Specialist Chapter: How to Build an Effective Assertion-Based SEP Licensing Programme in China
This is an Insight article, written by a selected partner as part of IAM's co-published content. Read more on Insight
For a licensing programme, the assertion of patent rights means much more than seeking a final remedy; the licensing programme can be concluded in a much more effective manner based on a premeditated assertion-based licensing strategy. This article discusses how to build an effective assertion-based SEP licensing programme in China to secure a successful licensing deal.
- Advantages of using an assertion in a SEP licensing programme
- When to initiate a SEP assertion
- Popular courts for filing SEP cases in China
- Types of patents that can be asserted
- Participants in the assertion
Referenced in this article
- Unwired Planet v Huawei
- VoiceAge v HMD
- OPPO v Sharp
- Huawei v Samsung
- OPPO v Nokia
- Huawei v Conversant
- Qualcomm v Apple
- CNIPA 2022 Annual Report
The patent licensing negotiation practice has been reshaped in past decades, especially for standard-essential patents (SEPs). In the past, both sides of a negotiation were equal as bilateral licensing was primarily undertaken by companies that not only own patent portfolios but also implement the technologies; however, with the enormous success of the standardisation of cellular technologies, such as 4G and 5G by the Third Generation Partnership Project, the licensing ecosystem has become much more complex and has witnessed the emergence of diverse players, including smartphone manufacturers, chipset vendors, infrastructure vendors and innovation institutions.
With the emergence of non-practising entities of which the business activity is focused on licensing patents to obtain the best possible return on investment, there is an imbalance in the positions of licensing parties: non-practising entities actively seek royalty payments without obtaining cross-licences from implementers, while implementers are disadvantageously involved in negotiations for cross-licences that non-practising entities do not need. Licensees have less motivation to obtain licences, as the initial offer from the licensor is often regarded by the licensee as intolerably high. As a result, patent owners tend to initiate legal actions after the bilateral negotiations collapse.
In the context of active licensing, an assertion can be regarded as a pragmatic tool rather than a last resort. First, an assertion helps to keep both parties engaged. Bilateral licensing negotiations between patent holders and implementers have become drawn out because of neglect, delay tactics and other acts of gamesmanship by the implementers. Assertions act as warning to implementers. An implementer will take the licensing offer more seriously, and will therefore respond promptly, if the risk of litigation is no longer a remote possibility. It will also be motivated to seek bilateral negotiation to resolve the dispute if there is an imminent risk of suffering losses in the market should an injunction be granted during the litigation.
Second, an assertion is an acknowledged approach to verifying the value of a patent portfolio. When obtaining a licence, whether the implementer has implemented the patent and how valuable the patent portfolio are often the key debates. The negotiations often get stuck at the technical discussions before the business dialogue is even started. As the infringement and the validity of the patents are discussed and determined during the court trials, the interactions during the court trials and the judge’s decisions can be referred to as solid verifications of the value of the patent portfolio. Obtaining a clearer understanding of the value of the patent portfolio makes it relatively easier for the parties to manage their expectations and make reasonable decisions, therefore leading to a better chance of a settlement between the patent holder and the implementer.
In addition to adjudicating disputes, the judicial system can serve as a positive factor in encouraging parties to agree on a licence. For example, in the Unwired Planet v Huawei case, the English court held that it would be improper ‘to grant a final injunction unless the court is satisfied that the patent is valid and infringed, and it has determined a FRAND rate’. This implies that the court intended to take a neutral position with regard to a FRAND licence: the court’s FRAND injunction encourages the two parties to agree on the FRAND terms it ushered in and enter into a FRAND licence, rather than resolving the dispute in whatever effective manner other jurisdictions may employ (eg, imposing a large risk of injunctive action against the implementer before a final judgment is made regarding the validity and infringement of the SEP); in other words, the judicial system can encourage the two parties to reach a FRAND deal by using the legal toolkits available to them rather than simply settling the dispute in a manner that favours one party over the other.
