This authentic 2025 typical intellectual property case released by the Supreme People’s Court Intellectual Property Tribunal involves hidden patent infringement through multiple shell companies. The actual controlling enterprise behind the infringement is Xingke Precision Machinery Group (replaced alias for confidentiality), a manufacturer of industrial pipe processing equipment with independent R&D capabilities. To avoid direct patent infringement liability and separate its main business risks, Xingke Precision established three asset-light anonymous shell limited liability companies from 2022 to 2023: Yida Equipment Sales Co., Ltd., Hongsheng Machinery Processing Factory, and Ruichang Industrial Trading Co., Ltd. The registered shareholders and legal representatives of the three shell companies are all distant relatives, temporary office clerks and outsourcing staff of Xingke Precision, who have no capital investment, no technical R&D capacity and no independent business decision-making power. From January 2023 to June 2024, Xingke Precision’s internal technical department copied the complete technical scheme of ZL202110XXXXXX invention patent owned by the plaintiff Lide Machinery Co., Ltd., and produced a large number of infringing pipe processing machines. All production and sales links were externally labeled under the names of the three shell companies: the shell companies signed sales contracts with downstream buyers, issued sales invoices and collected sales payments, while Xingke Precision was fully responsible for product R&D, production, after-sales technical service and all core operation decisions. All sales income generated by infringing products was transferred from the shell companies’ bank accounts to Xingke Precision’s exclusive corporate settlement account within 5 working days after fund entry, and each shell company only retained less than RMB 1,800 monthly trivial administrative expenses to maintain industrial and commercial registration validity. After Lide Machinery filed a patent infringement lawsuit against the three shell companies, the legal representatives of the shell companies claimed that their companies had no connection with product R&D and production, and refused to bear compensation liability, attempting to rely on the independent legal person status of shell companies to shield Xingke Precision’s actual infringement conduct. After the IP court conducted evidence investigation on capital flow, enterprise internal documents and personnel labor relations, the judge pierced the corporate veil and ruled that Xingke Precision, its actual controllers and the three shell companies bear joint and several civil liability for intentional patent infringement. Five core binding legal norms apply to this case:
1. Article 20 of the Company Law of the People’s Republic of China (Veil-Piercing Rule): Where a company’s shareholder abuses the independent legal person status of the company and the shareholder’s limited liability to evade debts and seriously damage the interests of the company’s creditors, the shareholder shall bear joint and several liability for the company’s debts.
2. Article 11 of the Patent Law of the People’s Republic of China: After the patent right for an invention or utility model is granted, without the permission of the patentee, no entity or individual may exploit the patent, that is, manufacture, use, offer to sell, sell or import the patented product, or use the patented process, and use, offer to sell, sell or import the product directly obtained by the patented process.
3. Article 71 of the Patent Law of the People’s Republic of China: Where an infringement of patent right causes losses to the patentee, the amount of compensation shall be determined in accordance with the actual losses suffered by the patentee due to the infringement; if the actual losses are difficult to calculate, the amount shall be determined in accordance with the illegal gains obtained by the infringer due to the infringement. For intentional infringement of patent rights with serious circumstances, the compensation amount may be determined to be one to five times the amount calculated according to the above methods.
4. Article 1168 of the Civil Code of the People’s Republic of China: Where two or more persons jointly commit an infringement and cause damage to others, they shall bear joint and several liability.
5. Judicial Interpretation Standards for Identifying Beneficial Owners of Infringement Shell Companies (Supreme People’s Court IP Tribunal Guiding Standards): Comprehensive evidential chains consisting of capital transfer records, labor contracts of production and sales personnel, internal enterprise technical research and development documents, profit allocation ledgers and business decision-making meeting minutes shall be adopted to confirm the actual controlling beneficial owner behind nominal shell companies, regardless of the identity of registered shareholders or legal representatives.
The intellectual property court obtained complete, mutually corroborating evidential materials through bank account investigation, enterprise document preservation, witness interrogation and production site on-site inspection, fully verifying that the three shell companies were only nominal paper operation carriers completely controlled by Xingke Precision Machinery Group: First, all production equipment, raw material procurement funds and product technical R&D costs for the infringing pipe processing machines were fully remitted from Xingke Precision’s public corporate bank account to the three shell companies’ accounts; the three shell companies themselves had no independent operating capital, no raw material procurement channels and no independent product production capacity. All illegal operating profits generated by infringing products were fully transferred to Xingke Precision’s settlement account within 5 working days after the funds entered the shell companies’ accounts, and the shell companies only retained minimal monthly administrative expenses. Second, all core personnel engaged in product technical copying, equipment production, order sales and customer after-sales service for the infringing products were formal employees who signed labor contracts with Xingke Precision Machinery Group; the three shell companies did not sign independent labor contracts with any production and sales staff, nor did they bear any employee salaries, social insurance and welfare expenses. Internal enterprise email archives and R&D meeting minutes showed that all product technical improvement plans, downstream customer sales strategies and infringing product profit distribution decisions were formulated and issued by Xingke Precision’s senior management and technical directors; the registered legal representatives of the three shell companies never participated in any product R&D, production or sales decision-making work. Third, all industrial and commercial registration procedures of the three shell companies, sales contract templates signed with downstream buyers, special VAT invoice issuance procedures and e-commerce platform store filing materials were uniformly handled by the administrative and finance departments of Xingke Precision; the registered legal representatives of the shell companies only provided personal identity documents for enterprise registration, and never participated in any commercial negotiation, contract signing or invoice issuing activities on behalf of the shell companies. Fourth, after Lide Machinery issued a lawyer’s letter and filed a civil patent infringement lawsuit against the three shell companies in mid-2024, the legal representatives of the three shell companies submitted identical written defense statements to the court, claiming that their respective enterprises only engaged in intermediate sales business and had no knowledge of the product technical source and patent infringement facts, and refused to provide internal financial account books, personnel labor records and enterprise operation documents to the court. After the judge ordered full disclosure of enterprise financial and personnel materials, the complete capital flow and labor relation evidential chains directly exposed the actual control relationship between Xingke Precision and the three shell companies.
