Risk Management for U.S. Patent Infringement Lawsuits

The article co-authored by Lei Mei of Mei & Mark LLP and titled “Risk Management for U.S. Patent Infringement Lawsuits” was published in the March 2014 edition of Guangdong LED Magazine.
 
A copy of the article (English Version) is reproduced below:

The Chinese LED market is growing rapidly in the past few years. It is becoming an important player in the world market. It is obvious that the LED industry is more and more popular, as indicated by the growing litigation cases in the United States.

On September 11, 2013 Nichia sued Everlight Electronics in federal court in Marshall, Texas for alleged infringement of U.S. Patent No. 7,432,589 (“the ’589 patent”). The complaint alleges that Everlight’s LED model 61-238/RSGBB7C-B02/ET infringes the ’589 patent. The ’589 patent is directed to a semiconductor device capable of preventing an adhesive for die bonding from flowing to a wire bonding area. This is not the first lawsuit between these LED rivals.

On September 30, 2013, the United States District Court for the Central District of California issued a Final Judgment and Order imposing an injunction that prohibits Lights of America from making any misrepresentations about its LED products. The decision also includes a substantial monetary judgment, ordering Lights of America to pay the Federal Trade Commission over $21 million dollars.

Moreover, on September 20, 2013, the Trustees of Boston University filed patent infringement litigation against more than 20 companies in federal court in Boston regarding its LED patent 5,686,738. Defendants include Acer, Nikon, Sony, Dell, Fuji and others.

All these cases remind us about the importance of our own risk management. This section will discuss how Chinese companies may develop risk management strategies for U.S. patent infringement lawsuits.

I. Identify Potential Risks

As for any risk management, the starting point is to identify potential risks. Regarding U.S. patent infringement lawsuits, potential risks come in two forms: direct risks and indirect risks.

Direct risks, prevalent among semiconductor manufacturers, may come from product design. For example, during the R&D process, engineers might have studied competitors’ technology or patents to develop their own solutions. If the final product has features that would be covered by third party patents, it creates direct risks of potential patent infringement lawsuits.

Indirect risks, common among packaging companies that source semiconductor materials from manufacturers, may come from contracts and purchasing agreements. For example, when a packaging company enters a contract to purchase semiconductor components from a component manufacturer, the contract may be silent on potential IP liabilities regarding the components, or even release manufacturers from any future liabilities. As a result, the packaging company may be liable for patent infringement because of the components it purchased. Certainly, bargaining powers among the contracting parties may determine the wording of these contract provisions, but one must be aware of this type of indirect risks.

In addition, Chinese companies that do not directly import or sell components in the U.S. may face indirect risks of patent infringement lawsuits in the U.S. For example, customers of Chinese companies may buy and package the components in Asia and then sell final products in the U.S. A U.S. patent owner may then petition the United States International Trade Commission (ITC) to institute a Section 337 investigation that may exclude importation into the U.S. of any products containing infringing components.

To fully evaluate direct and indirect risks, Chinese companies should engage competent U.S. counsel to perform due diligence at every step of the production cycle.

II. Minimize Potential Risks

After identifying potential risks, Chinese companies will need to minimize potential risks of patent infringement lawsuits. Generally speaking, successful companies have adopted three common approaches.

First, design around to avoid your competitors’ patents. To minimize expenses, designing around should take place in the early phase of R&D, and one must continue to monitor competitors’ patenting efforts throughout the R&D process. Naturally, Chinese companies should not design around alone without input of competent U.S. counsel, because determining the scope of patent claims requires in-depth legal analysis.

Second, when designing around is not preferable (too costly or difficult), Chinese companies may retain competent U.S. counsel to render opinions on validity or infringement or both. Although an opinion letter is not required to defeat willful infringement (and potential treble damages) under recent U.S. case law, it is still desirable to have one because it will save future litigation costs and remove some uncertainties of the litigation.

