Case Study–Rapid Removal of Infringements from the Market

Lawrence J. SHAW, Xinxue YU and Jianmin FENG

(as published in the Patent Lawyer Magazine)

One of the advantages of China’s legal system is that intellectual property enforcement proceedings take place over short time periods relative to Western standards. Capitalizing on this, Jiaquan IP Law scored a major victory for Guangdong Midea Refrigeration (Midea) by removing infringing air conditioners from major markets before the peak of summer sales season, resulting in an increase in sales for Midea of roughly USD$30,000,000.

Overview
Midea protected its leading line of air conditioners with a utility model patent for a means for mounting an electronic control/display panel to the chassis. Midea had achieved tremendous commercial success with their product line, in part due to the simplicity and practicality of the utility model. In early 2014, Midea became aware that at least six infringing products manufactured by Ningbo AUX Air Conditioning Co. Ltd. (“AUX”) of Zhejiang were being marketed, and retained Jiaquan IP Law to pursue legal recourse. Jiaquan gathered evidence of the infringements in April 2014 and a lawsuit was filed in May 2014. Because Guangdong Province tends to be a favorable venue for infringement plaintiffs, Jiaquan IP Law located a distributor of the infringing products in Guangdong Province and named them as a co-defendant.

In October 2014 AUX attempted to invalidate the utility model patent by initiating an Invalidity Procedure before the Patent Review Board (PRB), and in November 2014 AUX filed its Response to Midea’s Complaint. The PRB ruled in March 2015 that a number of claims that read on the infringing products were valid. AUX then appealed the PRB’s decision to the Beijing IP Court in March 2015. The Beijing IP Court upheld the invalidity decision of the PRB, and in April 2015 AUX further appealed the invalidity judgment of Beijing IP Court to the Beijing High People's Court, which also upheld the invalidity judgment.

The Jiangmen Intermediate Court issued a First Instance Judgment with an injunction ordering the cessation of sales of infringing products in early June 2015 (i.e., while the appeal of the PRB’s invalidity decision was pending). Using the injunction, online infringements were reported to the three largest online business-to-consumer retailing sites and the infringements were pulled from those sites within two weeks of the First Instance Judgment. This resulted in an increase in Midea's summer sales of 180 million RMB (i.e., roughly USD$30,000,000) relative to the previous summer.

AUX appealed the First Instance Judgment in July 2015, and the First Instance Judgment was essentially upheld by the Guangdong High People’s Court in a Second Instance Judgment in December 2015.

TIMELINE GRAPHIC:
3 April 2014 – Midea begins evidence preservation
27 May 2014 – Midea files Complaint
17 October 2014 – AUX files to invalidate Midea’s patent
21 November 2014 – AUX files Response to Complaint
10 March 2015 – Invalidation decision issued
27 April 2015 – AUX appeals invalidation decision
9 June 2015 – First Instance Judgment issued
23 June 2015 – Infringements removed from major websites
2 July 2015 – AUX appeals First Instance Judgment
14 December 2015 – Second Instance Judgment issued
(*** Should be a horizontal timeline, with months marked. Lines from each timeline event to the appropriate place on the timeline. The exact dates given above are just for the graphic designer’s reference.)

Jurisdiction
The infringing products, six models of air conditioners, were manufactured by Ningbo AUX Air Conditioning Lo. Ltd. (“AUX”) of Zhejiang Province, a province in Eastern China which includes the important port of Ningbo. The infringing products were sold online and by retail outlets across the country. Jiangmen Dayang Electric Appliances Co. Ltd. (“Dayang”) of Guangdong Province was one of the largest distributors of the infringing products. Naming Dayang as a co-defendant allowed Jiaquan to bring the case before the Jiangmen Intermediate Court of Guangdong Province, which tends to rule more favorably for infringement plaintiffs than the courts in Zhejiang Province.

Evidence Preservation
China does not have the equivalent to US-style discovery. Instead, evidence is collected by “evidence preservation” which involves, for instance, purchasing goods, visiting manufacturing sites, or petitioning a judge to seize evidence at places of business. Often attorneys, in the presence of a notary public, are the ones visiting infringing manufacturers (generally under the pretense of being a potential customer or supplier) due to the specialized knowledge needed to identify infringing products. Therefore, practicing IP law in China can have an element of adventure to it that is not paralleled in the West.

In the present case, in April 2014 the evidence was simply obtained by a notary public recording the marketing of infringing products on AUX’s website, and a notary public notarizing payment for and receipt of infringing products from Dayang. The infringing products were sealed by the notary public for presentation to the courts.

The Complaint
The Complaint filed by Jiaquan IP Law on behalf of Midea in May 2014 alleged that the defendants were in violation of Utility Model Patent No. ZL201220672840.9 entitled “Air conditioner” by utilizing technical features covered in claims 1 and 7-10 of the patent. The Complaint requested court orders for AUX to cease infringements, destroy the infringing products and related promotional materials, destroy molds and equipment used for manufacturing the infringing products, offer an apology to Midea and publish an apology through its website and three major publications, pay for an economic loss of 500,000 RMB (an amount which Midea reserved the right to increase according to further evidence), and reimburse Midea for costs incurred in stopping the infringement. The Complaint also requested a court order for Dayang to cease sales of the infringing product.

