Patent infringement through reading glasses.

Executives’ Liability for Patent Infringement

February 3, 2020 / Blog, Case Comment, Featured Author
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The Supreme People’s Court of China reversed a judgement made by the court of second instance in a patent infringement case of SMC Corporation v. Ni Tiancai, Leqing Zhongqi Pneumatic Technology Co., Ltd(“Zhongqi Company” for short), which related to executives’ liability for patent infringement. As the Supreme People’s Court made a detailed discussion on executives’ liability for patent infringement, which rarely occurred in ordinary infringement cases, this case became one of the typical cases of IP in China and provided direction and demonstration for trial nationwide, and captured wide attentions among professionals and scholars.

The Supreme People’s Court affirmed the fact and judgement of infringement determined by the courts of first instance and second instance, but reversed that Zhongqi Company and its general manager had constituted joint infringement.

 

The First Instance (Ref.: (2016)浙03民初494号,Darts-ip Ref.: darts-918-259-F-zh)

The Wenzhou Intermediate Court held that, joint infringement refers to the combination of the actions of multiple actors into the infringement with internal connection, leading to an occurrence of damage, in which each actor had the intention of infringement subjectively, and objectively carried out the division of labor and cooperation or jointly implemented an act. According to this concept, the evidence submitted by SMC Corporation (“SMC” for short) failed to prove that Ni provided Zhongqi Company with his personal bank account in the situation that he was fully aware of infringing products, or Ni and Zhongqi Company had other common intentions of infringement subjectively. Therefore, the court dismissed SMC’s claim that Ni should undertake the joint liability.

 

The Second Instance (Ref.: (2017)浙民终200号, Darts-ip Ref.: darts-809-732-E-zh)

The Zhejiang High Court held that, it was Zhongqi Company who implemented the infringement act. Neither Ni’s action of selling infringement products on Alibaba on behalf of the company nor posting information on the official website as the leader in charge of the website could prove he and the company had the common intention of infringement. Although Ni provided his personal bank account for collecting payments on the company’s behalf, it should only be regarded as a duty behavior since he is the legal representative of the company. The evidence submitted by SMC failed to prove that Ni and the company had the common intention of infringement or Ni offered his help for the company in infringement.

 

The Process of Retrial (Ref.: (2018)最高法民再199号, Darts-ip Ref.: darts-776-356-F-zh)

SMC submitted a new evidence during the process of the Supreme People’s Court’s retrial to prove: 1)Ni admitted that the aim of offering his personal account for collecting payments was to escape tax, 2) Ni, one of the two shareholders of the company, had an in-law relationship with the other shareholder, and the company was actually controlled and managed by Ni. The court found a new fact based on the original evidences: in the official online store of Zhongqi Company on Alibaba, there was information with the title of “Wholesale of SMC Solenoid Valve(SY5120-5LZD-01)”, “Details of SMC Solenoid Valve”, “How The Solenoid Valve Works ”,etc. in a section of “News Center” . The article of “Details of SMC Solenoid Valve” introduced the solenoid valve’s operating principle, application, structure, and selection principle and method in great detail. The accused infringing product purchased by SMC was clearly and definitely marked by the figurative trademark of “SMC”.

For the issue of whether Ni and Zhongqi Company constituted joint infringement and therefore should bear joint liability, the court held that: First, Ni and Zhongqi Company had a common will. Ni was the legal representative, controlling shareholder, executive director and manager of the company. The only other shareholder of the company had an in-law relationship with him. He had strong control over the company, and the will of him and the company had obvious commonality. Second, Ni and the company should be aware of that they may infringe SMC’s patent right. The company clearly mentioned on its online store that they wholesaled SMC solenoid valve, and introduced SMC Solenoid Valve’s operating principle, application, structure, and selection principle and method in detail. Moreover, the accused infringing product was marked by the figurative trademark of “SMC”. As the legal representative of the company, Ni was obviously and clearly aware of the corresponding products and technical contents of SMC, and he had a clear cognition that the alleged infringing product might fall into the scope of the patent involved of SMC. In this situation, Ni and the company still carried out the acts of manufacturing, selling and offering to sell the alleged infringing products, which can be considered to having obvious joint infringement intention. Lastly, there existed a mutual use, cooperation, support for each other between Ni and the company. Ni’s act of collecting the payment through his personal bank account was recognized by the company. Both of them jointly completed the sales of the infringing product and the recovery of the payment. It can be seen that Ni used his control power over the company to implement the act of manufacturing, selling, and offering to sell the alleged infringing products jointly with the company. To sum up, the court agreed with SMC ‘s claim that Ni and Zhongqi Company constituted jointly infringement and should bear joint liability.

 

Comment

Objectively, Ni’s act of collecting the payment through his personal bank account was proved by the original evidence. Both the court of first instance and the appeals court considered that it failed to prove that Ni and the company had subjectively common intention of infringement. However, the Supreme People’s Court combined the newly submitted evidence and two other important facts found in the original evidences to conclude that Ni and the company had an obvious intention of joint infringement, and finally demonstrated that their joint infringement was established from both the subjective and objective aspects.

From the perspective of the trial of the case, although there was new evidence at the retrial stage, the other facts found by the Supreme People’s Court based on the original evidences played a very important role to prove that Ni subjectively “should be clearly aware that the alleged product infringed the patent right”. We cannot judge whether the court of first instance and the appeals court believed that “the other facts found by the Supreme People’s Court based on the original evidences” did not have a substantial effect on the determination of Ni ’s infringement or ignored these facts, but the case can at least give us the following implications:

Enterprise executives cannot completely disassociate themselves from the responsibility for infringement of intellectual property rights. Under certain circumstances, “duty behaviors” for which enterprise executives consider to be reasonable would often become a necessary component of joint infringement, including: the situation that executives(or shareholders) have financial confusion with enterprises (this phenomenon is common in many small and medium-sized enterprises with irregular management), and the situation that a company’s irregular corporate governance structure makes it difficult to distinguish the company’s will from the personal will of executives (or shareholders). Especially in severe cases , financial confusion may lead executives (or shareholders) to face external debt with the company to a greater extent .

In addition, combining the conclusions of this case and the statistics of the Supreme People’s Court’s reversing rate in infringement cases in the Darts-ip’s patent database (as shown in the figure below, the reversing rate and the rate for remanding for retrial of the Supreme People’s Court together account for 23%), it can be predicted that if the relevant evidence is sufficient and strong, insisting on an appeal should be a good choice. Especially as nowadays the Supreme People’s Court has jurisdiction over all patent cases for appeals ,the patentees who have concerns about geographical protection will protect their rights more confidently.

 

Source: https://darts-ip.com

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