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Kissei Pharmaceutical Co., Ltd. v. Shiratori Pharmaceutical Co., Ltd. and others


Tokyo High Court / Decided Oct. 31, 2002 / Case No. Hei 12(ne)2645 (Appeal to the Supreme Court was denied on June 27, 2003)
(Patent Law, Section 104; Civil Procedure Law, Section 157)

SUMMARY
1. New arguments and evidence was submitted to replace the arguments and evidence on which the lower court had based its ruling. However, the filing of the replacement arguments and evidence was prohibitively late. Such delay, having retarded the progress of the hearing, constituted gross negligence on the part of the appellees. The lower court's ruling to reject the claims by the Plaintiff was vacated
2. The appellees were ordered to pay damages in the total amount of approx. 1.57 billion yen plus interest.

FACT

Kissei owns a patent relating to a method for manufacturing an anti-alergic agent. The patent was granted on May 14, 1982 and expired on January 18, 1993. One of the patent's target substances was a compound generally known as a "TRANILAST".

Shiratori manufactured the TRANILAST and sold it to pharmaceutical companies who then prepared formulations comprising the TRANILAST for sale. In 1990, the Plaintiff sued Shiratori and 6 companies (purchasers) claiming for injunction of the manufacture of the TRANILAST. The injunction claim was later changed to the damages claim under Section 104 of the Patent Law. Two other companies were added as the second group of Defendants in 1997.

Shiratori alleged that its TRANILAST products were manufactured subject to Shiratori's own manufacturing processes and that its processes were not read on the patent. Shiratori stated its belief that under the purchase agreements, it provided to the Defendants a guarantee that its TRANILAST products were manufactured in accordance with a patent to Sankei, one of the Defendants and that they were indemnified from any liability of infringement under a patent of a third party. The other Defendants relied their defense upon Shiratori's attorney. This reliance continued for about 8 years until Shiratori replaced its attorney in 1998.

Initially, Shiratori produced only a limited scope of documents. Despite repeated requests by the Plaintiff and the court during the trial, Shiratori produced only a limited amount of documents. Shiratori was slow and reluctant in producing relevant documents which caused the tremendous delay of proceedings. With critical arguments by the Plaintiff, Shiratori changed argumentations many times. Nevertheless, the lower court eventually ruled that 1) Shiratori's sale of the TRANILAST to the Defendants was established, thereby to witness the consequential use by them; 2) Shiratori relied the manufacture of the TRANILAST on the Sankei's patented process as inferred from the fact that there were no inconformity in produced evidence; and 3) Shiratori's manufacturing process was not read upon the Plaintiff's patent claim because of difference in starting materials.

In the ruling, the court noted that the delay in document production was unfair. The court also noted that while such unfair delay could be penalized under the existing Civil Procedure Law, it is free from penalty under the former Civil Procedure Law. The court acknowledged, therefore, that such unfairness was not a prevailing factor that would allow the court to render the entire case in favor of Kissei. The court ruled because 1) the former Law allow submission of evidence "any" time; and 2) the court accepted the delayed submission without taking appropriate measure against it.

Kissei appealed. In its third appeal brief, however, Shiratori cancelled its arguments relating to non-infringement of the manufacturing processes of the TRANILAST on which the defense of the other Defendants relied upon in the lower court trial, and filed new arguments to establish different manufacturing processes with different reactive conditions.

HOLDING

On appeal, the Tokyo High Court found that the replacement of arguments and evidence was negligence as it constituted an intentionally delayed defense under the new Civil Procedure Law. The Court overturned the lower court's decision of dismissing the Plaintiff's damages claim and found that the Defendants failed in overcoming the statutory presumption of infringement. The Court concluded that the Plaintiff's claim for damages was legitimate. For this judgment, the Court reasoned as follows.

1. Late Filing

During the High Court proceeding, it was turned out that parts of the manufacturing records as produced by Shiratori in the lower court trial were falsely altered. Shiratori admitted that the alteration was carried out under the instructions of its former attorney. The instructing attorney concerned that the records potentially indicated infringement of another Kisseies patent and also violation of the Drug Affairs Law because the manufacture of the TRANILAST started prior to the drug license.

