Determination of "Malice" in Malicious Patent Litigation

Intellectual property is created by law, and once acquired, the right holders obtain the exclusive right in rem, granting them near-monopolistic control within the scope of its intellectual property protection. This aligns with the purpose of market competition, which excludes the same behavior of similar economic actors, therefore intellectual property infringement litigation often has a market competition aspect. However, anything in excess can be detrimental. If such lawsuits deviate from the principle of good faith, they can easily disrupt the normal market competition order and harm others and public interests. Therefore, regulation is necessary, and the system regulating malicious intellectual property litigation came into being.

In recent years, the number of malicious IP litigation cases has increased significantly. As per data disclosed by the Supreme People's Court, the number of first-instance disputes over damage liabilities arising from malicious IP litigation across courts at all levels rose from 74 in 2022 to 152 in 2023, an increase of 105.41%. In terms of the IP rights involved, the number of malicious patent litigation cases accounts for over 50% on the China Judgments Online platform. The author believes that the reasons for this increase are twofold. On the one hand, from the perspective of authorization, since the authorization of utility models and design patents requires not substantial examination, the stability of such rights is often challenged by the accused infringer to claim that the patent holder engaged in malicious litigation. On the other hand, from the perspective of market competition, patent holders are likely to use their patents to construct barriers to restrict and exclude competition, and achieve the competitive goal of undermining their rivals. 

In response to the increasing number of cases, deepening the understanding of the constitutive elements determining malicious patent litigation, especially the element of "malice," is of great significance for both the patent holders to properly exercise their rights and the accused infringers to safeguard their legitimate rights and interests. This article starts from the concept and constitutive elements of malicious patent litigation, and combines past cases from courts at all levels to sort out and analyze the factual elements of "malice," aiming to provide insights into the understanding of the "malice" elements in practice.

The Concept and Constitutive Elements of Malicious Patent Litigation

The issue of malicious litigation has persisted for a long time. As early as 2004, Civil Adjudication Tribunal No.3 of the Supreme People's Court had conducted research and discussions on malicious litigation, defining that malicious litigation "generally refers to the act of deliberately bringing a civil lawsuit for the purpose of harming others or obtaining illegal benefits without factual basis and justifiable reasons, resulting in the loss of the opposing party in the lawsuit" [1]. In 2011, the Supreme People's Court officially listed "dispute over damage liabilities arising from malicious IP litigation" as a specified cause of action in civil litigation under the Provisions on Causes of Action in Civil Cases.

Specific to malicious patent litigation, courts at all levels have been trying to explore its connotation and extension since Yuan XX's case [2] decided by the Nanjing Intermediate People's Court in 2006. Today, courts at all levels have gradually unified their understanding of the concept and constitutive elements of malicious patent litigation. In multiple cases, the Intellectual Property Court of the Supreme People's Court has clarified that malicious litigation generally refers to a lawsuit deliberately filed by a party without any factual or legal basis, for the purpose of obtaining illegal or improper interests, which has caused losses to the opposing party in the lawsuit. Malicious patent litigation is determined based on the following four constitutive elements: the lawsuit obviously lacks the right or factual basis; the party filing the lawsuit knows this; causing damage to the opposing party; there is a causal relationship between the lawsuit and the resulting damage [3].

Determination of "Malice" in the Constitutive Elements of Malicious Patent Litigation

From the above concepts and constitutive elements of malicious litigation, it is evident that "malice" includes both cognitive and will aspects. The cognitive aspect requires that the party knowingly files an infringement lawsuit that obviously lacks right or factual basis. The will aspect necessitates that the lawsuit is initiated "for the purpose of obtaining illegal or improper interests, or to cause losses to the opposing party."

