Counter-Suit for Damages Actions Against Malicious Intellectual Property Rights Litigation

By Xu Jing and Zhang Hairuo*


Malicious litigation is using the legal right to litigate to protect an interest when no substantive right has been violated. Currently, Chinese law does not provide any specific provisions on how to determine whether a party has abused its right to litigate, nor the law defines the concept of malicious litigation. Moreover, Chinese law does not provide specific remedies for a victim of malicious litigation to repair the damages suffered from a malicious litigation.

In 2006, the Nanjing Intermediate People's Court heard the patent infringement case of Yuan Lizhong v. Yangzhou City Tongfa Air-Raise Actuator Factory & Yangzhong City Tongfa Industry Co. Ltd. This case was the first counter-suit for damages action brought as a reaction to a malicious litigation. In March, 2009, the Supreme People's Court promulgated the Opinions of the Supreme People's Court on Several Issues Regarding the Implementation of the National Intellectual Property Rights Strategy ( Fafa [2009] No. 16) ("Opinion") (1) which provides that:

  • "The courts shall appropriately accept and adjudicate cases that seek declaratory judgments of non-infringement and litigations that seek counter-suit for damages in claim of malicious litigations. The courts shall restrict the acts of abusing intellectual property rights ("IPR") and proceedings for the purpose of defeating competitors, eliminating and restricting competitions and obstructing innovations." (2)

The Opinion provides practical guidance to the people's courts in the proceedings of counter-suit for damages litigation, as well as judicial basis for the party to file counter-suit for damages action if the party is facing malicious litigation.

This article will discuss the Yuan Lizhong v. Yangzhou City case based on the spirit of the Opinion of the Supreme Court, and provide our opinions on how to define malicious litigation in relation to IPR, as well as how to take counter-suit proceedings for damages action in the event of malicious litigation.


I. Definition of Malicious Litigation and How to Determine "Malice"

When a party initiates litigation in the PRC, it must adhere to the "Honest and Credit" principle. Otherwise, the party will be considered to be abusing its right to litigate under the Chinese law. Based on this principle and general understandings described in the academic research papers, we consider that the definition for malicious litigation, to be prohibited under the current judicial practice, should refer to "a groundless civil action filed without a substantive rights violation or without factual basis and other justifiable reasons to pursue a litigation and which will result in damages to the interests of alleged parties". (3)Among all elements referred above, the key element is to determine if the party that initiated the groundless civil litigation is acting with "malice" towards the other party.

In the Yuan Lizhong v. Yangzhou City case, the plaintiff filed and was subsequently granted utility model patent for a technique solution which was already publically disclosed in the PRC's National Standards. Obviously, the patent can not meet the legal requirements for a utility model patent. The plaintiff initiated a patent infringement action against the defendant based on this patent. Consequently, the defendant filed counter-suit for damages claim. The Nanjing Intermediate People's Court held that the plaintiff maliciously filed the patent infringement litigation based on the following three reasons:

First, the PRC Patent Law ("Patent Law") is a state law, therefore, once it is published and implemented, all Chinese individuals and entities are deemed to have gained knowledge about it. In addition, since the Patent Law had been implemented for more than 16 years, the plaintiff could not establish himself as unaware or unclear about the novelty and creativity requirements for a patent as set out in the Patent Law.(4)

Second, the plaintiff, taking advantage of the fact that the PRC law does not require substantial examination for utility model patent applications, filed and was subsequently received utility model patent to a technical solution which was already disclosed and published under the PRC's National Standards without any alteration to the purpose of use of such solution. Accordingly, the Court held that the plaintiff lacked honesty and credibility and its act of filing the patent application and utilizing this patent to against the defendant should be deemed as acts in bad faith.(5)

Third, the litigation initiated by the plaintiff against third parties for patent infringement based on a patent filed by him in bad faith, had interrupted third parties' normal business activities and caused the defendant substantial losses.(6)

The above reasons considered by the Court in this case can be categorized into two aspects, which can assist us to determine how the Court defined "Malice". First, the courts will consider whether a plaintiff knew or should have known its claim lacks legal or factual grounds. For example, if the plaintiff received its IPRs through fraudulent actions during the application procedure, or if the plaintiff knew or should have known an IPR is invalid substantially or in formality. Second, the courts will consider if the plaintiff initiated the infringement litigation for the unseemly purpose of bringing damages to other party's lawful interests.(7)

In the Opinion, the Supreme People's Court specifies a number of circumstances that can be considered as "having unseemly purpose for litigation", including but not limited to: utilizing litigation proceedings to defeat competitors, to eliminate and restrict competition, and/or to obstruct innovation". For example, a party applies for a court injunction based on a knowingly invalid right to obstruct the normal business activities of a competitor; or a party, in order to fulfill the requirements for a court proceeding, forges evidence or uses other inappropriate means.

