Responding to Foreign Competitive Legal Tactics

Tips for PRC Companies Facing “337 Investigations”

——George Wang

As global trade and competition continues to increase and more and more Chinese companies go abroad, many have experienced competitive resistance from companies in other countries that they enter into.Some of the legal measures that have been used as roadblocks have included anti-dumping claims, anti-subsidy claims, and in the U.S., the “337 clause”, which is a section of U.S. Customs law that is designed to protect U.S. domestic industries. Many Chinese companies have faced these obstacles and due to their unfamiliarity with the legal system, they have encountered difficulty in responding.

The “337 Clause”

The initiation of the “337 Clause” first took place in 1930 for the purpose of protecting domestic U.S. industry.The article divides its focus into two categories: 1) analyzing whether direct imports directly compete and undercut the products of an existing U.S. business or industry (and also whether a certain level of damage is reached); and 2) intellectual property, analyzing whether an infringement of a company’s copyright, trademark, patent right, etc. has been violated. This category does not examine whether an industry has been damaged, just particular companies’ IP ownership.

Most applications of the “337 Clause” nowadays center on the second category, intellectual property infringement. Some PRC companies fall victim to the transgressions of others, and wind up having such roadblocks put up before them simply because they are a Chinese company, whether or not there is actually an issue of infringement. In any case, there are steps that PRC companies should take that will help with avoiding these hurdles.

How to Handle:

1、Active Response

Given the sometimes high legal costs and cumbersome procedures, Chinese enterprises often take an evasive attitude in the face of 337-investigations and do not reply or appear in court.That makes it very easy for the International Trade Commission (ITC) to make a default judgment, in which the accused Chinese enterprise is judged to be guilty of the infringement, simply because they did not respond.The result is that it is even more difficult to overturn that ruling, the PRC company is unable to enter the U.S. market, and they subsequently suffer great losses because a market is closed to them. .

In order to proactively combat such charges, PRC companies should not only make a point of responding, but should also seek to join forces with other Chinese companies facing the same charges.This “strength in numbers” approach not only has economic benefits (sharing the costs of legal representation), it also allows for integration of resources and speaking with the same voice.Having consistent responses from PRC companies facing the same problem is helpful in that allows the ITC to accurately understand the facts at hand.For example, a 337-investigation regarding patent rights on Zero-Mercury-Added Alkaline Batteries was instituted in the U.S. by America Energizer Holdings, Inc. and the America Union Carbide Corporation.Chinese battery enterprises combined to respond to the action, and each of them not only saved costs, but also won the action.

2、Engage Professional Attorneys

Chinese enterprises should engage professional legal representatives who have experience with 337-investigations.The process can be quite burdensome and not an area of expertise for the Chinese company that is trying to comply.Most 337-investigations are aimed at intellectual property infringement, and when faced such an investigation, the Chinese company needs to clarify whether the plaintiff’s intellectual property is being used in their product.The Chinese company also needs to confirm whether such applicant owns such the intellectual property and whether such intellectual property is still valid. In order to resolve the above problems, Experienced counsel is invaluable in attending the action, completing documentation, presenting evidence, drafting statements of defense, etc.

In engaging experienced legal representation, the Chinese corporation should seek to employ a team of attorneys in both China and the U.S. The reason is to make the most efficient use of the strong points of each.The time requirements in such proceedings are scheduled and there is not much room for delay or error.With the two legal teams working together, evidence can be gathered and assimilated on the China side, and statements of defense and evidence can be handled by the U.S. legal team.Also, during the course of the investigation, a lawyer for the Office of Unfair Import Investigation will participate as an independent overseer, and his or her opinion will be influential in the ruling of the administrative law judge. Accordingly, although the American attorneys who are familiar with the lawyers of the Office of Unfair Import Investigation will not be able to affect the independent judgment of such lawyer, there will be a level of professional trust in working together.By way of example, Duan & Duan’s cooperative law firm in the U.S. is familiar with the lawyers of the Office of Unfair Import Investigation.This creates a better work relationship for the party against whom the application is filed in such cases, and does much to instill confidence in the independent investigative lawyer that the matter is being handled correctly and professionally.

3、Establish Long-term Intellectual Property Strategies

The best way for Chinese enterprises to avoid being brought into 337-investigations is to establish and complete their own global intellectual property strategy.If the Chinese company owns the intellectual property, protective foreign interests are in a weak position in attempting to obstruct market entry by claiming an IP violation.Chinese enterprises should develop and own independent intellectual property, and they should not only do so in China, should register, protect and own it in the U.S. and globally so that competitors have no reason to institute an investigation. Secondly, foreign-trade enterprises who import their products OEM, should demand the entrusting party to provide documentary evidence regarding intellectual property rights and /or ownership, and stipulate expressly in the contract that the entrusting party shall undertake all liabilities, claims, and penalties suffered by Chinese enterprises arising from intellectual property infringement. Thirdly, Chinese enterprises can and should proactively retain attorneys to make necessary checks on the status and ownership of intellectual property when they carry on import business.This proactive measure can prevent accidental infringement on others’ intellectual property rights. If possible infringement situations are brought to light, they can be quickly rectified before a complicated and costly “337-investigation” gets launched.Lastly, if Chinese enterprises own the patent right in America and satisfy the “domestic industry” standard provided by the “337 Clause”, they, too, can employ the “337 Clause” to institute 337-investigations in America which may be aimed at other country’s products so as to prevent other country’s infringing products entering into the American market, and accordingly maintain their own legal rights and interests.

Chinese enterprises will inevitably meet various problems and resistance in the course of expanding more and more into international markets. However, there are no unconquerable problems if measures for research and response are taken seriously

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