Chinese courts also prefer seeing the parties settle the dispute during the litigation. The judge is usually willing to arrange mediation between the plaintiff and the defendant to settle the case. The judge may also consider the parties’ actions during the mediation when deciding on the FRAND issue. For example, in the case of Huawei v Samsung, the Shenzhen Intermediate Court twice held a meeting for mediation and required the parties to provide counteroffers. Whereas Huawei sent its offer, Samsung did not, and the mediation eventually failed. This was a key factor for the judge in deciding that Samsung was not in compliance with the FRAND obligation and that it delayed the negotiation, given its behaviour before and during the litigation. In light of the precedents in several jurisdictions, the courtroom can be considered an effective tool for encouraging SEP holders and implementers to agree on settlements.
Finally, even if the parties cannot settle during the litigation process, the court decision is instructive and guides future licensing negotiation behaviours. The guidelines made by the Court of Justice of the European Union (CJEU) in Huawei v ZTE are one example: in this case, the CJEU attempted to establish rules and procedures for granting injunctive relief in light of the willingness shown by the parties in negotiations.
Given the benefits of assertion discussed above, for a licensing programme, the assertion of patent rights means much more than seeking a final remedy; the licensing programme can be concluded more effectively based on a premeditated, assertion-based licensing strategy. Below, we discuss some takeaways for building an effective assertion-based SEP licensing programme in China to secure an effective and successful licensing deal.
When to make an assertion
A SEP holder can assert its patent rights either before or after the parties engage in a substantial negotiation.
Before the parties engage in a substantial negotiation
Under the Patent Law, the patent holder is entitled to enforce its patent rights when an infringement is identified. Theoretically, the patent holder can file a lawsuit at any time once there is a valid patent and an infringement is discovered. The patent holder may seek damages or injunctive relief.
However, for SEP-based assertions, if the litigation is filed before a substantial negotiation, and the plaintiff requests an injunction, the injunction is unlikely to be granted as the element of willingness under FRAND obligations, which is determined by the behaviours of the parties during the negotiation, is a critical factor that the Chinese courts investigate and consider.
A tricky situation arises if the SEP holder filed a lawsuit before a substantial negotiation but claimed injunctive relief after the negotiation. In the VoiceAge v HMD case, the SEP holder, VoiceAge, filed a lawsuit against HMD after twice sending the latter a licensing offer and receiving no response. VoiceAge requested only damages upon the filing of the lawsuit. It later requested an injunction when negotiations failed during the litigation process. The German court held that HMD was unwilling to accept the licence after VoiceAge sued before it filed for injunctive relief and that it purposely delayed the negotiation. The court, therefore, issued an injunction against HMD because VoiceAge had fully fulfilled its FRAND obligations while HMD did not meet FRAND requirements. This case shows that the German court believes that the determination of FRAND behaviour is directly related to the parties’ actions prior to and during litigation.
Whether the Chinese courts agree with the German courts remains to be seen. Nevertheless, the stance that violation of the FRAND obligation is considered as a factor for issuing an injunction is consistent with the judicial interpretation issued by the Supreme People’s Court and the case trial regulations issued by the Beijing and Guangdong higher people’s courts. When the rights holder files a request to stop the implementation of SEP (ie, a request for an injunction), judges will consider the subjective fault of the behaviour of both parties in respect of the FRAND obligation and relevant commercial practices.
After the parties engage in a substantial negotiation
A typical licensing negotiation process starts with a response from the implementer after the patent holder has sent the notification letter. The parties then discuss and execute a non-disclosure agreement (NDA), followed by technical and commercial discussions. Ideally, the parties will engage constructively and at a regular cadence.
In practice, the negotiations are often carried out alongside various delay tactics by the implementer. For example, implementers may ignore notifications and other communications for months or years, refuse or delay signing an NDA, direct the SEP holders to suppliers for licences and provide unreasonable and unacceptable counteroffers to the SEP holders, among other things. These are typical holdout strategies used by implementers.
Although licensing negotiation is a pas de deux, considering the impact of the financial situations of SEP holders, patent holders cannot dance indefinitely with implementers, especially knowing that the implementers are deliberately dallying. Under those circumstances, it can be concluded that those implementers are unwilling licensees, and the patent holder can consider initiating lawsuits after a substantial negotiation if the implementers keep stalling.
Popular courts for filing SEP cases in China
Chinese courts have become among the most popular global SEP dispute resolution battlefields. A handful of people’s courts in China have seasoned IP judges with experience in hearing SEP cases.
Before filing a case with these courts, the SEP holder should find out the extent of the backlog at the courts, which will significantly influence the timeline and cost of the legal proceedings and impact the effectiveness of filing the lawsuit, to increase its leverage in concluding a licence deal.