After hearing the case, the local intermediate people’s court with intellectual property jurisdiction made a binding first-instance judgment in March 2025, with core ruling contents as follows: First, the court confirmed that Xingke Precision Machinery Group, as the actual controlling entity behind the three nominal shell companies, completed all core infringing acts including copying the plaintiff’s patented technical scheme, organizing mass production of infringing equipment, arranging shell companies to sign sales contracts and collect sales proceeds, and fully satisfied the constitutive elements of intentional patent infringement as stipulated in Article 11 of the Patent Law. The total illegal profit obtained from selling infringing equipment in the whole case reached RMB 4.36 million, which constituted the serious circumstance applicable to punitive damages as specified in the judicial interpretation of the Patent Law. Second, the court applied the corporate veil-piercing rule under Article 20 of the Company Law and held Xingke Precision Machinery Group, its two actual controlling shareholders, and the three shell companies (Yida Equipment Sales, Hongsheng Machinery Processing Factory, Ruichang Industrial Trading) jointly and severally liable for all civil infringement compensation damages. The nominal legal representatives of the three shell companies, who only provided identity documents for enterprise registration and did not participate in any product production, sales or illegal operation activities, were exempted from personal civil liability after the court confirmed their lack of subjective intent and actual participation in infringement. Third, punitive civil compensation was imposed in accordance with Article 71 of the Patent Law: considering that Xingke Precision intentionally copied the complete patented technical scheme of the plaintiff and used multiple shell companies to conceal its actual infringement conduct to evade legal liability, the court applied a 2-fold punitive damage multiplier based on the confirmed illegal profit of RMB 4.36 million, and ordered Xingke Precision and the three shell companies to jointly pay cumulative infringement compensation of RMB 8.72 million to the patentee Lide Machinery Co., Ltd. In addition, the court ordered all parties to bear the plaintiff’s reasonable rights-protection expenses (attorney fees, forensic appraisal fees, notarization fees) totaling RMB 486,000. Fourth, the court issued a permanent injunctive order: Xingke Precision and the three shell companies shall immediately cease all acts of manufacturing, selling and offering to sell pipe processing equipment adopting the plaintiff’s patented technical scheme; all technical drawings, production molds and semi-finished infringing products stored by the defendants shall be sealed and destroyed within 10 working days after the judgment takes effect; the defendants shall not newly establish any shell enterprises for the purpose of concealing patent infringement conduct within three years.
This 2025 typical patent infringement guiding case released by the Supreme People’s Court Intellectual Property Tribunal puts forward four core compliance warnings for domestic machinery manufacturing enterprises involved in patent R&D, production and sales:
1. Enterprises shall not register anonymous asset-light shell limited liability companies in the names of unrelated third-party clerks, relatives and outsourcing staff to separate nominal enterprise operation risks from actual controlling entities, with the purpose of evading patent infringement civil compensation liability. Judicial organs will comprehensively adopt multi-dimensional evidential chains such as capital flow transfer records, employee labor contracts, internal technical R&D documents and business decision-making minutes to identify actual beneficial controllers and pierce the corporate veil to impose joint and several civil liability on the actual controlling enterprise.
2. Any intentional copying of the complete or core technical scheme of others’ authorized invention or utility model patents for mass commercial production and sales constitutes patent infringement; if the illegal profit amount reaches the statutory standard and the infringer adopts shell companies to conceal infringement facts to evade liability, the people’s court will apply multiple punitive damages in accordance with the Patent Law, and the actual controlling enterprise will face huge economic compensation costs and permanent production and sales injunction orders.
3. The independent legal person limited liability status of nominal shell companies cannot serve as a legal shield for actual controlling enterprises to implement intentional patent infringement acts. The Company Law, Civil Code and Patent Law jointly form a complete multi-layer civil liability restraint system covering joint tort identification, corporate veil piercing and punitive damages, to regulate acts of concealing actual control relations through shell companies to evade patent legal liabilities.
4. Manufacturing enterprises with independent R&D capacity shall establish standardized intellectual property internal compliance management systems, conduct comprehensive patent infringement risk pre-search and freedom-to-operate analysis before launching new product production and sales, and shall not adopt improper means such as copying others’ patented technologies and setting up hidden shell companies to avoid patent rights risks.
1. Supreme People’s Court of China Official Website – Full text of 2025 Typical Intellectual Property Cases (including this shell company patent infringement veil-piercing case): https://www.court.gov.cn/zixun/zt/202504/t20250426_946732.html
2. CNIPA Official English Website – Consolidated full authorized text of the fourth amended Patent Law of the People’s Republic of China (2020 Version): https://english.cnipa.gov.cn/col/col3068/index.html
3. WIPO WIPOLEX Global Intellectual Property Legal Database – Full English text of China’s Company Law, Civil Code IP-related tort provisions: https://www.wipo.int/wipolex/en/legislation/details/20112
4. China Judgments Online (Supreme People’s Court National Judgment Database) – Full first-instance judgment text of this 2025 pipe equipment patent infringement case: http://wenshu.court.gov.cn
