In the previous newsletter (Part I), we studied selected case judgements and their key holdings released by the Intellectual Property Tribunal of the Supreme People's Court concerning patent prosecution and grant. In this issue (Part II), we shift our focus to selected cases regarding patent infringement disputes.

For the Part I newsletter, please access it at: https://www.aciplaw.com/en/Article/info.aspx? itemid=4919.

The full Chinese version of the Summary of Judgement Key Holdings of SPC IP Tribunal (2024) can be accessed at https://ipc.court.gov.cn/zh-cn/news/view-4234.html

I. The Act of "Use" under the Chinese Patent Laws

【Legal Provisions】

Article 11 of the Patent Law (2020) stipulates:

After the grant of the patent right for an invention or utility model, except where otherwise provided for in this Law, no entity or individual may, without the authorization of the patentee, exploit the patent, that is, make, use, offer to sell, sell or import the patented product, or use the patented process, and use, offer to sell, sell or import the product directly obtained by the patented process, for production or business purposes.

After the grant of the patent for a design, no entity or individual may, without the authorization of the patentee, exploit the patent, that is, make, offer to sell, sell or import the product incorporating its or his patented design, for production or business purposes.

In the SPC Case 1 below, the court applied the 2008 amendment of the Patent Law, but the corresponding provision is identical to the 2020 version.

【SPC Case 1】 (2023) SPC IP Civil. Final 1477（（2023）最高法知民终1477号）

Key Holdings: Where an infringer manufactures an infringing product, provides it to another party for use, and profits from repurchasing and reselling other products manufactured by that other party using the infringing product, it shall be determined that the manufacturer has committed both the act of manufacture and the act of joint use.

Case Summary: The patented product involved is a type of material dumping machine. Using this product (machine) can improve the efficiency of dumping compared to the prior art and yield intact packaging bags for reuse. Defendant Company A manufactured the alleged infringing product and provided it to Defendant Company B for free use. By using the alleged infringing product (machine), Defendant Company B recovered and sold the recycled bags (i.e., the intact packaging bags remained after dumping) to Defendant Company A, Defendant Company B earned profits through this way, while Defendant Company A profited from the price difference between repurchasing and reselling the recycled bags.

The SPC held that under this cooperation model, the acts of Defendant Company A and Defendant Company B involved mutual exploitation and cooperation. The act by Defendant Company A of allowing Defendant Company B to use the alleged infringing product and the act by Defendant Company B of direct use of the same, constituted a joint use under the Patent Law. Defendant Company A’s act of manufacture and use both constituted infringement, and should bear corresponding liability.

Brief Comment: In general patent infringement cases, a defendant in the role of manufacturer is usually found to have committed acts such as making, selling, or offering to sell the infringing product, but is rarely held liable for "using" the infringing product. The particularity of this case lies in the fact that Defendant Company A was not only the manufacturer of the infringing machine but also profited from providing the infringing product to another party (Defendant Company B, who committed the infringement by “use”) for use, recovering the resulting by-products, and reselling them. The court ultimately determined that Defendant Company A committed two types of infringing acts, i.e., manufacture and use, and the "use" act was a joint infringement for which it should also bear liability. Although no direct profit was made from selling the infringing product after manufacture, the profit gained from the "use" stage may serve as a basis for calculating damages

II. Defense of Legitimate Source in Patent Infringement Cases

【Legal Provisions】

Article 77 of the Patent Law (2020) states: Any person, who, for production and business purpose, uses, offers to sell or sells a patent infringement product, without knowing that it was made and sold without the authorization of the patentee, shall not be liable to compensate for the damage of the patentee if he can prove that he obtains the product from a legitimate channel.

In the SPC Case 2 below, the court applied Article 70 of the 2008 amendment of the Patent Law, but the provision's content is identical.

Furthermore, Article 25 of the Interpretation of the Supreme People's Court on Several Issues Concerning the Application of Law in the Trial of Disputes over Infringement of Patent Rights (II) (initially adopted in 2016, amended in 2020) stipulates:

Where a person, for production or business purposes, uses, offers for sale, or sells a patent-infringing product, without knowing that it was manufactured and sold without the authorization of the patentee, and provides evidence proving the legitimate source of the product, the people's court shall support the patentee's claim to cease said acts of use, offer for sale, or sale, unless the user of the alleged infringing product proves that a reasonable price was paid for the product.