AUX Attempts to Invalidate the Utility Model Patent
Chinese utility model patents protect innovations relating to the shape and/or structure of a product, and have a term of 10 years from the application date. Utility model patents allow for the protection of innovations which are more incremental than invention patents since in assessing inventive step the examiner will generally only cite one or two prior art references and those references will normally be limited to the technical field of the product.

Utility Model Patent No. ZL201220672840.9 entitled “Air conditioner” protects a means for mounting a control/display cartridge on a panel of the chassis of the air conditioner. As shown in the figures of the utility model patent, the panel (100) has a fixed column (200) with a central hole (210) and rectangular parallelepiped positioning members (220), and the cartridge (300) has a mounting tab (320) with a central mounting hole (330) and rectangular parallelepiped grooves (340) which can mate with the positioning members (220). Each positioning member (220) has a first sub-positioning member (221) on one side of the central hole (210) and a second sub-positioning member (222) on the other side of the central hole (210). The advantage of the invention is that when a fastener, such as a screw (not shown), is screwed into the aligned holes (330) and (210) to secure the control/display cartridge (300) to the panel (100), rotational forces applied by the screw are prevented from rotating and/or deforming the mounting tab (320). For brevity, only claims 1 and 7 will be presented here. Claims 1 and 7 of the utility model patent read:

1. An air conditioner characterized by comprising: a panel, a fixed column located on the panel and provided with a first mounting hole and a positioning element, and a display box provided with a second mounting hole and a positioning groove, wherein the display box is mounted on the fixed column by means of a fastener in the first and second mounting holes and the positioning element is engaged with the positioning groove.

7. The air conditioner according to claim 1 characterized in that the fixed column is of cylindrical shape, a bottom surface of which is connected with the panel, and the first mounting hole, first and second sub-positioning elements are provided on another surface of the fixed column, an inner side of the first sub-positioning leg being an arc-shaped surface aligned with the wall of the first mounting hole, an inner side of the second sub-positioning leg being an arc-shaped surface aligned with the wall of the first mounting hole, the first sub-positioning groove communicating with the second mounting hole and the second sub-positioning groove communicating with the second mounting hole.



Utility patents undergo preliminary examination for formalities and obvious substantial defects, but do not undergo substantive examination prior to issuance. An infringement defendant will therefore typically contest the validity of an applied utility model patent through an Invalidation Procedure. Indeed, AUX petitioned the Patent Review Board (PRB) to determine the validity of the utility model patent, and while the Invalidation Procedure was pending the litigation was stayed.

It is often beneficial to commission an Evaluation Report of a utility model patent from SIPO before initiating litigation, since judges tend to decline to stay litigation during an Invalidity Procedure if there has been a positive Evaluation Report. However, even though there was a positive Evaluation Report in this case, the judge stayed the litigation during the Invalidation Procedure. In March 2015, the PRB ruled that claims 7-10 of the utility model patent were valid and the stay of litigation ended.

The First and Second Instance Judgments
The First Instance Judgment was issued on June 9, 2015. The judgment ordered that:
(i) AUX stop infringement of the utility model patent by ceasing manufacturing, selling, and offering for sale of the infringing models of air conditioner;
(ii) AUX destroy infringing products in their warehouse, and destroy all special molds and equipment used for manufacturing the infringing product, and destroy all promotional materials for the infringing products;
(iii) Dayang stop selling the infringing products;
(iv) AUX pay monetary damages of 100,000 RMB to Midea; and
(v) AUX pay 82% of the court fees of 9,800 RMB.

Upon receiving the First Instance Judgment, Jiaquan notified the major online business-to-consumer websites www.alibaba.com, www.t-mall.com, and www.jd.com of the decision, and the infringing products were removed from the sites within 14 days of being notified. It is the policy of these sites to remove infringing products based on a First Instance Judgment, even when that judgment is under appeal. These sites are estimated to account for a total of 25% of national air conditioner sales. As a result, that summer Midea’s sales increased by 180 million RMB (roughly USD$30,000,000) relative to the previous summer.
Both Midea and AUX appealed the First Instance Judgment to the Guangdong High People’s Court in July 2015. Midea attempted to increase the monetary award, and AUX appealed on the grounds that the invalidity decision was under appeal when the First Instance Judgment was issued. The Second Instance Judgment issued in December 2015 upheld the First Instance Judgment.

Conclusion
Although the Chinese Supreme Court has repeatedly urged caution in issuing preliminary injunctions in intellectual property litigations, particularly in patent infringement cases, nonetheless the Chinese legal system is structured such that time scales involved in litigation are very short by Western standards. This allows Chinese markets to be rapidly cleared of infringing products. The major delay in the present case was due to a stay in the litigation while the Invalidity Procedure was pending -- of the 13 months from the filing of the Complaint until the First Instance Judgment, 5 months was subsumed by the stay in the litigation during the Invalidity Procedure. Often, having a positive Evaluation Report for a utility model patent would induce the judge to not stay the litigation. If that had been the case, the litigation would only have taken 8 months.

It should also be noted that effective strategies are available in China to take advantage of bottlenecks in distribution to deal significant blows to infringers and benefit plaintiffs. In the present case, a substantial portion of air conditioner sales occur in the summer months through online retailers, so shutting down the online channels produced significant financial gains for the plaintiff. As will be covered in a future Jiaquan IP Law newsletter, the Chinese legal system also provides effective expedited enforcement procedures against infringements at trade shows since trade shows also function as important bottlenecks in marketing and distribution.