Overall, "malicious litigation" can be interpreted as a party attempts to fulfill its unseemly purpose and compensation through initiating litigation proceedings and/or through obtaining compulsory interim injunctions. The compulsory interim injunctions include preliminary injunction, interlocutory injunction, property preservation and evidence preservation.

As malicious litigation is fundamentally unlawful and harmful to third parties, the Supreme People's Court explicitly provides in the Opinion that the courts must exercise its power with care in respect of protecting legal rights and preventing the abuse of rights. Based on this principle, the parties involved are provided legal remedies of filing counter-suit for damages suits against proceedings filed with malicious purposes as an effective means of preventing abuse of IPRs.(8)


II. Counter-Suit for Damages Actions

Although the Opinion issued by the Supreme People's Court allows counter-suit for damages actions, it did not specify details on application of such practice. Since the counter-suit for a damages action is a type of litigation where a plaintiff asks for compensation for damages suffered from a malicious litigation, the proceeding in its core is a civil litigation regarding infringement of rights and compensation. Accordingly, for further discussion on counter-suit damages actions, the basic rules for infringement proceedings in a civil litigation can be used as guidance.

  • A. The Plaintiff of a Counter-suit for Damages Actions

    The plaintiff of a counter-suit for damages action should be the party who is a defendant of a malicious litigation. However, other parties may also qualify as the plaintiffs. In general, all of the parties that have suffered damages by a malicious litigation should have the right to file a counter action against the party that brought the malicious litigation. For example, the defendant in a malicious litigation is a manufacturer that is accused producing infringing items, and the damages to the defendant spreads to its product distributors because they cannot distribute the supposedly infringing product, then they will have standing to sue for the losses that the party that brought the malicious litigation caused them.

    B. Jurisdiction of Counter-suits for Damages Actions

    The grounds for filing a counter-suit for damages action are based on the existence of malicious litigation, i.e. it has been formally determined or determined in principle that a proceeding is a malicious litigation. For example, the plaintiff of a malicious litigation has lost the case, or the patent rights being used as the bases for an infringement litigation has been invalidated by the Patent Reexamination Board ("PRB"). Under such circumstances, the opposite party or the damaged party may file a counter-suit for damages action. As the counter-suit for damages action is filed against a malicious litigation, therefore, although it is an independent proceeding, it must be filed to the same court which heard the malicious litigation. This will allow the court to conveniently explore the facts of both cases and save judicial resources.

    C. Scope of Compensation in Counter-Suit for Damages Actions

    The scope of compensation given to the damaged party in a counter-suit for damages action shall be consistent with the damages suffered from the malicious litigation. The aggrieved party has the right to ask for various types of compensation applicable to different civil liabilities, for example, to remedy monetary damages, the "Fill and Level Up" principle can be used which enables the aggrieved party to recover all monetary losses suffered from a malicious litigation. The damages referred herein include not only losses in respect of manufacturing and business operation, but also all reasonable costs incurred in defending itself in the malicious litigation, such as the court fees, attorney's fees, travel expenses, communication costs, verification costs, investigation costs and work time lost costs, etc.(9)

    The aggrieved party can also claim compensation against damages to its "personal rights". This refers to damages suffered by a party in a malicious litigation to its reputation and market recognition. The applicable compensation can include issuing public apology, eliminating detrimental effects, restoring reputation and recognition.

    Finally, depending on the actual situation of the case, the aggrieved party can also apply to the court to impose penalties based on the relevant Civil Law measures regarding "acting to obstruct civil litigation", such as imposing admonishment to the defendant of the counter-suit for damages action.


III. Counter-Suit for Damages Actions Should be Handled with Care

A counter-suit for damages action is intended to punish a malicious litigator that violates the "Honest and Credit" principle by initiating a groundless lawsuit to inflict damage on a party that is acting properly. In practice, actions for protecting and enforcing lawful IPRs should be clearly differentiated from filing a malicious litigation, therefore, a defendant is not necessarily obtained a right to file counter-suit for damages action simply because the plaintiff losses the case.