Third, strategically patent the technologies that will cover your competitors’ products. Typically, in the semiconductor industry, products may be covered by many patents owned by different companies. Owning patents that cover a competitor’s products may enable you to negotiate a cross licensing deal so that both companies will be able to make and sell products without facing each other’s patent infringement lawsuit.

III. Manage Actual Risks

Unfortunately, some potential risks are inevitable to avoid. Therefore, Chinese companies must also be prepared to face and manage actual risks. For example, in the U.S., patent holding companies operate under a business model where they do not make any products themselves (thus unlikely to be sued for infringing other companies’ patents), but seeks royalties through licensing and patent enforcement. Therefore, Chinese companies need to learn how to handle U.S. patent infringement lawsuits.

This section will discuss two areas that are particularly relevant to Chinese companies: personal jurisdiction and electronic discovery. When you receive a copy of the complaint of a U.S. patent infringement lawsuit, you may consider taking several strategic steps in response.

First, evaluate your position in the stream of commerce. For example, do you sell products in the U.S.? Do you import products to the U.S.? Do you sell products in China, but your customers sell or import products into the U.S.?

On the one hand, if you sell or import products into the U.S., it is most likely that at least one U.S. district court has jurisdiction. The question then becomes which U.S. district court has jurisdiction. If the products are not sold in or imported into a particular district (e.g., Maryland), then this particular U.S. district court may not have jurisdiction. The plaintiff, however, may bring a suit in the appropriate U.S. district court.

On the other hand, if you sell the products only in China, but eventually the products are imported to and sold in the U.S., the situation becomes more complicated and requires careful analysis by U.S. counsel. For example, in Technology Patents, LLC v. Deutsche Telekom AG, No. AW-07-3012, slip op. at 2 (D. Md. Aug. 29, 2008), China Mobile and Singapore Telecom were named as two of many defendants in a U.S. district court in Maryland, but did not sell products in the U.S., as they merely allowed its existing users to send text messages while traveling in Maryland through agreements with U.S. wireless carriers. Therefore, they were not subject to personal jurisdiction in Maryland.

In contrast, if you sell your products to a customer, knowing that the customer will either import the products directly to the U.S. or package them with other components and import the final products to the U.S., it is more likely that you will be subject to personal jurisdiction in at least one U.S. district court.

Second, develop defense strategies by working with U.S. counsel to determine, for example, whether the company should file a motion to dismiss the lawsuit for lack of personal jurisdiction. Obviously, the decision depends on specific facts in individual cases. Additionally, U.S. counsel will help you identify potential issues, access risks, and develop appropriate defenses.

Third, prepare for document production if the lawsuit is not dismissed. As discussed earlier, discovery is a major component of U.S. patent litigation, and failure to produce relevant documents will result in severe sanctions. For example, in Qualcomm Inc. v. Broadcom Corp., No. 05 Civ. 1958, 2008 WL 66932 (S.D. Cal. Jan. 7, 2008), the judge ordered more than $8.5 million against Qualcomm, the plaintiff, for failure to produce relevant emails.

Typically, the judge will set a discovery schedule in the beginning of the case, so each party must be prepared to preserve the evidence and produce relevant documents timely. Accordingly, Asian companies should work with competent counsel to develop a discovery plan including identifying all relevant documents for production.

With careful preparation, Asian companies can learn to manage actual risks and handle patent infringement lawsuits smoothly.

Three Lessons from Apple’s “iPad” Trademark Dispute in China

NOTE: This article was published by IP and Technology Law360 in a slightly modified form on March 6, 2013.

One of the high-profile intellectual property (“IP”) cases in 2012 was the dispute between Apple and Proview Technology of Shenzhen, China regarding Apple’s use of the “iPad” mark in China. Apple eventually paid $60 million to settle the dispute. The implications from this dispute, including how it may impact Apple’s business in the U.S. and how Samsung missed a golden opportunity in its patent war against Apple, are less understood. This article discusses three general lessons that U.S. companies and IP professionals can learn from this dispute.

First, understand potential risks of doing business in China. Doing business in China can be very rewarding, but one must also understand the possible risks. This article focuses on risks involving trademarks.

