(2017 Top Ten Typical Cases) Dachuang Precision Equipment (Anhui) Co., Ltd. vs. Shanghai Baiqin Machinery Co., Ltd. et al. over Liability for Damages Arising out of Malicious Intellectual Property Lit

 

Dachuang Precision Equipment (Anhui) Co., Ltd. vs. Shanghai Baiqin Machinery Co., Ltd. et al. over Liability for Damages from Malicious Intellectual Property Litigation

- Standard for determining malicious intellectual property litigation

 

[Case Brief]

Plaintiff: Dachuang Precision Equipment (Anhui) Co., Ltd. (“Dachuang”)

Defendant: Shanghai Baiqin Machinery Co., Ltd. (“Baiqin”)

Defendant: Xinbaiqin Special Vehicle Co., Ltd. (“Xinbaiqin”)

Baiqin is the patentee of the utility model patent titled “散装饲料罐 (A Bulk Feed Tank)” (Patent No.: ZL200620114854.3); Xinbaiqin is the patentee of the utility model patent titled “适用于饲料螺旋叶片输送装置的中间支承机(A Middle Supporting Mechanism Used for A Helical-blade Conveyor for Feed Delivery)” (Patent No.: ZL201220575497.6); Xinbaiqin is the sole subsidiary of Baiqin and licensed by the latter for the implementation of the utility model patent titled “散装饲料罐 (A Bulk Feed Tank)”.

On January 12, 2015, Xinbaiqin filed a lawsuit against Dachuang to the court (as (2015) LZCZ No. 13 case, hereinafter referred to as Case No. 13) claiming that the bulk feed tanks sold by Dachuang infringed the above two utility model patents. Dachuang filed an petition to the Patent Re-examination Board to annul the above two patents within the statutory defense period.

In the trial, Xinbaiqin acknowledged the fact that Xinbaiqin reported to the Ministry of Industry and Information Technology about the Dachuang’s infringement of its intellectual property during the litigation of Case No. 13.

In response to the request from Taiwan-invested Dachuang Precision Equipment (Anhui) Co., Ltd. for project review by the law , the Ministry of Industry and Information Technology (GWH (2015) No. 1530) issued a reply on September 11, 2015, stating that: “Shanghai No.1 Intermediate People's Court decided that the utility model patent of a constant-diameter variable-pitch auger conveyor for bulk feed delivery shall be owned by the Plaintiff Xinbaiqin, and this device is classified as dedicated device for a bulk feed delivery truck. In accordance with Clause 3 'Non-infringement of other’s intellectual property by special-purpose vehicles and products' under Article VI 'Licensing conditions for special-purpose vehicles and products' of the Rules on the Access Administration of Special-purpose Vehicle and Tanker Producers and Products, Dachuang had not been granted an access license by us...During the period of public summons and afterwards, Xinbaiqin called and sent letters to us for many times, accusing Dachuang of infringing its intellectual property and requesting us to deny Dachuang the access license... On April 7, 2015, we held a coordination meeting with both parities and relevant local departments in charge of economic and information industries to discuss issues about the access of Dachuang. It was decided at the meeting that as for the bulk feed delivery truck and products, Xinbaiqin held the patent of relevant device, and the dispute over intellectual property between the parties shall be solved according to the court’s decision later. ”

According to the Comment Letter of National Intellectual Property Administration Concerning Several Intellectual Property Issues Related to Dachuang Precision Equipment (Anhui) Co., Ltd. (GZBHBZ (2016) No. 295), “with reference to the letter attached with the Examination Decision of the Patent Re-examination Board for utility model patents No. 201220592644, No. 200620114854 and No. 201220575497, the Patent Re-examination Board has, through investigation, made the examination decision of request for invalidation to annul all above patents; with such decision made during the litigation period or in the midst of proceedings, we have not come to the final decision. ”

