IP lawyer: Beijing High Court upholds China’s first-ever SEP injunction

On March 28 2018 the Beijing High Court affirmed the Beijing IP Court’s finding in Iwncomm v Sony that Sony directly infringed Iwncomm’s patent for wireless local area network (WLAN) authentication and privacy infrastructure (WAPI). The court upheld the permanent injunction, along with damages of Rmb9 million ($1.3 million) – although it did reverse the finding of contributory infringement.

Background

Iwncomm owned a WAPI (Chinese counterpart to WiFi)-related SEP on a method for the secure access of mobile terminals to WLAN, which is achieved with the participation of a mobile terminal, an access point and an authentication server.

Sony was sued by Iwncomm for:

• direct infringement of the WAPI patent for testing the WAPI functionality of its handset products during R&D, manufacture and pre-delivery inspection; and
• contributory infringement for manufacturing and selling a mobile terminal (the WAPI module of handsets), which jointly infringes the WAPI patent together with the access point and an authentication server.

The trial court found Sony liable for direct infringement and contributory infringement and granted an injunction and damages.

Patent exhaustion

The appellate court upheld the trial court’s holding that the exhaustion doctrine does not apply to method-of-use claims. It agreed that China’s Patent Law explicitly provides exhaustion for product claims and product-by-process claims (ie, products directly obtained through a patented process) only.

The appellate court’s interpretation is relatively conservative compared with the US approach. In Quanta Computer, Inc v LG Electronics, Inc (553 US 617 (2008)), the US Supreme Court held that a method-of-use claim is exhausted by the authorised sale of an item, provided that a two-prong test is satisfied.

However, even if the Chinese court were to adopt the two-prong test, the Sony handset product does not cover all the inventive aspects of the patented method, and would unlikely meet the second element.

Contributory infringement versus divided infringement

The appellate court vacated the trial court’s finding of contributory infringement. First, it reiterated the precondition for proving contributory infringement: direct infringement or quasi-direct infringement – that is, a certain entity (eg, an end user) has practised the patent but is not liable for direct infringement.

Next, the appellate court stated that where no single actor performs all steps of a method claim (the so-called ‘divided infringement’), quasi or direct infringement occurs only where a certain entity “directs or controls” the others’ performance, or where the actors form a “joint coordination”. For the purposes of the appeal, the parties agreed that neither the end user nor the provider of the mobile terminal, access point or authentication server had performed all steps of the WAPI patent. The appellate court held that in the present case no entity directed or controlled the others’ performance, nor was there any joint coordination among the actors. Accordingly, the appellate court concluded that Sony’s provision of mobile phones to end users did not constitute contributory infringement.

Analysis

The most controversial question in the appellate judgment seems to be that given the court reversed the finding of contributory infringement, how could Sony be still ordered to pay the same amount of damages?

Neither Sony nor the appellate court raised the implied licence theory, which may be a better alternative for dealing with the issue of patent exhaustion.

The implied licence defence is typically presented where a patentee sells a product without an express disclaimer and the use of that product necessarily involves a patented method. Precedents show that Chinese courts have set out two requirements for the grant of an implied licence:

• The product involved must have no non-infringing uses; and
• The patentee or licensee places no express restriction on the purchaser’s use or sale of the product.

In the present case, Sony could justify its testing activity by arguing that Iwncomm’s sale to Sony of the testing device (ie, the access point and authentication server) constitutes an implied licence for Sony to use such device in practising the WAPI patent. Further, the testing for R&D satisfied the supposed uses of the testing device set by Iwncomm – that is, for purposes of evaluation, testing and verification, not for resale, lending or other commercial uses.

We look forward to learning how the Supreme People’s Court clarifies the various issues in this case.