Patent Infringement Damage in China

1. Patent Infringement Damage in China Liu, Shen & Associates: Jun Qiu May 2015

2. Outline • Current Laws and Regulations • Statistics • Measures for improving damage awards • Case Examples • Summary

3. Current Laws and Regulations Article 65, Patent Law Damage is calculated on one of the following bases: • Patentee’s actual loss • Infringer’s illegal profit • 1-3 timesof patent license fees  • Statutory damages between • RMB10,000-1,000,000 ($1,613-161,300) • 5. Reasonable legal expenses

4. Current Laws and Regulations Rule 20, Provisions of the Supreme Court on Patent Disputes • 1. Patentee’s actual loss • Formula 1.1 • Patentee’s loss= reduced number of sale units of patentee’s products due to infringement X reasonable profit of a unit of Patentee’s product • Formula 1.2 • Patentee’s loss= number of sale units of infringer’s products X reasonable profit of a unit of Patentee’s product

5. Current Laws and Regulations Rule 20, Provisions of the Supreme Court on Patent Disputes • 2. Infringer’s profit • Formula 2 • Infringer’s profit = number of sale units of infringer’s products • X reasonable profit of a unit of infringer’s product

6. Current Laws and Regulations Rule 21, Provisions of the Supreme Court on Patent Disputes • 3. One to three times of Licensing fees • Formula 3 • Licensing fees = number of sale units of infringer’s products X • 1 ~ 3 times X referenced licensing fees per unit

7. Statistics Number of 1st Instance Litigations of Patent Civil Cases Accepted by Courts Nationwide – Supreme Court

8. Statistics IP infringement damage case example report in 2013 - IP Center at Zhongnan University of Economics and Law • For patent infringement cases 2008-2012 • Average damage awards: RMB 80,000 ($12,900) • Statutory Damage ratio: 97%

9. Statistics Judge of Beijing High Court presented at IP court forum 2014 • For patent infringement cases 2002-2012 • Average damage awards: Lower than RMB 300,000 ($48,400) • Statutory Damage ratio: 92% Judge of Guangdong High Court in IP court forum 2014 • For IP infringement cases • Statutory Damage ratio: Greater than 95%

10. Statistics Our investigation on some effective decisions issued by Beijing Court from 2011-2013 • Among 68 invention patent infringement cases • Damage award: 38 cases • Over RMB 1 million 2 cases; • 500,000-1 million 11 cases; • Below RMB 500,000 15 cases • Average damage awards: RMB 500,000 ($80,600) • Statutory Damage ratio: 92% • Among 9 utility model patent infringement cases • Average damage awards: RMB 90,000 ($14,500) • Statutory Damage ratio: 100%

11. Statistics Common perception • Low damage awards • High ratio of statutory damage • Judge of Beijing High Court • For patent infringement cases, 93.2% of patentee claimed statutory damage • Judge of Beijing First Intermediate Court • For patent infringement cases in 2010-2013, 86.3% of patentee claimed statutory damage in damage claims supported by the court 11

12. Insufficient Evidence • Difficulty to collect evidence such as real account books • Difficulty to obtain referenced license fees due to lack of patent licensing activities in China 12

13. Measures taken by Legislation • Proposed Fourth Amendment of Patent Law in China • Lessening burden of evidence collection regarding damages by the patentee • If patent infringement can be established, more liability is imposed on alleged infringer to provide accounting books, documents • Punitive damage for willful infringement, up to 3 times • Administrative Action • Authorizing the administrative authority to impose fines 13

14. Measures taken by Courts • Guangdong High Court • Evidence disclosure system • Evidence disclosure liabilities of participating parties • Obstruction of evidence disclosure system • Liabilities in case of obstruction of evidence disclosure • Preponderance of evidence system • Discretionary damage greater than statutory damage if evidences show greater damage but can not determine exact damage • Bigger role for expert testimonies and judicial appraisal 14

15. Measures taken by attorneys • Public available sales figures • Evidence preservation procedure • Experts testimony • Previous contracts 15

16. Case Exmples • Goertek v. Knowles • Kubota v. Fengling • Longchen v. Tongba • Huawei v. IDC 16

17. Goertek v. Knowles • US corporation with headquarter at Illinois • Market leader and global supplier of advanced miro-acoustic devices • Manufacturing sites at Jiangsu, China and Malaysia • Chinese Acoustic chip manufacturer located at Weifang, Shandong • Public held company established in 2001 and listed in ShenZhen Stock Exchange in May 2008 17

18. Goertek v. Knowles June 21, 2013，Knowles sued Goertek in ITC and district court on patent infringement of three US patents regarding silicon microphone packaging product July 12, 2013 Goertek sued Knowles (China) in Weifang, China on patent infringement of five CN UM patents regarding silicon microphone, UM patents stands after invalidation actions June 21, 2013，Knowles sued Goertek in Suzhou, on patent infringement of one CN patent, CN patent was invalided April 17, 2014 Weifang court awards RMB 74.4 million on infringement of 2 patents February, 2013 Goerteck & Knowles reach agreement 18