As for the will aspect, most patent infringement lawsuits mainly seek the cessation of infringement and compensation for damages, and the opposing party will inevitably suffer losses in competitive or financial interests. Therefore, it is easy to conclude that the purpose of bringing an infringement lawsuit is to obtain illegal or improper interests or cause losses to the opposing party if the lawsuit meets the cognitive aspect. Given that the will aspect of malicious litigation is relatively easy to define, the key to determining "malice" lies in the cognitive aspect. As for the cognitive aspect, determining whether the party "obviously knowing that the lawsuit lacks right or factual basis" often requires comprehensive consideration on multiple facts, therefore cognitive aspect often becomes the focal and challenging factor in determining whether the lawsuit meets the requirements of "malice" or even constitutes a malicious lawsuit.

As per the constitutive requirements defined by the Supreme People's Court mentioned above, the author believes that determining the cognitive aspect of "malice" should follow a certain logical order: establish whether the lawsuit obviously lacks right or factual basis at first, and then ascertain whether the party filing the lawsuit knows about this fact.

Determination on Obvious Lack of Right and Factual Basis

In the context of malicious patent litigation, the obvious lack of right basis mainly refers to the substantial defects in the legal effect of the patent on which the patent holder relies to file the patent infringement lawsuit. Such defects include scenarios where the patent has been declared invalid or the patent rights have been terminated due to subjective or objective reasons. These substantial defects, which definitively impact the patent's legal status, often involve determinations like an effective invalidation decision or a patent rights termination announcement. If such substantial defects in the patent cannot be confirmed, it is often difficult to directly conclude that the patent holder obviously lacks right basis.

In practice, if a patent infringement lawsuit involves utility models and designs, the court may require the patent holder to provide a patent evaluation report. The report, however, only serves as the preliminary evidence for evaluating the stability of the patent, rather than the basis for evaluating the legal effect of the patent. Therefore, even if the conclusion of the patent evaluation report is negative, it is not appropriate to directly determine that the lawsuit "obviously lacks the right basis". Further analysis, in combination with the reasons leading to the negative conclusion, is required.

Factual basis refers to the minimum facts necessary to specify or identify the subject matter of the lawsuit, that is, at least the facts that can prove the objective existence of the disputed substantive legal rights and obligations. In patent infringement cases, the factual basis mainly lies in whether the patent holder's claim of infringement has basic grounds, such as whether the accused infringer's technical scheme falls within the patent holder's protection scope and whether the alleged infringer performed the corresponding actions. To determine whether the litigation "obviously lacks a factual basis," it is necessary to establish a significant absence of factual basis. Any litigation carries the risk of failure due to insufficient evidence, improper litigation strategy, or incorrect legal understanding. It is unreasonable to demand that the party ensure the litigation's ultimate success at the outset of filing the lawsuit.

In practice, whether a lawsuit against a party has a preliminary factual basis should be judged based on the facts of the case and empirical rules. If the patent's technical scheme significantly differs from the accused infringing product's technical scheme, the litigation is often easily recognized as obviously lacking a factual basis. For example, in a previous case involving Beijing Yuandong Cement Company and Beijing Sifang Rugang Company [4], Beijing Sifang Rugang Company voluntarily abandoned the method claims in the invalidation procedure but then claimed method patent infringement against Yuandong Cement Company. The court held that its lawsuit lacked a basic factual basis. Conversely, if the patent holder can provide preliminary factual and legal grounds when filing a patent infringement lawsuit, it is not easily considered to be as obviously lacking a factual basis. For example, in a malicious patent litigation case filed by a Hunan company [5], the Supreme People's Court thought that the Hunan company made a preliminary judgment on whether a Guilin company constituted patent infringement. As the right holder of the patent involved, the Hunan company had the right to file a lawsuit when it found the possibility of infringement. Meanwhile, the patent infringement lawsuit it filed had preliminary factual and legal basis, demonstrating a certain level of reasonableness. It was not a blind lawsuit with no legal and factual basis at all.

Determination on Claimant's Awareness of Obvious Lack of Right and Factual Basis

Whether the claimant is aware that the litigation obviously lacks a legal basis or factual foundation is a key element to determine the cognitive aspect of malicious litigation. Since awareness pertains to the subjective state of the claimant, unless the claimant admits it, it is impossible to directly conclude "awareness" based on evidence. Therefore, it is often necessary to infer from the claimant's objective behavior and empirical rules.

