The legitimate source defence and why it is good news for defendants in patent infringement disputes

During patent infringement litigation in China, sellers often use the legitimate source defence to alleviate their liability for damages. Despite the principles set out in the relevant judicial interpretation, courts exercising judicial discretion in assessing this defence have yet to form stable jurisprudence. The Intellectual Property Court of the Supreme People’s Court has therefore used Renhengde v Huzhou Aixin & Huzhou MCHC Hospital to clarify the criteria of the legitimate source defence.

Article 77 of the 2020 Patent Law defines the defence as such:

Where any person, for the purpose of production and operation, uses, offers to sell, or sells a patent infringing product without knowing that the product is produced and sold without permission of the patentee, he shall not be liable to compensate the damages of the patentee provided that the legitimate source of the product can be proved.Article 25 of the Interpretation of the Supreme People's Court on Several Issues Concerning the Application of Law in the Trial of Disputes over Infringement of Patent Rights(II) provides that:

Where a party, for the purpose of production and operation, uses, offers to sell or sell a patent infringing product without knowing that the product is made and sold without the permission of the patentee, and provides evidence showing the legitimate source of the product, the court shall support the claim of the patentee that the above using, offering to sell and selling shall be stopped, except for the user of the infringing product who can prove that it has paid a reasonable price for the product.

For the purpose of Paragraph 1 of this article, "without knowing" refers to circumstances where a party has no actual knowledge and should not have knowledge.

"Legitimate source" here means that the alleged infringing product is acquired through regular business methods such as lawful sales channels or usual sale and purchase contracts. Any party who engages in using, offering to sell or selling such product shall proffer relevant evidence that is consistent with trading habits to prove said legitimate source.

Renhengde v Huzhou Aixin & Huzhou MCHC Hospital

Beijing Renhengde Pharmaceutical Co (Renhengde) is the owner and licensor of an invention patent called “correction of ear deformities” (No 200990108740.X). Huzhou Aixin Mother & Baby Health Care Service Co and Huzhou Maternity and Child Health Care Hospital sold – and offered to sell – an ear-correcting device. Renhengde alleged that the device infringed its patent and sued both defendants.

The Hangzhou Intermediate Court of the Zhejiang Province affirmed that the defendants had indeed infringed the patent, based on the finding that the alleged infringing product incorporated all the technical features of claims 1, 2, 4, 6, 7, 8 and 12 of Renhengde’s patent. While the court found that both defendants were engaged in the sale of the infringing products, it held that if the products were proven to have been obtained from a legitimate source and the defendants had exercised reasonable care, they should be exempt from damages liability.

Renhengde appealed to the Supreme People’s Court, which upheld the trial court’s verdict. The court clarified that the legitimate source defence is admissible when two conditions are met:

• the infringing product has a legitimate source; and
• the seller has not committed any subjective fault.

With regard to the first condition, the ‘legitimate source’ of the infringing product is three-pronged:

• the seller must procure the infringing product from a legitimate sales channel;
• the seller must procure the infringing product at normal market price and in normal transaction mode; and
• there is sufficient evidence to corroborate the above.

With regard to the second condition, the Supreme People’s Court underlined the significance of allocation of the burden of proof and the balance of enforcing patent rights and maintaining market transaction order. The court opined that in general, if the seller can prove that it follows the legitimate and normal market transaction rules and obtains the products from legal channels and at reasonable prices, then it has fulfilled its duty of reasonable care as a good faith operator and can be presumed to be subjectively free of fault, unless the patentee can prove otherwise. If the patentee fails to provide contrary evidence to that presumption, the seller's legitimate source defence is established.

While in this case the plaintiff had sent a cease and desist letter before initiating the civil suit, the court ruled that the letter, which only serves as prima facie evidence in ascertaining the subjective fault of the seller, is insufficient to establish the seller’s subjective fault immediately. Due to the technical nature of the patent and since the alleged infringing product had secured administrative approval of medical apparatus and instruments, the sellers paid reasonable care by conducting a formality review of the product. The Patent Law does not impose an excessive duty of care on the seller. If the patentee sends a cease and desist letter to the accused, courts still need to consider the facts of the case when determining whether the seller is at fault, rather than jump to conclusions purely based on one fact.