Introduction
In early 2023, two final judgments in three related intellectual property matters were made public by the Supreme People’s Court of China (the “SPC”).[1] These judgments represent a significant development in the protection and enforcement of intellectual property rights (“IPRs”) in China, with particular implications for foreign-invested enterprises. This article provides a brief review of these high-profile cases and offers recommendations for foreign companies navigating the commercial landscape in China.
The Cases: A Brief Overview
Golden-Elephant Sincerity (“GES”), a foreign-invested chemical company, holds proprietary rights to trade secrets and two patents concerning the production of melamine.[2] In April 2014, it was revealed that Shandong Hualu-Hengsheng Chemical Co., Ltd. (“SHH”) was involved in developing a melamine production line that was strikingly similar to GES’s own design. Mingda Yin, GES’s former chief engineer, was implicated in the unauthorized transfer of confidential information to SHH, raising serious legal and ethical concerns.
Subsequent investigations revealed that Mingda Yin may have provided GES’s confidential information to two additional companies responsible for the design and/or engineering of SHH’s production line, Ningbo Fareast Chemical Group Co., Ltd. and Ningbo AT&M Environmental & Chemical Engineering Design Co., Ltd.
GES, along with other plaintiffs, filed a series of civil lawsuits against the alleged infringers for patent infringement and misappropriation of trade secrets.[3] While the lower courts’ judgments were not entirely favorable to GES, the cases were then appealed to the SPC, and the SPC overruled the judgments of the lower courts and granted enhanced remedies in support of all of the plaintiffs’ requests.
Key Takeaways from the SPC Judgments
The judgments of the SPC in these matters provide important insights into the jurisprudential principles governing IPRs in China. The key rulings are as follows:
Equal protection for foreign-invested enterprises: Historically, foreign investors often assumed that Chinese courts would be biased in favor of domestic companies, placing foreign companies at a comparative disadvantage. These cases call into question that notion. GES, a foreign-invested enterprise, was granted enhanced remedies by the SPC, including increased damages and an injunctive order requiring disassembly of the infringing production equipment and destruction of relevant technical documents and materials.
Determining damages without requiring proof of “contribution margin”: The SPC adopted a new legal doctrine that avoids the complex issue of determining the “contribution margin” of the patent or trade secret. In this context, “contribution margin” refers to the proportionate contribution of the technology derived from the patent or trade secret in question to the infringer’s profits. Under conventional legal theory, Chinese courts assessed the “contribution margin” and multiplied that figure by the infringer’s profits to arrive at the amount of damages.[4] This methodology, which places an onerous burden of proof on the plaintiff, has long been viewed by plaintiffs as an obstacle to securing relief in the Chinese legal system. The SPC judgments addressed this issue by easing the plaintiffs’ burden of proof with respect to the “contribution margin.” The decision explained that the assessment of damages shall be “calibrated to the particularities of the case, e.g., the degree of substantive culpability of and the harmful consequences caused by [each defendant’s misappropriations of the plaintiffs’ trade secrets], with reasonableness and appropriateness,” without the need to consider the “contribution margin.”[5] This shift marks a significant departure from past practice and provides a more equitable framework for adjudicating intellectual property disputes.
Rejection of “waste of social resources” as a defense for infringers: In these cases, the plaintiffs sought an order compelling the defendants to dismantle the infringing production equipment and destroy related engineering drawings and technical information. The defendants countered that such actions would be a “waste of social resources”—a position that was upheld by the lower courts. The SPC overturned the lower courts’ rulings, stating that “the approach [taken by the lower courts] improperly restricted the right holders in the exercise of their IPRs and would also lead to an impasse in the enforcement of the judgment when the parties cannot reach a consensus, potentially giving rise to new disputes and litigations. Such an approach could not effectively protect GES’s IPRs and could, to some extent, increase the costs of resolving disputes between GES and SHH.”[6] This decision significantly reduces the likelihood that infringers will continue to infringe under the defense of avoiding the “waste of social resources,” thereby strengthening the protection of IPRs.
Recommendations for Foreign Companies in China
Diversified intellectual property protection: To optimize the protection of their interests, IPR holders are encouraged to protect their rights through various means, such as patents and trade secrets. On this basis, when confronted with IPR infringements by others, IPR holders can make a comprehensive assessment of the various rights at their disposal and initiate as many legal actions as possible against the infringing party. In the cases at issue, the plaintiffs skillfully pursued a two-pronged strategy, targeting both patent infringement and trade secret misappropriation, and secured favorable results. This tactical approach serves as a valuable precedent and illustrates the importance of a nuanced and aggressive legal strategy in protecting and enforcing IPRs in China.
Reasonable claim for damages: A key aspect of the plaintiffs’ success in this matter was the reasonable assessment of damages. The total damages sought by GES did not exceed the lowest estimate of the defendants’ profits from the sale of the infringing products. This approach allowed the SPC to conclude that the amount of damages sought by the IPR holders was determined “with reasonableness and appropriateness.”
Concerted pursuit of monetary and injunctive reliefs: The plaintiffs secured not only monetary damages, but also injunctive relief—including the dismantling of infringing equipment and destruction of misappropriated documents and materials. In the Chinese legal context, such non-monetary relief can have profound consequences, including potentially derailing the infringer’s production and sales strategies, and may ultimately be more fatal to the infringer than the mere imposition of monetary damages. This multifaceted approach to remedies underscores the importance of a comprehensive legal strategy that utilizes both monetary and non-monetary remedies to protect and enforce IPRs.
Conclusion
These cases suggest China is strengthening intellectual property protection and increasingly seeking to provide a level playing field for all companies, including foreign-invested enterprises. The SPC’s judgments in these cases arguably establish important legal precedents for the resolution of future intellectual property disputes within China. Foreign companies doing business in China would be well advised to carefully review these judgments as they contemplate their intellectual property protocols with these judicial decisions.
[1] ZMZ No. 541 (Supreme People’s Court, 2022) and ZMZ No. 1559 (Supreme People’s Court, 2020).
[2] Chinese Patent Nos. CN102219754B and CN101922874B.
[3] MC No. 97 (Guangdong High Court, 2017), MC No. 2948 (Chengdu Intermediate Court, 2017), and MC No. 2553 (Guangzhou IP Court, 2016). It should be noted that MC No. 2553 was dismissed by the court in recognition of the invalidity of the patent at issue, and therefore, it falls outside the purview of the present article.
[4] Article 16 of Interpretation on Several Issues concerning the Application of Law in the Trial of Patent Infringement Dispute Cases.
[5] ZMZ No. 541 (Supreme People’s Court, 2022).
[6] See id.