INTELLECTUAL PROPERTY LITIGATION IN HONG KONG: Are the Courts up to the Challenge?

The Hong Kong Government has set a goal of transforming Hong Kong into a “world class knowledge based economy.” In 2011, a review of the Hong Kong patent system was commissioned to ensure that its “further evolution would facilitate the development of Hong Kong into a regional innovation and technology hub.” Last year, the advisory committee issued its report. One of the key recommendations was the introduction of a system for locally examining and granting patents to build a local infrastructure of skilled patent attorneys. In addition, the Innovation and Technology Commission set up an Innovation and Technology Fund to assist local companies to introduce innovative ideas by subsidising patent applications; establishing a cash rebate scheme; and providing a business incubation programme.

Hong Kong is not alone in seeking to encourage innovation. Singapore has a strong policy of encouraging local innovation and attracting foreign research and development with tax breaks and other incentives. In Mainland China, one of the key industrial policy planks is to move from being the “world’s factory” to developing indigenous technology. Efforts in this direction include, granting tax holidays and lowering tax rates for high-technology enterprises. Many other governments worldwide are also seeking to encourage innovation.

In order to encourage innovation, governments overseas have recognised that their court systems need to be able to handle intellectual property (“IP”) disputes as quickly and as efficiently as possible.

The last 20 years have seen major reforms worldwide in the way that IP cases are handled in all major jurisdictions. Most countries have created specialist courts to hear IP cases. In Japan, patent cases can only be filed in the Tokyo or Osaka District Courts and all appeals go to the Tokyo High Court. In Mainland China, all major cities have created IP tribunals at both first instance and appellate levels. In Germany and the United States, all appeals on patent cases go to a specialist appellate court. Even in Singapore, which is smaller than Hong Kong, IP cases are, since last year, assigned early on to one of four High Court judges with IP experience.

The United Kingdom has perhaps been the most innovative in developing its IP litigation system. All large IP cases are, and have been for many years, assigned to the Patents Court in the Chancery Division which has specialist IP judges. However, the best and dare I say its most innovative development has been the revitalisation of the Patents County Court, which was recently renamed the Intellectual Property Enterprise Court (“IPEC”).

The UK’s IPEC is designed for small- and medium-sized enterprises (“SMEs”) to litigate IP disputes with limited procedural hurdles and substantially reduced costs. It has, since a revitalisation in 2010, been extremely successful. The key features of the IPEC are strong case management by one specialist judge assigned to the case. This includes limitations on discovery, interlocutory applications and cross-examination. Patent and trademark attorneys may appear on behalf of their clients, and companies may be represented by individuals. Perhaps, most importantly, there is a cap on the costs that are recoverable from the other side at GBP50,000 (HK$600,000).

The cap on costs is very important for SMEs. The potential costs to be paid if an action is lost are prohibitive to all but the best-funded litigants. Large companies and other well-funded litigants very often use the threat of large costs orders as a big stick to force small litigants out of the market or into unfavourable settlements. In Hong Kong, exorbitant demands for costs, even on short interlocutory matters, are all too common. In one recent case, a demand for HK$12 million in costs was made for five days in court. No small company can even contemplate litigation when faced with the possibility of such crippling costs orders. Small entrepreneurs will give in and settle even if they think they have a good case rather than be bankrupted if they lose.

With a cap on the costs recoverable from the other side, a party can budget for litigation and know the downside of losing. The other side is not prohibited from spending whatever they consider necessary, they just cannot expect the other side to pay it, nor use their exorbitant costs as a negotiating lever.

This is particularly important for IP litigation which is very different from most other forms of litigation. In the vast majority of cases, the parties have had no prior relationship, they may have never even known of each other’s existence. Very often, each party will have genuinely developed new ideas independently. When they come into conflict, they need an independent tribunal to as quickly and efficiently as possible determine their respective rights so they can move forward with their business. As far back as 1974, a committee reviewing the United Kingdom’s patent system said:

“Industry is concerned with delays which now occur in patent actions and with consequent expense. … The expense of patent actions to industry lies not only in the costs of the action, although these may be considerable, but also in the fact that delay in reaching a final decision may make it necessary to postpone commercial and technical decisions. An expensive project may have to be discontinued or a valuable opportunity missed.”

Further, the threat of bankrupting costs orders stifles innovation. One of the greatest sources of innovative ideas are small companies. They need to be able to develop new ideas, but if challenged, have legal disputes resolved economically. If they cannot, they will either move elsewhere or give up on an idea that could bring great benefits to Hong Kong as a whole.

So, what is the state of IP litigation in Hong Kong?

The committee reporting on the reform of the patent system did not consider the litigation system in detail. Instead (at para 3.31(a)), the committee said there is strong IP protection in Hong Kong with a “well-established legal system in Hong Kong for enforcing patent rights”. They added that “Hong Kong also provides first-class dispute resolution services that meet the needs of different stakeholders”. There were no other proposals or comments.

