Competition Dynamics, Inc - IP valuations
Standard setting organisations (SSOs) are independent, not-for-profit organisations that oversee telecoms and other technical standards (eg, 3G, 5G and long-term evolution (LTE)). To develop and promote the adoption of technical standards, the SSO ‘ecosystem’ is designed to provide incentives to both the innovators and implementers of SEPs. On one hand, after the innovators disclose patents that are or may be essential to the standards, they are expected to receive a fair return of investment through licensing the SEPs. Also, because the innovators are required to declare that they are prepared to license the SEPs on FRAND terms (Annex 6, Section 6.1 of the European Telecommunications Standards Institute IP Rights Policy, 19 November 2014), standard implementers are assured that the SEPs will be available and licensed on a FRAND basis. Due to the voluntary collaborative nature of the SSO system, along with increasingly competitive telecoms markets, FRAND commitments have become the subject of numerous litigations in the past decade.
China is emerging as one of the fastest growing markets. As Chinese manufacturers have developed significantly over time, SEP litigations have also boomed in China over the past few years. In this chapter, we discuss the general trend of SEP litigations in China and dive into some implications of the latest developments with respect to economic approaches and legal procedures.
SEP cases in China
In 2010, Nokia sued Huaqin in Shanghai – it is considered the first SEP case filed by a patentee in China. Since then, the number of SEP cases in China has increased steadily. In light of the most recent IP protection policies in China and the Fourth Amendment to the China Patent Law effective from 1 June 2021, the number of SEP cases in China is expected to continue this upward trend in future.
According to a Lexfield study, about 160 SEP cases were accepted in China between 2011 and 2019 (Statistics of Chinese SEP Cases in 2011-2019, Zhao Qishan and Lu Zhe, Lexfield Law Offices, July 2020). More than 95% of these SEP cases are related to technical standards in the telecoms industry. Of the 160 Chinee SEP cases, the number of FRAND-related litigations is on the rise, although many are ordinary patent infringement cases.
The parties to SEP cases in the telecoms industry cover both active domestic and international manufacturing players such as Huawei and Qualcomm, as well as non-practising entities such as InterDigital (IDC). Because the inventions that constitute international widely adopted telecoms standards (eg, 3G and LTE) are mainly contributed by non-Chinese innovators, and because Chinese handset manufacturers have achieved great success over the past 10 years, most of the SEP cases in China are between domestic manufacturers and foreign entities. As one would expect, most patent infringement SEP cases in China are initiated by innovators, while FRAND cases in China are initiated by implementers, claiming that the innovators have breached their FRAND obligations.
From a geographic distribution perspective, because telecoms involvement is active in economically developed regions, the vast majority of the SEP cases are filed in Beijing, Guangdong, Shanghai and Jiangsu.
Comparable licences and top-down approaches
The top-down and comparable licence approaches are widely used in many jurisdictions to determine FRAND terms and conditions. The comparable licence approach relies on licence agreements between parties that are similarly situated, providing direct evidence on how the market prices SEPs. In contrast, the top-down approach generally refers to a method that starts with an aggregate royalty rate for all SEPs reading a given standard (the ‘top’). It then estimates the share that should be paid for rights to a particular SEP owner’s portfolio.
Both approaches have been adopted in Chinese court decisions in SEP cases. For example, in Huawei v IDC (2013), the Guangdong High People’s Court applied the comparable licence approach in analysing IDC’s offer to Huawei. More specifically, the court’s analysis relied on public statements about two IDC licence agreements with Apple and Samsung (although not the licences themselves). In Huawei v Conversant (2018), the Nanjing Intermediate People’s Court adopted the top-down approach for the first time. In estimating the top for each standard, the court first adopted the global aggregate rates found in TCL v Ericsson (a US case), then applied a regional discount for China to adjust the aggregate rates down further. Because the court found only one of the 15 Conversant patents to be both essential and valid, the rate arrived in this case is actually small, a result that favoured Huawei. Because this rate can be potentially used as a comparable rate in similar cases, it may affect other FRAND disputes, not only between the two parties but also other cases involving Huawei or other Chinese implementers.
Although the top-down approach is popular and considered to be relatively precise and reliable in theory, it has faced multiple challenges. It should therefore be applied only after taking account of further considerations.
First, an accurate top-down estimate must start from a reliable top; however, it has proved challenging to accurately determine the one-way aggregate royalty rate for all SEPs for any given standard. In TCL v Ericsson, Judge Selna relied on early pronouncements made by SEP owners and other stakeholders. However, this method is unsatisfactory because such pronouncements were made many years before the commercialisation of the standards, a criticism recognised by the judge in Unwired Planet v Huawei (a widely cited UK case). Research has found that ‘hedonic regression’ (a technique employed recently in the US case VLSI v Intel, is actually a promising means for measuring the contribution of each attribute of a smartphone (including the practice of a standard such as LTE) to the product’s price. Because smartphones are complex products that involve thousands of features, the hedonic model allows the value of technical standards to be estimated in isolation from other product features.
