In early 2018, Wan Hui Da Law Firm, an affiliate of Wanhuida Peksung IP Group, represented a small household electrical appliance maker in requesting the Customs of Guangdong and Zhejiang provinces to seize 3 containers of goods valued at around RMB 2 million (301 thousand USD) on the ground of patent infringement. Lawsuits were filed with the Ningbo Intermediate Court and the Guangzhou IP Court respectively once infringement had been confirmed by us. At the same time, the courts were requested to collect evidence from the Customs offices and to take property preservation measures. The total number of containers we successfully detained on behalf of this client has reached 26 since we initiated patent enforcement programs via the Customs in 2004.

Requesting Customs to seize export products on the ground of patent infringement has proved to be a potent legal tool against exporters. If the products involved are subsequently detained by the court and found infringing, what awaits them is destruction. The exporter will be hit by a double blow: it needs to indemnify both the patentee for the damage caused by its infringement and the oversea buyer due to its failure to make delivery. If the exporter submits a counter guarantee and requests the Customs to release the goods, the patentee may use the counter guarantee to secure enforcement of the damages once the court confirms the infringement and awards damages.

But a coin has two sides. It is very difficult for patentees to organize Customs seizures of export patent infringement goods. Besides, if the risk is not well controlled, the other party may file a counterclaim, and the patentee may end up having shot himself in the foot. Below are some tips that may help navigate the patentee through the whole process.

Infringement analysis and patent stability analysis

It is common sense that a patentee needs to conduct an infringement analysis on the suspected infringing products before taking any legal actions. But this is not enough. It is also essential to ascertain the stability of the patent. Such verification of the patent stability is often underestimated. Indeed, when a patent is being enforced in a legal action, it is frequent to see the defendant filing a counterclaim challenging the validity of the patent. A design or utility model, which is granted without substantive examination, is particularly vulnerable. Though in principle, an invention patent stands a better chance to survive an invalidation action, the average rate of invention patents being declared invalid is not so encouraging. Therefore, it is strongly recommended to fully evaluate the stability of the patent by studying prior designs and arts, before resorting to radical measures like Customs interception.

It is worth noting that when filing for the Customs recordal of a design patent or utility model, the patentee is required to submit a patent assessment report, or else the filing would be discarded by the General Administration of Customs (GAC).

The infringement analysis and patent stability analysis may serve as a point of reference in the formulation of the strategy. It is not unusual that a patentee, after assessing the risks and chances of success, opts to rather “moderate” measures, like sending a cease and desist letter, requesting the mediation of the local intellectual property office or IP Protection Center, or filing a lawsuit after obtaining admissible evidence. But if the patentee decides to proceed with the Customs interception, there is some heads-up:

Necessary Preparation

There is a very short time window for the patentee to apply for Customs interception. This is due to the necessity to ensure the efficiency of Customs clearance.

  1) Customs recordal

In view of their little understanding of the technical features of patents, Chinese Customs have been very discreet in intercepting allegedly patent infringing products. In most cases, Customs seizures are instigated upon the request of the patentee. The “Regulations on the Customs Protection of Intellectual Property Rights” (Regulations) and the “Rules for Implementation of the Regulations on the Customs Protection of Intellectual Property Rights” (Implementation Rules) do not make Customs recordal a prerequisite to warrant Customs interception of allegedly patent infringing products. However, in practice, some local Customs still weigh in Customs recordal when deciding on the temporary detainment of suspect cargos. Just to be on the safe side, the patentee should record its patent(s) with the GAC in advance.

  2) Guaranty bond

In light of the high risk of patent cases and of the impact that a potential Customs interception may inflict on the interests of the consignor and consignee, Customs usually require the applicant to provide a cash deposit equal to the value of the allegedly infringing products prior to interception.

In addition, if the patentee subsequently files the lawsuit (as requested by the Customs) and requests the court to seize the goods detained by the Customs, the court will also require the patentee to provide a guaranty bond. The patentee had better have a clear understanding on the forms of guaranty bond that are acceptable to the court.

