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The collective expertise of our global team distinguishes OBWB in the field of Intellectual Property Law. We align our best resources to meet each client's specific needs and we treat each matter with the highest degree of attention and care.

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China's Punitive Damages and FTO Analysis in Patent Cases (Part II)

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In the first part of the article, we discussed the risk of punitive damage for patent infringement without FTO analysis, the benefit of qualified patent infringement analysis, and the requirement of the FTO analyst. In this part of the article, we will discuss the requirement of the content of the FTO opinion. 

3. Professionalism of analysis

FTO analysis should not be cursory, and its purpose should not be only to avoid punitive damages. First of all, the opinion should be in writing. Oral or informal opinions would not meet the requirements. Second, it cannot be conclusions only, such as a very simple conclusion written on a handwritten paper. Such a simple opinion is not professional.

A professional opinion should include the following contents:

(1) Legal investigation. The legal authorities of patent infringement in China include the Patent Law, relevant judicial interpretations, guiding cases, etc. For specific cases, sometimes the relevant cases should be referred to as specific interpretations of the law.

(2) Investigation of the products in issue. The product to be analyzed should not be substantially different from the final product actually produced or sold in the market. The composition of the product and the steps of the method should be accurately analyzed and described to truly reflect the technical solution of the product involved.

In one US case, the patent attorney's opinion was made three months before the final product drawings were determined. In that case, however, there was no substantial difference between the final product and the one analyzed by the patent attorney, so it did not diminish the effect of the opinion. But if the final product did have substantial difference from the product analyzed by the patent attorney, the attorney's analysis may not be able to avoid punitive damages. The same principle applies in China.

(3) The protection scope of patent claims should be determined. According to the Patent Law of China, the scope of patent is subject to the contents of the claims. The description and drawings can be used to interpret the claims. According to China's legal practice, the prosecution history of patent examination can also be used to interpret claims.[i]  A correct understanding of the scope of claims is the premise of the infringement analysis.

(4) Literal infringement analysis and equivalent infringement analysis should be included. Because patent infringement includes literal infringement and equivalent infringement, it is unprofessional not to analyze both types of infringement.

(5) It is safer for an FTO analysis to be conducted for at least all independent claims. A patent usually has more than one claim. Since infringement of only one claim is an infringement, the conclusion of non-infringement should be against all claims. In theory, it may not be sufficient if we can only analyze independent claims. However, in fact, the scope of independent claims is the largest. If independent claims are not infringed, it is unlikely that there is infringement of dependent claims. Therefore, it is important to identify certain independent claims in a form of dependent claims in some special patents and analyze all of the independent claims.

4. Analysis of other defenses when FTO analysis conclusion is infringement

It understandable that the conclusions of the opinions presented to the court are always no infringement. This is because ignoring the infringement conclusion of the opinion may well guarantee punitive damages. However, there might be chance that in the FTO analysis, the conclusion is that the patent right is infringed. In this situation, the first thought may be to “design around.” Design around is an important source of technological progress. However, in some cases, it may not be possible to make a design around. Then we will need to analyze the availability of other defenses. These other defenses include prior art defense, prior use rights defense, temporary transit defense, non-business defense, malicious acquisition of patent right defense, patent invalidation defense, right exhaustion defense, administrative examination and approval defense, etc.

When any of these defenses is established, the defendant will be considered as non-infringing or deemed as non-infringing. If there is a qualified analysis which suggests that such defenses exist, and the defendant's belief of non-infringement can be proved, the infringement should not be found as intentional infringement.