On September 18, 2015, the Patent Re-examination Board issued No. 26980 Examination Decision of Request for Invalidation. They believed that the patent involved fell short of creativity and therefore annulled the utility model patent titled “A Bulk Feed Tank” (Patent No.: ZL200620114854.3). On June 25, 2015, the Patent Re-examination Board issued No. 26224 Examination Decision of Request for Invalidation. They believed that the patent involved fell short of creativity and therefore annulled the utility model patent titled “A Middle Supporting Mechanism Used for A Helical-blade Conveyor for Feed Delivery” (Patent No.: ZL201220575497.6).On October 26, 2015, Xinbaiqin applied to the court for the withdrawal of Case No. 13; on October 28, 2015, the court granted the permission for the withdrawal.

In the trial, both the Plaintiff and the Defendant acknowledged the presence of several disputes over the ownership and infringement of intellectual property the parties.

Dachuang argued that the techniques used in both patents were prior art techniques, Baiqin and Xinbaiqin abused intellectual property, obtained the utility model patent by irregular patent application, and filed a malicious intellectual property litigation, which led to the failure of Dachuang to obtain the production qualification of bulk feed truck. For the last two years, this behavior interfered with Dachuang’s operation, severely infringing the legal rights of Dachuang and inflicting huge economic losses on Dachuang. For this reason, Dachuang filed an action to Shanghai Intellectual Property Court for an order that: 1. the Defendant constituted malicious intellectual property litigation; 2. the Defendant shall pay RMB 0.9 million to the Plaintiff as compensation for economic losses inflicted on the Plaintiff due to its malicious intellectual property litigation; 3. the Defendant shall pay RMB 1 to the Plaintiff as reasonable expenses.

Baiqin and Xinbaiqin argued that: first, the Patent Re-examination Board’s annulment of the two patents was based on the fact that they fell short of “creativity” instead of “novelty”, so the techniques involved in the two utility model patents of Baiqin and Xinbaiqin were not prior art and the patent application shall be in no way deemed as “malicious”; second, the patents were legally granted to Baiqin and Xinbaiqin, which entitled them the right of action; upon the reception of the Examination Decision of Request for Invalidation, Baiqin and Xinbaiqin withdrew the action immediately; third, Dachuang failed to present evidence that the failure to obtain the production qualification from the Ministry of Industry and Information Technology was attributable to the litigation of Case No. 13. Fourth, Dachuang failed to present evidence for the actual losses resulted from the failure to obtain the production qualification. Baiqin and Xinbaiqin requested for the rejection of all claims of Dachuang.

 

[Adjudication]

After the trial, Shanghai Intellectual Property Court determined if the involved act constituted malicious intellectual property litigation from the following aspects:

First, the reason that the two patents involved in Case No. 13 were annulled by the Patent Re-examination Board, as stated in the invalidation decision, was that they fell short of creativity instead of novelty, and the evidence presented by the Plaintiff was not sufficient to prove that the techniques used in the patents were prior art techniques, let alone to prove that Baiqin and Xinbaiqin filed two malicious patent applications even though they were fully aware that the techniques were prior art.

Second, when Xinbaiqin filed an action against the infringement upon its utility model patent, the patent for utility models titled “A Bulk Feed Tank” and “A Middle Supporting Mechanism Used for A Helical-blade Conveyor for Feed Delivery” based on which the claims were made had been granted by National Intellectual Property Administration and were valid. Xinbaiqin’s suit against the Plaintiff according to its legal and valid patent right had proper reasons and shall be deemed as legal exercise of the right of action; and after the decision of invalidation made by National Intellectual Property Administration, Xinbaiqin immediately applied for the withdrawal of the lawsuit. The evidence that the Plaintiff presented was not sufficient to prove the malicious intent of Xinbaiqin in filing the patent infringement suit (Case No. 13).

