Strategy for settlement negotiation in IP infringement cases

After discovery of infringement, intellectual property (IP) right holders filing administrative complaint, civil litigation, or taking other right-defending measures usually intend to ask the infringing party to cease infringement and compensate for their losses. Apart from pursuing the case through regular legal proceedings, right holders also have another option: Negotiate with the infringing party for a settlement.

Why settlement?

Many right holders have never been interested in negotiating with the infringing party for a settlement, especially in cases where the infringement facts and evidence are very sound and clear. This is because to negotiate for a settlement means that the party gives up winning a potential favourable judgment or administrative penalty decision against the other party.

Besides, many right holders are reluctant to descend from the superior and strong position of the plaintiff or complainant to an equally situated position in settlement negotiation. Since courts usually make mediation efforts in civil trial, some right holders only show the willingness to settle in order to muddle through the court procedures in many cases, instead of actually solving the dispute.

However, with respect to the judicial practice, settlement negotiation, if used properly, may not only solve the dispute effectively, but also even achieve the goal that could not be realized through administrative complaint or litigation. Based on the authors’ experience, right holders should give settlement negotiation more consideration under the following circumstances:

1. Right holders hope to solve the dispute as soon as possible. Many courts have a large backlog of IP cases, and the progress of cases is slow. Where the right holder is a foreign party, the trial time limit for such foreign-related litigation cannot be determined, and the time for closing the case is even more difficult to predict. From a commercial perspective, the prolonged delay of the case can be very detrimental to the right holder. In order to close the case as soon as possible, settlement negotiation is an option worth considering.
2. Right holders hope to obtain other interests other than cessation of infringement and compensation for losses. Taking trademark infringement and unfair competition cases as an example, many infringing parties may also pre-emptively register trademarks in other classes. Following the regular procedure, in order to fight against such pre-emptive registration acts it is necessary to separately file trademark opposition, cinvalidation, and cancellation, etc., against the pre-emptively registered trademarks. However, such actions against pre-emptive registration of trademarks are sometimes very hard to pursue. For instance, if the pre-emptively registered trademark has been registered for more than five years, it is difficult to invalidate the trademark. Also, if the similarity between the pre-emptively registered trademark and that of the right holder is not obvious, the chances of success are not great. In such a case, requiring the infringing party to give up or transfer the pre-emptively registered trademark in the settlement agreement becomes an attractive “shortcut” that may save time and resources.
3. Right holders expect to achieve greater commercial interest through negotiation. In practice, some infringing parties’ malice is not obvious and may have extensive sales channels across the country. From a commercial perspective, an infringing party’s sales channels may meet the right holder’s need to expand the market. In such circumstance, settlement negotiation could also turn the infringing party into an agent, directly supporting the business operation of the right holder.

However, if a right holder only hopes to obtain a favourable judgment in order to deter potential infringers in the market, settlement negotiation is not a suggested choice.

How to negotiate

To negotiate over infringement disputes does not mean to abandon legal proceedings entirely. In most cases, the strategy of “suing while negotiating” works better. Legal proceedings can help right holders to maintain a stronger position. If negotiation fails, right holders can also hold the infringing party accountable through the relief of legal proceedings, which is exactly what the infringing party wants to avoid.

Apart from litigation, right holders could also consider clamping down on the infringing party by other means in order to facilitate the settlement. For example, if an infringing party sells infringing products on its Taobao shop, right holders could file complaints on the Alibaba platform. If the APP or game operated by an infringing party contains infringing information, right holders could file complaints on the relevant APP stores to remove the infringing items. The greater the pressure imposed, the more likely the settlement negotiation will achieve a desirable effect.

Settlement agreement

When both parties have agreed on a main settlement scheme, it is time to draft the settlement agreement. Right holders shall strive to get the initiative to draft the first settlement agreement, and the following items should be paid attention to when arranging the drafting and signing of the settlement agreement:

1. Agree on severe liability for breach of contact. Severe liability for breach of contract could bring enough pressure on the infringing party to make them fulfil the obligation under the agreement. Settlement agreements on intellectual property disputes are different from normal commercial settlement agreements. If the liability for breach of contract has enough deterrence, infringing parties in most cases will perform the settlement agreement seriously.
2. Prepare all the relevant documents in advance, as early as possible. If the settlement agreement involves procedures such as transfer of trademark, cancellation of trademark, etc., it is necessary to prepare the relevant formalities documents as early as possible, and urge the infringing party to sign such documents when signing the agreement, to avoid the infringing party from pulling back after signing the settlement agreement.
3. If an infringing party is a legal person, right holders should, to as great an extent as as possible, require the legal representative to sign the settlement agreement or provide guarantee to facilitate performing the settlement agreement.
4. Keep in close touch with the case-handling authority in case a judgment or penalty decision is made before a settlement agreement is signed by the parties. Otherwise, the signing of the settlement agreement will be hindered. Meanwhile, right holders, with the aid of the case-handling authority, could resort to squeeze play against the opposite party, when necessary, to facilitate the settlement negotiation.

In conclusion, if settlement is properly advanced with a well-designed strategy based on the actual conditions, right holders will achieve a desirable effect in most cases, and even obtain commercial interests that cannot be achieved through legal proceedings.

This article was originally published in China Business Law Journal.