Unfortunately, I beg to differ. On a worldwide comparison, Hong Kong’s system for protecting IP rights is far behind other jurisdictions and does not meet the needs of different stakeholders. The table below shows, based on my experience, that Hong Kong stands well below other jurisdictions in handling IP cases (including Mainland China).

Unlike most other jurisdictions, in Hong Kong, there is no specialist court, no specialist list and no specialist judge to handle IP cases. Despite it now being 17 years since the handover, when a local Patents Ordinance took effect, new rules of court for patent cases have not even been enacted – the rules still refer to the old colonial Registration of Patents Ordinance.

The fact that there is no specialist list or court means that actions have to be filed in general list. This can be very slow. Interlocutory applications are listed before different judges or masters, meaning there is also no continuity.

The result of all of this is that there can be substantial delays and costs incurred well before a case gets to trial. Ordinary interlocutory hearings can take an inordinate amount of time. If a defendant raises a jurisdictional challenge, it can take more than a year to have the question determined – in most other jurisdictions the case would be coming on for trial in that time. In one case I am aware of, a decision on a jurisdictional challenge has still not been handed down 18 months after the hearing.

Hearings and trials before non-specialist judges can often take double the length of time compared to hearings in the UK.

Even where a “speedy trial” is ordered, the cases can come on for hearing slower than they would in the ordinary course in the UK and Singapore. In the past two years, there have been two speedy trial orders for IP cases. One was a patent case that was tried 12 months after the order for a speedy trial; the other was a trademark case, tried 16 months after the order was made. In Singapore and the UK, most IP cases are tried within this time.

Conclusion

Hong Kong has fallen behind other jurisdictions in the handling of IP cases. The late Sir Hugh Laddie, one of the leading IP silks in England, said on his resignation as a judge that he felt that rather than having him decide cases outside his specialty: “It would have been better to use a roulette wheel”. While he was perhaps exaggerating, the same applies in reverse. IP cases do raise a number of technical issues where consistency of application of the law is very important. Having different judges without any specialist background deciding cases is very much like betting on a roulette wheel. There is no certainty as to how cases will be decided and certainly no consistency. This uncertainty and lack of consistency can stifle innovation.

It would be possible to address some of these issues very quickly. Just as is already the case for admiralty, construction and commercial cases, the judiciary could very easily create an IP list with one or two designated judges to hear cases. This would not require enacting any new legislation. While the best option would be for a judge with IP experience to be appointed to the list, even if the judge assigned to the list was not a specialist judge, the judge would acquire experience if they heard IP cases regularly.

Similarly, Practice Directions could be prepared for IP cases to deal with the gaps in the Rules of Court and to provide for better handling of cases.

In the longer term, the Rules of Court should be amended to, first, update the rules for patent cases and, preferably, provide for simplified procedures for smaller intellectual property cases along the lines of the UK’s IPEC.

It has been suggested that there are not enough cases to justify an IP list with a full-time judge. This is really a chicken or egg question. The current costs of and delays in bringing IP cases are prohibitive. The uncertainty caused by not having a specialised tribunal also discourages litigation. From my own personal experience, I can say many clients have wished to resolve IP disputes in Hong Kong, but when advised of the potential costs, delays and uncertainties have elected not to take action or, if being threatened with a case, to agree to an unfavourable settlement simply to avoid the risks. If there was a specialised court with reduced costs, it is very like that many more cases would be brought before the court. Unlike other forms of litigation, this would be a good thing. A healthy innovative economy will generate IP disputes that need resolution.

Table Comparing IP Litigation in Hong Kong with International Jurisdictions

 

Jurisdiction

Specialist IP Courts

Speed

Economy

Transparency

Total

Comments

 

UK – IPEC

8

10

10

10

38

No specialist appellate court but usually at least one experienced IP judge sits on appeal.

 

Germany

9

10

8

10

37

No specialist first instance court, but many courts have strong IP experience.

Japan

10

7

8

10

35

Cases can proceed relatively slowly.

UK – Patents Court

8

8

5

10

31

Costs in the patents court can be very high.

 

Singapore

3

10

5

10

28

No specialist court but cases now assigned early to judges with IP experience. Very good case management.

 

Mainland China

10

5

5

3

23

Specialist courts at first instance and appeal. Political influence and corruption remains a big problem for transparency.

 

USA

7

5

3

8

23

Specialist appellate court for patent and trademark cases. Trials are before juries (reducing transparency) and very expensive.

 

Hong Kong

0

5

5

10

20

No specialist judges or courts; slow procedures; very costly.

Speed: Average time taken for cases to be heard. Approximately 1 year = 10.
Economy: Relative costs of bringing or defending action, including liability in costs to the other side. 10 = Relatively inexpensive.
Transparency: Potential for tribunal to be influenced by outside pressure or corruption or lack of clarity for reasons for decision.

By Douglas Clark, Barrister