Third, after filing this suit, Xinbaiqin reported to the Ministry of Industry and Information Technology about Dachuang’s infringement of its intellectual property, which was not illegal itself and did not prove the malicious litigation of Xinbaiqin; after all, it was the Ministry of Industry and Information Technology that should determine upon examination and verification whether or not the access license would be granted to relevant products of Dachuang. It was known from the letter of the Ministry of Industry and Information Technology that the disapproval of access license for Dachuang’s bulk feed truck and products was because of multiple disputes on the ownership and infringement of intellectual property between the parties, instead of merely based on Case No. 13. Since the trial of relevant cases was still in progress, the Ministry of Industry and Information Technology delayed the access of Dachuang’s relevant products. Furthermore, Xinbaiqin applied to the court for the withdrawal of Case No. 13 in October; for more than one year since then, Dachuang had not yet obtained the production qualification for bulk feed truck; even though Dachuang would be granted the access license in the future, it would be long after the withdrawal of Case No. 13. Therefore, the court held that existing evidence was not sufficient to prove the causal relationship between Dachuagn’s failure to obtain the access license for relevant products and the filing of Case No.13, the claim of Dachuang that Case No. 13 resulted in the disapproval of production qualification for its bulk feed truck by the Ministry of Industry and Information Technology was not justified.

The judgement of first instance was made by Shanghai Intellectual Property Court that all claims of Dachuang were rejected.

Neither party involved in the case instituted an appeal upon the judgement of first instance, and the case has come into effect.

 

[Comment]

The infringer shall be liable for damages due to its intentional or negligent infringement of other’s right or interest.[1][1] Malicious litigation refers to the litigation that is filed by a party without factual and legal basis for its illegitimate interests.[2][2] When the intellectual property owner filed an action without proper reason and basis for illegal interests, which inflicted benefit loss on the counter-party, the counter-party shall have the right to claim damages from the intellectual property owner. Therefore, malicious intellectual property litigation is a type of civil tort.

The dispute on liability for damages arising out of malicious intellectual property litigation is a new cause of the actions that amended by the Supreme People’s Court in 2011. Malicious litigation is a main form of abusing the right of action, which is nothing new in our life. Theoretically, malicious litigation occurs not only in the field of intellectual property but also in other civil, criminal and even administrative actions. However, due to the intangible nature of intellectual property and its role in competition, it is highly likely that a malicious litigation is filed in the name of exercising the intellectual property rights. More and more people are calling for rules and regulations on such phenomenon. China has no specific legal provisions on malicious litigation now, but this does not mean that there is not legal basis. The general provisions concerning infringement in Clause 2 under Article 106 of the General Principles of the Civil Law are applicable for the tort of malicious mitigation, according to which: ”citizens and legal persons who through their fault encroach upon state or collective property or the property or person of other people shall bear civil liability. ”  Moreover, according to Clause 2 under Article 47 of the Patent Law: “the decision declaring the patent right invalid shall have no retroactive effect on any judgement or mediation agreement of patent infringement which has been pronounced and enforced by the people’s court, on any decision concerning the handling of a dispute over patent infringement which has been performed or compulsorily executed, or on any contract of patent license or of assignment of patent right which has been performed prior to the declaration of the patent right invalid. However, the damage caused to other persons in bad faith on the part of the patentee shall be compensated.” Although certain punishment measures have been put forward against the patentees filing an malicious litigation, they have relatively limited effect and define no channels of active remedy for the victims in malicious patent litigation. When the Patent Law was revised for the third time in 2008, they did attempt to put the constitutive aspects for malicious litigation in a separate Clause and the Clause A10(2) under the Proposed Third Revision Draft of the Patent Law stated that: “where the patentee, who is fully aware that his/her patented technique or design is prior art or design, makes malicious accusation against others for patent infringement and files an action to the people’s court or requests the patent administration department for handling, the alleged infringer may request the people’s court to order the patentee to pay compensation for losses incurred therefrom to the alleged infringer. ” However, it is difficult to accurately define malice in words, this clause has not been adopted so as to leave much room for discretion in judicial practice.

