The Latest SEP Developments In China
By Wei Huang, Guizhen Han and Bei Yin
Law360, New York (June 22, 2017, 12:32 PM EDT) --
Wei Huang
Guizhen Han
Bei Yin
After Huawei Technology Co. Ltd. brought the antitrust lawsuit and the lawsuit concerning the adjudication of royalties consistent with the fair, reasonable and nondiscriminatory principle against InterDigital Corporation (IDC), disputes concerning standard-essential patents have continuously emerged in China. The disputes have been highly complicated given that they are related to the systems of intellectual property rights protection of different jurisdictions, the understanding of IP abuses and the relationship between IP protection and antitrust. Thus, from the day when such disputes came into the sight of the public, they attracted wide attention.
After the Huawei v. IDC cases, one important development of China’s practices concerning SEPs is related to whether SEP holders may apply injunction relief. When the Beijing IP Court decided the dispute between IWNCOMM and Sony Mobile Communications (China) Co. Ltd. on March 22, 2017, it held that although IWNCOMM committed to the standard-setting organization that it would license the patent according to the FRAND principle, Sony cannot refer to the FRAND commitment to justify patent infringement. Moreover, it held that it will decide whether to grant injunction relief on the basis of analyzing the faults of the parties during the process of SEP licensing negotiations.
Twenty-seven days after the judgment of IWNCOMM v. Sony was issued, the Beijing High People’s Court published the "Guidelines for Determining Patent Infringement," which provide tentative interpretations of the FRAND commitment and discussed the relationship between the acts that the plaintiff fulfills its commitment and that the plaintiff applies for injunction relief. In the meantime, the guidelines provide some factors for assessing whether an implementer or an SEP holder has negotiated in good faith.
The IWNCOMM v. Sony case and the guidelines touch upon important issues of disputes concerning SEPs. These issues include: What is the nature of an SEP holder’s FRAND commitment, what is the legal basis for an SEP holder or SEP implementer to commence a FRAND litigation, whether an SEP holder who is obliged to license in accordance with the FRAND principle is entitled the right to injunction relief, what is the content of the FRAND commitment and when would a SEP holder be found to breach its FRAND commitment?
Based on the judgment of the Beijing IP Court and the guidelines, this article briefly discusses the above-mentioned issues and reveals the implications of the court’s judgment and the guidelines for SEP holders and implementers.
The Nature of the FRAND Commitment and the Legal Basis for FRAND Trials
The Beijing IP Court held that the SEP holder who commits to license in accordance with the FRAND principle has made a unilateral legal act. This does not mean that a licensing agreement has been concluded between the SEP holder and the implementer. Thus, the implementer cannot argue, based on the SEP holder’s FRAND commitment, that the implementation of the SEP holder’s patent is not an infringement. Under China’s legal system, only in the circumstance that a patentee purposely hides patents to cause the effect of misleading, that is, such patents are prior arts, would the people’s courts consider that there is not a patent infringement, with a purpose of protecting the reliance interests of bona fide third parties.
Since a FRAND commitment does not indicate that a licensing agreement has been reached between an SEP holder and an implementer, it is questionable whether the parties can commence a FRAND litigation based on contractual relationship. The third-party beneficiary doctrine applied in the U.S. does not apply in China, because the third party will not have an independent right to raise claims against the debtor without being authorized by laws. In fact, China has been debating whether a FRAND trial is contractual after the Huawei v. IDC case. Whereas IWNCOMM v. Sony does not touch upon the determination of FRAND royalties and the guidelines are silent about the lawsuits concerning the determination of licensing conditions consistent with the FRAND principle, it remains to be seen how China’s judicial practice will understand the nature of a FRAND trial.
Whether an SEP Holder That Assumed the Obligation to License in Accordance With the FRAND Principle Is Entitled the Right of Injunction Relief
The Beijing IP Court ruled in the IWNCOMM v. Sony case that under China’s legal framework, injunction relief is analogous to terminating patent infringement and, according to China’s Patent Law and other relevant regulations, it is the general rule to order the defendant to terminate infringement whereas not to order so is an exception. Given the special features of SEPs and that the effect of abusing injunction relief would be serious to the extent that the adoption and promotion of relevant standards can be impacted, the Beijing IP Court reasoned that, to determine whether to grant injunction relief, it will assess whether the SEP holder and the implementer has negotiated in good faith. In the circumstance that either party is found to be not bona fide, such a party may be in faults. The people’s courts shall make a decision based on an analysis of the faults and the degree of the faults of each side:
While the implementer and the SEP holder has negotiated in good faith, or the SEP holder is in faults, the people’s courts shall not order injunction relief;
While the SEP holder has negotiated in good faith yet the SEP implementer is in faults, the people’s courts shall order the injunction relief; and
While both the SEP implementer and SEP holder are in faults, the people’s courts shall analyze each party’s faults and balance the parties’ interests to make a decision accordingly.
