Jacob Schindler

Last January, the Intermediate People's Court of Shenzhen hit Samsung with an SEP injunction as part of the Korean company's sprawling international patent dispute with Huawei. It was just the second such decision in China. Previously, the Beijing IP Court handed Chinese standard developer Iwncomm an injunction against Sony in 2016. The potentially significant commercial impact of the order is evidenced by Samsung's ongoing efforts to get a US federal judge to block its enforcement.

Last week, the Shenzhen court published the full written verdicts in the two cases at hand - which weighed in at over 350 pages in total. I have asked Shanghai-based attorney David Shen to summarise the key points of the decisions - his analysis follows:

Background

The Shenzhen Intermediate Court recently decided an infringement case filed by Huawei against Samsung related to a standard essential patent (SEP) No. 201110269715.3 (method and apparatus for sending control sinaling). The court held that Samsung maliciously delayed negotiations and was “at fault” during the negotiation. The court further found that Huawei’s patent is a 4G LTE SEP, and Samsung infringed Huawei’s SEP. As a result, the court granted an injunction and ordered Samsung to cease its infringing activities.

Huawei and Samsung have negotiated for over six years to cross-license each other’s patent portfolios including 3G and 4G LTE SEPs. Deadlocked in negotiation, Huawei initiated in 2016, followed by Samsung, a series of lawsuits and counter-lawsuits against each other in China and the United States.

Parent company’s FRAND commitment binding its affiliates

The defendants in this case are Samsung China, Samsung Huizhou and Samsung Tianjin. However, the delay tactics that Huawei complained were carried out by their parent company, Samsung Electronics Co Ltd.

The first question was whether the Samsung Electronics Co Ltd.’s FRAND commitments bind its affiliates. The Shenzhen court found that the parent company has formed a community of shared economic interests. Samsung Electronics gains its economic benefits through the three Chinese affiliates’ manufacturing and sales activities in China. The court held that where a parent company acts on behalf of itself and its affiliates to negotiate a license, the parent company’s acts should be deemed to be the affiliates’ acts. In this case, Samsung was a beneficiary of Huawei’s licensing commitments to ETSI and Samsung acted as an implementer.

FRAND negotiations

The Shenzhen Intermediate Court found that Huawei had met FRAND obligation while Samsung had not, after a detailed review of the negotiation history, the respective SEP strength of each portfolio and royalty rates offered during the negotiation.

Negotiation history

The court found that Samsung employed delay tactics in the cross-license negotiation and took improper positions.

The court found that: a) Samsung delayed the procedures with the insistence on bundling together both the SEPs and non-SEPs; b) Samsung delayed the technical discussion by not responding in a timely way to the claim charts provided by Huawei; c) Samsung also delayed the license offer and delayed counter offer; d) Samsung rejected Huawei’s proposal to submit the licensing dispute to a binding arbitration three times; and e) Samsung twice failed to submit a comprehensive solution proposal in the court-organized mediation.

The court found little basis to criticize Huawei’s acts during the negotiation, although Huawei provided a misleading scope of the patents purchased from SHARP at the beginning. As Huawei clarified the issue later in the negotiations, the court found that it was not a significant fault.

SEP strength

The court found Huawei’s license offer meets the FRAND obligation since it is consistent with the strength of its portfolios.

The court held that both Huawei and Samsung shared a similar position of strength in their overseas portfolios. The court also found Huawei was stronger than Samsung in the Chinese patent portfolios by comparing: a) the essential patents adopted by 3GPP; b) the number of 3G and 4G essential patents declared by ETSI; and c) the essentiality and tech contribution revealed by the third party report, between Huawei and Samsung. During its analysis and reasoning, the court rejected the conclusion of a Thomson Reuters report submitted by Samsung and a forward citation analysis in a Samsung expert report while considering other third party reports. These two reports were disregarded because their analysis mainly focused on the US patent portfolios and applications only. The court found them unhelpful in assessing the strength of China portfolio.

Royalty rate

The court held that the license rate proposed by Huawei met the FRAND obligation since the offers were not excessively far above the global aggregate rate range redacted by the court.

The court reviewed a large amount of documents and carried out a ‘top down’ analysis to compare the offers. It found that Huawei’s portion in 3G SEP is about 5%, and its global 3G aggregate rate is 5%. For 4G, the court found that Huawei held about 10% of the number of 4G SEPs, and its global aggregate rate for 4G would be about 6-8%. The court concluded that Huawei’s offers were not excessively far above the global aggregate rate as it would leave room for further negotiation. For confidentiality reasons, the court redacted the key terms of Huawei’s offers from the published decision.

The court rejected the reference to the Huawei vs. IDC case, because: a) the royalty rate in the IDC case only applies to IDC’s Chinese portfolio, while in this case, Huawei and Samsung are negotiating a global cross-license; b) IDC is an NPE, whose business model is different from an operating company such as Samsung; c) the portfolios strength of IDC is far less than that of Huawei or Samsung; and d)  Huawei and IDC entered into a global license agreement after the Guangdong High Court’s decision, which superseded the rate determined by Guangdong High Court.

SEP infringement

Finding that the patent-in-suit is an SEP

After detailed analysis, the court found that Huawei’s patent was essential and found Samsung to be in infringement. Huawei established the patents-in-suit are 3G and/or 4G LTE SEPs by referring to published 3GPP Technical Specifications. Further, the court found Samsung’s infringement since Samsung’s asserted smartphones are 3G and/or 4G LTE enabled.

Non-infringement defence by Samsung

Samsung put forth a prior art defense citing earlier Ericsson patent references, literature on network technology, and 3GPP RAN Working Group 1 materials, which was rejected by the court.

The court also rejected Samsung’s patent exhaustion defense. Samsung argued that it has received a license to the asserted patents through its use of Qualcomm chipsets. The court found that the license granted by Huawei to Qualcomm does not cover 4G LTE patents, which was the patent being asserted by Huawei.

Injunction

The Shenzhen Intermediate Court granted a permanent injunction in favor of Huawei, but noted that Huawei and Samsung could continue their negotiations after the decision comes into force. If a cross-license is reached in the future, or Huawei requests for non-execution of the permanent injunction, the injunction will not be enforced.

Samsung has the right to appeal this decision to the Guangdong Higher Court. If Samsung appeals, the injunction will be automatically stayed.

Comments

To ultimately determine the answer to a simple yes/no question about whether to grant an injunction based on the conduct of party negotiations, the Shenzhen Intermediate Court adopted an approach which is closer to the German court’s approach in applying Huawei v. ZTE and followed the Beijing High Court’s guideline on an SEP infringement case. By comparing the “fault” between the two negotiating parties, the court found that Huawei was entitled to an injunction remedy because Huawei was not at fault, whereas Samsung was at fault during the negotiation.