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08 October 2018
Infringement and patent stability analysis
Customs release of goods on receipt of counter-guarantee
Requesting property preservation measure for customs seizure
In early 2018 a small household electrical appliance maker requested that the customs offices of Guangdong and Zhejiang provinces seize three containers of goods valued at around Rmb2 million ($301,000) on the ground of patent infringement. Once infringement had been confirmed, lawsuits were filed with Ningbo Intermediate Court and Guangzhou IP Court, respectively. At the same time, the courts were asked to collect evidence from the customs offices and take property preservation measures. Twenty-six containers have been successfully detained on the plaintiff's behalf since patent enforcement programmes were initiated via Customs in 2004.
Requesting Customs to seize export products on grounds of patent infringement has proved to be a potent legal tool against exporters. If the products involved are subsequently detained by the court and found to be infringing, they will be destroyed. The exporter therefore suffers a double blow – it must indemnify both:
If the exporter submits a counter-guarantee and requests that Customs releases the goods, the patentee may use the counter-guarantee to secure enforcement of the damages once the court has confirmed the infringement and awarded damages.
However, it is very difficult for patentees to organise customs seizures of exported patent-infringing products. Besides, if the risk is poorly controlled, the other party may file a counterclaim and the patentee may end up having shot itself in the foot. Below are some tips that may help patentees to navigate the process.
Patentees should conduct an infringement analysis on suspected infringing products before taking legal action – but it is also essential to ascertain the stability of the patent. The importance of verifying patent stability is often underestimated. Indeed, when a patent is being enforced in a legal action, a defendant will often file a counterclaim challenging the validity of the patent. A design or utility model which is granted without substantive examination is particularly vulnerable. Although in principle an invention patent is more likely to survive an invalidation action, the average rate of invention patents being declared invalid is not so encouraging. Therefore, it is strongly recommended that patentees fully evaluate the stability of the patent by studying prior designs and art before resorting to radical measures such as customs interception.
When filing for customs recordal of a design patent or utility model, the patentee must submit a patent assessment report, or else the filing will be discarded by the General Administration of Customs.
The infringement analysis and patent stability analysis may serve as a point of reference in the formulation of the strategy. It is not unusual for patentees, after assessing the risks and chances of success, to opt instead for 'moderate' measures (eg, sending a cease and desist letter, requesting the mediation of the local IP office or IP Protection Centre or filing a lawsuit after obtaining admissible evidence). However, if the patentee decides to proceed with the customs interception, it should prepare accordingly.
There is a very short timeframe for patentees to apply for customs interception. This is because of the need to ensure the efficiency of customs clearance.
In view of their minimal understanding of the technical features of patents, Chinese Customs has been very discreet in intercepting allegedly patent-infringing products. In most cases, customs seizures are instigated at the patentee's request. The Regulations on the Customs Protection of Intellectual Property Rights ('the regulations') and the Rules for Implementation of the Regulations on the Customs Protection of Intellectual Property Rights ('the implementation rules') do not make customs recordal a prerequisite to warrant customs interception of allegedly patent-infringing products. However, in practice, some local customs offices still take customs recordal into account when deciding on the temporary detainment of suspect cargos. To be on the safe side, the patentee should record its patents with the General Administration of Customs in advance.
In light of the high risk associated with patent cases and the impact of a potential customs interception on the interests of the consignor and consignee, Customs usually requires that the applicant provide a cash deposit equal to the value of the allegedly infringing products before interception.
In addition, if the patentee subsequently files the lawsuit (as requested by Customs) and requests the court to seize the goods detained by Customs, the court will also require the patentee to provide a guaranty bond. The patentee should have a clear understanding of the forms of guaranty bond that are acceptable to the court.
Pursuant to Article 24.1 of the regulations:
where the Customs detain the allegedly infringing goods in accordance with Article 15 of these Regulations and do not receive notification for assistance in enforcement from the People's court within 20 working days from the date of detention, the Customs shall release the detained cargos.
