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.

The article starts by focusing on a recent patent-licensing lawsuit brought in China by a Canadian company, WiLAN Inc., against  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 “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 these down.

1. China is a good place for patent lawsuits because China lawsuits move quickly. True, and something our China lawyers and international dispute resolution lawyers have been saying for many years. Way back in 2011, in China Litigation Basics, we noted 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, because Chinese courts do a good job at enforcing clearly written Chinese language contracts and I often note how the World Bank always ranks China in the top ten among countries in enforcing contracts. Because lawsuits move quickly in China, lawsuits in China cost 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 some time. We often tell our clients how it usually makes sense to sue Chinese companies in Chinese courts because China does not usually 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 to expect a fair shake in commercial lawsuits against private companies in China, especially in China’s more international cities. 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 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 completely block your competitor from the XYZ widget market worldwide. This is one of the reasons why we constantly emphasize the benefits to foreign companies registering their trademarks and patents in China. See e.g., How And Why To Trademark In China.

When our lawyers draft contracts for China, our 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. An internationally savvy Japanese client recently sought my law firm’s help in resolving 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 our client on the due date. We then sued the Chinese company in its hometown to seize assets from the Chinese company via a prejudgment writ of attachment. This required our client post a money bond, which we had arranged in advance. Within three weeks of our filing the lawsuit, the Chinese defendant paid all amounts owing, together with interest, court costs, and attorneys’ fees. The Chinese defendant told us it paid promptly because it needed to get its assets out from under our seizure to be able to continue functioning as a business. The local court never had to hear the case; it 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 draft the contract under Japanese law with arbitration in Hong Hong, we would never have been able to achieve this successful result. Instead 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. And 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 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.