A joint investigation and enforcement by Guangzhou, Dongguan and Huizhou AMRs
A Rouse client has recently reached the successful conclusion of an invention patent infringement dispute involving simultaneous administrative enforcements across three Administration for Market Regulation (“AMRs”) offices in China’s Guangdong province.
This case is a success story in terms of directly solving a problem in the client’s key sales market (and thereby increasing sales). It started with online-to-offline action reaching the source in China. This led to the following outcomes: (1) a favourable settlement with the infringers; (2) stringent undertakings; (3) higher-than-expected compensation paid; (4) withdrawal of bad faith design patent applications; and (5) the destruction of moulds used to manufacture the invention patent infringing products.
The timeline saw the first investigations conducted in May 2020, enforcement actions carried out in November 2021, and settlement formalities finalised in early 2022. The process took one and half years, starting during the first stage of the Covid-19 outbreak in China.
The original problem identified
Merchants were selling a product into the client’s end markets in Europe and North Africa which infringed its Chinese invention patent and interfered with its sales through its own online channels. Based on overseas test purchases, the client saw the products originated in China.
Online investigation – all it took was a click
During the first round of online monitoring, among more than one hundred and fifty infringing listings from different sellers, one seller stood out from others:
- Its products infringed the client’s patent;
- The seller was only selling this one type of products made by the client and claimed to have their own factory;
- The seller’s legal representative had successfully registered IPR that copied the original invention patent; and
- The seller was operating under two companies, different online stores and had registered their own brand.
Considering this, Rouse separated and held actions against the listings belonging to this one seller. Instead, after an initial test purchase and analysis of the infringing products, Rouse conducted an offline investigation to determinate the origin of the infringing products from this seller (the “Distributor”).
As for the remaining infringing listings, online complaints were filed with a success rate of 100%. Beside cleaning the online platforms, Rouse also was interested in checking if any sellers would file counterclaims that could reveal the origin of the products.
Offline investigation – follow the breadcrumbs
1, Stage one: the distributor in Guangzhou
The first step was to investigate the distributor, located in Guangzhou city. It was at a stage of growing their own brand and building awareness of their products. Through communications with the distributor, investigators understood they did not really own their own factory or production line, but instead outsourced it. Connecting the dots from the information taken from the distributor and crosschecking it with field investigation, Rouse pinpointed three probable suspect factories.
At this stage, Rouse had received notice of two counterclaims from two online sellers against whom the takedown was filed. It turned out that these sellers submitted a proof of purchase from one of the suspect factories, albeit the product details were not in their invoice. An online investigation allowed Rouse to confirm this as the supplier, located in nearby Dongguan city.
Although the identity of the supplier was clear, there was no direct evidence linking the infringing products to the factory nor the people in charge of it.
2. Stage two: the branch supplier in Huizhou
The online profile of the supplier showed that 1) they focused on overseas markets, instead of domestic Chinese sales; and 2) they were aware and careful enough never to display the infringing products.
A first approach resulted in the supplier sending the contact of the salesperson, who provided a catalogue with the infringing models from a so-called branch factory. A notarized test purchase was conducted, but the order and sample courier information showed the source was from a newly open company in Huizhou city, registered by the salesperson.
An onsite investigation revealed that this factory in Huizhou was formally independent from the main supplier in Dongguan city, but in fact acted as their branch. Although samples were detected in Huizhou, it was revealed that the manufacture was still done by the main supplier in Dongguan.
At this point, Rouse had evidence against the distributor in Guangzhou, on sales of infringing goods and stock, as well as evidence that the factory in Huizhou provided the infringing goods. But the main target in Dongguan still couldn’t be connected with clear proof. Enter stage three.
3. Stage three: the main supplier in Dongguan
In order to achieve meaningful enforcement, Rouse would need to include the main supplier in Dongguan, as: 1) they were the origin of the infringing products; 2) were the biggest target among the three; and 3) had strong overseas marketing.
Assuming the highest degree of evidence necessary required for Dongguan jurisdiction cases, Rouse approached the target under a new pretext. The final result was a success, obtaining notarized evidence that 1) linked the main supplier to the infringing products and to the distributor; and 2) demonstrated that the supplier had the means to produce and kept stock.
1. Why administrative enforcement
Although Rouse managed to obtain notarized evidence on samples and communications from the three targets, the only identified stock and relative proof of sales volume was from the distributor. Therefore, filing litigation would be a risk due to lack of evidence to estimate damages compared to the higher costs of court action.
Ultimately, to locate and destroy moulds of the infringing products, we recommended administrative action to:
- Fix evidence of stock, moulds and sales records to pave the way for potential litigation (for possible damages claims);
- Request adverse party to stop infringement permanently; and
- Seek damages through administration mediation.
For an introduction to China’s administrative enforcement for patent infringement, please see the following article “Patent and Design Patent Administrative Enforcement in China”. (https://rouse.com/insights/news/2021/patent-and-design-patent-administrative-enforcement-in-china)
2. Multiple jurisdiction issue
Our attorneys first contacted the AMRs of the three cities separately to arrange for a joint complaint filing and then to coordinate a date for simultaneous enforcement.
The initial response, however, was slow and ultimately two AMRs claimed to have no duty nor jurisdiction to conduct joint enforcement actions covering the other cities. Given the three targets are connected and all within Guangdong province, Rouse met the Guangdong Provincial AMR, the supervising authority over the three cities, to obtain their support.
At the provincial AMR, Rouse introduced the case background and the links between the three targets that made simultaneous enforcement essential. This was ultimately a success, with the provincial MSA contacting the three city-level AMRs and requesting their joint actions to conduct enforcement against the targets.
3. Enforcement – Administrative inspections
In November 2021, at the same time, AMRs from Guangzhou, Dongguan and Huizhou simultaneously carried out administrative inspections at the three addresses, each location involving a minimum of three officers and with a duration between one and a half and three hours.
At the Distributor’s office and warehouse, the AMR found around one hundred and eighty infringing products and sales records in the computer. In the main supplier’s factory in Dongguan, the officers identified 3 moulds of infringing products and eighty products in stock.
After the inspections were completed, the AMRs encouraged both sides to settle and avoid undergoing interrogation and oral hearing, which the client agreed as long as infringement stopped and damages were paid.
Led by a senior attorney, experienced at negotiations, our team settled the cases favourably with the three targets. In sum, the infringers agreed to:
- Waive their patent rights / withdraw patent application of all valid or pending patents similar to the infringing products within ten working days of the Agreement, including a key identified design patent and utility model patent;
- Stop infringing all IP rights of the client, including the identified patents;
- The distributor and main supplier agreed to pay damages;
- Through mediation of the AMR, the branch supplier in Huizhou signed an undertaking to never infringe the client’s IP rights; and
- The moulds and stock were destroyed in the presence and under the supervision of Rouse representatives.
The settlement agreements were reached and enforced within a month after the enforcement and the cases were concluded.
This win for the client is impressive by the fact that it ended in favourable settlement with the help of three AMR offices with separate jurisdictional remits in Guangdong province. It demonstrates the vital importance of online-to-offline investigations to reach source targets. It shows the value of (often maligned) administrative enforcement in China, without resorting to costly litigation. The approach was nevertheless litigation driven – to obtain sufficient evidence of damages and losses for the courts, so that a settlement payment could still be negotiated. Enforcing invention patent rights is often thought of as a long and costly process, involving extensive evidence gathering and civil litigation. Engaging administrative authorities presents a cost-effective, fast and compelling enforcement solution in China.