The patentee must therefore act quickly. Within 20 working days, the patentee must file a lawsuit before the court, securing court rulings on obtaining and preserving evidence – and even preserving property – then promptly notify customs to assist the court in enforcing the rulings. Foreign patentees must complete the notarisation and legalisation of their power of attorney and certificate of incorporation beforehand.
In practice, Customs must release the allegedly infringing cargo if the consignee or consignor posts a counter-guarantee. However, without explicit provision in the regulations, practice varies on the pre-release sampling of the cargo, which could be used as evidence for subsequent court action, as the interpretation of Customs and the courts on the laws and regulations is divided.
In order to ensure the timely release of goods and cut losses, the consignee or consignor will often post a counter-guarantee immediately after customs interception. This leaves almost no time for the patentee to obtain a court ruling on the preservation of evidence or property. If there is no sample for the court to conduct infringement analysis, there will be no case at all. It would be prudent for the patentee to acquaint itself with the practices of different customs offices in this regard.
Although this is a compulsory precaution, it can be a very tricky issue.
Article 23 of the regulations provides that:
After filing an application with the Customs for taking protection measures, the IP rights holder may file an application with the People's court for ordering cessation of the infringement or taking the measure for property preservation in connection with the allegedly infringing goods detained pursuant to the Trademark Law of the People's Republic of China, the Copyright Law of the People's Republic of China, the Patent Law of the People's Republic of China or other relevant laws.
In practice, a patentee filing for evidence preservation may not always request that the court take property preservation measures. This is understandable, since there is a risk of being countersued and held accountable for the exporter's losses if the customs interception is ascertained as wrongful. There are also circumstances in which the patentee leveraging customs interception in order to claim royalties from the alleged infringer chooses not to proceed with property preservation. In light of the above, some local customs offices consider it an abuse of administrative resources if the patentee does not seek a court ruling for property preservation after customs interception.
However, it is controversial to consider that the stock of infringing goods is equivalent to 'property' (of the defendant) that can be preserved in order to secure the execution of the judgment to be rendered. Indeed, courts' opinions are divided – some refuse to rule on property preservation of goods detained by Customs.
Article 100 of the Civil Procedure Law provides:
in the event that the execution of a judgment may become impossible or other prejudices may be caused to the party concerned due to the acts of the other party or other reasons, the people's court may, upon the request of the said party, order the preservation of property of the other party.
Some courts opine that 'property' in this provision merely refers to movable property, real estate and intangible assets that may be liquidated to settle debts. Following this reasoning, courts should order the destruction of those infringing products rather than using them to offset the damages of the IP owner. As regards the allegedly infringing goods, property preservation measures should not apply. Instead, the court may issue an interim injunction and seize the infringing goods as part of the execution of the interim injunction. While in theory this is a credible solution, courts are very cautious in issuing interim injunctions.
Some believe that regardless of whether infringing goods are considered property or not, they must not be released until the infringement is determined, and that 'property' should be interpreted in a broad sense. If the court finds infringement, it may order the destruction of the inventory of infringing products, and the intercepted goods (not entering the market) should be regarded as part of the inventory. If the goods were released, it would be impossible to execute a court order for the destruction of stocked products.
However, this is a delicate issue; in such circumstances, it is essential for the patentee to ascertain the court's stance on adopting preservation measures regarding customs seizures.
Customs seizure is a double-edged sword. While requesting that Customs seizes allegedly infringing products undoubtedly puts tremendous pressure on the infringer, reckless action may be catastrophic to the patentee. Patentees should therefore think twice before wielding seizure against an alleged infringer.
For further information on this topic please contact Shuhua Zhang or Paul Ranjard at Wanhuida Peksung by telephone (+86 10 6892 1000) or email (email@example.com or firstname.lastname@example.org). The Wanhuida Peksung website can be accessed at www.wanhuida.com and www.peksung.com.
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