Given the varying degrees of understanding and knowledge of patents among patent holders in China, applying a uniform standard during factual inference may lead to unjust outcomes in some cases. Hence, when inferring awareness, a cautious and restrained approach should be adopted, considering the patent holder's cognitive ability and specific behavior comprehensively. Moreover, the "awareness" should be based on the claimant's subjective state at the time of filing the infringement lawsuit. The claimant's objective behavior after the lawsuit should generally not be used to infer their "awareness" at the time of filing the lawsuit. For example, if a patent holder re-files a lawsuit after knowing that the opposing party is not infringing, it can generally be considered that the patent holder is aware of the lack of a legal basis or factual foundation when re-filing the lawsuit. However, this alone cannot conclude that the patent holder had the same "awareness" in the initial lawsuit.

To further clarify the situations where awareness can be inferred, the author has categorized the following circumstances recognized as awareness based on previous judgments from various courts.

The Defective Right Type

In such cases, the patents used as the basis for lawsuits often involve utility models and design patents lacking novelty, thus being declared invalid or likely to be. This is mainly because such patents can be granted without substantial examination, making it possible for patent holders to apply for patents despite knowing their technology or design lacks novelty. The lack of novelty often arises from patent holders applying for patents on technologies or designs already publicly disclosed by others.

In determining a patent holder’s awareness, it's necessary to consider both the nature of their actions and their cognitive abilities. If a patent holder applies for a patent on a technology or design already publicly disclosed by others, this act is often considered unjustifiable. Consequently, lawsuits they initiate for infringement are easily presumed to be based on "knowing the lack of right basis," according to empirical rules.

If a patent holder applies for a patent on their own technology or design already publicly disclosed, further judgment is often required to assess their cognitive ability. For example, in the case of Shanghai Alpaca Arte Trading Company v. T Box Industrial Company [6], T Box Industrial Company applied for and obtained design patent rights on a design previously exhibited and sold. The court ruled that applying for patent rights after publicly displaying or selling one's own patented product doesn't necessarily imply malicious intent, it must be comprehensively judged based on the party's cognitive abilities. In this case, the short time between the publication date and the application date of the two patents, coupled with T Box Industrial Company's small scale, was insufficient to establish that T Box Industrial Company knowingly intended to maliciously apply for a patent and enforce it. However, in the case of Hui Shang Cheng Company v. Xiong XX [7], Xiong  applied for a design patent on a design he already publicly disclosed on Tencent's video website. Moreover, prior to initiating the patent infringement lawsuit in question, Xiong had previously filed complaints and patent infringement lawsuits against others, including Alibaba. Taking into account these complaints and litigation history, the court determined that Xiong possessed adequate legal awareness. Therefore, when Xiong pursued the patent infringement lawsuit in this instance, it fulfilled the criteria for knowing the lack of right basis.

Moreover, conflicts between authorized patent rights and prior legitimate rights of others also reflect defective rights. In such cases, if it can be proven that the patent holder was aware of infringing on or had the possibility of accessing the prior rights of others, they are easily deemed to have known the lack of right basis. For instance, in the case of Tianxiaxiu Liquor Company v. Yuyuan Liquor Company [8], Yuyuan Liquor marked "Yanghe" in the relevant disputed design patents, conflicting with the registered trademark exclusive rights Tianxiaxiu Liquor obtained before Yuyuan Liquor’s application of the design patents. Before its application, Yuyuan Liquor had already been penalized for labeling "China Yanghe" or "Jiangsu Yanghe" on its Liquor packaging, indicating its awareness that the relevant patent lacked authorization conditions, constituting a case of knowing the lack of right basis.

