Among various IP right enforcement cases, those involving chemical manufacturing processes and trade secrets are deemed as the hardest to enforce by legal professionals. After a year of preparation and trial, the dispute between the American company Ashland and a Chinese chemical technology company over patent and trade secret infringement at last was settled under the mediation of court earlier this year. The defendant promised to respect the IP of Ashland, reassuring that it would not use the patents and trade secrets in question of chemical manufacturing processes any longer, and paid the plaintiff 22 million yuan with costs.

Infringement of core techniques

Ashland is a Fortune 500 company which provides specialty chemicals in more than 100 countries, and assumes a leading position in many industries including the specialty chemicals for papermaking. It owns an advanced technology named “water-in-water polymer dispersion” which was applied by its subsidiary company in Beijing to produce the K series products. The K series products use water-in-water polymer dispersion as retention and drainage aids as well as flocculants in the process of papermaking, the approach could efficiently solve the environmental problems generated by the papermaking industry. Ashland protects this technology through trade secrets (know-how) and patents.

In 2009, Ashland found that a former managerial employee of its Beijing subsidiary joined another chemical company and participated in the establishment of an industrial additives company. The former employee was suspected of applying Ashland’s patented technology and trade secrets to manufacture series of products similar with Ashland’s K series. The alleged infringing product competed directly with Ashland’s product and was eroding Ashland’s market share in China, which has caused huge economic damages to Ashland’s Beijing subsidiary.

Through preliminary analysis, Ashland believed that the former employee and the two companies had infringed upon its patents and trade secrets, and determined to enforce its lawful rights. Therefore, Ashland filed lawsuits against the defendants at the Suzhou Intermediate People’s Court and the Beijing First Intermediate People’s Court alleging patent infringement and trade secret infringement respectively, requiring injunction against the defendant’s infringing activities, seeking 20 million yuan in damages for patent infringement and 7 million yuan for trade secret infringement.

The complexity of chemical process patents

Commissioned by Ashland, Unitalen’s attorneys Li Yongbo, Kong Fanwen, Li Hongjiang, patent agent Zhao Zhongzhang, the plaintiff’s American attorneys Zhu Song, David L Hedden, and the technical expert Dr. Xu Zufeng, etc. formed a strong legal and technology team. After discussion, they reached a consensus that the key points of the case were: firstly, the disputed product was hard to be decided as a “new product” according to the patent law. Therefore, it would be troublesome to prove that Ashland’s patent had been infringed by the alleged infringing process. The production of documents might only be possible with a court subpoena for retention of documents. However, before a subpoena can be issued, the plaintiff needed to show a prima facie case by demonstrating likelihood of success on the merit, which is the difficult point.

Secondly, a comprehensive analysis over the patent claims need to be done. Certain steps of the patented process such as some raw materials and their additive amounts might be known through analysis. But the retention and drainage aids produced through the patented process were industrial chemical products used in papermaking and therefore could not be purchased directly in open market. Besides, since the products were special, the majority independent labs that the attorneys of the plaintiff contacted were incapable of rendering a comprehensive and accurate analysis of the alleged infringing product due to lacking of necessary examination devices or experience.

Attorney Kong Fanwen said in an interview with China IP magazine, “There are two major reasons behind these difficulties. On the one hand, since the technologies in question in these cases are complicated and could not be perceived directly, judges often need to refer to professional analysis and examinations to determine whether there is any infringement. However, in certain chemical fields, even the proprietors themselves can not master the examination method. As a result, seeking for a proper independent lab to handle the work is difficult. On the other hand, since China has no provision for the ‘discovery process,’ the plaintiff carries an unusually heavy burden of proof. The litigation procedure can be even troublesome for the proprietors since the litigated chemical product is not a ‘novel product’ in patent law sense. Under this circumstance, even if an infringement truly exists, the plaintiff may still have to struggle with production of evidence. Therefore, many patent owners, particularly those from counties which have discovery processes such as the U.S., lament that ‘China does not truly protect process patents,’ and that ‘trade secrets are insufficiently protected in China,’ etc.”

Attorney Kong further commented, “Although confronted with such difficulties, it is still necessary to collect evidences actively, to conduct a comprehensive examination and to achieve preliminary evidences to prove the existing of the infringement. It was also a critical precondition to seek a subpoena as well as investigation and evidence collection. In fact, the Chinese courts have also been strengthening the protection for process patents. For example, Xi Xiaoming, Deputy Chief Judge of the Supreme Peoples’ Court of the People’s Republic of China pointed out in his speech in the ‘China IP Adjudication Conference’ that although the product obtained through patented processes were not new products, a patentee could discharge the burden of proving infringement if, after proving that an alleged infringer had manufactured the same product, but failing, upon reasonable efforts, to prove actual usage of the patented process by the alleged infringer, the patentee could show by preponderance that the product which was most likely to have been produced by the patented process under the circumstances in combination of known facts and conventional experience, and the burden would then be shifted to the alleged infringer, in accordance with relevant provisions of the civil procedure, to show that his process was different from the patented process.”

Attorney Kong Fanwen explained that the steps Unitalen took were: firstly, getting in touch with large independent labs in the polymer field both at home and abroad to get a whole set of sample examination methods which was complete, accurate and repeatable. Secondly, sealed a part of the defendants’ sample products in one of the defendant’s client factories under notarization and delivered the samples to the labs in Shanghai and Germany for thorough examinations. Thirdly, the attorneys and technique experts of the plaintiff drafted a relatively comprehensive preliminary report on the alleged infringing activity according to the patent claims. Based on the above works, the plaintiff required the Suzhou Intermediate People’s Court to preserve evidences, and then launched a patent infringing lawsuit. Through three evidence exchanges and three formal sessions, the infringing act of the defendant was gradually revealed.

