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Using the legitimate source defence in patent infringement litigation

Legitimate source defence is a common tactic employed by the party accused of patent infringement. According to statistics, the legitimate source defence is the most frequent defence in all of the patent-related civil lawsuits tried by the Intellectual Property Court of the Supreme People’s Court (SPC) in 2019. The distribution of burden of proof and the scope of exemption from liability for damages are the two major focuses of dispute, according to the Annual Report of the Intellectual Property Court of the Supreme People’s Court. This article discusses the applicability of the legitimate source defence in view of typical precedents.

Definition and elements
The legitimate source defence is founded on Article 77 of the Patent Law, which provides that “any person, who uses, offers to sell or sells a product infringing a patent for production and business purpose 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.”

It can be seen that acts to which the legitimate source defence is applicable are limited to using, offering to sell or selling a patent infringement product for the purpose of production and business and do not include acts of manufacturing or import. Therefore, neither manufacturers nor importers of infringing product is eligible to use the legitimate source defence.

Two elements required for the legitimate source defence to be established are good faith and proof of legitimacy. Good faith means that the party accused of infringement does not know and cannot know that the patentee gives no authorization and thus the party commits no subjective fault. Legitimacy points to the “legitimacy of the way the product is obtained, such as via legal sales channel, based on ordinary sales contract and so forth, and the party who uses, offers to sell or sells the product shall provide relevant evidence proving his or its act complies with trade usage”, as noted in paragraphs 2 and 3 of Article 25, Interpretation (II) of the Supreme People’s Court on Several Issues Concerning the Application of Law in the Trial of Disputes over Infringement of Patent Rights (2020 Amendment) (the interpretation).

Nature and legal consequences
The legitimate source defence is a defence for exemption of compensation liability, rather than a non-infringement defence, and it does not affect the determination of infringement. The acts of using, offering to sell or selling infringement products without the authorization of the patentee are still acts of infringement even if the defence is found tenable and the infringing party shall bear other civil liabilities besides compensation. Where the legitimate source defence is tenable, as stipulated in a judicial interpretation by the SPC, the court shall uphold the right holder’s demand that the infringing party cease the acts of using, offering to sell or selling the patent-infringing product, unless the party accused of using the infringing product proves by evidence that a fair consideration for the product has been paid (Paragraph 1, Article 25 of the interpretation.

Moreover, a successful legitimate source defence will not exempt the party from bearing the fair expenditure for enforcement against the infringement. For example, in a judgment, while determining that the appellant Shaw Brothers Sales Department’s legitimate source defence is tenable, in Judgment No. 1240 (2020), the SPC held that “Shaw Brothers Sales Department’s responsibility of ceasing the infringing acts and paying the fair expenditure for patent enforcement are not exempted and hence, it shall assume the fair expenditure spent by Jin Minhai on enforcing his patent involved in this case”.

Citing the case of Guangzhou Ruisu Mechanics Co., Ltd. v/ Shenzhen Helitai Technology Co., Ltd. et al (Judgment [No. 25 (2019)), the SPC stated in its Summary of the Adjudication Gist (2019) that “legitimate source defence is only a defence exempting liability for compensation, not a non-infringement defence. That the seller’s legitimate source defence is tenable neither changes the infringement nature of the act of selling infringing products nor exempts the seller from the liability of cease the selling. The seller shall bear the fair expenses paid by the right holder for seeking remedies for the infringement to be ceased,” according to Provision 7.

Burden of proof
The party claiming the legitimate source defence should bear the major burden of proof according to the general principle that “the burden of proof lies with him who makes a claim.” Thus, according to the provisions issued by the SPC, the party claiming legitimate source should present evidence to prove the fact that “the infringing product or counterfeit involved is obtained legally, including via legal purchase channel, at a reasonable price, and from a direct supplier, among others; if the evidence provided by the defendant is commensurate with its duty of reasonable care, it may be determined that the defendant has completed evidence presentation as mentioned in the preceding paragraph, and it may be presumed that the defendant does not know that the product or counterfeit infringes upon an intellectual property; the defendant’s duty of reasonable care can be determined according to evidence such as its business scale, level of professionalism, and trade usage, among others.”

As the element of “not knowing” is a negative fact that is difficult to prove, the examination on the proof of not knowing provided by the party claiming legitimate source defence is less strict. Unless the right holder provides contradictory evidence proving the party knows or should know, the good faith of the party claiming legitimate source will be presumed. In other words, where the right holder cannot provide sufficient evidence, legitimate source defence will be determined tenable if the party can establish a full evidence chain by providing a purchase contract, a receipt, a payment voucher and others which corroborate to prove that the infringing product is obtained via a legal purchase channel, at a reasonable price, and from a direct supplier.

Citing the case of Baokou (Xiamen) Sanitary Ware Co., Ltd. v. Guantao County Peilong Plumbing Installation and Maintenance Store (Judgment [No. 118 (2019)), the SPC stated that “if the seller can prove that it, complying with legal and normal market trading rules, obtains the products from a certain source, via a legal channel and at reasonable price, and that its act of selling follows the principle of good faith and conforms to trade usage, it can be presumed to have no subjective fault. In this case, the right holder should provide the opposite evidence; where the right holder fails to provide any contrary evidence sufficient to overturn the aforesaid presumption, the seller's legitimate source defence should be determined to be tenable,” according to Provision 6 of the SPC’s Adjudication Gist (2019).

