Punitive Damages and FTO Analysis in Patent Cases (Part I)
According to the fourth amendment of China's Patent Law, “for intentional patent infringement with serious circumstances,” the amount of damages may be enhanced from one to five times of the normal damages amount. This is a very severe sanction for intentional infringement. Although the newly amended Patent Law will not come into effect until June 2021, the five times punitive damages for intentional patent infringement may be implemented from the beginning of 2021 because China’s Civil Code, which stipulates punitive damages in principle, has already come into effect on January 1, 2021.
It is expected that the Supreme People’s Court of China will eventually promulgate corresponding judicial interpretation for the newly amended Patent Law. However, business practitioners in the market may possibly encounter related lawsuits before then. Therefore, measures to avoid punitive damages may need to be taken before being sued for intentional infringement in any event.
In the United States, FTO (freedom to operate) analysis is an important means to avoid punitive damages due to willful patent infringement. FTO analysis refers to the legal opinion analyzing whether the technology implemented by an entity falls into the scope of a valid patent owned by others. Such analysis may have two types: an analysis against targeted patent(s) and an analysis against targeted product(s)/technology. For the analysis against targeted product(s)/technology, a patent search with respect to the relevant product(s)/technology is needed, and the analysis on whether the identified patents are infringed will be made according to the search results.
The purpose of this article is to explain the role of FTO analysis in avoiding punitive damages and what needs to be done to obtain an effective FTO opinion.
1. Infringement without FTO analysis may be regarded as intentional infringement
For the subjective requirement of punitive damages, Chinese Patent Law has set a relatively low standard, i.e., only “intentional.” In the Civil Code of China, “intentional” and “malicious” are used differently. In some clauses, “malicious” is used, while in others, “intentional” is used. There are also cases that both “malicious” and “intentional” are used in the same clause.3 Among the statutes relating to intellectual property rights, the trademark law and anti-unfair competition law use "malicious," while the copyright law uses "intentional." In the Patent Law, there is also a distinction between “malicious” and “intentional.” In the Civil Code and Patent Law, “intentional,” rather than “malicious,” is used for punitive damages, which indicated that there is no need for particularly high subjective standards. According to the general understanding, “intentional” can be divided into “directly intentional” and “indirectly intentional.” Among them, “indirectly intentional” refers to the psychological state of knowing one's own behavior may cause harm to the society and allowing the harmful result to happen.
At least in terms of quantity, China is now a major patent country. According to the statistics released by China National Intellectual Property Administration in July 2020, by the end of June 2020, the number of valid domestic invention patents (excluding Hong Kong, Macao and Taiwan) was 1.996 million.5 If the utility models and designs are counted, the number of valid patents should be stunning.
With such a large number of patents, the manufacturers and sellers of products should realize that the risk of infringing others’ patents is increasing when the products enter the Chinese market. According to the concept of “indirect intent” under Chinese civil law practices, if the manufacturers and sellers know the products may infringe a patent right, but do not take any preventive measures still allowing the infringement to occur, such conduct may be found “indirect intentional” and constitute intentional infringement.
In Underwater Devices Inc. V. Morrison-Knudsen Co.,6 the U.S. Court of Appeals for the Federal Circuit (“CAFC”) held that if a potential infringer has actual notice of another's patent rights, he has an affirmative duty to exercise due care to determine whether or not he is infringing. Such an affirmative duty includes, inter alia, the duty to seek and obtain competent legal advice from counsel before the initiation of any possible infringing activity.
The Underwater Devices decision was made in 1983. Although the standard in the United States has changed greatly since the decision was made, this decision is fairly consistent with the situation in China where punitive damages have just been established and the interests of patentees are actively sought.
In addition, in the United States, it is necessary to mark the patented products, and before the litigation is filed, the accused infringers may be informed by a warning letter, etc. In some cases, if such notification is not given, the damages caused before the notification would not be compensated.7 In China, because there is no such notification obligation as that under the U.S. Patent Law, the calculation of damages has nothing to do with whether the infringer has been notified or not. Therefore, in China, it may not be a good choice to delay the analysis of patent infringement by waiting for the patentee’s notification.
In sum, in China, when the manufacturers or sellers already know the products may infringe a patent right, if FTO analysis has not been carried out before the suspected infringing conduct occurs (for example, the product is put into the market for sale), once infringement is found, there is a chance that it will be considered as intentional infringement; no matter whether a notice from the patent owner is provided.
For the enterprise whose products have large sales, fall in the patent-intensive technical fields, or are in the situation where competitors already have patented products on sale, the risk of being identified as an indirectly intentional infringer will be greater if FTO analysis has not been conducted before the products are sold in the market.