When it comes to the determination of malicious intellectual property litigation, the constitutive aspects for civil tort may be taken as reference. Currently, there are four commonly recognized  aspects for the civil tort in the academic circle, namely the subjective accountability, the illegal act, the fact of damage, the causal relationship between act and damage[3][3].

Firstly, special emphasis needs to be placed on the subjective aspect for malicious intellectual property litigation, namely the determination of malice. In general, the subjective accountability of infringement include intentional or negligent infringement; however, the malicious intellectual property litigation is special in that: first, the obligee is fully aware of the lack of legal and factual basis in the litigation; second, the obligee expects the proceeding to directly interfere with and inflict benefit loss on his/her business competitor. Some suggest that the faults of those who file malicious intellectual property litigation shall include gross negligence, such as provisions of Article 385 of the Civil Procedure Law of Macao [4][4]. The author disagrees with this idea because, on the one hand, the right of action is considered as the first institutional right in modern society ruled by law and the last resort to guarantee citizen’s rights, so limitation on such right shall be extremely prudent; on the other hand, with the social development and the update of laws and regulations, litigation has become a professional skill, while citizens’ legal awareness and capacity to action are still in their infancy, which lead to the imbalance between the liability for the party’s negligence and the status quo of social development. The author believes the malicious intellectual property litigation should be defined as a malicious fault in terms of the subjective accountability and shall not include a gross negligence, so as not to harm the legitimate interest of the parties that properly exercise the right of action and restrain the enthusiasm in exercising the right of action. As the worst accountable state, “malice” entails the actual intent and the indifference of the actor towards prohibitive laws or legitimate interest of others.[5][5] Malice is a kind of subjective motivation of human beings, so it is difficult to determine in judicial practice. The author believes that the key to determining whether a party files an malicious intellectual property litigation is to find out whether the party is fully aware that his/her claim lacks factual and legal bases and whether the party harbors the improper motive of infringing the legitimate rights and interests of the counter party.

Second, in terms of illegal act, the illegality of malicious intellectual property litigation does not lie in the litigation itself, for that filing an action is the basic right of any party. It is mainly reflected in the fact that the filing of an action is not justified by any objective basis. Whether or not the right of an intellectual property owner to file an infringement action is legal and valid is key to determining the existence of objective basis. For instance, during the application of patent, if the patentee fraudulently obtains the patent right from the patent office, or uses an expired patent that has become invalid, or withholds other information that impacts the validity of reason with objective and reasonable basis, all these can be taken as reasons without objective basis. In fact, the objective act of a malicious intellectual property litigation is closely correlated with the subjective malicious mentality; on one hand, the objective act is based on and reflects certain subjective mentality of the actor; on the other hand, some objective acts may directly serve as the basis on which the subjective mentality is judged. Therefore, the determination of infringement in malicious intellectual property litigation shall not be constrained to the legality of act but shall take into further consideration whether the actor’s exercising the right of action has legal basis or reasonable cause of action.

As for this case, when Xinbaiqin filed an action against the infringement upon its utility model patent, the patent for utility models titled “A Bulk Feed Tank” and “A Middle Supporting Mechanism Used for A Helical-blade Conveyor for Feed Delivery” based on which the claims were made had been granted by National Intellectual Property Administration and were in valid state. Xinbaiqin’s suit against the Plaintiff according to its legal and valid patent right had proper reasons and shall be deemed as lawful exercise of the right of action. Dachuang argued that Xinbaiqin had no legal basis in terms of the form of the right of action, and presented a series of evidences to prove that Xinbaiqin filed malicious patent application even if it was fully aware that the technique involved in the case was prior art. However, although the two patents involved in Case No. 13 were annulled by the Patent Re-examination Board, as stated in the invalidation decision, it was because that they fell short of creativity instead of novelty, and through investigation, the court held that the evidence presented by the Plaintiff was not sufficient to prove that the techniques used in the patents were prior art techniques, let alone to prove that Baiqin and Xinbaiqin filed two malicious patent applications even though they were fully aware that the techniques were prior art. After the decision of invalidation made by National Intellectual Property Administration, Xinbaiqin immediately applied for the withdrawal of the lawsuit. Therefore, the evidence that Dachuagn presented was not sufficient to prove the malicious intent of Xinbaiqin in filing the patent infringement suit (Case No. 13).