During the pendency of the case before the district court, Shiratori replaced its attorney in 1998 However, Shiratori did not inform the new attorney of the alteration made with respect to some of the manufacturing records. It was not until the High Court proceeding that the new attorney first realized the vulnerability of his evidence when the Plaintiff attacked the incredibility of a copy of some manufacturing records. After close examination of the records, the new attorney decided to cancel the arguments made up to that point, and substituted the arguments and evidence in its second appeal brief. The present Civil Procedure Law penalizes the delayed filing of attack or defense for trial. When the courts find that the completion of the case has been delayed due to unreasonably late filing of defense and that such delay was caused by the party's gross negligence, the courts have the authority to reject such defense (Section 157). With regard to the timing of filing attack or defense, the present Civil Procedure Law applies the strict standard of "appropriate time" while the former Law applied a somewhat tolerant standard of "any time." The Court stated:

For Shiratori, the disclosure of manufacturing processes and the submission of its manufacturing records was quite easy to deal with because they were in its plant. Since the provision of Section 104 of the Patent Law [presumption of infringement] was applied to this case, Shiratori should have established its manufacturing processes of the TRANILAST being out of the patent scope and defended itself in the early state of the trial. In actuality, Shiratori cancelled its arguments on its manufacturing processes which had been alleged for 11 years from the filing of the complaint. Arguments for new manufacturing processes and the submission of second manufacturing records as support evidence were delayed significantly. Such delay was quite apparent in this case.

2. Civil Procedure Law

One of the statutory requirements under Section 157 of the present Civil Procedure Law is the presence of "intentional or gross negligence". The Court stated that the requirement was met when negligence was found in the conduct of the party itself or its attorney. In this regard, the Court stated:
It was Shiratori's attorney who alleged that Shiratori based the production of the TRANILAST on its manufacturing processes, and it was him who produced remanufacturing records as supporting evidence in a very unnatural manner. It was apparent that there was gross negligence on the part of Shiratori's attorney with respect to the late filing.

3. Presumption of Infringement

Under the Patent Law, when a patent is an invention of a process of manufacturing a novel product, any identical product can be presumed to have been manufactured by the patented process. (Section 104). In this case, Shiratori as the Defendant was in a position to defend itself by overcoming the statutory presumption that Shiratori used the patented process. Shiratori was obliged to disclose its own process to establish the difference from the patented process. However, what Shiratori did in this respect for 1991-1992 was to delay the proceedings by producing a limited amount of documents relating to 3 lots out of 55 lots which concerned the TRANILAST products. It was not until 1995, five years from the complaint, that a certain amount of relevant document was produced. These documents should have been produced promptly after the complaint filed in 1990. The Court went on stating:

We can assume two approaches affecting the completion of this case: 1) the Court rejects the filing of new defense; and 2) the Court continues to keep hearing the case. It is apparent that the second approach would require us to hear the new arguments from the beginning, resulting in further delay in completing this case. No further delay is admissible in this case. The lower court included notes in its decision that eDefendants' proceedings were unfair and tremendously against the bona fide principle in the order, timing and manner of document production.

4 Joint Liability of Other Defendants

Among the 8 Defendants, 6 companies purchased TRANILAST products from Shiratori. These companies, as purchasers, were not in the position to know about the manufacturing process of the TRANILAST. However, they had a chance to ascertain this information when they decided to enter into their purchase agreements with Shiratori and again when they were listed as Defendants in the complaint. Nevertheless, they blindly relied on Shiratori and its attorney for their defense, without making active efforts to defend themselves. As such, they were liable for gross negligence. Their negligence was witnessed by that fact that they agreed to the representation by Shiratori's former attorney at least for a substantial period of time for trial. The attorney's conduct for this period caused gross negligence, for which the retaining parties were jointly liable.

COMMENTS

This case is unusual in two aspects. First, delaying tactics were adopted by Shiratori's attorney and also, some evidence was fraudulently manipulated. Second, it took an unusually long time, more than a decade for the first ruling. A main reason for the delay, as the courts noted, was caused by the Defendants' delaying tactics. Under the new Civil Procedure Law, however, this type of bad acts should be put to rest.

Yet, this case portrays a kind of systemic failure in the handling of a patent infringement case. First, in this writer's opinion, the district court judges should have been more demanding and exhibit initiatives in case management. It is reported that a panel of trial judges was changed during the proceedings. In its decision, the new panel clearly stated that once submitted arguments and evidence were accepted by the (old) panel, the new panel cannot change the track in the same case. Nevertheless, questions remain unanswered that why Shiratori, despite repeated reminders for document production, could have been successful in the end.

Defendants also exposed their naivety in handling patent litigation. Such naivety was witnessed by the fact that they blindly relied their representation for trial on Shiratori's (former) attorney at least for the initial period of ten years. Several factors might have led them to rely on Shiratori's attorney. First, as they terminated the purchase of the TRANILAST relatively in the earlier stage, they might have anticipated that their litigation risk was minimum. Parts of the reason for their optimism might be the indemnification clause under the purchase agreement with Shiratori.

The Civil Procedure Law is now overhauled. The courts now attempt to accelerate proceedings of patent cases in a much shorter time, hopefully within 2 years. This case will be remembered as a bad example of case management for both for infringers and their attorneys.

(By Jinzo Fujino, Published in the AIPPI Journal, July 2003, pp 288-292)

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