IP Enforcement

Recent Court Decisions Regarding Mass Litigation in China

SIPSIP Enforcement, Knowledge

Intellectual property enforcement is viewed by most brand owners as strictly a cost centre – an unavoidable expense for a grudging responsibility. In some cases, however, where the potential rewards of enforcement litigation equal or even exceed the cost of that litigation, the entire IP enforcement paradigm can shift. For this to occur, there is ideally a critical mass of high-quality potential targets as well as laws and practices that make it likely that substantial damages will be awarded – and can be collected. Such programs, if run properly, can partially or even fully fund a brand’s IP enforcement.

In China, where damages awards have traditionally been quite low, and where it can be difficult to collect such awards (even with the increasing use of social credit penalties to force compliance), such programs usually rely on economies of scale, filing dozens or even hundreds of lawsuits, and counting on a large number of small successes to balance out likely failures, refusals by pirates to cooperate, etc. Normally, the sheer number of lawsuits filed necessarily entails empowering lawyers and their investigators to work on a contingency fee basis. These types of programs are generally referred to in China as “mass litigation” programs.

Whilst a number of brand owners have been able to effectively and efficiently run such programs in China, two recent cases from the Supreme People’s Court (“SPC”) regarding mass litigation programs call into question their future viability.

This is true even though SPC precedent is not binding on lower courts throughout China, as it is becoming increasingly common for local courts to view such cases as pertinent and persuasive. This makes it quite likely that the SPC’s “mass litigation” decisions will have a significant impact on such programs. Of particular concern however, are potential ambiguities in the SPC’s decisions that may well result in the decisions being much more broadly applied, impacting even brand owners who are not running traditional mass litigation programs of the type discussed above.

This update will offer insights into mass litigation programs, examine the SPC decisions, and consider possible outcomes arising from the SPC’s recent decisions. It will also provide brand owners and practitioners tips on addressing possible challenges arising from the same.

Mass Litigation Enforcement Programs

IP enforcement in China can be a costly and lengthy process,[1] and if IP owners are only pursuing a handful of enforcement matters, it is quite likely they may incur a net loss, with awarded/collected damages being far outpaced by expenses. Normally, that is viewed as an acceptable outcome, where the primary goal is obtaining orders against pirates, halting future infringement.

The expenses incurred in running Chinese IP enforcement programs have traditionally been exacerbated however, both by the notoriously low levels of compensation awarded by Chinese courts for IP infringements as well as the lack of effective mechanisms to force pirates to pay those awards. That said, over the last 5 to 6 years, legislative reforms (such as increases in minimum statutory damages awards in patent law and copyright law in China and the introduction of punitive damages) have seen increases in damages awards. Moreover, the assigning of social credit penalties to pirates for their failure to pay  damages awarded against them has seen a steady increase in the likelihood that pirates will pay up, often voluntarily, to avoid the bite of such penalties.

As a result, and as the number of civil enforcement matters pursued by an IP owner increases, greater economies of scale can readily be achieved. In that fashion, and with enough even minor successes in enough cases, damages awarded and collected may well reach the point where an enforcement program becomes self-funding or even a profit centre (i.e., the compensation collectively awarded across all enforcement matters is more than sufficient to cover the enforcement costs shelled out by the IP owner).

Generally speaking, certain factors must exist for mass litigation enforcement programs to cross that threshold:

  • Scale of infringement: Normally the sheer scale of infringement activity will have to be very high and should be widely spread across different provinces (thus involving a wider range of local courts).
  • Right business scale or business model: Generally speaking, owners of megabrands that are endemically counterfeited are more likely to be sufficiently victimised to support mass litigation. Often, however, brands with large licensing programs covering a wide range of goods and services across a number of classes might be well situated to run such a program.
  • Contingency-fee arrangements: Given the need to file dozens or even hundreds of lawsuits, IP owners will undoubtedly need to work with at least a few and sometimes many local litigators on a contingency-fee basis. Such arrangements mean that those litigators themselves fund much, if not all, fees incurred in litigating. In return, they receive a significant portion of the fees eventually awarded in those actions. These arrangements incentivise local litigators to run their cases as effectively and efficiently as possible, keeping their costs low, and ideally, seek settlement early and often.
Recent Decisions on Mass Litigation in China

Proof of a pirate’s infringement provides a near absolute right to sue for damages and to halt said infringement. That said, there is a concern that IP owners and their local lawyers running these types of programs might become focused primarily on profit, including by filing civil actions against infringers regardless of the scale of infringement or the financial situation of the pirate. In turn, the dockets of local courts might become clogged by such cases, unnecessarily increasing their workload to an untenable degree.

As a result of these concerns, the SPC recently issued two decisions clearly intended to discourage mass litigation. Below are summaries of those cases.