To weaken the legitimate source defence, the right holder can provide disproof of the good faith or the legitimacy of the source. In particular, the right holder is placed the burden of proof if it claims that the infringing party commits a subjective fault. In that case, a cease and desist letter or a court summon is usually provided to disprove the infringing party’s good faith.

For example, in the case of Zhu Zhonglei et al. v. Hangzhou Jusheng Technology Co., Ltd., the court held in the first instance that as Jusheng has presented the evidence which proves that the source of the infringing product was Weili and as there is no further evidence proving that Jusheng, before receiving a cease and desist letter from the plaintiffs Zhu Zhonglei et al., had known or should have known that a motor component in its toothbrush infringed upon a patent, Jusheng’s legitimate source defence of its acts of selling prior to the receipt of the cease and desist letter is tenable; however, after receiving the cease and desist letter from the plaintiffs, Jusheng continued selling the infringing product and thus committed a subjective fault. Therefore, the legitimate source defence of its acts subsequent to the receipt of the cease and desist letter is not tenable. The defendant appealed to the SPC but the SPC sustained the judgment of the first instance.

Another example is the appeal initiated by Wal-Mart East China Stores Co. Ltd. The SPC held that Wal-Mart East China Stores, as the defendant of the initial infringement lawsuit, received the complaints filed by the plaintiff, in which clearly recorded the information of the patent involved, the information of the infringing product and the comparison of the two; as a multinational corporation, Wal-Mart East China Stores had the awareness of IPR protection and the capability of handling IPR-related disputes; however, Wal-Mart East China Store did not make a sensible estimate or remove the infringing product after even six months since the receipt of the complaint; and the time of the inaction was unreasonably long. Thus, it was determined that Wal-Mart East China Stores should know that it was selling an infringing product.

Where the right holder can provide evidence proving that the party continues to use, offer to sell or sell infringing product despite being informed of the infringement in a sufficient and detailed manner, the infringing party’s legitimate source defence of its acts upon the receipt of the information will be found untenable and it shall bear the liability of compensation.

However, the right holder should take note that the facts of infringement should be described in detail in the letter informing the infringer of its infringement, and thereto relevant evidence should be attached. Otherwise, the court may hold that the letter is insufficient to prove that the party accused knows or should know its acts are infringing.

The SPC held in a civil ruling that, where the cease and desist letter sent by the right holder is the only way that the defendant can know that its act is infringing, the content of the letter should be examined: “if the information of the infringing product, the information of the patent (patent number, patent title, copy of patent certificate etc.) and comparison thereof are recorded in the letter in detail or attached thereto, in principle the seller upon receipt of the letter should be presumed to know that the product it is selling is an infringing product.” (Civil Ruling [No. 1036 (2014), Petition, Civil, SPC], the Supreme People’s Court). In another infringement dispute, the appellate court held that the notice of infringement sent by the patentee includes only part of the claims without giving comparison of the patent product and the infringing product or indicating the manufacturer of the infringing product and therefore, the notice is insufficient for the seller selling the product obtained from legitimate source to determine that the product is infringing.

Entities and individuals who use, offer to sell or sell patented products should be cautious about purchasing said items, first ensuring the channel is legal and asking for proof of ownership and certificate of authorization, and should take precaution by preserving the purchase contract, receipt and payment voucher with the product name and model indicated. That the product information is not clearly indicated on the proofs to correspond to the product accused of infringement can undermine the legitimate source defence in an infringement dispute.

They should also conduct review upon receipt of any notice of infringement (cease and desist letter, complaint, etc.) and it is imperative that the infringing acts be ceased if the infringement is true. Generally, a large corporate body such as a listed company or a multinational corporation is expected to bear more duty of reasonable care than a small- or micro-sized company, an individual business or a person.

For right holders enforcing their patent, a cease and desist letter in which relevant information is sufficiently recorded can serve as a proof of the infringer’s subjective fault and ill intention. However, it should be noted that the evidence of infringement should be preserved before sending the letter in case the letter prompts the infringer to remove the infringing product and causes the loss of the evidence.

Furthermore, where the manufacturer of the infringing product is unknown, triggering the legitimate source defence by those who use, offer to sell or sell infringing product may reveal clues of the manufacturer.
As where the places of domicile or places of habitual residence of several defendants in the same action are located within the jurisdictions of two or more people's courts, both or all of such people’s courts shall have jurisdiction over the action, the patentee can sue the manufacturer with the user and/or the seller exempted from compensation by legitimate source defence as co-defendant to secure more options of competent court. For instance, Gree Electric Appliances, by suing both the manufacturer Aosheng (domiciled in Ningbo) and the seller Jingdong (domiciled in Beijing), was able to bring its action with the IP court of Beijing, which accepted the lawsuit and sustained Gree’s claims. (Judgment [No. 7 (2018), First, Civil, Beijing73], the Beijing IP Court)

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