Searching for a seller

The SPC's directive led to a concentration of patent cases in places where manufacturers are generally located. In 1998, in the Summary of Minutes for the Meeting about Adjudication of Intellectual Property Cases by Some Courts (关于全国部分法院知识产权审判工作座谈会纪要), the SPC stipulated that a plaintiff may sue at the place of the seller if it names both the seller and the manufacturer as co-defendants. In 2001, this position was codified in the form of judicial interpretation in Article 6 of the Provisions.

Article 6 and related statutory mandate

Article 6 must be read within the confines of statutory limits on the court's territorial jurisdiction. Under the PRC Civil Procedure Law (中华人民共和国民事诉讼法), multiple individuals or entities can become necessary co-defendants in infringement litigation only if they commit infringement with joint intent or joint negligence, or their actions merge into a single act of infringement. Otherwise, the court has to obtain consent from defendants in order to lump them into one lawsuit.

There is little statutory or judicial guidance on whether and when multiple infringers of a single patent can qualify as necessary co-defendants in a lawsuit. Article 6 can be read to mean that the manufacturer and the seller are inherently necessary co-defendants, or that the manufacturer and the seller becoming necessary co-defendants is a condition precedent for the application of Article 6. In practice, most courts around the country appear to have taken the former position and exercised territorial jurisdiction without evidence of defendants' joint intent, joint negligence or joint infringement outcome.

This broad reading of Article 6 has led some manufacturers to feel prejudiced when they are named in a patent litigation with sellers that they have little or no business relationship with. In today's world of complex business transactions, a product may change hands multiple times between when it is made and when it is sold, as it may be imported, repackaged, combined with other components, transported, sold, and re-sold, before it reaches the consumers. To lump together two companies at the opposite ends of this chain of events in a patent case seems at odds with the statutory concept of necessary co-defendants.

Interpretation of Article 6

Who is the manufacturer?

The concept of manufacturer adopted by courts in China includes not only companies that make a product from raw materials, but also those that have substantial control over how the product should be made. For example, Apple products such as the iPad may be manufactured by original equipment manufacturers (OEMs) around the world, but Apple is undoubtedly considered the manufacturer of these products under Chinese law.

This “control” theory allows the plaintiff to identify the manufacturer of an allegedly infringing product through the company logo or trademark that appears on the product's packaging, operation manual, or advertisement. Whereas it is certainly reasonable to hold liable for patent infringement the company that ultimately benefits from or is responsible for the manufacture of the allegedly infringing product, the “control” theory may also drag many non-infringing companies into needless litigations because of its lack of focus on the manufacturing process.

Given the fact that the court in China has few procedural discourse to dispose of a case before the final adjudication on the merits, these non-infringing companies have to spend considerable amount of resources to defend against a plaintiff's claims. For example, the allegedly infringing product may be manufactured overseas without infringing on any Chinese patents, or the manufacturer derives no financial benefits from the sale because the products are counterfeit or illegally sold. In some reported cases, the plaintiff sues a so-called manufacturer only for its importation and sale of the allegedly infringing product. Even though the manufacturer designation is solely for jurisdiction purposes, courts generally have exercised jurisdiction in these cases under Article 6.

Who is the seller?

It is not difficult to discern who is sued as the seller in patent litigations since the plaintiff usually conducts a notarised purchase of the allegedly infringing product from a retailer of its choice and promptly names the retailer as a co-defendant in the ensuing lawsuit. The notarised purchase sometimes is the only evidence that a plaintiff needs to show in order to bring a case under Article 6 against the retailer. Regardless of how the retailer obtains the allegedly infringing product in the first place, it can hardly break up the connection between the manufacturer and seller in a case filed under Article 6 because the plaintiff apparently does not have to identify all parties associated with the product, nor does it have to prove the seller has a legitimate right to sell the product. For example, the patentee is able to sue both for patent infringement in a case where the seller is not an authorised dealer of the allegedly infringing product and may be liable for infringement to the manufacturer.

Sometimes the allegedly infringing product may be sold only in selected areas that are not in the plaintiff's forum of choice. In practice, many plaintiffs try to circumvent this problem by specifically asking a retailer in the forum to order the product from outside the jurisdiction, and then purchase the product under notarisation from the retailer after the product is delivered. This is a commonly-applied forum shopping practice in China sometimes referred to as “induced evidence”. The legality of induced purchases both for establishing jurisdiction and finding infringement has always been in contention in China.

In a famous copyright infringement case decided by the SPC, the plaintiff Beida Fangzheng specifically asked the defendant Gaoshu Tianli Technologies Inc. to install counterfeit software on its computer and then sued the defendant for copyright infringement. The SPC ruled in favour of the plaintiff after finding that the installation of counterfeit software under the plaintiff's direction was not the only occasion where the defendant committed copyright infringement. The SPC noted that the plaintiff's action was prompted by its knowledge of the defendant's frequent infringing activities. However, the SPC did not indicate whether the induced evidence is admissible if the installation in question is the only time that the defendant had infringed the plaintiff's copyright.

What about other infringing parties?

While Article 6 intends to resolve jurisdiction issues when both the manufacturer and seller are sued, there are no similar legal authorities to help analyse jurisdiction if other entities associated with the allegedly infringing product are sued together, such as an importer or user of the product. The common understanding is that in such cases, basic statutory rules of jurisdiction apply. This brings us back to the same question of whether Article 6 will be understood as providing a general rule governing multiple-defendant patent litigations or defining a specific situation where only the manufacturer and the seller may be sued as necessary co-defendants. In practice, most courts take an expansive reading of Article 6 and hold that all infringing parties, the manufacturer, importer, offeror, seller, and user, can be sued in a single case.

If other infringing parties are involved, it is unclear whether the lawsuit still has to be filed under Article 6. This is important because Article 6 stipulates that only the court at the place of the seller can handle a lawsuit filed against both the manufacturer and the seller. If additional parties are involved, the application of Article 6 potentially limits a plaintiff's choice of forums, as it may not be able to bring a lawsuit at all the defendants' domiciles or places of infringement. In any event, the court has the option to either take on the case against all defendants, or ask the plaintiff to drop its claims against some of the defendants and file a new case against them with a more appropriate court.

Final thoughts

Article 6 of the Provisions has increasingly become critical for plaintiffs in patent cases to establish jurisdiction as the cases frequently involve multiple alleged infringers. However, due to the lack of definition for key terms and the confusing interactions between Article 6 and relevant statutory requirements, courts around the country have applied different standards in analysing jurisdiction in Article 6 cases. According to a recent notice published by the Shanghai High Court, a plaintiff may be asked to declare during litigation whether it is suing the manufacturer for its overall allegedly infringing activities or only those related to Shanghai to avoid exposing the manufacturer to multiple liabilities. However, such notice may have little effect to help the manufacturer extricate itself from multiple repetitive lawsuits filed under Article 6. In order to provide clear guidance to companies operating in China about their risk of being hauled into certain courts to defend patent infringement claims, further clarification about the scope of Article 6 from the SPC may be needed.

Fang Qi, Fangda Partners, Beijing