30 Nov
2018

How a Chinese court would have decided the Unwired Planet appeal

The English Court of Appeal gave judgment in Unwired Planet v Huawei in October 2018. The case – one of the most significant in recent years covering standard essential patents (SEPs) - has been closely monitored by those of us who practise in China.

Given how FRAND matters have been litigated internationally, we cannot help but ask how Chinese courts would have been likely to have answered the three questions in the Unwired Planet appeal. These were:

  1. Whether a national court can adjudicate a global FRAND licence;
  2. Whether FRAND requires hard-edged non-discrimination such that a SEP holder must offer similarly positioned licensees similar rates; and
  3. Whether certain procedural steps in negotiation such as these outlined in Huawei v ZTE must be followed before a SEP holder can seek injunctive relief.

We have the following observations from a China perspective.

  1. FRAND royalty determination is a standalone cause of action in China; it is probable that Chinese courts can adjudicate a global FRAND licence

Chinese courts have to date not been asked to decide upon the royalty rate of a worldwide portfolio.  In Huawei v InterDigital, the Chinese court ordered a royalty rate of 0.019% under InterDigital's China portfolio.  That case did not involve issues concerning patent infringement of individual SEPs.  Huawei's request for FRAND determination was premised on a contractual claim.  InterDigital challenged the Shenzhen court's jurisdiction, yet its jurisdictional challenge was dismissed on the ground that in respect of the purported licence between Huawei and InterDigital, Shenzhen was where the licensee Huawei was domiciled and was also the place where the contract would be performed. 

Article 24 of the Supreme Court's 2016 Judicial Interpretation ("Judicial Interpretation") later codified the effect of the Huawei v InterDigital judgment concerning FRAND determination.  The Judicial Interpretation confirmed the Chinese courts' power to adjudicate FRAND royalties and stated that either a SEP holder or an implementer can seek such determination where they cannot reach a license agreement themselves.  This appears to create a standalone cause of action independent of any patent infringement claims.

In April 2018, the Guangdong High Court published Guidelines for Adjudicating Telecommunication SEP Cases ("Guangdong Guidelines").  Article 16 of the Guangdong Guidelines provides that where a party requests a court to adjudicate a multi-territorial SEP licence beyond the court's jurisdiction, the court can determine the royalties in respect of the licensed territory if "the other party fails to raise objection or any of its objections has been found unreasonable".  It should be noted that the Guangdong Guidelines are binding on courts within the Guangdong province, including the Shenzhen court. In line with Article 24 of the Interpretation, Article 16 of the Guangdong Guidelines went one step further by confirming the court's willingness to determine a global FRAND licence. 

It is worth noting that in the Huawei v Samsung infringement judgment handed down earlier this year, the Shenzhen Intermediate Court again indicated that a Chinese court can preside over a global licensing dispute.  In its decision, the Shenzhen court closely examined the proposed offers and counter-offers Huawei and Samsung each made during the negotiations of a global cross-licence.  The Shenzhen court assessed in particular the strength of Huawei's and Samsung's respective worldwide SEP portfolios and compared the parties' proposed offers in light of the portfolio strength.  The Shenzhen court ultimately concluded that Samsung had violated the FRAND principle and that its infringement of Huawei's SEP warranted injunctive relief.

Overall, it seems that where circumstances allow, Chinese courts will be prepared to determine FRAND royalties in respect of a global licence.  It would also not be too difficult to find the jurisdictional nexus if one of the parties is a Chinese party.

  1. China appears to adopt the hard-edged non-discrimination obligation

Chinese courts have not been asked to directly interpret the non-discriminatory prong of the FRAND obligation.  However, in the Huawei v InterDigital case, InterDigital argued against the "most favoured licensee" stance, stating that: "FRAND does not equate to the 'most favourable nation [principle]' in international trade." 

As noted in the English Court of Appeal ruling, the Guangdong High Court "seems to have accepted a hard-edged approach".  According to its Huawei v InterDigital judgment: "Under the same terms of trade, if a standards-essential patents holder charges a lower royalty from a certain licensee while a higher royalty is collected from another licensee, the latter will have every reason to believe to be subject to discriminatory treatment by way of comparison and the SEP holder would violate the commitment to grant non-discriminatory licences." 

Chinese courts have not issued a further judgment determining a license since Huawei v InterDigital.  Separately, in April 2017, the Antimonopoly Commission of China’s State Council published the long-expected draft Guidelines on Prohibition of IPR Abuse ("IPR Abuse Guidelines"). 

Article 18 of the IPR Abuse Guidelines concerns discriminatory treatment by an IP owner with a dominant market position. In assessing whether the different treatment of similarly positioned licensees amounts to an abuse, Article 18 cites the following factors as relevant:

  • Whether the licensees are in substantially the same position, including the scope of the relevant IPR and the substitutability of the relevant products provided by those licensees through utilising the licensed IPR;
  • Whether the licence terms are substantially different, including the territory and duration of the licence and the extent to which other commercial arrangements between the IP owner and a licensee may impact the decision; and
  • Whether the discriminatory treatment will significantly impair the licensee's ability to compete in the relevant market.

The third factor may appear to soften the hard-edged non-discrimination obligation.  It is unclear, however, how anticompetitive effects would be assessed and whether these effects would be relevant in a FRAND royalty determination case. 

  1. Courts would consider the parties' negotiation behaviours as well as the reasonableness of the offers made during negotiation 

China has essentially adopted a fault-based analytical framework for determining whether an SEP-based injunction should be granted.  Conceptually there appears to be striking convergence between the approach adopted by the Chinese courts and the Huawei v ZTE protocol. 

In Huawei v Samsung, for example, the Shenzhen court found that Samsung was at obvious fault procedurally.  According to the court, Samsung's acts had led to delays and breakdowns in negotiations. These included:

(i) failure to respond to Huawei's claim charts;

(ii) failure to respond diligently to Huawei's multiple offers or make counteroffers;

(iii) failure to participate in arbitration without justification; and

(iv) failure to actively participate in the court-ordered meditation.  

Furthermore, the Huawei v Samsung case illustrated that Chinese courts may focus not only on the procedural steps each party takes (or fails to take) in light of industry practice, but also on the substantive "FRAND-ness" of their respective offers and counteroffers.  The Shenzhen court held that Samsung violated the FRAND principle by proposing a rate significantly beyond the value of its SEPs and taking no account of the comparable strength of the parties' portfolios.  It was upon finding that Samsung was at obvious fault as both a procedural and substantive matter, that the Shenzhen court ordered a permanent injunction in favour of Huawei. 

Jill Ge

Senior Associate | Clifford Chance

Shanghai