In Apple’s case, Apple, through an intermediate company, purchased the right to use the “iPad” mark in various countries from a Proview entity in Taiwan. Later, however, Proview filed a trademark infringement lawsuit against Apple in China, claiming that the purchase agreement does not cover China.

It appears that the purchase agreement was not clear as to whether it covers the “iPad” mark in China. Since China is a civil law country, parol evidence regarding the parties’ intent carries little or no weight even if the agreement is ambiguous. To effect a transfer of the right, the agreement itself must comply with the statutory requirements. After a court initially ruled in Proview’s favor, the Chinese authorities began seizing iPads in several Chinese cities.

Luckily for Apple, Proview only sought to stop Apple’s sales of iPads in China, but did not seek to stop Apple’s manufacturing of iPads in China that would be shipped to the U.S. and other countries. Essentially, Apple may have dodged a lethal bullet because a less-known aspect of China’s Trademark Law is not even on the radar of many Chinese trademark lawyers.

Specifically, China’s Trademark Law does not explicitly say whether the manufacture of trademark-bearing products in China exclusively for export infringes the trademark rights of the party that has registered the trademark in China. Several Chinese courts have ruled that such manufacturing activities in China constitute trademark infringement regardless of whether the products are bound exclusively for export.

For example, in 2002, a Chinese court found that manufacturing branded products exclusively for export in China constitutes infringement of the Chinese trademark owner’s rights. Nike Int’l Ltd. v. Cidesport, Dec. 10, 2002, Civ. No. 55 (Shenzhen Intermediate People’s Court) (in Chinese). In that case, Nike and Cidesport owned the exclusive-use rights to the “NIKE” mark in China and Spain, respectively. Cidesport authorized a Chinese manufacturer to produce men’s ski jackets bearing the “NIKE” mark for export to Spain. Nike alleged that the Chinese manufacturer’s production infringed on Nike’s exclusive-use rights of the trademark “NIKE” in China despite the fact that the ski jackets would be exported to Spain. The Shenzhen Intermediate People’s Court ordered Cidesport and its Chinese manufacturer to halt production, destroy all branded products, and compensate Nike.

Therefore, it is important for U.S. companies that have their products manufactured in China to have a proper clearance procedure for trademarks in China, even if they do not sell such products in China. Obviously, if Proview had requested an order prohibiting Apple from manufacturing iPads in China, it would have posed a much bigger threat to Apple since it could affect Apple’s business internationally. This leads to our second general lesson.

Second, appreciate the international aspects of today’s IP practice. In today’s global business environment, IP practice has also evolved. One must appreciate the international aspects of today’s IP practice in order to properly manage and minimize risks for companies doing business internationally. As discussed above, Proview’s claim of ownership of the “iPad” mark in China could have threatened Apple’s business not only in China, but in other countries as well.

Therefore, for contentious IP matters such as patent litigation, optimal solutions often require global strategies. For example, as companies protect their inventions worldwide by filing for patent protection in different countries, patent litigation can turn into global warfare. Hypothetically, when a company sues its competitor for patent infringement in the U.S. and seeks an injunction to stop the competitor from selling competing products in the U.S., the company may also choose to sue its competitor for patent infringement in China, where the competitor’s products are manufactured. Note that under China’s Patent Law, manufacturing activities constitute patent infringement even if the products are bound exclusively for export.

In this manner, the company can manage its litigation risks in the U.S. by hedging its bets in China. In other words, even if the company loses the lawsuit in the U.S., it may win the lawsuit in China under China’s Patent Law to stop the manufacturing of the competing products, thus potentially obtaining the same business goal — stopping the competitor from selling competing products in the U.S.

Conversely, the competitor, when facing a patent infringement lawsuit brought by the first company in the U.S., could proactively sue the first company for patent infringement in China, where the first company’s products are also manufactured. In this manner, the competitor manages its own litigation risks by creating leverage. For example, if the competitor loses in the U.S., but prevails in China to stop manufacturing of the first company’s products, neither company may be able to sell its products in the U.S. and each would then be more willing to reach a business compromise to settle their dispute. This leads to our third general lesson.

