The Supreme People's Court recently concluded a dispute involving both infringement of a utility model patent and a claim for damages arising from bad faith IP litigation. The second instance judgment made clear that when determining whether a patent infringement lawsuit was brought in bad faith, a court may consider not only whether the lawsuit lacked a legal or factual basis, but also factors including the plaintiff's specific claims, the timing of the lawsuit, the litigation risks, the litigation strategy, and the extent of imbalance created between the parties' interests. The judgment also addressed whether reasonable expenses incurred by the defendant in filing a patent invalidation proceeding should be recoverable as part of the damages caused by the bad faith lawsuit. The court held that in determining liability for bad faith litigation, the act of filing the bad faith lawsuit itself constitutes the conduct of infringement. If the defendant's decision to initiate a patent invalidation proceeding was a forced response to the bad faith lawsuit, then the expenses incurred in that proceeding are directly causally related to the lawsuit, and the plaintiff who filed the bad faith action must compensate the defendant for those expenses.
Company A was the owner of the utility model patent in suit. In January 2023, Company A filed an infringement lawsuit against Company B, seeking CNY 23 million in damages. Company B filed a counterclaim, alleging that Company A had brought the lawsuit in bad faith and seeking corresponding compensation.
The first instance court found the following facts. Before filing the lawsuit, Company A obtained a patent evaluation report from the CNIPA. The report preliminarily concluded that claims 1 to 5 of the patent lacked inventiveness and that all claims were invalid. Before being sued, Company B was preparing for an initial public offering and had invested substantial human, material, and financial resources in that process. After being sued, Company B filed an invalidation request against the patent and also requested that the stock exchange suspend review of its listing application due to the pending lawsuit.
The first instance court found that the accused product did not fall within the scope of protection of the patent, and that Company A had brought the lawsuit in bad faith. The court ordered Company A to pay Company B CNY 400,000 in reasonable expenses and to issue a public statement on a specified platform to eliminate the negative impact. Company A appealed. The Supreme People's Court affirmed the first instance court's decision.
The Supreme People's Court agreed that the accused product did not fall within the scope of protection of the patent. With respect to whether the infringement lawsuit was brought in bad faith and how to determine the scope of reasonable expenses, the Court analyzed as follows.
First, the Court found that Company A's infringement lawsuit was brought in bad faith. The essence of bad faith litigation is an abuse of procedural rights. Imposing liability for such conduct is required by the principle of good faith and the prohibition against the abuse of rights. The right to sue is a right that parties may exercise when their substantive rights are infringed or disputed, enabling them to seek judicial protection and relief. However, every right has limits. Parties may exercise their rights within the boundaries prescribed by law, but they may not exceed those boundaries. Conduct that violates the purpose and spirit of the law, that seeks primarily to harm the legitimate interests of others, that abuses rights, or that disrupts fair market competition constitutes an abuse of rights. Such conduct should not be protected or supported by law, and the litigation itself should be deemed bad faith litigation. The subjective aspect of such bad faith litigation is the primary intent to harm the legitimate interests of others. The objective aspect is typically the filing of a lawsuit that lacks a legal or factual basis. These two are different, yet they share a certain connection. The weaker the legal or factual basis of the lawsuit, the more it suggests that the plaintiff was not seeking protection of legitimate rights but was instead acting primarily to harm the interests of the other party. At the same time, whether the plaintiff's primary intent was to harm the other party may be shown through additional factors beyond the legal and factual basis of the claim.Thus, in determining whether an IP lawsuit constitutes bad faith litigation, a court may consider not only whether the lawsuit lacked a legal or factual basis, but also factors such as the plaintiff's specific claims, the timing of the lawsuit, the litigation risks, the litigation strategy, and the extent of imbalance created between the parties' interests.
In this case, Company A ignored the litigation risks arising from the instability of its own patent. It could easily have determined whether the accused product fell within the scope of protection of its patent, and it knew the actual value of the accused product. Yet Company A chose to file an infringement lawsuit precisely when Company B was in the process of going public . Company A demanded an extremely high damages amount of CNY 23 million, which was clearly unreasonable and unsupported and yet capable of disrupting Company B's listing process, and ultimately caused the suspension of its listing application. Taken together, the unstable nature of Company A's patent, its bad faith conduct in concealing the unfavorable patent evaluation report, the relative ease of the infringement comparison, the obviously excessive damages claim, the timing of the lawsuit that could hardly be seen as coincidental, and the losses suffered by Company B all demonstrate that Company A was not seeking to legitimately enforce its patent. Instead, its primary intent was to delay Company B's public listing process and harm Company B's interests. Company A's conduct constituted an abuse of rights and amounted to bad faith litigation.
Second, the Court held that the reasonable expenses incurred by Company B in filing the patent invalidation proceeding in response to the bad faith lawsuit are recoverable as part of the damages caused by the bad faith litigation. Where a patent infringement lawsuit is found to have been brought in bad faith, the plaintiff who brought the bad faith action must compensate the defendant for the reasonable expenses incurred in responding to that lawsuit. The scope of such reasonable expenses includes not only attorneys' fees, travel costs, and accommodation expenses, but may also include, depending on the circumstances of the case, expenses incurred by the defendant in filing a patent invalidation proceeding against the patent in suit. In determining liability for bad faith litigation, the act of filing the bad faith lawsuit itself constitutes the conduct of infringement. If the defendant's decision to initiate the invalidation proceeding was a forced response to the lawsuit, then the expenses incurred in that proceeding are directly causally related to the lawsuit, and the plaintiff who filed the bad faith action must compensate the defendant for those expenses. Therefore, the attorneys' fees that Company B incurred in filing the invalidation proceeding against the patent in suit are recoverable as reasonable expenses, and Company A must compensate Company B for them.
The significance of this final judgment is twofold. First, it provides clear and workable factors for determining whether a patent infringement lawsuit was brought in bad faith. Second, it provides a thorough analysis of whether attorneys' fees incurred by a defendant in filing a patent invalidation proceeding in response to a bad faith lawsuit are recoverable as part of the damages caused by that bad faith litigation. This judgment offers important guidance to both litigants and courts in handling similar cases.
(2023) Zui Gao Fa Zhi Min Zhong No. 2044
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