In a dispute on liability for damages arising out of malicious intellectual property litigation, the fact of damage and the causal relationship shall also be considered. The fact of damage refers to the adverse effects that are brought by the intellectual property owner to the counter-party by means of malicious litigation, including direct and indirect property damages, and adverse effects on the corporate reputation or image. By nature, malicious intellectual property litigation is a kind of tort, the establishment of which also requires the causal relationship between the illegal act and the fact of damage. To be clear, in such cases, the counter-party’s legal rights and interests are not directly harmed by the tort of the actor, but instead indirectly damaged by the negative decision by the court to which the actor filed an action. In this case, the Plaintiff claimed that, after filing Case No. 13, Xinbaiqin reported to the Ministry of Industry and Information Technology about Dachuang’s infringement of its intellectual property, so the Ministry Ministry of Industry and Information Technology disapproved the access qualification for Dachuang’s relevant products, which finally inflicted loss on the Plaintiff. The court held that, according to the letter of the Ministry of Industry and Information Technology, the disapproval of access license for Dachuang’s bulk feed truck and products was because of multiple disputes on the ownership and infringement of intellectual property between the parties, instead of merely based on Case No. 13. Since the trial of relevant cases was still in progress, the Ministry of Industry and Information Technology delayed the access of Dachuang’s relevant products. Furthermore, Xinbaiqin applied to the court for the withdrawal of Case No. 13 in October; for more than one year since then, Dachuang had not yet obtained the production qualification for bulk feed truck; even though Dachuang would be granted the access license in the future, it would be long after the withdrawal of Case No. 13. Therefore, the court held that existing evidence was not sufficient to prove the causal relationship between Dachuagn’s failure to obtain the access license for relevant products and the filing of Case No.13. The claim of Dachuang that Case No. 13 led to the disapproval of production qualification for its bulk feed truck by the Ministry of Industry and Information Technology was not justified.

 

Index

First instance: Shanghai Intellectual Property Court (2015) HZMCZ No. 682

Members of collegiate panel: Xu Yanhua, Yi Jia, Yang Fuyu

 

Prepared by: Yang Fuyu

 



[1][1] Zheng Yubo, Civil Law: General Provisions of Obligations (Revision 2), China University of Political Science and Law Press, 2004 edition, p. 115.

[2][2] Tang Weijian, Malicious Litigation and its Prevention,  Theory and Practice of Procedural Law (2002 Civil, Administrative and Procedural Laws) edited by Chen Guangzhong, China University of Political Science and Law Press, 2003 edition, p.331.

[3][3] Shi Shangkuan, General Introduction to Obligation Law, China University of Political Science and Law Press, 2000 edition, p. 115.

[4][4] According to Article 385 of the Civil Procedure Law of Macao, “I. The Party who files an action in bad faith shall be fined. II. Those who have the following acts with intent or gross negligence shall be deemed as a malicious litigant: a) the litigant make or raise a groundless claim or objection and should not have no idea of the same; b) the litigant distorts the truth of fact or hide the fact which is important to the case judgement; c) the litigant fails to perform cooperative obligations; d) the litigant use the legal proceedings or means in obviously controversial manner, which has reached the illegal purpose, obstructed the discovery of truth, hindered the duty performance of the court or delayed the judgement without adequate cause. ”

[5][5]Zhang Xinbao, A Study on Constitutive Requirements for Tort Liability, Law Press China, 2007 edition, p. 443.

 

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