  3) Litigation materials

Pursuant to Article 24.1 of the Regulations, “where the Customs detain the allegedly infringing goods in accordance with Article 15 of these Regulations and do not receive notification for assistance in enforcement from the People's court within 20 working days from the date of detention, the Customs shall release the detained cargos”. The patentee therefore has to act on a very pressing time line. Within 20 working days, the patentee must file a lawsuit before the court, securing court ruling(s) on obtaining and preservation of evidence, and even preservation of property, and then promptly notify the Customs to assist the court in enforcing the ruling(s). Foreign patentees need to complete the notarization and legalization of their power of attorney and certificate of incorporation beforehand.

Customs release of goods upon receipt of counter guarantee

In practice, Customs has to release the allegedly infringing cargo if the consignee or consignor posts a counter guarantee. However, without explicit provision in the Regulations, practice varies on the pre-release sampling of the cargo, which could be used as evidence for subsequent court action, as the interpretation of the Customs and the courts on the laws and regulations is divided.

In order to ensure the timely release of goods and cut losses, the consignee or consignor often, for the quick release of the goods, posts a counter guarantee immediately after Customs interception. It leaves almost no time for the patentee to obtain the court ruling on preservation of evidence or property. If there is no sample for the court to conduct infringement analysis, there will be no case at all. It would be prudent if the patentee could acquaint itself with the practices of different Customs in this regard.

Requesting the court to take property preservation measure for the Customs seizure

This is a compulsory precaution, but in fact, a very tricky issue.

Article 23 of the Regulations provides that “after filing an application with the Customs for taking protection measures, the IPR owner may file an application with the People's court for ordering cessation of the infringement or taking the measure for property preservation in connection with the allegedly infringing goods detained pursuant to the Trademark Law of the People's Republic of China, the Copyright Law of the People's Republic of China, the Patent Law of the People's Republic of China or other relevant laws”. In practice, patentee filing for evidence preservation may not always request court to take property preservation measures. It is understandable because the risk of being countersued and the cost of being held accountable for the exporter’s losses once the Customs interception is ascertained as wrongful could be intimidating. There are also circumstances where patentee leveraging Customs interception as a means to claim royalties from the alleged infringer, chooses not to proceed with property preservation. In light of the above, some local Customs come to form an opinion that if the patentee, after Customs interception, does not seek a court ruling for property preservation, it would be an abuse of administrative resources.

Yet, to consider that the stock of infringing goods is equivalent to "property" (of the defendant) that can be preserved, in order to secure the execution of the judgement to be rendered, is a controversial issue. Indeed, courts’ opinions are divided. Some courts refuse to rule on “property preservation” of the goods detained by the Customs.

Article 100 of the “Civil Procedure Law” provides that, “in the event that the execution of a judgment may become impossible or other prejudices may be caused to the party concerned due to the acts of the other party or other reasons, the people's court may, upon the request of the said party, order the preservation of property of the other party…” Some courts opine that the term “property” in this provision merely refers to movable property, real estate and intangible asset that may be liquidated to settle debts. Following this reasoning, courts should order the destruction of those infringing products, rather than use such to offset the damages of the IP owner. As regards the allegedly infringing goods, property preservation measures should not apply. Instead the court may issue an interim injunction and seize the infringing goods as part of the execution of the interim injunction. In theory, it seems to be a solution. But in practice, courts are very cautious in issuing interim injunctions.

We believe that whether they are considered as "property" or not, the inventory of infringing goods must not be released until the infringement is determined. The term "property" should be interpreted in a broad sense. If the court finds infringement, it may order the destruction of the inventory infringing product, and the intercepted goods (not entering the market) should be regarded as part of the inventory infringing products. If the goods were to be released, it would be impossible to execute court order on destruction of stocked products.

But this is a delicate issue and, under such circumstances, it is essential for the patentee to figure out how the court stands in adopting preservation measures regarding Customs seizures.

Customs seizure is a double-edged blade. Requesting the Customs to seize allegedly infringing products no doubt puts tremendous pressure on the infringer. Nevertheless, reckless action may be catastrophic to the patentee. Patentees need to think twice before wielding it against the alleged infringer.