The reasoning of the Beijing IP Court appears consistent with the thoughts provided in the guidelines. The Beijing High People’s Court provides the following thoughts for determining whether injunction relief should be granted to a SEP holder:
When the SEP holder purposely breaches its FRAND commitment, which causes the effect of impeding the conclusion of a licensing agreement, the people’s courts shall not grant injunction relief, provided that the SEP implementer is not in obvious faults.
When there is no evidence that the SEP holder purposely breaches its FRAND commitment and the SEP implementer is not in obvious faults during the process of negotiation, the people’s courts shall not order injunction relief, provided that the SEP implementer pays royalties in time or provides guarantee no less than the royalties requested by the SEP holder; and
When the SEP holder fails to assume FRAND obligations, yet the SEP implementer is also in obvious faults, the people’s courts shall make a decision based on analyzing the faults of each party and thus, determining which party bears the main responsibility.
The above court reasoning and the analytical thoughts reflected in the guidelines are important, for not only do they enhance the protection of intellectual property rights, but they also help analyze under what circumstance would the conduct to apply for injunction relief be considered as contrary to the Anti-Monopoly Law, especially given the context that competition regulatory agencies have expressed concerns over the impact of injunction abuses on competition, e.g., the European Union and India.
The above court reasoning and the analytical thoughts demonstrate that, first, in China injunction relief is the lawful right conferred by laws to patentees, which means that injunction relief is not in itself illegal. Second, it is in the circumstance that the lawful right is abused that the people’s court has to consider whether the way to exercise that lawful right incurs problems. It is likely that the SEP holder in faults to apply for injunction relief is found to abuse the lawful right.
However, there is a difference between China and the EU when it comes to the question that whether the abuse of the right to apply for injunction relief may constitute an independent monopolistic conduct. The European courts have made it clear that an abuse of injunction relief can violate Article 102 of the TFEU whereas the Guangdong High People’s Court in China recognized that the injunction is a tool to implement excessive pricing. In other words, China’s judicial practice does not consider that the SEP holder to apply for injunction relief would implement an independent abuse of dominance.
It is noteworthy that the opinion of the Guangdong High People’s Court are well reflected by the draft "Antitrust Guidelines for IP Abuses," which provide that: although SEP holders have the lawful right to apply for injunction relief, SEP holders who have dominance to utilize injunctions to force the licensees to accept excessive royalties or other unreasonable trading conditions can cause the effect of eliminating or restricting market competition.
The Contents of FRAND Commitment
FRAND commitments are widely seen in various IP rights policies of standard-setting organizations. However, SSOs do not define any FRAND commitments. It thus is natural that SEP holders and SEP implementers understand FRAND commitments in different ways. When the differing understandings cannot be reconciled whereas the contents of FRAND commitments play a vital role in deciding the licensing terms and conditions of SEPs, there emerges the lawsuits concerning FRAND commitments worldwide. After the Huawei v. IDC case, lawsuits concerning FRAND commitments also spring up all over China, which raise challenges to the people’s courts as well as to the legislative bodies. In this context, the guidelines issued by the Beijing High People’s Court that provide the circumstances for finding SEP holders’ breach of FRAND commitments have made a significant trial. The circumstances prescribed are as follows:
Failing to inform infringement in written notice and failing to specify the scope and the manner of infringement;
Failing to provide, in manners consistent with the course of dealing, patent information through written notice, ex post the accused infringer express the willingness to negotiate;
Not providing an answer period in accordance with the commercial practice;
Suspending or impeding negotiation while not providing any reasonable cause;
Imposing obvious unreasonable conditions to the extent that the conclusion of a licensing agreement ends with failure; and
Other acts that demonstrate that the SEP holder is in obvious faults.
The Implications of the Newest Judicial Practices to SEP Holders and Implementers
While China is enhancing the protection of IP rights, the current judicial practices appear to indicate that SEP holders are in a favorable condition to commence relevant patent infringement litigation to protect legitimate rights and interests in China.
China has also enhanced the regulation of IP abuses. Although the Beijing IP Court ruled that injunction relief is the lawful right of an SEP holder, it is cautious when making decisions to issue injunction relief. It thus cannot be the conclusion that SEP holders to apply injunction relief in China will not face antitrust risks. On the contrary, the anti-competitive effects associated with abuses of injunctions have long been recognized by the people’s courts and as explained, has been further recognized by the Antitrust IP Guidelines. Therefore, although the enhanced protection of IP rights creates a favorable environment for SEP holders, it is necessary that they remain cautious when exercising relevant rights in China.
Finally, since the finding of several types of monopolistic conducts will assess the FRAND commitments made by SEP holders to SSOs, the circumstances provided for finding whether SEP holders breach FRAND commitments by the guidelines are important, even though the guidelines are not tailored to antitrust practices. We recommend, therefore, that SEP holders and implementers refer to the guidelines during the process of negotiations. For SEP holders, this would guarantee the right to apply for injunction relief in patent infringement litigations on the one hand, and reduce antitrust risks on the other. For SEP implementers, this would reduce the possibility of being threatened by SEP holders’ injunctions.
Wei Huang is a managing partner, Guizhen Han is a senior associate and Bei Yin is an associate in Tian Yuan Law Firm's Beijing office.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