2. Qualified patent infringement analysis opinion can avoid punitive damages
If a patent attorney has provided a FTO analysis opinion that the product does not infringe a patent right, the "intentional" element required by the patent law for punitive damages can be ruled out.
In the above-mentioned Underwater case, the accused infringer may be deemed as having fulfilled his affirmative duty and will not bear the punitive damages if there is a qualified legal opinion according to which the patent right has not been infringed. In Braun Inc. v. Dynamics Corp. of Am.,8 the CAFC held that continuous consultation with a patent attorney was highly probative evidence of good faith.
Therefore, if the defendant obtains a qualified FTO analysis opinion which indicates that the product is not infringing any patent rights, it will greatly help the defendant to prove that the accused infringement does not constitute an intentional infringement.
3. Qualification requirements for FTO Opinion
However, not all FTO analysis opinions can be used to avoid punitive damages. On one hand, ignoring the opinion certainly cannot prove the defendant is unintentional. On the other hand, FTO opinion should also meet the following requirements:
A. The person who prepares the opinion should have certain qualifications
In the U.S. decision Arctic Cat Inc. v. Bombardier Recreational Prods., Inc.,9 the non-infringement analysis opinion relied on by the defendant BRP was prepared by an engineer from the internal IP department. The trial court held that because the person who prepared the opinion was not an attorney, “whatever the quality of his work, BRP cannot legally rely on him to establish the advice of counsel defense.”10 In contrast, in Read Corp. v. Portec, Inc., 11 the FTO analysis opinion was prepared by a senior patent attorney. Although the attorney did not conduct a special patent search in that case, the court still considered the opinion to be qualified and confirmed that the infringer did not have to bear punitive damages.
In China, the qualification related to patent practices includes attorneys and patent agents. Patent agents are divided into general patent agents and patent agents with litigation agent qualification. Attorneys are divided into attorneys with patent agent qualification, patent attorneys and other attorneys. Due to lack of litigation experience, FTO analysis opinion provided by general patent agents is likely to be questioned.
A patent agent who meets one of the following four conditions can be identified as a patent agent with litigation agent qualification: (1) having obtained the lawyer's qualification certificate or legal professional qualification certificate for more than one year; (2) having represented a party in patent litigation cases; (3) having represented a party in cases related to patent right invalidation; or (4) other special circumstances recognized by the All-China Patent Agents Association. Nevertheless, a patent agent with litigation agent qualification does not necessarily mean he or she has experience dealing with patent litigation matters. If the patent agent with litigation agent qualification is experienced in patent invalidation proceedings but never handle any patent litigation matters, his or her qualification to provide a FTO analysis opinion is questionable since the nature of patent invalidation matters and patent litigation matters is greatly different. Therefore, there is a risk that a FTO analysis opinion prepared by a patent agent who never represented any party in a patent litigation case may not be recognized as a qualified FTO legal opinion.
Due to the technical nature of patents and the fact that most of the attorneys graduated from law schools may never represent a party in a patent case, an attorney who does not have the patent bar admission may be questioned if they provide FTO opinions. A patent attorney and an attorney with patent agent qualification are collectively referred to as a "dual certificate attorney" in China. The difference is that the former works in a law firm with patent agency qualification, while the latter works in a law firm without patent agency qualification. Therefore, the order of selection for the person to provide an effective FTO opinion is preferable to be a patent attorney, an attorney with patent agent qualification, and a patent agent with litigation agent qualification who has patent litigation experience. This should constitute a basic requirement. In terms of litigation experience, the richer the better.
In the second part of the article, we will discuss other requirements of FTO analysis opinion and possible defenses when FTO analysis opinion concludes infringement.
2. See Article 1185 of the Chinese civil code, which is consistent with the expression of patent law, but does not specify the multiplier of normal damages.
3. See Article 500 of the Chinese civil code, in which both “malicious” and “intentional” are used. In addition, articles 164 and 459 use “malicious” and “intentional” alone, respectively.
4. See Article 47 of Chinese patent law.
5. From People’s Daily Online，http://ip.people.com.cn/n1/2020/0709/c136655-31777407.html.
6. 717 F.2d 1380 (Fed. Cir. 1983).
7. 35 U.S.C. Sec. 287.
8. 975 F.2d 815, 822 (Fed. Cir. 1992).
9. 198 F.Supp.3d 1343 (S.D. Fla. 2016), aff’d, 876 F.3d 1350 (Fed. Cir. 2017).
10. This is stricter than in Underwater Devices. In that case, the court held that “Mr. Schlanger was not a patent attorney. Again, this fact alone is not controlling, but does bear on the question whether M-K, when it sought advice, did so in good faith.”
11. 970 F.2d 816 (Fed. Cir. 1992).