Nature Republic Co., Ltd. v Huayang Store & Zhongzhuang Supply Chain Management Co., Ltd.[2]

Background: The plaintiff is Korean cosmetics manufacturer Nature Republic. Nature Republic is best known for their aloe vera gels, and its products have been widely counterfeited throughout China.

The first defendant Huayang Store is a small offline shop located in the Hebei province. Huayang Store sold infringing “NATURE REPUBLIC” aloe vera gels manufactured by the second defendant Zhongzhuang Supply Chain Management Co., Ltd. (“Zhongzhuang”). The infringing aloe vera gels were being sold for around US$3.50 each.

The plaintiff conducted notarised purchases (required as evidentiary proof in support of PRC civil litigation) from Huayang Store and confirmed that the sample was counterfeit. Nature Republic filed a civil action against the defendants, claiming trade mark infringement and demanding compensation of RMB30,000 (around US$4,200) and legal fees of RMB10,000 (US$1,400).

In the first instance decision, the Court found that trade mark infringement had been established, and held both defendants jointly and severally liable, awarding RMB7,000 (US$1,000) in compensation (including legal fees). In the appeal of that decision, the Huayang Store was found not liable, as it was able to prove that it had purchased the products from a “legitimate source” – a quirk of PRC trade mark law that can basically absolve a party of damages liability if they can prove they purchased the products from a source they had no reason to suspect was supplying fakes. The manufacturer Zhongzhuang, however, was still found liable for the awarded damages.

SPC Ruling: The SPC overturned the appellate court’s decision, finding that even though trade mark infringement had been established, the plaintiff should not be awarded compensation due to its “misuse” of civil litigation in China as a means of turning a profit, wasting judicial resources in the process. In the SPC’s view, such conduct should not be encouraged or promoted.

The key factors leading to the SPC’s decision were as follows:

  • Excessive litigation: Between 2019 and 2023, many small and medium sized cosmetics stores in nearly a dozen provinces across China had received judicial summonses for trade mark infringement actions launched by the plaintiff.

In total, over 4,000 judgments were issued, and the total amount of compensation gained by the plaintiff’s civil actions exceeded RMB100 million (US$14 million).

  • Unclear record of relevant legal expenditure: Nature Republic had conducted notarised purchases from various sellers in batches, and as a result, it was unable to clearly demonstrate the precise legal expenditure related to the named defendants in this case.
  • Low price of products: Lastly, the SPC was also influenced by the fact that the unit price of the defendants’ infringing products was low (around US$3.50 only).

Shenzhen Big Event Technology Co., Ltd. v Shenzhen Yijian Technology Co., Ltd. ((2022) Supreme People’s Court, Intellectual Property Division, Final Instance No. 2947)[3]

Background: The plaintiff operates a Shenzhen based business called BCASE & SOTHING selling small home appliances, mobile phone accessories, and car accessories.

The defendant operates two online stores and was responsible for nine listings that infringed upon the plaintiff’s utility model patent. The infringing products were priced at around only US$1.00-2.00.

The plaintiff conducted notarised purchases of the infringing products from the defendant’s online stores and confirmed they were likely infringing its utility model patent. As a result, the plaintiff filed a civil suit against the defendants claiming patent infringement and seeking damages of RMB200,000 (around US$28,000, inclusive of legal fees).

At trial, the Court found that patent infringement had been established, awarding RMB40,000 (around US$5,600, inclusive of legal fees) to the plaintiff. This was upheld in the first round of appeals.

SPC Ruling: The SPC overturned the decision and held that although patent infringement had been established, only RMB2,000 (around US$300) should actually be awarded to the plaintiff.

The key factors leading to the SPC’s decision were as follows:

  • Excessive litigation: The plaintiff filed a number of related cases in Shenzhen (as well as a few hundred similar lawsuits across the country), and the SPC found that the total compensation awarded to the plaintiff across various cases in Shenzhen was already more than sufficient to compensate the plaintiff’s likely economic losses and reasonable legal expenses in the Shenzhen area.
  • Seller, not manufacturer: The defendant was only a seller, and not the manufacturer, of the infringing products.
  • Low price of products: As in the Nature Republic case, the SPC noted that the unit prices of the infringing products were extremely low.
  • Lack of intentional infringement: Lastly, the plaintiff did not successfully prove that the defendant intentionally infringed the plaintiff’s patent, nor did it demonstrate any repeat infringements or other acts that would support a higher damages award.
Implications for Brand Owners

The above SPC decisions calls into question the viability of mass litigation enforcement programs in China under their “traditional” form, even though brands running such programs are almost necessarily being endemically counterfeited across the country by thousands of pirates, potentially leading to “death by a thousand cuts” for the brand. In that regard, the most worrying aspect is the SPC’s failure to clearly define just how many cases need to be filed before a plaintiff can be deemed a “mass litigator” and/or when the SPC’s other prevailing factors in the two cases, particularly the “low sales cost” factor (where the price of the infringing products is very low – and likely significantly lower than genuine products) should be invoked by trial courts determining damages to be awarded and liability for the same.