In a counter-suit for damages case heard by the Beijing High People's Court in May, 2008, the Court held that the original lawsuit for design patent infringement should not be deemed as malicious litigation, as the design patent was valid at the time of litigation and there was no malicious intention to be found against the plaintiff. In that case, the design in the original litigation was invalidated because the plaintiff published a similar design before the patent application was filed, which resulted in invalidation of the design patent. There was no prior art of other parties exist prior to the application. Therefore, it is not justifiable to deem that the plaintiff filed design patent in bad faith.(10)

Accordingly, the threshold for determining a malicious litigation is whether the plaintiff has the intention of purposely harm another party, or the plaintiff knows or should have known the right to be relied upon for the litigation is invalid. If the plaintiff does not have the intention of harming another party, then the litigation should not be considered malicious, even if the plaintiff's claim is considered frivolous. (11)Under such circumstances, the defendant can not take counter-suit for damages action.


IV. Legal Trends for Counter-Suit for Damages Actions

Though there are no explicit provisions regarding malicious litigation in the Chinese laws, legal mechanism for preventing malicious litigation has now been formed. It is foreseeable that, in the future judicial practice, the people's courts will set stricter criteria for accepting the cases and particularly impose tighter control over granting interim injunctive measures.

In the Opinion, the Supreme People's Court states that, in some types of intellectual property infringement cases, the courts must reach a basic conclusion regarding the possibility of the infringement when considering granting applications for temporary injunctive measures. In respect of applications to preserve evidence, the court shall also take into account the risk of the evidence being destroyed, as well as, the applicant's ability to collect the evidence. This has shown the trend that the Supreme People's Court tends to tighter the control over granting temporary injunctive measures.

In practice, the parties and their attorneys shall pay special attention to the validity of the IPRs being used in the infringement suits. On one side, if the opposite party's activities satisfy the criteria for malicious litigation, especially when fraudulent conducts are found at the IPR application and granting stage, and which result in invalidation of such right, the party and its attorney can consider initiating a counter-suit for damages action in order to protect its legitimate interests. On the other hand, the IPR right owners and their attorneys shall also be more careful prior to filing an IPR infringement action, the party must be cautious and carefully evaluate the validity of the right, collect all relevant evidence to support its claims, and avoid risks of frivolous litigation. This will assist avoiding counter-suit for damages actions.


(This article was originally written in Chinese, the English version is a translation.)


* Zhang Hairuo is an associate of King & Wood's IP Litigation Group in Beijing.



Notes:

(1) Fafa [2009] No. 16, the Opinion was promulgated by the Supreme People's Court on March 29, 2009.

(2) See Article 5 of the Opinion.

(3) Yuan Lizhong v. Yangzhou City Tongfa Air-Raise Actuator Factory & Yangzhong City Tongfa Industry Co. Ltd ., Nanjing Intermediate People's Court, 2006. The Court opinion can be found at the China IP Judgment Website: http://ipr.chinacourt.org/public/detail_sfws.php?id=7702(last visit on October 20, 2009)

(4) Yuan Lizhong v. Yangzhou City Tongfa Air-Raise Actuator Factory & Yangzhong City Tongfa Industry Co. Ltd ., Nanjing Intermediate People's Court, 2006. The Court's opinion can be found at the China IP Judgment Website: http://ipr.chinacourt.org/public/detail_sfws.php?id=7702 (last visit on October 20, 2009)

(5) Ibid.

(6) Ibid.

(7) Research Report for the Malicious Litigation issued by the No. 3 Tribunal, the Supreme People's Court, website at http://review.jcrb.com/zyw/n330/ca282590.htm (last visit on October 20, 2009)

(8) See Article 8 of the Opinion.

(9) Liu Hongbing and Mao Fanghui, "Several Issues Surrounding Hearing Counter-Suit for Damages Actions Against Malicious Patent Infringement Litigation," Plaintiffs found at the China Civil and Commercial Law", see website: http://www.civillaw.com.cn/article/default.asp?id=36512 (last visit on October 20, 2009)

(10) Beijing Mingri Electronics Co. Ltd. v. Venaier (Beijing) Electronic System Co. Ltd., Beijing High People's Court, 2008, The court's opinion can be found at the China IPR Judgment Website: http://ipr.chinacourt.org/public/detail_sfws.php?id=17458 (last visit on October 20, 2009)

(11) See Article 18 of the Opinion.