19. Goertek v. Knowles Venue Shopping • Buying infringing product from a second dealer located at Weifang who is a retailer of a first dealer who is a distributor of the infringing product Goertek located at Weifang Knowles (China) located at Suzhou

20. Goertek v. Knowles Damage claims Goerteck provided sufficient evidences, but Knowles failed to provide counter evidence during proceeding • Patentee’s loss Formula 1.2 Patentee’s loss= number of sale units of infringer’s products X reasonable profit of a unit of Patentee’s product • Number of sale units is based on public available data disclosed on the websites by Knowles (China), export number collected from Custom through evidence preservation procedure • Reasonable profit is based on an audit report on patentee’s product incorporating the patents and apportion analysis considering contribution of individual patent to overall profit of the patentee’s product 20

21. Kubota v. Fengling 21 Kubota (Japan and China) and Taizhou Fengling are agriculture machinery manufacturers and competitors in China Market Kubata sued Fengling at Nanjing Intermediate Court in 2008 Fengling sued Kubota for patent invalidation • PRB invalidated all claims • Beijing 1st Intermediate Court upheld the invalidation decision in 2009, • Beijing High Court reversed and remanded the decision in 2010 • PRB upheld patent right in 2011

22. Kubota v. Fengling 22 Nanjing Intermediate Court held that Fengling infringed Kubota patent and awarded 800,000 RMB in statutory damage in 2012 Jiangsu High Court upheld the decision in 2013

23. Kubota v. Fengling 23 Kubota asked 2.5 million in damage • Damage is calculated based on Formula 2 Infringer’s profit = number of sale units of infringer’s products X reasonable profit of a unit of infringer’s product • Number of units manufactured and sold was based on news reports on website of Fengling and newspaper regarding a specific model incorporating the patent • Reasonable profits was based on administrative subsidy rate provided for agriculture machinery Although such evidences were not considered sufficient to support damage claim, the court awarded a high statutory damage

24. Longcheng v. Tongba 24 Zhongshan Longcheng and Hubei Tongba are stroller manufactures and competitors In April, 2008, Longcheng sued Tongba on patent infringement and Wuhang court found infringement During appeal, both sides reached a mediation agreement in 2009. In the agreement, Tongba agreed to stop infringing Longcheng’s patent and would pay RMB 1 million if one instance of infringement was found in the future.

25. Longcheng v. Tongba 25 Longcheng found that Tongba continued to infringe the patent in 2009 and 2010. Longcheng chose to sue in a case of patent infringement instead of breach of contract in 2011 Wuhang court awardrf RMB 140,000 based on statutory damage due to lack of evidence HuBei High court affirm the decision

26. Longcheng v. Tongba 26 Longcheng filef petition to Supreme Court Supreme Court heard the case and awarded RMB 1 million Damage in December, 2013 based on following holdings: • Mediation agreement is valid • Liability of Tongba does not belong to concurrence between liability for breaching contract and infringement, but is solely a liability for infringement • Court shall allow parties to reach agreement on damage awards occurred in the future due to difficulties to collect evidence and cost saving in law suits

27. Huawei v IDC • IT cooperation • Members of 123 SSOs including ETSI • NPE • SEP patent holders for 2G/3G/4G/IEEE802 standard 27

28. Huawei v IDC August, 2008 Licensing Negotiation Royalties 2% (2009-2016) September, 2009，IDC joined ETSI and provides SEPs July, 2011 IDC sued Huawei in ITC and district court on patent infringement December,2011 Huawei sued IDC in ShenZhen, China on antitrust violation and asked court to determine RAND rate February, 2013 ShenZhen court RAND Rate: 0.019%; Antitrust compensation: RMB 20 million June, 2013 NDRC started antitrust investigation on IDC October, 2013 Guangdong High Court Affirmation May, 2014 IDC & Huawei reach agreement 28

29. Huawei v IDC 29 In Shenzhen Court Huawei contended that royalty rate set between IDC and Samsung or Apple was much lower than royalty rate of 2% asked by IDC IDC contended that Samsung and Apple licensing agreement were earlier than Huawei negotiation and IDC did not fully recognize the values of the patent portfolio, the court should not determine royalty rate between private parties

30. 5.6 mil 31.3 bil Huawei v IDC • RAND royalty rate for Huawei is determined based on Apple and Samsung royalty rate Fixed licensing fees = = Apple royalty fees= 0.018% Product Revenue • RMB 20 million damage awards is a discretionary damage based on • Legal expenses in US and China • Notarization fees • Loss of competitive advantages due to failing to obtain licenses in time 30

31. Summary 31

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