Third, leverage competitors’ legal trouble in China for one’s own competitive business advantage in the U.S.  For the reasons below, Apple’s legal trouble in China regarding the “iPad” mark actually was an opportunity for a number of Apple’s competitors, such as Samsung and HTC. Unfortunately, no one seized this opportunity.

For example, another high-profile IP dispute in 2012 was the global patent war for smartphones and tablets between Apple and Samsung, which resulted in a verdict of over $1 billion in damages against Samsung (NOTE: the court since has vacated a portion of the verdict). The two have litigated and continue to litigate in many countries.

Because China’s Trademark Law likely prohibits manufacturing of products in China that would infringe someone else’s mark, as discussed above, the “iPad” mark in China could have been a huge bargaining chip for Samsung. Indeed, Proview was in a bankruptcy proceeding when it sued Apple for trademark infringement in China. Had Samsung stepped in and purchased the “iPad” mark in China from Proview, Samsung could have extracted much more value from this mark. This could have helped Samsung gain leverage in its global patent war with Apple.

The lesson here, therefore, is to monitor competitors’ legal troubles in key countries. And  be prepared to seize the opportunity for one’s own competitive business advantage.

            Overall, in today’s global economy, IP practice has become increasingly multi-faceted and multi-national. Even if a dispute arises in one specific country, it might impact a company’s business elsewhere. Therefore, a company doing business globally should think about a global strategy for resolving localized disputes. There are many lessons that a company can learn from Apple’s “iPad” trademark dispute in China.

About the Author:

Lei Mei is the managing partner of Mei & Mark LLP, an Intellectual Property and Litigation law firm based in Washington, DC.  He is the author of a new book ConductingBusiness in China: An Intellectual Property Perspective (Oxford University Press 2012).

Risk Management for U.S. Patent Infringement Lawsuits

When Asian companies become more successful and start doing business in or for the U.S. market, they will inevitably face patent infringement lawsuits in the U.S. This section will discuss how Asian companies may develop risk management strategies for U.S. patent infringement lawsuits. Some of the strategies may also apply to companies in the U.S.

I. Identify Potential Risks

As for any risk management, the starting point is to identify potential risks. Regarding U.S. patent infringement lawsuits, potential risks come in two forms: direct risks and indirect risks.

Direct risks, prevalent among semiconductor manufacturers, may come from product design. For example, during the R&D process, engineers might have studied competitors’ technology or patents to develop their own solutions. If the final product has features that would be covered by third party patents, it creates direct risks of potential patent infringement lawsuits.

Indirect risks, common among packaging companies that source semiconductor materials from manufacturers, may come from contracts and purchasing agreements. For example, when a packaging company enters a contract to purchase semiconductor components from a component manufacturer, the contract may be silent on potential IP liabilities regarding the components, or even release manufacturers from any future liabilities. As a result, the packaging company may be liable for patent infringement because of the components it purchased. Certainly, bargaining powers among the contracting parties may determine the wording of these contract provisions, but one must be aware of this type of indirect risks.

In addition, Asian companies that do not directly import or sell components in the U.S. may face indirect risks of patent infringement lawsuits in the U.S. For example, customers of Asian companies may buy and package the components in Asia and then sell final products in the U.S. A U.S. patent owner may then petition the United States International Trade Commission (ITC) to institute a Section 337 investigation that may exclude importation into the U.S. of any products containing infringing components.

To fully evaluate direct and indirect risks, Asian companies should engage competent U.S. counsel to perform due diligence at every step of the production cycle.

II. Minimize Potential Risks

After identifying potential risks, Asian companies will need to minimize potential risks of patent infringement lawsuits. Generally speaking, successful companies have adopted three common approaches.

First, design around to avoid your competitors’ patents. To minimize expenses, designing around should take place in the early phase of R&D, and one must continue to monitor competitors’ patenting efforts throughout the R&D process. Naturally, Asian companies should not design around alone without input of competent U.S. counsel, because determining the scope of patent claims requires in-depth legal analysis.

