China Litigation for Foreign Companies: It’s a Good Thing

In China’s Patent-Lawsuit Profile Grows, the Wall Street Journal wrote how China is increasingly becoming the venue of choice for foreign company patent litigation.

That’s right. China.

The WSJ article starts by focusing on a recent patent-licensing lawsuit brought in China wholly by choice by a Canadian company, WiLAN Inc., versus Japanese electronics company Sony Corporation:

Ottawa-based WiLAN Inc., which earns revenue by licensing its patents, filed a suit against Sony last week in a court in the eastern Chinese city of Nanjing, alleging that the Japanese company’s smartphones violated its wireless-communication-technology patent, according to the filing reviewed by The Wall Street Journal.

According to the article, WiLAN’s lawsuit shows how “China is becoming a more attractive place to seek legal action for companies that accumulate patents for litigation and licensing purposes.” China is becoming a good venue for such lawsuits for two salient reasons. One, such lawsuits in China “are less time-consuming and less costly than in the U.S. and the country’s courts have developed rapidly over the past several years.” And two, “if an injunction is granted in China, it wouldn’t only apply to products sold in the country using the patent in question, but also to the exports of such goods made in China, giving the plaintiff a possible bargaining tool for a licensing deal.” Let’s break this down.

  1. China is a good place for patent lawsuits because China lawsuits move quickly. Absolutely true, and something we have been screaming from the rooftops (not literally) for many years. We made this point back in 2013, when we stated that “the advantages for a plaintiff include a fast docket (typically less than a year to trial) and generally lower overall attorney’s fees (than the United States) due to a lack of discovery.” Back in 2011, in The Basics on China Litigation, we made a similar point by noting that “once a case begins in a Chinese court, things move fast. Very fast.” We are always touting China as a great venue for litigating contract disputes, beginning by noting how “Chinese courts do very well at enforcing clear written contracts” and noting how the World Bank always ranks ranked China in the top ten among countries in enforcing contracts. Because lawsuits move quickly in China, lawsuits in China cost far, far less than in most other countries.
  2. China’s “courts have developed rapidly over the past several years.” True, and also something we have been saying for quite some time. We often tell our clients how it usually makes sense to sue even Chinese companies in Chinese courts because China does not enforce United States court judgments (or the court judgments of most other Western countries) and because China’s court system “is more navigable than many American lawyers believe it to be” and “foreign companies can and do regularly win cases against Chinese companies in Chinese courts.” Our international dispute resoltuion lawyers often tell our clients that they can generally expect a fair shake in commercial lawsuits against private companies in China, especially in China’s more international cities. So yes, even suing Chinese companies in China’s courts often makes sense. And when it comes to IP litigation, China has specialized IP courts whose judges tend to be well versed in intellectual property matters, both factually and legally. And unlike in the United States where IP litigation often involves a battle of the experts with a jury ultimately deciding, in China, the IP  Court judges usually bring in their own experts to help them with more complicated intellectual property issues.
  3. “If an injunction is granted in China, it wouldn’t only apply to products sold in the country using the patent in question, but also to the exports of such goods made in China.” Ponder this for a minute. If you can win an IP lawsuit in China, it may serve as the equivalent of winning an IP lawsuit for the entire world. If you make your XYZ widget in China and your competitor makes its XYZ widget in China and China is the only place in the world that can make XYZ widgets at a competitive cost, you prevailing in an IP lawsuit in China can block your competitor from making its XYZ widgets in China and that could have the effect of completely blocking your competitor from the XYZ widget market worldwide. This is one of the reasons why we are constantly tout the benefits to foreign companies registering their trademarks and patents in China. See China: Do Just ONE Thing: Register Your Trademarks AND Your Design Patents.

According to the Wall Street Journal article, China is becoming a patent litigation hub, along with the United States and Germany:

Traditionally, the U.S. has been the global hub for such lawsuits, but in recent years patent-licensing firms are looking for new places to bring lawsuits, lawyers and legal scholars say. While Germany is already becoming a popular venue for patent lawsuits because of its sophisticated and efficient court procedures, some potential litigants are also starting to consider filing their cases in China.

When we draft contracts for China, our foreign company clients usually instruct us to have the contract be governed by foreign law, with disputes decided by arbitration outside China. This is often a mistake. One major reason is that when any form of arbitration is required, the plaintiff has no access to the very effective prejudgment remedies available within the Chinese litigation system.

A recently completed matter shows how this can work. A very internationally savvy Japanese client recently sought help from my law firm to resolve a contractual dispute. A Chinese company owed our client a substantial sum, but the amount was not documented by a clear contract and the exact sum owed was not specified in writing. We were able to convince the Chinese side to enter into a new agreement where the Chinese company agreed to an exact payment amount with a precise payment date. In our initial drafting of this agreement, we provided that the agreement would be governed by Chinese law with jurisdiction in the Chinese court where the Chinese defendant had its home office. The client resisted, making the usual arguments: Chinese law is unclear and Chinese courts will favor the local party. In the end, we convinced the client to follow our approach.

As we expected, the Chinese party did not pay on the due date. We then filed a  lawsuit in the hometown of the Chinese defendant to seize assets from the Chinese defendant in a prejudgment writ of attachment. This required our client post a money bond, which we had arranged in advance using our contacts in the local bonding community. Within three weeks of our filing suit, the Chinese defendant paid all amounts owing, together with interest, court costs and attorneys’ fees. The Chinese defendant indicated the primary reason it paid so promptly was to get its assets out from under our seizure. The local court never had to hear the case; it was needed only to cooperate with the asset seizure, which it did without regard to the home country of either plaintiff or defendant.

If we had gone along with our client’s initial inclination to provide for application of Japanese law with arbitration in Hong Hong, we would never have been able to achieve this successful result. Instead of our being able to move quickly and forcibly against the Chinese defendant and its assets, we would have been forced to proceed outside China in a slow and expensive arbitration proceeding. In the end, we likely would have received nothing more than an arbitrator’s order to pay, which we would have had to bring back to China for enforcement in the same court we used for the debt collection litigation. Most importantly, we would not have been able to use the Chinese court’s effective prejudgment attachment procedure, which put the defendant in the mood to comply with our payment request.

It also bears mentioning that the contract between our Japanese client and the Chinese defendant was in Chinese to ensure that it be the only agreement seen by the Chinese court — not some translation of an English language contract. This not only helped to clarify content, it also made sure we did not spend precious time waiting for a court translation, which might not even be accurate.

Chinese language contracts in a Chinese court? We like that.