Excluding several popular Chinese courts that are experienced in handling SEP cases, such as the Shenzhen Intermediate People’s Court, the Wuhan Intermediate People’s Court, the Chongqing Intermediate People’s Court and the Nanjing Intermediate People’s Court, as well as the three IP specialised courts, there are three courts in Fujian province that have received attention for being pro-patentee: the Fuzhou Intermediate People’s Court, the Xiamen Intermediate People’s Court and the Quanzhou Intermediate People’s Court.
In the prominent patent infringement case of Qualcomm v Apple, the Fuzhou court issued a preliminary injunction order against Apple. A German IP licensing company secured a deal with Apple by availing itself of the Fuzhou Intermediate People’s Court. In addition, there are a dozen ongoing audio codec SEP cases at the Xiamen court in which complicated technological, standard and legal issues are involved. These three courts in Fujian province are, therefore, considered equivalent to the US District Court for the Eastern District of Texas, and they are becoming more and more popular for both foreign and domestic patent owners as venues to initiate lawsuits based on both non-SEPs and SEPs.
Types of patents that can be asserted
According to the China National Intellectual Property Administrations 2022 Annual Report, about 28 per cent of invention patents do not survive validity challenges; therefore, making assertions based on more than one patent is advisable. To balance the effectiveness and cost of carrying out lawsuits, it is recommended to assert three to six patents.
Making assertions based on a non-SEP would be an advantage if the implementer’s product also falls under the scope of the patent. This is a helpful strategy considering the fact that obtaining an injunction order for a SEP case is relatively tricky because complicated FRAND issues would be involved and a full spectrum of products that meet the standard would be banned. In contrast, when asserting a non-SEP, an automatic injunction can be granted as soon as the infringement is established, which is relatively easy to decide compared with asserting a SEP.
For example, in the global dispute between Huawei and Samsung, the parties sued each other based on both SEPs and non-SEPs. In a non-SEP infringement case before the Quanzhou Intermediate People’s Court, the court found in favour of Huawei, with Huawei obtaining an injunction order and damages of 80 million yuan. Huawei took advantage of this for its licence negotiation with Samsung and obtained a favourable outcome.
Engaging experienced firms and experts
SEP disputes are far more complicated than non-SEP disputes and usually require the involvement of multiple third parties, including technical appraisal institutions, experts on the standards, economists and market intelligence providers.
An experienced law firm in both licensing and litigation will oversee the involved parties and help steer the licensing procedure forwards in parallel with the litigation. It is important that the communications between the firms engaged for invalidation and infringement are coordinated. Since China has a bifurcated system, with patent validity decided separately from patent infringement, parties should be careful to ensure that any amendments to the claims in the invalidation procedure do not affect the infringement proceedings.
Further, if the budget allows, it is highly recommended to engage technical appraisal institutions, experts on the standards and economists:
- Technical appraisal institutions can provide a report to prove the patent’s correspondence to the specific standard against which it is being reviewed, which helps the judge to understand the technical solutions and industrial practice.
- Experts on the standards can explain the complex technologies and the development of the relevant standards.
- Economists can serve as a strong backup for elaborating on the extent and amount of the damages claimed in the assertion.
The involvement of experts on the standards and economists not only serves as solid support that can facilitate the judge’s decision-making but also allows a more explicit picture to be formed with regard to establishment of the infringement, the FRAND extent and the damages. This, in turn, helps parties to manage their expectations of the settlements through litigation or negotiation. Taking advantage of the multiple resources available in the assertion is, therefore, a critical link in achieving the final goal of reaching a licensing agreement.
Efficiency matters in an active SEP licensing campaign. Including a well-planned assertion strategy as part of the integrated licensing strategy is recommended to secure an effective and successful licensing agreement. A SEP holder can initiate an assertion after or before a substantial negotiation, but the claims in the assertion should comply with the purpose of the assertion.
Although there are several conventional Chinese courts that are popular in SEP dispute resolutions in China, the courts in Fujian province are also exceptional dynamic courts that are worth considering. It is recommended to assert three to six patents to balance costs and efficiency, with the assertion of a non-SEP being an advantage.