Another form of defective rights arises when right of the patent used to file litigation is terminated. Unlike patents declared invalid, termination of patent rights renders them ineffective but doesn't invalidate the rights during the period preceding termination. Therefore, the patent holder can still seek compensation from the infringer for losses incurred during the valid period of the patent. However, if the patent holder files a patent infringement lawsuit seeking compensation for losses incurred after the termination of the patent rights, it is necessary to consider the patent holder's duty of care and cognitive abilities to determine whether they "knew of the lack of right basis." For example, in the case of Fujian XX Company v. Quanzhou XX Company [9], the court found that Quanzhou XX Company had a duty to manage the payment of patent annuities. After the patent rights were terminated due to non-payment, Quanzhou XX Company filed an administrative lawsuit with the Beijing Intellectual Property Court and later withdrew it, voluntarily giving up the opportunity for relief. Moreover, Quanzhou XX Company had hired professional lawyers when filing the lawsuit, indicating clear awareness that the lawsuit lacked a legal basis.

The Repeated Litigation Type

Patent holders with different levels of understanding may have varying perspectives on whether they have the right basis for initiating litigation. However, if the court has already determined on whether a patent holder has right or factual basis when they file a patent infringement lawsuit, and then the patent holder still files another lawsuit based on the same patent, against the same infringer, and for the same product, this will be considered as knowingly filing a lawsuit without right or factual basis.

For example, in the case of Jinfuyuan Factory v. Zhongxingda Company [10], Zhongxingda Company filed three lawsuits against Jinfuyuan Factory and its distributors over the same mat product. In the first lawsuit, after receiving evidence that the accused infringing product belonged to prior design, Zhongxingda Company did not attend the court hearing. In the second lawsuit, the Zhengzhou Intermediate People's Court determined that the accused infringing product belonged to prior design, and Zhongxingda Company did not appeal. After this judgment became effective, Zhongxingda Company, based solely on the patent evaluation report, again filed a lawsuit with the Qingdao Intermediate People's Court using the same patent as the basis for rights and against Jinfuyuan Factory. Based on the effective judgment of the Zhengzhou Intermediate People's Court, it can be presumed that Zhongxingda Company knew there was already an effective judgment determining that the accused infringing product did not infringe its patent. Under this circumstance, Zhongxingda Company's subsequent lawsuit is considered to be knowingly lacking in factual basis.

The Malicious Evidence Collection Type

The exercise of intellectual property rights should adhere to the principle of good faith and must not harm the legitimate rights and interests of others. When intellectual property rights are infringed, the rights holder may lawfully exercise their right to sue. However, this right must be exercised in good faith, with sincerity and caution. If the opposing party has not committed any infringement, but the patent holder still obtains so-called "infringement evidence" through methods such as "inducing infringement" or "trap evidence collection" and uses this to file a patent infringement lawsuit, the accused infringement behavior may superficially meet all the requirements for determining patent infringement. However, the facts on which the infringement determination is based are merely "false" facts artificially created by the patent holder, and the patent holder does not have any factual basis worth protecting. Such a lawsuit can be deemed as a situation where the patent holder "knowingly lacks factual basis."

Conclusion

The "malice" in malicious patent litigation is primarily evident in the claimant's "awareness" that their lawsuit lacks a legitimate basis in rights or factual grounds. Determining this subjective state should be based on the facts of the case and established principles, adhering to a principle of cautious restraint to make reasonable inferences. This approach aims to prevent bad-faith abuse of rights and protect the legitimate interests of honest businesses.

References:

[1] See《最高人民法院民三庭关于恶意诉讼问题的研究报告》。

[2] （2003）宁民三初字第188号。

[3] （2021）最高法知民终1353号，最高人民法院知识产权法庭裁判要旨摘要（2023）第49条。

[4] （2015）京知民初字第1446号。

[5] （2021）最高法知民终1353号。

[6 ]（2022）沪民终394号。

[7] （2022）粤民终668号。

[8] （2018）苏民终119号。

[9] （2022）最高法知民终1861号。

[10] （2018）最高法民再388号。