Sometimes James Trussell's life in Shanghai seems pretty similar to the one he left behind in St. Paul, Minnesota. Trussell, 3M Company's first China-based in-house counsel, comes home from his office in Pudong, helps his three daughters with their homework; some nights the family even orders Papa John's pizza for dinner. March 24 wasn't one of those days. After months of preparation, Trussell spent the morning in a Shanghai courtroom, watching his Chinese outside counsel argue an infringement case over 3M's respirator masks. The proceeding was conducted entirely in Chinese, and Trussell is still learning the language--"Other than saying good morning and thank you, my Chinese isn't going to get us very far," he says. Trussell relied on his outside counsel to translate through notes and whispers. The whole trial took two hours, and by lunchtime, a dazed Trussell was back in his office. A month later, a three-judge panel at the Shanghai Intermediate People's Court found that the respirator masks sold by a Shanghai-based manufacturer, Shanghai Dasheng Health Products Manufacture Co., Ltd., infringed 3M's patents. The court awarded 3M the equivalent of about $31,000. It was 3M's first civil court victory in China.
3M is no stranger to China: The St. PaulÐ based company has been in the country since 1984, when it became the first U.S. corporation to establish a wholly owned subsidiary there. But going through a full civil court proceeding in China was entirely new. "My biggest surprise was how well it went," says Trussell, a 12-year 3M veteran who has been in China since August 2005. The case is a lesson to foreign companies, many of whom still neglect to file Chinese patents. It's also notable for having gone relatively smoothly: This wasn't the first patent win by a foreign company, but it was one of the easiest. There were no decrees passed down from the government, no high-powered IP specialists riding in to save the day. The case didn't grab headlines, like Pfizer Inc's recent defense of its Viagra patent, or Starbucks Corporation's January trademark win. And even though it involved a foreign company, the litigation was handled just like any other in the Shanghai court. That makes it a victory for all foreign companies operating in China, as well as one for the Chinese courts, often slammed for being weak enforcers of foreign IP rights.
3M didn't set out to fight a court battle in China. In fact, the company's China troubles started in Australia, where company sales representatives first spotted the fake products. The masks looked exactly like 3M's 9000 series, but they were missing the company's logo. "They were more or less copies," says St. PaulÐbased 3M patent attorney W. Karl Hansen. "If you look at them side by side, they basically look the same." Because the masks lacked the company name, they weren't true counterfeits, but rather technological thefts. Further investigation by 3M engineers revealed that the look-alikes violated at least two of 3M's Chinese patents, one covering the design and a second on the structure of the mask. In-house 3M lawyers traced the products back to Shanghai-based Dasheng Health Products.
Rather than attack Dasheng on its home turf, 3M decided to go after the mask importer, an Australian shipping company, which agreed to stop importing the infringing product. Happy with an easy success, 3M decided to let the matter drop. But then more infringing masks, traced back not just to Dasheng but also two other Chinese companies, started appearing across Europe.
The problem had become too significant to ignore. The 9000 series is a popular product in the personal safety market, used by emergency workers all over the world in biohazardous situations like fires or industrial accidents. An infringing version could damage 3M's reputation, and, if it failed, cost lives. "It was important to us because customer health and safety was at issue," says 3M's litigation manager Hildy Bowbeer, who is based in St. Paul. Tracking and prosecuting every importer that was bringing the masks into Europe would be expensive and time-consuming. So 3M decided to go after the source.
At first, the company tried using administrative actions, which take only a few weeks and are quicker and cheaper than a full-blown court case. 3M appealed to the patent administrative authorities in Guangzhou to stop the other, smaller Chinese companies from bringing the mask into Europe. "What you are really doing is presenting enough evidence to convince the administrative agency to conduct a raid," says Trussell. 3M showed the infringing masks to the Guangzhou officials, who then raided the businesses, seized infringing masks, and issued an injunction.