Finally, engaging an experienced law firm that possesses an exceptional understanding and intuition of licensing and that is capable of coordinating between multiple parties, such as technical appraisal institutions, experts on the standards and economists, is important in ensuring the success of a licensing campaign.
 Unwired Planet International Ltd and Anor v Huawei Technologies (UK) Co Ltd and Anor  UKSC 37 .
 Hu Zhiguang and Zhu Jianjun, ‘Several Procedural Issues in SEP Injunction Litigation – A Study Based on Lawsuits Between Huawei and Samsung’, China Patents and Trademarks, Vol. 143, No. 4, 2020.
 Huawei Technologies Co Ltd v ZTE Corp and ZTE Deutschland GmbH, Judgment of 16 July 2015, Case C-170/13, ECLI:EU:C:2015:477.
 Patent Law, article 60.
 Working Guidelines of the Guangdong High People’s Court on the Trial of Standard-Essential Patent Disputes (Trial Implementation), Guangdong High People’s Court, 26 April 2018. The Guidelines provide that injunctive relief for standard-essential patents are appropriate only if the infringing party has acted in bad faith.
 VoiceAge v HMD, Regional Court of Munich, Case No. 7 O 15350/19, 19 August 2021.
 Interpretation No. 2 of the Supreme People’s Court on Several Issues Concerning the Application of Law in the Trial of Patent Infringement Dispute Cases (2020 Amendment), article 24, paragraph 2 stipulates that if the patentee’s deliberate violation of its fair, reasonable and non-discriminatory (FRAND) licensing obligations leads to a failure to conclude a patent licensing contract, and the accused infringer has no obvious fault in the negotiation, the People’s Court will generally not support the patentee’s request to stop the implementation of the standard.
 Guangdong Provincial Higher People’s Court, ‘Guidelines for the Trial of Standard-Essential Patent Dispute Cases (Trial), article 12: ‘[the Court will] comprehensively consider whether the SEP owner meets the requirements of the FRAND statement, and whether the implementer is at fault, and decide whether to support the request to stop the implementation of the SEP’; Beijing Higher People’s Court, Several Opinions on Strengthening IP Adjudication and Promoting Innovation and Development, article 12: ‘when determining whether to issue an injunction, it is important to consider whether the negotiating parties have obvious faults in violation of the principle of good faith, and it cannot be assumed that the patentee has made a FRAND commitment and an injunction will not be issued’.
 See, eg, Sisvel v ZTE, Ordinary Court of Turin, Case No. 30308/20215 RG, 18 January 2016 (Sisvel v ZTE). The court found the defendant did not respond to a claim chart for 10 months.
 In Sisvel v ZTE, the defendant took seven months to sign a non-disclosure agreement.
 See, eg, Sharp v Daimler, Regional Court of Munich, Case No. 7 O 8818/19, 10 September 2020. Daimler repeatedly sent Sharp to its suppliers and refused to provide Sharp with the required information needed for Sharp to make a licensing offer to Daimler. The court found that Daimler had not acted as a ‘willing’ licensee and could not rely on the fair, reasonable and non-discriminatory (FRAND) defence derived from its suppliers.
 See, eg, Nokia v Daimler, Higher Regional Court of Karlsruhe, Case No. 6 U 130/20, 12 February 2021. The defendant set royalty rates based on the value of components. The court found that an approach that is unacceptable to a SEP owner is not FRAND.
 OPPO v Sharp (2020) Yue 03 Min Chu No. 689; Huawei v Samsung, (2016) Yue 03 Min Chu No. 816.
 Xiaomi v IDC (2020) E 01 Zhi Min Chu No. 743.
 Oppo v Nokia (2021) Yu 01 Min Chu No. 1232.
 Huawei v Conversant (2018) Su 01 Min Chu No. 232–234 (Huawei v Conversant).
 Qualcomm v Apple (2018) Min 01 Min Chu No. 1208.
 Bing Zhao, ‘IPCom patent campaign against Apple in China appears to end with global settlement’, IAM, 7 January 2022.
 For example, three patents are asserted in the Huawei v Conversant case, and six patents are asserted in the Advanced Codec Technologies licensing campaigns (Bing Zhao, ‘US NPE leverages China litigation to secure Xiaomi deal’, IAM, 17 December 2019).
 Huawei v Samsung (2015) Min 05 Min Chu No. 725.