The pretrial subpoena is one of the key factors in the plaintiff’s litigation strategy. Article 67 of the Patent Law, as amended, provides for the document retention system as follows: “To check a patent infringement, when evidence might be lost or might be hard to acquire thereafter, the patentee or interested party may, before taking legal action, file an application with the people’s court for evidence preservation.”

“If the people’s court takes preservation measures, it may order the applicant to provide guarantee. If the applicant fails to provide guarantee, the application shall be rejected.”

“The people’s court shall make a ruling within 48 hours from the time of its acceptance of the application. If it rules to take preservation measures, such a ruling shall be enforced immediately.”

“If the applicant does not take legal action within 15 days from the date the people’s court takes preservation measures, the people’s court shall lift such measures.”

According to the above provision, the precondition of evidence preservation is that the “evidence might be lost or might be hard to acquire thereafter.” Different from preliminary injunction, whether the applicant should post a bond when requesting a subpoena for document retention is in the discretion of the court. That is to say, if the applicant only applies for preserving trivial evidence such as advertisements, contracts, invoices and account books, the court would not require the bond.

Attorney Li Yongbo also told China IP magazine that the document retention system is one of the major new contents added to the Patent Law during its third amendment. Applying for a subpoena in this case was because that in process patent infringing cases, it was not only hard for the plaintiff to acquire infringing evidences which could prove that the defendant has applied patented technology to its manufacturing process, but also easy for the infringing company to hide or destroy related accounting books or production process records.

Litigation strategies in trade secret cases

One of the most conspicuous features of this case is that the plaintiff filed for patents and trade secrets litigations simultaneously.

Attorney Li Yongbo told China IP magazine: “During the patent litigation process, we concluded through analysis that since some major responsible persons in the defendant companies once assumed important positions in Ashland, had accessed to the disputed technology and produced similar products in the defendant company after leaving Ashland, there were already the essential component factors of trade secret infringement. Thus, the plaintiff filed trade secret infringing lawsuit with the Beijing First Intermediate People’s Court based on evidences concerning the operation process of the defendant company and other factors. Integrated with the evidences shown in the Suzhou Intermediate People’s Court, the trial of the trade secret case was smooth.”

Generally speaking, criminal procedures are most effective in handling trade secret infringing cases. However, in the present case, after taking all factors into consideration, Ashland tended to resort to civil procedures rather than criminal procedures. But to the proprieter, it is harder to launch and win a civil lawsuit over trade secret infringement, and more difficult to push forward the case than in a patent infringing case.

“The innate features of process patents have determined that its application is reflected in a series of production processes. Without the intervention of public powers, it is hard for us to grasp the authentic and intact manufacturing process by our own. What distinguishes trade secrets from patents is the technical numerical value: in a patent specification, the technical numerical value is a scope but in trade secrets it is a specific number. Besides, a chemical process involves not only the composition of raw materials but also the order of adding the materials. These all increased the burden of proof of the plaintiff,” explained Attorney Kong Fanwen. “Comparing with patent right, the protection of trade secrets is less accessible on both system and management layers. Therefore, in order to achieve maximum commercial profits, it is common for obligees to adopt multilevel protection for their core technologies which combines patent protection and trade secret protection. At the present case, it is exactly because Ashland has valid patent right on the disputed technology that it could achieve the main trade secret infringing evidences of the defendant through patent litigation smoothly and filed a civil litigation over trade secrets thereafter. Eventually, it gained all-round protection over its core technology.”

According to Attorney Kong Fanwen, the large amount of document collecting and examining work that the plaintiff had done during the process of the patent litigation contributed greatly to the later trade secret infringing case. The examining results of the independent labs enabled the plaintiff to discriminate the authenticity of the defendant’s evidences. After two sessions, the infringing act of the defendant came out of the water gradually. When the plaintiff has gained advantages in both litigation procedures, the defendant offered to settle the case under the conciliation of the court.

In IP cases, the amount of damages is one of the most difficult issues. “When it came to compensation claims, we submitted to the court evidences and materials which reflected the loss of the plaintiff, the profit gained by the defendant and the achievement of the defendant which were disclosed through media reports and other publicity materials,” said Attorney Li Yongbo.

On January 18th, 2012, Ashland and the defendant company reached settlement on both cases. The defendant promised to respect the IP of Ashland, reassured that it would not use the disputed patents and trade secrets of chemical manufacturing methods any longer, and paid the plaintiff 22 million yuan in compensation. This marks the highest compensation by far in IP infringing lawsuits filed by foreign companies in China that falls into the chemical producing industry.

Attorneys’ experience and advices

“The victory came partially from the determination of the plaintiff and the experience of its attorneys, and partially from the perpetual increasing IP protection strength of the Chinese judicial circle. Ashland achieved maximum interests through this case. It reassured its investment interests in China and paved the road for further investments as well as introduction of advanced technologies to China,” commented Attorney Li Yongbo.

In his opinion, what can be learned from this case are: firstly, the trial experience of Chinese courts on IP cases has been enhanced while their protection strength for IP is increasing. For right holders, when their IP rights are infringed, they should adopt positive measures to resort to legal approaches to vindicate their legal interests with determination and confidence. Secondly, foreign parties involved in such cases should fully recognize the differences on law provisions and legal procedures between their countries and China, and choose an experienced team to strive for the maximum interests within the Chinese legal framework.

(Translated by Monica Zhang)