This concern is not hypothetical: within weeks of the SPC decisions being issued, an infringer in a lawsuit being managed by SIPS specifically raised a “mass litigation defence”. There, the accused pirate claimed that our client, a foreign cosmetics brand, was a “mass litigator” and should thus be deprived of any damages award. Fortunately, we were able to demonstrate that the plaintiff had only filed a total of five lawsuits against various infringers in the last five years, and that the defendant in this and the earlier-filed cases had all engaged in long-term, multi-channel infringements.

Hopefully, those two key factors will carry the day and ensure a reasonable amount of damages is imposed against that infringer. Nevertheless, any brand owner filing multiple civil lawsuits in the preceding four to five years should absolutely anticipate infringers attempting to cast them as “mass litigators” in their ongoing actions.

Recommended Best Practices

As a result of these decisions, IP owners would be wise to insulate their enforcement programs from the impact of a mass litigation defence being raised. This entails carefully considering the impact of each of the factors raised by the SPC and putting their cases in the best possible light to minimise the risk that they might successfully be accused of abusing China’s legal system through mass filings of civil lawsuits against sympathetic defendants.

To this end, the following should be kept in mind:

  • Target manufacturers and sellers with large sales amounts: The SPC seems to have viewed the small- to medium-scale defendants in these cases in a very sympathetic light, particularly where the products being sold were low cost – and only shown to be sold in small quantities. As a result, IP owners would be wise to primarily focus on manufacturers of fakes and larger-scale sellers, ensuring as much as possible that efforts are made to demonstrate significant sales volumes. This might be accomplished by conducting administrative raids in advance of litigation, hoping that authorities will diligently seek out details of past sales, and/or notarising evidence of longer-term sales volumes from online sources tied to the infringers.
  • Alternatives to civil litigation: [4] Prior to filing civil actions, it is also recommended that IP owners consider employing other avenues of enforcement. Such efforts could very well lead to more detailed evidence of larger scale past sales and illegal profits, as well as better evidence of intentionality in those sales.

At a minimum, IP owners should consider issuing pre-litigation cease and desist letters to infringers, only issuing proceedings after obtaining notarised or time-stamped proof of sales or promotion of the infringing products post-dating the pirate’s receipt of the letter. This will help IP owners to argue bad faith on the infringers’ part in their continuous infringement conduct and make it impossible for infringers to plead ignorance of the IP infringement.

As well, and where cease and desist letters are sent, IP owners should ensure they have solid, admissible evidence of when and how those letters were delivered. Where possible, and besides delivering the letters via Express Mail Service (“EMS”), IP owners should send them through email as well, which will clearly indicate the time and date of sending (and may also confirm the pirate’s opening of the email). Time stamping of the delivery process by EMS and/or email to preserve such evidence, which is cheaper and easier than notarisations, can also be considered.

For online infringements, IP owners can consider filing take-down requests via the relevant e-commerce platform prior to civil litigation.

For offline infringements (mainly regarding trade mark infringement), consideration should also be given to filing complaints to the relevant Market Supervision Bureau (“MSB”). The MSB will be able to conduct raids against infringing operations, seize infringing products and tools used to make them, order cessation of infringing activity, and/or impose financial penalties (which are paid to the MSB, not to the impacted brand owners). If the value of the counterfeits traded by the infringer reaches relevant thresholds, the IP owner may also request the Public Security Bureau (“PSB”) to take over the case and conduct a criminal investigation against the infringers. In any event, evidence collected by the MSB or PSB of sales volumes, illegal profits, etc., will be viewed as admissible evidence of the infringer’s conduct, and help to counter the key factors in a mass litigation defence.

  • Evidence of legal expenses: Lastly, it is prudent that IP owners maintain a clear record of their legal expenses in relation to each individual infringer. For notary fees, IP owners should ask assisting notaries public to issue separate invoices for each individual infringer (rather than one general invoice covering a batch of notary services).

Dan Plane, Grace Chen and Jeremy Chiu


Endnotes

[1] For more information,  see: Dan Plane and Grace Chen, ‘The Use of Civil Litigation in the PRC as an Effective Form of Dispute Resolution for IP owners’, SIPS (Web Page, 3 July 2020).
[2] See Liu Shan, ‘Use intellectual property rights protection and litigation as a means of making profits? This road is blocked!’, China IP News (Web Page, 12 September 2023).
[3] See Huang  Miaoyan, ‘The amount of compensation awarded was changed from 40,000 to 2,000, which fully reflects the attitude of the Supreme People’s Court in continuing to suppress the bulk rights protection of intellectual property rights’, Guangdong Baijun Lawyer (Web Page, 29 July 2023).
[4] For more information about IP enforcement in China,  see: Dan Plane and Grace Chen, ‘Enforcement of IP Rights in China – A Primer’, SIPS (Web Page,  31 March 2020).