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The First Case of Patent Extortion in China: Action for Enforcement or Malicious Prosecution?

November 15, 2019 / Blog, Case Comment
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A recent patent infringement case in China has raised a heated discussion on whether the patent owner’s action is justified patent execution or extortion – as it is happening right at the eve of the accused infringer’s IPO event. This article aims to outline the judgment made by Shanghai Pudong district court to offer a reference to the audiences that may be interested in this type of cases. (Case Ref.(2018)沪0115刑初3339号,Darts-ip Ref.: darts-344-636-H-zh)

The background

The Public Prosecution Service (Shanghai Pudong District People’s Procuratorate) accused Xingwen Li of threatening companies to sign a license or settlement agreement by filing patent infringement lawsuits which would have a substantially adverse impact on their operation, listing or financing to extort a large amount of money.

1.The facts-Part 1

  1. A) From March to July 2017, when IReader Technology Co., Ltd. (hereafter referred to as IReader) was at the time of IPO, Li filed several patent infringement lawsuits against it in the name of Shanghai Kedou Electronic Technology Co., Ltd. (hereafter referred to as Kedou) which operated by himself. The involved patent was ZL201010523284.4. IReader was forced to sign a patent license contract with Kedou(because according to ChinaSecurity Law, the Intellectual Property that Security issuer has obtained or been using should not have substantial legal risk). The contract stipulated that IReader had obtained rights to use all of the patents and patent applications which belong to Ked IReader should pay Kedou 800 thousand RMB license fee. IReader actually paid 500 thousand RMB afterwards.
  2. B) At the end of July 2017, Li made up a fake contract with a signature date on 2016 which stipulated that Kedou had exclusively licensed its patents to Budao company (legal representative: Xingwu Li, Xingwen Li’s brother) which is actually under Li’s Then Li filed a patent infringement lawsuit against IReader before Beijing IP court in the name of Budao company and informed the China Securities Regulatory Commission (CSRC). IReader was forced to sign a settlement agreement with a commitnment to pay Budao company 800 thousand RMB. IReader actually paid 100 thousand RMB afterward.

2.The facts-Part 2

On October 2017, when Xiamen Intretech Inc. (hereafter referred to as Intretech) was in the process of applying for listing on the main board of Shenzhen stock market, Li filed a lawsuit against it on the ground of infringing patent right before Xiamen intermediate court in the name of Benxing company and informed CSRC. Intretech was forced to sign a settlement agreement with Benxing company and paid 288 thousand RMB.

3.The facts-Part 3

At Gubei company’s critical fundraising stage, Li brought multiple lawsuits against it on the ground of infringing patent rights in the name of Kedou, before Shanghai IP court from 2015 to 2017. Furthermore, he lodged complaints with Taobao and other online shopping platforms, resulting in removal of Gubei’s products. Gubei was forced to sign a patent license contract and paid 225 thousand RMB to Kedou.

4.The facts-Part 4

From 2015 to 2016, Li sued Hongyan company for infringing patent rights in the name of Ke Dou. Hongyan was forced to sign a patent license contract and paid 50 thousand RMB to Kedou.

 

The judgment

Whether the fact 1-A,2,3,4 constitute extortion?

To judge whether the act constitutes extortion, it is necessary to not only examine whether the actor has the purpose of illegally taking possession of the property, but also accurately scrutinize whether the actor conducted threating or intimidation.

Firstly, on the subjective aspect, the existing evidence can only identify that the payment obtained by Li is the patent license fee, and cannot be used to ascertain that Li has the purpose of illegal possession.

Further, the patents involved in the case are legal and effective, and there is no evidence showing that Li obtained these patent rights through plagiarism, fraud, theft and other illegal means.

Besides, the court also mentioned that ” it cannot be deemed that Li has the purpose of illegal possession simply because he filed a lawsuit at the sensitive time point of the accused company’s preparing for IPO or fundraising”.

Secondly, on the objective aspect, even though Li claims for damages through litigation, and  it cannot exclude the possibility that the accused infringer is willing to reach settlement with Li on spirits of autonomy of private law to avoid trouble or litigation costs, it cannot be ascertained that the accused infringer was enforced to pay or his willings are subject to any control.

Therefore, the court holds that Li’s conduct does not constitute extortion.

Whether the fact 1-B constitute extortion?

Firstly, on the subjective aspect, Li and his brother conspired maliciously to make up the fake contract, in order to mislead the court or the CSRC to believe “Budao company has the exclusive right to use the patents and is not bound by the previous common license contract”, and try to invalidate IReader’s defence that it has the right to use patent ZL201010523269. X. The essence of the above behaviour is that two defendants conspire maliciously to sign a contract that aims to extort money from the accused infringer.

Secondly, on the objective aspect, Li and his brother filed a lawsuit by making a fake license contract at the critical time point of the accused infringers’ IPO stage and then informed CSRC , which objectively put massive pressure to the victim as they are afeard that the failure of IPO will bring giant risks and costs, it can be affirmed that the accused infringers’ payment is processed under fear and Li was purposely leveraging on the fear to extort money from them,

Therefore the court holds that Li’s conduct, in fact, 1-B constitutes extortion.

Comment

In this case, the fact that Li filed patent infringement action utilizing the patents which were not actually used by himself to pursue damages from the company that implemented the patented technology in their operation is similar to NPEs’(aka. “patent trolls”) common practice. Although NPE is notorious in the patent system, there is nothing wrong with patent enforcement through litigation. Shanghai Pudong District Court holds the same opinion by deciding that the Li’s conducts unveiled in fact 1-A,2,3,4 do not constitute extortion, and further emphasized that it could not be considered a crime because of its bringing a lawsuit at a sensitive time point.

What is really at issue, in this case, is whether the fact 1-B constitutes extortion. Based on the crime constitution elements of extortion, the court scrutinized on whether Li has the purpose of illegal possession and whether Li has used threats to attain the object. It is worth mentioning that Li’s defence (darts reference number: darts-344-637-h-zh-2) points out that “Xingwen Li has both the enforceable patent rights and the prior exclusive license agreement, and the settlement amount is based on mixed factors. It is not that Li filed a complaint only with the exclusive license agreement, therefore it is necessary to decide in favour of the defendant regarding this point. But the court didn’t respond to the defence. We will pay close attention to the progress of the case in the court of second instance (if any).

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