Interim royalties may soon be regular part of Chinese patent litigation, and implementers will set price

The legal environment around SEP and FRAND issues is developing very rapidly in China, and a new set of guidelines released by the Beijing Higher People's Court adds yet more new ideas to the mix. In some areas, the document borrows from overseas principles like those set forth in the ECJ's Huawei v ZTE decision, while in others it appears to show more deference to implementers - a strong constituency in China, of course.

The guidelines provide official insight into how the Beijing High People’s Court and the Beijing IP Court might deal with patent-related disputes; but they also play a leading role in influencing jurisprudence across the country, so it would not be a surprise to see the same principles adopted by other venues. With over 20 SEP cases pending on the Beijing IP Court’s docket alone, and more likely to follow, there is a lot riding on how FRAND jurisprudence develops in China.

In what looks to be a very significant development, the guidelines show how SEP implementers might avoid an injunction by depositing interim royalties with the court (in cases where neither party is ‘at fault’ FRAND-wise). This seems somewhat similar to the arrangement that has been adopted by Indian courts, including in a few cases involving Chinese defendants. But there's a twist - it appears that implementers, rather than judges, will decide how much that interim royalty deposit should be.

Local practitioners say that the interim royalty idea did not appear in earlier drafts of these guidelines. Its inclusion in the final version is the latest sign that China’s courts are taking a progressive approach to FRAND matters, perhaps listening carefully to the concerns of domestic industry and adapting ideas from other jurisdictions to local circumstances.

In the analysis that follows, Jill Ge, Charles Pommiès and David Shen of Allen & Overy’s China practice break down what the new guidelines mean for SEP owners and implementers:

The Beijing High Court recently issued its revised Guidelines for Patent Infringement Determination. Articles 149 to 153 of the guidelines are new and relate to infringement of standard essential patents (SEPs).  These provisions shed further light on SEP injunction issues after the Beijing IP Court granted first such injunction in the Iwncomm v Sony decision earlier this year. 

FRAND defence to injunctions

The norm for patent litigation in China is that upon finding of infringement, permanent injunctions will be granted as a matter of course. There is no eBay-like rule. However in relation to SEPs, Article 24(2) of the Supreme Court’s 2016 Judicial Interpretation creates a FRAND defence to injunctions. It provides that an injunction is not generally available where during the negotiations, (i) a patentee intentionally violates the FRAND obligations, and (ii) the accused infringer is clearly not at fault.

By now setting out SEP related provisions in a section entitled “defences to injunctions”, the guidelines affirm the majority view in China that SEP-based injunctions should be denied, unless there is wrongdoing on the part of an implementer.

It should be noted that this FRAND defence to injunctions has nothing to do with the competition law.

Fault-based analytical framework

While based on the willing licensee/willing licensor concept, China has essentially adopted a fault-based analytical framework to assess whether a SEP injunction should be granted. Compared to Europe there is a greater onus on the patentee/licensor to act “reasonably”.

According to Articles 152 and 153 of the guidelines, courts are required to examine both parties’ behaviours during FRAND licence negotiations with a failure to perform certain acts by the SEP holder or implementer possibly leading to a finding of a fault on their respective parts. Issues to be considered include whether:

1. the SEP holder fails to notify the implementer of the patent infringement in writing, specifying the patent rights and the alleged infringement;
2. the implementer fails to respond in a timely manner to the infringement notification;
3. the SEP holder fails to provide the patent information and licensing conditions in writing, after the implementer explicitly expresses a willingness to enter into a licence;
4. the implementer fails to respond in a timely manner to the licensing offer or to propose its terms after rejecting the SEP holder’s licensing conditions; and
5. the SEP holder fails to set out a time limit for the implementer to respond its licensing offer.

The above criteria appear to have been taken from European Court of Justice’s Huawei v ZTE decision. The guidelines also stress that the licensing terms and time limit for response need to take into account the customary practice in the trade. Taking a practical approach, the guidelines are intended to encourage good behaviour by both parties and to bring certainty to FRAND negotiations.

In addition to the objective, requisite steps parties are required to take during negotiations, Articles 152 and 153 also provide that the parties may be found to be at fault for “obstructing or delaying the licensing negotiation without justifiable reasons”, or “imposing clearly unreasonable licensing conditions”. No clear guidance is provided as to the meaning of these phrases which will be subject to further interpretation by the courts in deciding a SEP infringement suit.

One interesting question is on what basis a court would find an offer or counter-offer “clearly unreasonable”. While the SEPs are usually licensed on a portfolio basis, a patent infringement suit only involves one patent in China. It is also unclear what would be taken as the benchmark for assessing the “unreasonableness”.

Interim payment by an implementer

What happens if no party is at fault? Article 152 says no injunction should be granted, yet the implementer is required to deposit with the court royalty payments it alleges are due or an equivalent bank guarantee.

In theory, such interim payments by an implementer could secure the interests of SEP holders and make a holdout strategy more costly. As such, it is a good rule that will balance the interests of SEP holders and implementers. 

However, leaving the amount of payment to be determined by an implementer without checks by the court could be problematic. It also raises questions as to whether any royalties would be deposited at all, where the implementer also challenges the validity of the SEP at issue. In China, a defendant will usually bring invalidation proceeding before the Patent Re-examination Board. The first defence for an implementer is always that the SEP is invalid and not infringed. In such circumstance, how could the interim payment be determined and actually worked out?

It is encouraging to see that some sensible approaches to dealing with SEP disputes have made their way into the guiding documents of the Beijing courts. Despite the continuing convergence of jurisprudence in FRAND litigation worldwide, many issues will remain unclear until they are litigated in the Chinese courts in the Chinese way.