On September 15, 2010, General Protecht Group Inc. (Protecht) called a press conference in Beijing and announced its complete victory in the lawsuit against it brought by Pass & Seymour, Inc. (P&S) and the decision of the U.S. International Trade Commission (ITC) was overturned, which was witnessed by the Ministry of Commerce of the PRC, Bureau of Fair Trade for Imports, Exports and China Chamber of Commerce for Import and Export of Machinery and Electronic Products, among others. It was miraculous that Protecht, a Chinese private enterprise, could win an appeal against a U.S. government agency’s ruling.
The Bumpy Road of Chinese Private Enterprises in the U.S.
In 2003, the U.S. government began to compel the use of an earth leakage protection device – Ground Fault Circuit Interrupters (GFCI). Four American enterprises, including Leviton Manufacturing Company (Leviton), owned the patented technology for GFCI and have monopolized the U.S. market for 20 years.
A Chinese enterprise, Zhejiang Dongzheng Electrical Co., Ltd., the predecessor of Protecht, also possessed this technology and took aim at the U.S. market. Because of its high performance-price ratio, good quality and favorable prices, Protecht’s GFCI products quickly occupied the main stream market of 38 states in the U.S., capturing about 10 percent of the U.S. market in less than six months. Protecht’s rapid development aroused panic among many American enterprises, including Leviton, an industry giant and one of the world’s top 500 enterprises. As of the beginning of 2004, these American local enterprises began to resort to various means to prevent Protecht’s development in the U.S., which resulted in Protecht’s marathon journey of responding to the lawsuits in the U.S.
The 558 Patent Infringement Action – “the First Sino-U.S. IP Case”
On April 16, 2004, Leviton Manufacturing Co., Inc. filed a suit before a federal District Court of New Mexico against Nicor, Inc. (Nicor), Protecht’s American customer. The complaint alleged that Nicor violated claim 3 of Leviton’s U.S. patent No. 6,246,558 (the 558 patent) by distributing Dongzheng’s products. The complaint demanded Nicor to cease infringement, pay attorney fees and statutory expenses arising from the litigation, and compensate Leviton for direct and indirect losses. Leviton also requested that Nicor’s directors and operators assume personal liability. The litigation techniques employed by Leviton in this case were very tricky and ruthless and it applied the U.S. law to extremes, which is very rare, even in the U.S. cases. During the three months from April to July, Leviton filed in succession four lawsuits in four different district courts of three states against Protecht’s four American distributors for the same cause of action and claim. Chen Wusheng, Protecht’s president, remarked, “Leviton is obviously prepared. It brought Protecht’s four distributors before four different federal courts based on the identical patent and identical claim, which increased the legal costs multiple times.”
On July 17, 2004, Protecht experienced a drastic decline in the U.S. market. Subsequently, Protecht retained Morris, Manning & Martin, LLP, an American law firm, to represent it in the litigation and filed a motion for leave to intervene in Leviton’s case as the second defendant before a federal District Court of New Mexico. On June 10, 2004, the Court granted Dongzheng leave to intervene.
On July 10, 2007, Judge Browning issued a judgment, ruling that Protecht’s GFCI products did not infringe Leviton’s 558 patent. This is the first time in the judicial record that a Chinese enterprise won a complete victory over its competitor in the U.S. patent infringement litigation. The American media estimated, “the case’s political significance far exceeds its commercial value.” The People’s Daily also published articles asserting that it “breaks the situation that Chinese enterprises had never prevailed in the Sino-U.S. IP litigation.” Both domestic and foreign media called it “the first Sino-U.S. IP case”.
ITC Section 337 Investigations
However, Leviton did not stop there. On August 16, 2007, only 36 days after Protecht’s victory in the lawsuit, Pass & Seymour, Inc. (P&S), Leviton’s strategic ally, filed a complaint with the ITC, alleging that the GFCI products of five Chinese enterprises and ten American enterprises infringed its six patents and requesting the ITC to conduct a Section 337 investigation against these enterprises. The five Chinese enterprises were: General Protecht Group Inc., Zhejiang Dongzheng Electrical Co., Ltd., Wenzhou Trimone Science and Technology Electric Co., Ltd., Shanghai ELE Manufacturing Corp. and Shanghai Meihao Electric Appliance Co., Ltd. In addition to the Section 337 complaint with the ITC, P&S also filed an action before the United States District Court for the Northern District of New York against the above enterprises for patent infringement.
On March 30, 2009, the ITC issued a limited exclusion order against the Chinese enterprises, prohibiting the importation of GFCI products into the United States. This decision rendered the loss of several - billion – Yuan annual export on the part of China’s leakage protection manufacturers and left more than 50,000 workers in the relevant industry chain unemployed.
On September 17, 2009, Protecht appealed the ITC’s decision to the United States Court of Appeals for the Federal Circuit (“CAFC” or “Federal Circuit”) requesting it to rescind the ITC’s decision.
On August 27, 2010, the Federal Circuit court entered a judgment, revoking the ITC’s decision that Protecht infringed P&S’s patents. The news, upon release, attracted widespread attention from the media. Many TV programs such as CCTV Oriental Horizon and Half-Hour Economy have conducted special reports on this event.
“For more than 700 long days and nights I worried. It was a really a hard-won victory.” Protecht’s president Chen Wusheng was too excited to hold back his tears in front of the camera when speaking of the victory of the 558 Patent case in 2007. Three years have passed. However, Mr. Chen’s eyes were full of tears again when facing the media. “We encountered four lawsuits in six years. After a lengthy and hard fight we finally won the victory, which proved that we Chinese enterprises are innocent.” This is a classic case in which a Chinese enterprise appealed the ruling of a U.S. government agency – the U.S. ITC, and also the first time that a Chinese enterprise won in an appeal against a U.S. government agency’s decision.
