial of Patent Infringement Dispute Cases (draft for discussion on a meeting in October 2003) [9] Reference: Legitimate Source Defense in Actions Concerning Intellectual Property Infringement -- Taking Patent Infringement Actions for Instances, by Wang Na, People’s Judicature -- Application, 19th Issue of 2007, Page84. [10] Reference: An Analysis on the Rationality of Applying Bona Fide Acquisition to Legitimate Source Defense, by Huang Jianwen, Intellectual Property, 10th Issue of 2016, Page33. [11] Article 5.10 of the Guidance on the Trial of Patent Cases issued by Jiangsu High People’s Court provides that “legitimate source should meet the elements of contract law, which means the user, the person offers for sale or the seller has contractual relation provided in Contract Law with the alleged-infringing products, rather than the alleged-infringing products are made with authorization of the patentee. The basic elements for determining legitimate source including lawful contract relation, lawful purchase channel and fair consideration, etc.” [12] Reference: An Analysis on the Rationality of Applying Bona Fide Acquisition to Legitimate Source Defense, by Huang Jianwen, Intellectual Property, 10th Issue of 2016, Page33 [13] On this issue, some scholars hold that, according to the Supreme People’s Court and Jiangsu High People’s Court, the proper and reasonable contractual relation is equal to legitimate source. In my opinion, the aforementioned content points out that legitimate source requires proper and reasonable contract elements, but the two are not the same. The latter is the prerequisite of the former rather than sufficient condition. The subjective elements also need to be considered as to the establishment of legitimate source. [14] Reference: Application of Exclusion of Compensation Liability to Operators, by Intellectual Property Division of Hunan Changsha Intermediate People’s Court, People’s Judicature, 23rd Issue of 2011. [15]Reference: An Analysis on the Rationality of Applying Bona Fide Acquisition to Legitimate Source Defense, by Huang Jianwen, Intellectual Property, 10th Issue of 2016, Page34. [16] Reference: Paragraph 3, Article 25 of the Interpretation of the Supreme People’s Court on Several Issues Concerning the Application of Law in the Trial of Patent Infringement Cases (II). [17] Reference: Article 14 of the Interpretation of the Supreme People’s Court on Several Issues Concerning the Application of Law in the Trial of Patent Infringement Cases (II).