Second, due to the voluntary nature of SEP disclosures to SSOs, the standard valuation process faces hurdles in estimating the aggregate number of SEPs that are actually essential to a standard. For example, because SSO members must disclose all patents that they believe are, may be or may become essential to a technical standard, such requirements lead to over-disclosure and uncertainty as to whether a ‘disclosed essential’ SEP is an ‘actually essential’ SEP. Technical studies are helpful as they claim to identify which SEPs are actually essential. However, these essentiality opinions often disagree. To confront this disagreement, Competition Dynamics developed an econometric model that accounts for differences across studies and produces a reliable prediction of the essentiality of SEPs for each innovator.
Third, even assuming that accurate estimates can be obtained for the top and for the aggregate number of actually essential SEPs, determining the value of a particular SEP owner’s portfolio is still difficult. This is mainly because patents differ widely in their quality. In other words, because patent value distributions are known to significantly skew to the right, in any given sample there are many patents that have little value and relatively few that have high value – patent quantity is a poor proxy for patent quality. However, to compensate an SEP owner accurately, the share of the top that is assigned to an individual firm should reflect the quality, not just the quantity, of the firm’s patents. In practice, patent quality measures, such as patent forward citations, can be applied to rank SEPs when determining the share of total value that should be awarded to an individual innovator’s SEP portfolio.
Anti-suit injunctions and global coordination
As a general matter, the purpose of anti-suit injunctions is to temporarily suspend potential enforcement of foreign judgments and maintain litigation order in the courts of the country issuing the injunction, without denying or affecting foreign judgments, or interfering with the judicial sovereignty of other countries. Several factors are usually considered when deciding whether to issue an anti-suit injunction:
- irreparable harm to the party seeking the injunction, if the injunction is not granted;
- the balance of the interests of both parties;
- the impact of anti-suit injunction on the public interest; and
- international comity.
Anti-suit injunctions have a long history in US and English law, but their use in patent cases has only recently become commonplace with the advent of global SEPs and competing national courts that are asked to set global FRAND licence terms. In China, while the law does not explicitly permit courts to issue anti-suit injunctions, Article 100 of China’s Civil Procedure Law permits Chinese courts to order a respondent to conduct or refrain from conducting certain actions if the respondent’s behaviour threatens to cause harm to the other party or prevent the court from enforcing a judgment.
Recently, Chinese courts have issued several anti-suit injunctions in SEP cases. These injunctions responded to earlier anti-suit injunctions issued by courts in the United States and Germany in 2018 and 2019, respectively.
The first anti-suit injunction in China was issued by the Supreme People’s Court in Huawei v Conversant in 2020 to prevent Conversant from enforcing the injunction issued by the German court. After Huawei filed the case in China, Conversant filed an SEP case before the Dusseldorf District Court in Germany. A few days after the Dusseldorf court issued a judgment confirming Huawei’s infringement and allowing Conversant to file a request to enforce the judgment with a bond, the Supreme Court in China granted an anti-suit injunction ordering Conversant not to file an application to enforce the Dusseldorf judgment until the case is closed in China.
The Chinese court first assessed whether Conversant’s enforcement in Germany would have a substantial impact on the trial and enforcement of the judgment in China (civil ruling, the Supreme People’s Court, 28 August 2020). The Chinese court reasoned that the subject matter of the two cases is basically the same and that the objectives overlap, so if the German court issued a permanent injunction it would interfere with China’s jurisdiction in China.
The Chinese court also examined each of the usual four factors:
- A permanent injunction in Germany would force Huawei to exit the German market or accept the offered royalty terms before the Chinese court issued a judgment, meaning that Huawei might therefore suffer irreparable harm.
- The temporary suspension of the enforcement of the German injunction would not be detrimental to Conversant, but Huawei might suffer severe damage if the German injunction was to be enforced.
- There would be no harm to the public interest, whether or not the anti-suit injunction was issued.
- The case in China was filed three months before the German case, therefore prohibiting Conversant from applying for enforcement does not affect the later trial in Germany nor does it detract from the legal validity of the German judgment.
Since the Conversant decision, several other anti-suit injunctions followed in Xiaomi v IDC and Samsung v Ericsson. It should come as no surprise that there is an increasing number of anti-suit injunctions issued in China in telecoms and related industries as 5G and the Internet of Things become widely adopted.
Although anti-suit injunctions seem to direct the focus of the parties to resolve a global dispute, the effectiveness of anti-suit injunctions in achieving a fair result for both parties remains unclear. Take Xiaomi v IDC as an example. The court in China first granted an anti-suit injunction as requested by Xiaomi in September 2020. In October, the Delhi High Court in India issued an anti-enforcement injunction, in response to a request by IDC, to stop Xiaomi from enforcing the Chinese anti-suit injunction. Evidently, it would be difficult to enforce either of these injunctions if national courts are unwilling to compromise on each other’s decisions. In such cases, the real issue that both courts and parties face is a lack of global coordination across jurisdictions. If SEP cases continue to move in this direction without caution, anti-suit injunctions may pose serious threats to international comity due to the battle among courts in different jurisdictions.