“A Game Between the King and the Beggar”
This is a tough confrontation between strengths of huge disparity. Leviton is a powerful opponent with a monopolistic position in the industry and strong economic strength. During the six years’ litigation Protecht paid USD 12 million of litigation costs and bore huge pressure of public opinion and emotional stress. It is an inspiring victory. However, more challenges ensued from it. On September 3, 2010, just 7 days after Protecht’s victory, Leviton again filed a complaint with the ITC, requesting the ITC to initiate Section 337 investigations against dozens of enterprises including Protecht and permanently prohibit all infringing products from entry into the U.S. market.
The Chinese enterprises’ litigation abroad is often compared to a “game between the king and the beggar”. In the U.S., engaging in a lawsuit often involves massive expenses, with the litigation fees ranging from millions to tens of millions of U.S. dollars. To weaken Chinese enterprises’ strengths and even drag them down, American enterprises often adopt the following strategies: bringing multiple lawsuits at one time to greatly increase legal costs; filing lawsuits against Chinese enterprises without stop, i.e., turning to Section 337 investigations if the court ruled unfavorably, thus making them swamped with lawsuits and complaints.
“We respect intellectual property and will never infringe others’ intellectual property rights. The first time I had contact with Leviton, I held it with awe. But now I feel that it is already corrupt.” said Mr. Chen. “It is not only an unfair competition but also a rogue practice. We will keep going to let the subsequent enterprises know where the enemies’ firepower is even if we may fall on the road.” Mr. Chen’s words won him respect and admiration.
Section 337
Section 337 has it origin in the United States Tariff Act of 1930 and the U.S. ITC is responsible for the administration and enforcement. Under Section 337, anyone who owns and exploits an intellectual property right in the United States can file a complaint against unfair imports to exclude unfairly imported products from entry into the U.S. regardless of whether or not the complaining party is based in the U.S. or abroad. If the ITC finds, after investigation, that the imported products infringed U.S. intellectual property right, it has the authority to direct U.S. Customs to deny entry of the infringing products into the U.S. market. The relevant IPR officials with the U.S. Embassy in Beijing once said that on top of Section 337, there are also in the U.S. remedial measures available to the Customs to prevent importation of products infringing registered trademarks and copyrights, whereas Section 337 is an important supplement to the Customs’ remedial measures.
Since China’s entry into the WTO, Chinese enterprises have encountered frequent trade barriers overseas and Chinese technologies have been frequently involved in Section 337 investigations. Up to July 2010, the total number of Section 337 cases initiated in the U.S. against Chinese enterprises amounted to 102 (49 between 1986 and 2006; 53 between 2006 and 2010, among which 5 in July 2010), which accounted for 55.6% of the total of the U.S. during the same period.
Excluding cases pending decision, up to now, Chinese enterprises prevailed in only 9 cases in the stage of Section 337 investigations and as to the remaining cases, they appealed the ITC’s decisions but failed to win.
Section 337 investigations involve complex procedures and costly litigation fees. As a result, many Chinese enterprises are forced to give up litigation and thus cannot enter the U.S. market. Zhang Ping, executive vice dean of the Intellectual Property School of Peking University, said, “As an administrative action, a Section 337 investigation is a speedy investigation mechanism and most often no compensation is available. As a consequence, many small and medium-sized businesses have no alternative but to run away if they are being sued because they lack the financial strength to pay the high expenses.” Xia Xiang, vice investigative specialist of the Ministry of Commerce of the PRC Bureau of Fair Trade for Imports, said, “Some multinationals that own intellectual property rights in the U.S. use Section 337 investigations as a means to restrain competition, monopolize market, and curb the upgrading of Chinese industry and the importation of products. By making use of their advantages in intellectual property rights and the global intellectual property to develop and deploy their strategies, they blocked many Chinese industry chains at the low end of the value chain.”
Professor Zhang Ping is of the view that these American enterprises are in fact using their intellectual property as a means to protect trade, which, in effect, has barred Chinese enterprises from entering the U.S. market. If they failed in the district courts, they would file a Section 337 complaint with the ITC. They will resort to various means to hinder normal trade. Lawsuits are just a superficial phenomenon. The ultimate goal is the struggle for the market. Section 337 is on the surface a very fair system. Any enterprises can make use of this system to protect its market in the U.S. as long as they are founded and registered in the U.S., irrespective of their nationality. However, when used repeatedly, it became a tool for American companies to protect their own interests. This problem cannot be dealt with by any enterprise alone because the problems that exist are with the system itself. We should seek a systemic solution. The U.S. should also provide a free trade market for fair competition and should not let Section 337 investigations become a trade barrier for Chinese enterprises to enter the U.S. market. Mr. Chen Wusheng expressed for given the present situation, it is urgent that the Chinese government to establish mechanisms and develop countermeasures against restrictions, oppose international trade protectionism, restrain foreign companies from maliciously suing Chinese enterprises and protect our national industry by using the intellectual property umbrella legally.
Steven E. Adkins, an attorney with Jones Day, suggested that before the importation of their products into the U.S., Chinese enterprises should make full preparations for potential Section 337 investigations. For example, consult competent and professional lawyers about whether their products have the risk of infringing others’ intellectual property rights; locate and retain competent ITC trial lawyers; make efforts to keep company records, including complete records of business dealings as well as records of design, project and R&D because these documents are helpful in proving non-infringement of Section 337 on the part of Chinese companies; be active in acquiring U.S. intellectual property rights, etc.
(Translated by Zhang Meichang)