Second, when designing around is not preferable (too costly or difficult), Asian companies may retain competent U.S. counsel to render opinions on validity or infringement or both. Although an opinion letter is not required to defeat willful infringement (and potential treble damages) under recent U.S. case law, it is still desirable to have one because it will save future litigation costs and remove some uncertainties of the litigation.

Third, strategically patent the technologies that will cover your competitors’ products. Typically, in the semiconductor industry, products may be covered by many patents owned by different companies. Owning patents that cover a competitor’s products may enable you to negotiate a cross licensing deal so that both companies will be able to make and sell products without facing each other’s patent infringement lawsuit.

III. Manage Actual Risks

Unfortunately, some potential risks are inevitable to avoid. Therefore, Asian companies must also be prepared to face and manage actual risks. For example, in the U.S., patent holding companies operate under a business model where they do not make any products themselves (thus unlikely to be sued for infringing other companies’ patents), but seeks royalties through licensing and patent enforcement. Therefore, Asian companies need to learn how to handle U.S. patent infringement lawsuits.

This section will discuss two areas that are particularly relevant to Asian companies: personal jurisdiction and electronic discovery. When you receive a copy of the complaint of a U.S. patent infringement lawsuit, you may consider taking several strategic steps in response.

First, evaluate your position in the stream of commerce. For example, do you sell products in the U.S.? Do you import products to the U.S.? Do you sell products in China, but your customers sell or import products into the U.S.?

On the one hand, if you sell or import products into the U.S., it is most likely that at least one U.S. district court has jurisdiction. The question then becomes which U.S. district court has jurisdiction. If the products are not sold in or imported into a particular district (e.g., Maryland), then this particular U.S. district court may not have jurisdiction. The plaintiff, however, may bring a suit in the appropriate U.S. district court.

On the other hand, if you sell the products only in China, but eventually the products are imported to and sold in the U.S., the situation becomes more complicated and requires careful analysis by U.S. counsel. For example, in Technology Patents, LLC v. Deutsche Telekom AG, China Mobile and Singapore Telecom were named as two of many defendants in a U.S. district court in Maryland, but did not sell products in the U.S., as they merely allowed its existing users to send text messages while traveling in Maryland through agreements with U.S. wireless carriers.[1] Therefore, they were not subject to personal jurisdiction in Maryland. [2]

In contrast, if you sell your products to a customer, knowing that the customer will either import the products directly to the U.S. or package them with other components and import the final products to the U.S., it is more likely that you will be subject to personal jurisdiction in at least one U.S. district court.

Second, develop defense strategies by working with U.S. counsel to determine, for example, whether the company should file a motion to dismiss the lawsuit for lack of personal jurisdiction. Obviously, the decision depends on specific facts in individual cases. Additionally, U.S. counsel will help you identify potential issues, access risks, and develop appropriate defenses.

Third, prepare for document production if the lawsuit is not dismissed. As discussed earlier, discovery is a major component of U.S. patent litigation, and failure to produce relevant documents will result in severe sanctions. For example, in Qualcomm Inc. v. Broadcom Corp., the judge ordered more than $8.5 million against Qualcomm, the plaintiff, for failure to produce relevant emails. [3]

Typically, the judge will set a discovery schedule in the beginning of the case, so each party must be prepared to preserve the evidence and produce relevant documents timely. Accordingly, Asian companies should work with U.S. counsel to develop a discovery plan including identifying all relevant documents for production.

With careful preparation, Asian companies can learn to manage actual risks and handle patent infringement lawsuits smoothly.

------
[1] Technology Patents, LLC v. Deutsche Telekom AG, No. AW-07-3012, slip op. at 2 (D. Md. Aug. 29, 2008).
[2] Id.
[3] Qualcomm Inc. v. Broadcom Corp., No. 05 Civ. 1958, 2008 WL 66932 (S.D. Cal. Jan. 7, 2008).