There may be some objections to the fact that the patent invalidation analysis opinion can be used to prove the defendant's unintentional nature. In Commil USA, LLC v. Cisco Systems, Inc.,[ii] the U.S. Supreme Court held that the validity of a patent and patent infringement are two different issues. Patents are always assumed to be valid, and there are administrative proceedings to determine the validity of a patent. These views have a wide influence in China's intellectual property community. Unlike in U.S. courts, Chinese courts may hold that invalidity analysis cannot be used as a reason for unintentional infringement.[iii]

In this regard, we contend that at least with respect to the utility models and designs that have not been challenged by invalidation, the patent invalidation analysis report can be used to prove the defendant's infringement unintentional. First of all, the utility models and designs have not undergone substantive examination, and a product producer may not be obligated to invalidate a utility model or design. Further, an invalid patent cannot be infringed, and many patents may be invalid. Therefore, for the defendant who is convinced that the patent is invalid, he or she should be found having no intention to infringe the patent. Of course, upon the discovery of such a patent, it is best to invalidate the patent.

Secondly, in China, the invalidation proceedings, including the administrative procedures of invalidation in China National Intellectual Property Administration, the first instance of the Beijing Intellectual Property Court and the second instance of the Supreme Court, will be time and labor consuming. Therefore, the defendant should not be required to invalidate these patents before the products enter the market. If the defendant engaged a patent lawyer and obtained a legal opinion that the patent involved may be invalid, it should not be found that the defendant has subjective intention of infringement.

Furthermore, if the patent attorney has provided an analysis conclusion that the patent in issue is invalid and the client relied on the conclusion but ultimately was found to have infringed, then the subjective state of the infringer is mainly due to the overconfidence of completely relying on the invalidation conclusion made by non-judicial authorities. That is, the infringer has foreseen that his behavior may have infringed a certain patent, but believes that the patent is invalid, so he can avoid patent infringement. In this case, according to the law of China, this is only a kind of negligence, and an infringement due to such negligence should not be regarded as an intentional infringement.

5. Whether FTO analysis will be counterproductive

The meaning of “intentional” includes knowing. FTO analysis may involve patent searching. If a related patent is found and the attorney gives a warning of infringement, it is undoubtedly that fact that the client is in a subjective state of knowing. Can we reduce the subjective malice without conducting such search and analysis?

In this regard, first we think that this “ostrich attitude” is not desirable. On the one hand, as mentioned above, an infringement without doing FTO analysis may be considered as intentional.

In addition, if the risk of a patent infringement is found, there are many countermeasures to cure the risk in the early stage, such as making a design around, purchasing or obtaining license, preserving the evidence of prior art defense or first use rights defense, etc. Without patent search and analyses, there will be no opportunities to find such countermeasures.

On the other hand, we should consider the trade-off between the two risks. Although there is no attorney-client communication privilege system between lawyers and clients in China as that in the United States, it is very difficult for the plaintiff to prove that the defendant has once obtained a negative FTO opinion against the defendant, in terms of the burden of proof with respect to intentional infringement. However, if no FTO analysis has been carried out, we will never know what the risk is associated with the product and how large the risk could be. Sometimes, unknown risk is the biggest risk.

In sum, to avoid punitive damages up to five times and the possible cases of patent “pengci,”[iv]any manufacturer should understand the great importance of FTO analysis and seriously consider the necessity of FTO analysis.

[i] The prosecution history here includes the examination history archives of the patent in issue as well as those of other patents in the family with division relationship. See Article 3 of the interpretation of the Supreme Court of People on several issues concerning the application of law in the trial of patent infringement disputes (FA Shi [2009] No. 21) and Article 6 of the interpretation of the Supreme Court of People on several issues concerning the application of law in the trial of patent infringement disputes (2) (FA Shi [2016] No. 1).

[ii] 135 S. Ct. 1920 (2015).

[iii] In the case of Gree company v. Aux Company and Jingdong company (the fifth of the top ten intellectual property trial cases in Guangdong Province in 2019), the court held that “any entity has the obligation to avoid the infringement of the patent right in this case, and cannot challenge the national law to protect the patentee by questioning the validity of the patent right.” The utility model involved in this case has suffered several rounds of invalidation and survived.

[iv] “Pengci” is a Beijing dialect and means faking an accident to claim compensation. It may be deemed as one kind of blackmail. Jiao Yang, the chief judge of intellectual property division of Supreme People’s Court, called it the business of enforcement. See https://www.sohu.com/a/426175249_733564.