Considering settlement in intellectual property strategy

Given the exclusivity of intellectual property, conflicts inevitably occur in confirming and safeguarding intellectual property rights. In most cases, these rights are confirmed and protected pursuant to established intellectual property strategy. But in some cases alternatives to conflict, such as settlement, should be considered.

Settlement difficulties

Due to high litigation costs and damages in countries with a more developed IP regime, many cases end with a settlement agreement reached before the court issues a final judgment.

Settlement, of course, is also an available solution in China. In reality, however, just a small portion of clients chose to resolve disputes through settlement. In many cases, infringers decide to exhaust the judicial processes just to delay the final court order and enforcement, despite precedents of judgment against them. Such situations can be attributable to the following factors:

1. Litigation costs are relatively low. 

Compared to litigation costs in some developed countries that usually amount to hundreds of thousands or millions of US dollars, the litigation cost of intellectual property infringement cases in China is fairly affordable. Accordingly, the Supreme People's Court statistics indicate intellectual property cases rising in recent years.

In addition to enhanced awareness of IP protection, relatively low litigation costs are also one of the possible reasons for that upward trend. The relatively affordable and short litigation process reduces concern about litigation costs.

2. Awarded damages not generally high.

As mentioned in the article titled Factors Affecting the Amount of Damages Awarded in Intellectual Property Infringement Cases (China Business Law Journal volume 14, issue 2), while substantial damages have been awarded in a few notable cases, the general trend does not show a significant increase in damages for ordinary IP infringement cases. In addition, most cases have shown limited support for the rights holder's investigation, notarisation and attorney fees.

For the rights holder, a low compensation amount can hardly cover the actual loss caused not only by the infringement, but also paying to defend it.

3. Insufficient punishment for malicious delay.

In IP infringement cases, some infringers raise objections to jurisdiction without any convincing reason, or even refuse to accept court documents to delay litigation in bad faith.

Although the litigation process in China is relatively efficient, it is still common to see malicious delays in litigation, and malicious denial of obviously valid evidence such as notarised evidence.

Yet there are no universally applicable or effective penalties for such acts. Given the low damages awarded in general, situations arise in judicial practice when the infringer maliciously uses the judicial process to delay the litigation, evade liability and even profit from continued infringement.

Although elevated litigation costs, complex procedures and protracted trials have some negative effects, surely disputing parties would assess their advantages and disadvantages in litigation more reasonably and objectively if litigation costs were adjusted, damages increased and malicious acts in the judicial process punished.

They would proceed with litigation more prudently, increase the likelihood of efficient dispute resolution by settlement and save judicial resources.

Applying settlement in IP strategy

Rights holders need to understand how to use settlement to serve their overall intellectual property strategy. Although settlement is not currently the main approach to IP litigation, it should be considered as a possible solution at different stages of litigation. After all, the most likely way to lead to passivity once a dispute arises is to push the case on emotion, regardless of the case's merits.

1. Merits of case.

Settlement is not suitable for all cases - for example, not where it is necessary to win the lawsuit to deter other potential infringers in the market.

However, in relatively complex scenarios, such as when it is difficult to predict the outcome based on the rights basis or evidence, or difficult to achieve a strategic victory through a single case, continued litigation may be very costly. In such circumstances, settlement is a better option.

2. Other party’s situation.

Whether as plaintiff or defendant, it is necessary to understand the capacity of the other party and purpose of the litigation. If the other party stands firm to seek a court order through litigation, it is difficult to reach a settlement.

It is also necessary to consider the credibility of the counterparty and understand its litigation pattern based on precedents, so as to assess the possibility of settlement. A good understanding of the other party is conducive to reaching a settlement.

3. Overall strategy.

Whether settling an individual case or pursuing comprehensive settlement, the objective remains advancement of overall strategy. In some IP infringement cases, the two sides eventually even enter into a partnership through settlement.

But there are also cases in which overall strategy has been to persevere in litigation for years to achieve its goal. Therefore, the likelihood of settlement should be assessed based on the overall IP strategy.

Key takeaway

Whether settlement is an appropriate choice or not should be determined according to trends of judicial practice in terms of amount of damages, bad faith and other considerations, case merits, the situation of the other party, and overall IP strategy.

When the time is right, settlement may be the preferred option to save time, manpower and resources.

*The original article was published in China Business Law Journal,20 June 2023.