Meanwhile, 3M's outside counsel, Rose Baochun Zeng of the Guangzhou-based Guangdong United Intellectus Law Firm, tried to convince the administrative office in Shanghai to raid Dasheng. But the office refused, saying that it didn't have the authorization. "To continue pushing would have been an exercise in futility; at worst it would have alerted Dasheng to our concerns," says Bowbeer. Getting patent administrative offices to conduct raids is difficult, says Beijing-based patent litigator Xiang Wang, of counsel at Jones Day. Officials are more likely to take action on trademark violations than patents, because it's easier for them to see the infringement.
After the rejection from Shanghai, 3M's legal team in St. Paul (Trussell wasn't yet stationed in China) wanted to file a civil court action. But the company's business side was wary. Civil court was an untested legal strategy, and the costs would probably outweigh the potential rewards. "Statutory damages are less than or equal to what it costs to enforce the case," says 3M patent attorney Hansen. Chinese law caps damages at $60,000, and getting additional punitive damages is difficult. But the lawyers--Bowbeer, Trussell, and Hansen--believed that a win would send a worthwhile message to future infringers. "This was not like the guy on the street selling DVDs," says Trussell, "This is an established business where we thought it would be more important to have what closely approaches a U.S. trial." After several weeks of wrangling, the company's legal and business managers agreed.
But before Zeng could file a complaint in Shanghai court, 3M had to submit a huge amount of documentation about its patents. As is standard, many of these papers had to be authenticated by the nearest American consulate. For 3M, that's in Chicago. In the end, says Hansen, the stack of documents sent to Chinese administrators was about 4 feet high. Once the Chinese court accepted the documents, the 3M team started drafting a complaint, called an indictment in China, which covered the basic facts of the case. The document was drafted in English, reviewed by 3M lawyers in St. Paul, and then translated into Chinese.
Zeng filed the complaint in August 2005. Dasheng replied, denying infringement, and the special IP division of the Shanghai court accepted the case, scheduling a March trial. The speed was a welcome change of pace from 3M's U.S. patent battles. Less welcome were the rules governing evidence collection. "The books have what looks like a discovery process, and the courts will tell you there's a discovery process," says Trussell, "[But] it's not a real enforcement mechanism with teeth in it." Every piece of evidence must be notarized, including product samples. There are no subpoenas or depositions, so it's almost impossible to demand information from the other side. Courts rarely sanction lawyers or litigants for producing fake evidence.
"It's a different legal culture," says Jones Day IP lawyer Anthony Chen. "In Chinese court they don't receive oral testimony much. When you go into court, you want to have notarized objects." Expert testimony is rare. If the patent is really complex, experts are appointed by the court from one of ten designated appraisal centers for IP matters. The expert opinion isn't binding; it's just to help the court better understand the technology.
The lack of discovery makes getting the financial records needed to prove significant damages, like lost profits, nearly impossible. Zeng and Trussell had no problem showing infringement. The more difficult part involved proving that Dasheng sold the product, a fact the company denied. The judges wanted to see an unbroken chain of sale from Dasheng to the final distributor. 3M had a Dasheng product catalog that used serial numbers similar to what was marked on the European products. But getting a definitive link, without access to Dasheng documents, was tough.
3M filed an evidence preservation request, asking the court to inspect Dasheng's factory site. The court agreed, after 3M paid the standard $2,813 (22,500 RMB) fee. When the court inspected the factory, it found serial numbers that coincided with those in the catalog, convincing the judges of a connection between manufacturing and sales. Proving anything beyond that basic link, like the magnitude of Dasheng's infringing activity, was impossible without records of sales volumes, profit margins, or operating income.
The trial mostly consisted of handing sealed envelopes of notarized evidence to a three-judge panel, says Trussell: "What passes for trial largely consists of each party reading into the record their arguments." First Zeng made 3M's case, presenting the infringing products and their analysis. Then it was Dasheng's turn. Their outside counsel, Deng Youguo of the Shanghai Zhijun Law Office, denied infringement and that they sold the products.
