Where an alleged infringer can provide evidence proving that the infringing product was obtained through a lease agreement with an unexpired term, that reasonable rent has been paid, and that the infringer neither knew nor should have known the product was infringing, the People's Court may uphold the legitimate source defense.
Weifang Company A filed a lawsuit, claiming that it had filed a utility model patent application titled "Direct-Cooling Spiral Pre-Chiller Temperature Reduction Device" (hereinafter referred to as “the patent”) with the CNIPA on December 16, 2020, which was granted on July 16, 2021, and had been utilized in the manufacturing and sale of products. The patent was still within its protection term and remained legally valid. Shandong Company B and Shandong Company C were accused of manufacturing and using pre-chillers that infringed the patent. A comparison confirmed that the accused technical solution fell entirely within the protection scope of the patent claims, establishing infringement. Weifang Company A thus filed the lawsuit, requesting: 1) Shandong Company B to immediately cease manufacturing the infringing products, and Shandong Company C to immediately cease using the infringing products; 2) Both defendants to destroy specialized equipment, molds, and tools used to produce the infringing products; 3) Compensation of RMB 2.8 million from Shandong Company B and RMB 200,000 from Shandong Company C for economic losses and reasonable expenses; and 4) Coverage of attorney fees, preservation costs, and litigation fees by both defendants.
Shandong Company B argued in its defense: The evidence provided by Weifang Company A failed to substantiate infringement. The photographic evidence submitted by Weifang Company A clearly demonstrated that the accused technical solution differed from the patent claims and did not constitute equivalent infringement. The accused product had been manufactured and used before the patent application date, entitling Shandong Company B to prior-use rights and precluding infringement liability. Additionally, the accused product was outsourced to a third party, with Shandong Company B merely supplying materials and paying for customized equipment. Given that the pre-chiller featured a simple structure widely used in the slaughtering industry, even if the accused product shared common technical features with the patented technology, such features were deemed common general knowledge. Shandong Company B neither intentionally nor negligently committed infringement. Weifang Company A's claimed damages lack legal and factual basis.
Shandong Company C contended that it had leased the factory and equipment from Shandong Company B since February 2022, establishing a legitimate source for the accused product’s use, and thus should be exempt from liability.
After trial, the court found the following facts: Weifang Company A was the patentee. Upon its application, the first-instance court executed evidence preservation on May 24, 2022, at the leased premises of Shandong Company C, with Company C’s staff present and signing the record. During the first-instance trial, Shandong Company B acknowledged that the alleged infringing product captured in the evidence preservation video was manufactured by itself and subsequently leased to Shandong Company C. Shandong Company C likewise confirmed that the product shown in the preserved video was under its leased use. On February 1, 2022, Shandong Company B and Shandong Company C executed an Asset and Land Lease Contract, whereby Shandong Company B agreed to lease its existing assets - including land, equipment, workshops, factory buildings, dormitories, water/electricity supply systems, telecommunications facilities, and wastewater treatment infrastructure - to Shandong Company C. Shandong Company C was granted usage rights and modification rights over all leased assets (provided that any alterations required prior consultation and approval from Shandong Company B). The lease term spanned five years, from February 1, 2022, to January 31, 2027. Shandong Company C had paid Shandong Company B the first annual rent of RMB 4 million.
The first-instance court rendered its ruling on September 30, 2022, ordering as follows: 1) Shandong Company B shall immediately cease manufacturing products that infringe Weifang Company A's utility model patent upon the ruling taking effect. Second, Shandong Company B shall compensate Weifang Company A for economic losses and reasonable expenses totaling RMB 150,000 within ten days of the ruling's effective date. Third, Shandong Company C shall pay Weifang Company A reasonable expenses of RMB 10,000 within ten days of the ruling's effective date. Fourth, all other claims by Weifang Company A were dismissed. Dissatisfied with the ruling, Shandong Company B filed an appeal. The Supreme People's Court issued its final judgment on June 13, 2023, rejecting the appeal and affirming the original ruling.
The court's legally effective judgment held that, pursuant to Article 77 of the Patent Law and Article 25 of the Judicial Interpretation on Patent Infringement Disputes (II), “Where a party, for production and business purposes, uses, offers for sale or sells a patent-infringing product without knowing that such product is produced and sold without authorization of the patentee, and the legitimate source of the product can be proved by evidence, the courts shall uphold the right holder’s claim of ordering the party to stop aforesaid using, offering for sale or selling the patent-infringing product, unless the user of the accused infringing product proves by evidence that the reasonable consideration for such product has been paid…’Without knowing’ means neither actually know nor should know. ’Legitimate source’…means the product is obtained through a normal commercial manner such as legitimate sales channel and an ordinary sales contract. Regarding the legitimate source, the person who uses, offers for sale or sells the product shall adduce relevant evidence proving that his or its act complies with the trading customs.” Shandong Company C submitted evidence demonstrating that it had leased the allegedly infringing product for use and paid reasonable rent. At the time the first-instance judgment was rendered, the lease term had not yet expired, and Shandong Company C had already made partial rental payments. On these grounds, the first-instance court determined that Shandong Company C's legitimate source defense was established and accordingly declined to support Weifang Company A's claims demanding that Shandong Company C cease using the product alleged to infringe the patent at issue and destroy the contested product. This determination was properly supported by both factual and legal grounds. Should Weifang Company A consider that Shandong Company C's continued use of the allegedly infringing product beyond the scope of the paid reasonable rent constitutes infringement of its patent, it may initiate separate legal proceedings in accordance with the law.
(2022) Zui Gao Fa Zhi Min Zhong No. 2869
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