The “ without knowing” as in the first paragraph of this Article refers to actual ignorance and no reason to know.

The “legitimate source” as in the first paragraph of this Article refers to obtaining the product through normal commercial means such as legitimate sales channels or ordinary purchase contracts. The party who uses, offers to sell, or sells the product shall provide evidence consistent with customary transaction practices to prove legitimate source.

【SPC Case 2】 (2023) SPC IP Civil. Final 1478（（2023）最高法知民终1478号）

Key Holdings: In patent infringement disputes, for a user's defense of legitimate source to be established, it is necessary to concurrently satisfy both the objective requirement that the alleged infringing product has a legitimate source and the subjective requirement that the user has no subjective fault. Both are indispensable.

(Note: This case is related to SPC Case 1 above and itself was not included in the Summary of Judgement Key Holdings of the SPC IP Tribunal (2024). The above "Key Holdings" are key sentences extracted from the judgement rendered by the SPC IP Tribunal in this case.)

Case Summary: This case is related to SPC Case 1 above, sharing the same basic infringement facts, and involves the adjudication of the infringing acts committed by Defendant Company B in the same infringement incident. In this case, the plaintiff sought an order for Defendant Company B to pay compensation for infringing acts committed during the period from September 2019 to August 2020. The table below outlines the timeline and corresponding event ascertained by the court.

In the SPC's judgement, the time when the litigation documents from the previous case were served on Defendant Company B in September 2019 was an important boundary point. The defense of legitimate source defense was established for acts before that point, and its establishment for the period from that point until December 31, 2019 (the expiration date of the original contract) was also recognized. However, for acts after the contract was renewed in December 2019 (i.e., the orange period in the table above), the legitimate source defense was not established.

The SPC held that in patent infringement disputes, for a user's legitimate source defense to be established, it must concurrently satisfy both the objective requirement that the alleged infringing product has a legitimate source and the subjective requirement that the user has no subjective fault. Specifically, objectively, the user should prove that the alleged infringing product has a legitimate source, which means it was obtained through normal commercial ways such as legitimate supply channels, ordinary purchase contracts, etc; and subjectively, the user should prove that they actually did not know and had no reason to know that the product used was an infringing product manufactured without the patentee's authorization. Both conditions are indispensable.

In September 2019, Defendant Company B received the litigation documents for case (2019) NMCC Hohhot Civil. First Instance 860 (the relevant previous case), initially becoming aware of the potential infringement of the alleged infringing product. However, as it had previously signed a Sales Contract with Defendant Company A through a (normal) bidding process, and upon receiving the aforementioned litigation documents, the contract only had three months remaining in its performance period. Considering the need to maintain Defendant Company B's normal business operations and ensure market transaction security and stability, it could still be held that Defendant Company B was not subjectively at fault before the expiration of the prior contract, thus satisfying the subjective requirement for the legitimate source defense.

However, after the contract expired on December 31, 2019, Company B renewed the contract with Company A and continued to use the alleged infringing product, leading to the continued expansion of the consequences of the alleged infringement. Moreover, Company B is an operator in the relevant industry and had previously cooperated with the plaintiff for several years, and thus should have a higher duty of care. After its prior contract with Company A expired, it should have first ceased the alleged infringing acts that were under litigation dispute, rather than choosing to renew the contract and continue the alleged infringing acts. Therefore, Company B’s act of renewing the contract with Company A and continuing to use the alleged infringing product could hardly be considered in good faith. From the date of renewal, Company B no longer met the subjective requirement for the legitimate source defense.

Brief Comment: The provision on the "legitimate source" defense in the Patent Law is succinct. In many past patent infringement civil disputes, defendants (e.g., operators selling infringing products) often invoked this article to claim exemption from compensation liability (though still liable to stop infringement), but their evidence primarily focused on the objective requirement of legitimate source. Through detailed reasoning in its judgement, the SPC has clarified the conditions for establishing this defense, i.e., both the objective and subjective requirements must be met concurrently, where a lack of good faith can be a decisive factor in rejecting the defense. Furthermore, in this case, the SPC conducted a differentiated analysis and inference regarding the subjective states of the actor under different time periods and objective conditions, thereby reaching distinct conclusions.

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