After the hearing, the judges went into their chambers and, after a few minutes, came out and started asking Dasheng's counsel questions about whether they had tried to settle. It was a very clear indication of the court's opinion, says Trussell.
Trussell's intuition was correct. On April 19 the court ruled for 3M. The monetary award was small, but the message was big, Bowbeer says: "What was important was taking a stand and taking advantage of what the system does provide." Soon after the ruling, Dasheng approached 3M with a settlement offer. They would pay the damages and agree not to appeal to the Shanghai Intermediate People's Court, if 3M would cover the legal fees. 3M agreed. "The settlement for us was so close to outright victory," says Trussell, "that it didn't cost us much to avoid the appeal." What's more, the infringing masks have not since been found in Europe, China, and Australia. Dasheng and its lawyers could not be reached for comment.
3M's victory could not easily be repeated. With more than 20 years' experience in the market and about 70 IP lawyers on staff worldwide (about 60 based in St. Paul), 3M was ideally set up for a court battle. The company had a big legal staff to collect all the necessary precourt documentation. Once the litigation began, Zeng did most of the actual work. Foreign lawyers are prohibited from practicing Chinese law, so appearing in court or writing documents is verboten. But Zeng suggested that Trussell attend the most significant hearings. Even though he couldn't participate, his presence sent a message to Chinese officials. "At a certain point when we need to reaffirm to local authorities that this is an important case," he says. "[It's] a message that this is something that is important to 3M."
Most importantly, 3M had well-written, straightforward Chinese patents. "A lot of companies may not have made the decision five or ten years ago to build a patent portfolio," says Trussell. 3M had the foresight to file even before it had a significant business in the region. The key patents covering the respirator masks were filed in 1997.
The biggest problem faced by most companies in China is a lack of patents. In China, the top foreign filers of domestic patents are mostly Asian businesses: Samsung Group, Matsushita Electric Industrial Co., Ltd., and Sony Corporation topped the list last year. The only American company in the top ten was IBM Corporation, which ranked sixth. Many midsize- or smaller-sized foreign companies either didn't file in China or filed shoddily written patents with serious defects, says Jones Day's Wang.
Without patents, filing an infringement case is nearly impossible. When Intel Corporation patent counsel Hongbin Wang worked at GE Healthcare Bio-Sciences, the company discovered that a Chinese competitor was infringing a U.S. patent. "That's not a patent infringement," Wang remembers telling his managers. "There is no [Chinese] patent." The technology was originally owned by Amersham plc, which GE acquired in 2004, and Amersham hadn't filed any Chinese patents. Wang and his colleagues used the mistake to convince GE to file more in China.
Chinese companies happily exploit the thoughtlessness of their competitors. "Some Chinese companies tell me their slogan is: ÔIf you do not respect your IP in China, we will not either,' " says Jones Day's Wang. If the multinationals don't file patents, their Chinese competitors will. "[In] two cases here, the local companies filed our client's U.S. publication [at the Patent and Trademark Office] literally without even having any change," says Wang. Patentless companies have some recourse, says Chen. They can try suing over trade secrets, which is more difficult to litigate, or filing utility patents. But these methods aren't as effective as an infringement case.
Increasingly, companies are following 3M's lead and filing in China. In 2005, over 476,000 patent applications were filed, a 36 percent increase from the previous year and about 67,000 more than were filed at the Patent and Trademark Office.
The patenting frenzy will inevitably lead to more suits, especially as counterfeiting becomes more advanced. As companies continue to move R&D centers to China, like the $40 million research center that 3M opened last year in Shanghai, it's becoming easier for counterfeiters to get their hands on technological processes. As a result, counterfeit products increasingly violate not just trademarks but patents. "We see more infringing product, mainly coming out of China," says Hansen, who has worked in 3M's occupational heath and environmental safety division for 16 years.
Trussell knows that 3M's recent suit won't be its last. Nor can the company haul every infringer into court. But the win, he thinks, is a good sign that when things get bad, 3M has recourse. "You're never going to stop infringement completely," he says, "but we wouldn't hesitate to go back to the courts again."
