One of the hot on-going disputes on IP in China and the world is the relationship between standardization and intellectual property, particularly the role of standards essential patents (SEP’s) when a licensor has undertaken an obligation to license its patents on a fair, reasonable and non-discriminatory (FRAND) basis.  Chinese courts have played an important part in this debate.  The most recent skirmish in this area is the case between Huawei and InterDigital Corporation (IDC), which was the subject of a decision of the Shenzhen Intermediate Court and has since been decided on appeal by the Guangdong High Court.

The first instance case was not published, as it is the subject of a confidentiality order, and the press on the appellate decision suggests that this case won’t be published either. The Guangdong High Court rendered its decision on October 28, and damages assessed at 20,000,000 RMB.

The press suggests that IDC was asking for a royalty rate of two percent, or about 10 times the royalty it obtained from Apple, Samsung and others for its 2G and 3G standards essential patents.  The press doesn’t identify whether those licensing efforts were undertaken without litigation, which IMHO should make a difference in royalty rates that may be reasonably requested.

According to the press, in response to IDC’s initiation of a Section 337 case in the US, Huawei brought a law suit in its hometown of Shenzhen.  Huawei opposed IDC’s request for a “package license” of IDC’s patents and its effort to obtain a royalty free cross-license with IDC using the “pressure” of the Section 337 case, noting that an SEP “controls the market.”    No further factual, technical or economic analysis has been noted, which to me might include whether there was a technical work around the standard, or if Huawei had leveraged China’s short two year statute of limitations in China to delay entering into licensing negotiations, or what aspects of the standard the patent was directed to and the degree to which it was a core to the technology or only a component of the technology (to assess damages or a reasonable royalty).

The case was decided on the basis that IDC’s conduct constituted “unfair conduct” by reason of its excessive pricing behavior compared to other licensees.  The press noted that China’s antimonopoly extends to overseas conduct that directly affects Chinese production, exports, etc. with a large and substantial influence that can be realistically predicted, and that Chinese courts therefore had jurisdiction.   The press did not address the related question of whether, as the reports seem to suggest, a Chinese court can sit in judgment on a US proceeding at the ITC and deem its initiation as a per se act of monopolistic conduct, at least where a FRAND obligation is involved.

The lower court case had been commented upon by judges apparently from the Shenzhen court: Ye Ruosi, Zhu Jianjun, and Chen Wenquan : 标准必要专利权人滥用市场支配地位构成垄断的认定评华为公司诉美国IDC公司垄断纠纷案 (Recognizing Abuse of Market Position by Holders of Standards Essential Patents – Huawei v. US IDC Company) , 3 电子知识产权 (Electronics Intellectual Property) (2013).  It is to be hoped that a non-confidential version of these decisions is released so that the public can better understand the cases, and that judges are not placed into an awkward position of writing articles about cases they decided or that were on appeal.  The ITC of course has non-confidential versions of its docket and orders, see 337-TA-800 Notice of Commission Decision to Review Initial Determination, and the Delaware state court case decisions are also available on line: Delaware District Court Denies Motion to Expedite FRAND Determination in InterDigital Case .

Also of note is that while Huawei has accused InterDigital of antitrust violation because of its standardization practices, Huawei’s strategy is not limited to US companies and a defensive position where it has SEP’s.  In Germany, Huawei brought a case against Chinese competitor ZTE (Huawei v. ZTE, District Court Dusseldorf, Germany, 21 March 2013, case no. 4b O 104/12).   This case was since referred to the European Court of Justice.

In light of the nature of the SEP controversies, there have been some interesting new academic papers.   Profs. Zheng Wentong and D. Daniel Sokol have issued a paper on standardization and IP in China that is well worth reading (FRAND in China).  The National Academy of Sciences just released a report on standards and intellectual property, Patent Challenges for Standard-Setting in the Global Economy: Lessons from Information and Communications Technology.   I am also expecting that MIIT will be shortly hosting a conference on this important global IP topic.  Of course, other scholars, notably Zhang Ping of Peking University Law School and Pete Suttemeir, emeritus of the University of Oregon, have contributed to this field.  See, e.g., Pete Suttemeir and Yao Xiangkui’s report  on “China’s Post-WTO Technology Policy: Standards, Software, and the Changing Nature of Techno-Nationalism” and  Zhang Ping and Ma Xiao, “标准化与知识产权战略”, 2005 (Intellectual Propety and IP Strategies), and Zhang Ping and Zhao Pingshan’s  book 冲突与共赢：技术标准中的私权保护” (Conflict and Win-Win: Protection of Private Rights in Technical Standards) (2011).  MOFCOM official An Baisheng and others also raised the issue at the WTO regarding incorporation of patents into standards as a technical barrier to trade (TBT).  China submitted a document  to the WTO Committee on Technical Barriers to Trade , named “Intellectual Property Right (IPR) Issues in Standardization-Communication from the People’s Republic of China”  (G/TBT/W/251, 25 May 2005, Document No. 05-2126 ) , and later its addendum “Background Paper for Chinese Submission to WTO on Intellectual Property Right Issues in Standardization(G/TBT/W/251) ”(G/TBT/W/251/Add.1, 9 November 2006, Document No. 06-5389”, both documents are available at http://www.wto.org. I also wrote extensively about this issue in my book Anti-Monopoly Law and Practice in China.

Why such controversies?  In my opinion, one part of the  controversy is about whether a patentee who has agreed to license his standards on Fair, Reasonable and Non-Discriminatory (FRAND) terms as part of a standardization practice is thereby prohibited from seeking an injunction when a prospective licensee declines to take a license.   A key question in this regard, which was identified in the USPTO/DOJ white paper on standardization and intellectual property, is whether the licensee has been afforded a fair opportunity to take a license.  If the licensee has been afforded an opportunity and declines to take a license, then it is my personal opinion that the licensee should not take the “shield” of a FRAND commitment, and turn it into a sword that weakens the licensors ability to license on fair terms.  In fact, the licensee would have no incentive to take a license if terms of a litigation based license are the same as ones that are negotiated without litigation costs.   One can also argue that the difficulties that foreigners  face in participating in  state run standardization organizations in China, as well as the low royalty and damage rates that exist for licensing into China, may deny foreigners a fair opportunity to license their rights.  Moreover, as China has become a manufacturer of the world, the ability to license into China has become a key component of a licensing strategy for a company licensing to China.  No one likes paying royalties, and foreign complaints about low payments for royalties are nothing new in China.  It was identified as a problem by the US International Trade Commission in its report on May 2011, China: Effects of Intellectual Property Infringement and Indigenous Innovation Policies on the U.S. Economy, ( Ch 5, page 38, esp. footnote 162) .

Of course, not all the developments in the SEP area have involved just the US and China.  These problems have assumed a global importance in our interconnected world.  The  Apple v. Samsung 337 case involved the availability of a USITC exclusion order (similar to an injunction) when a standard essential patent has been asserted.  At the recent AIPLA annual meeting on October 25, Chief Judge Rader suggested that the bar should be more active on important CAFC decisions, such as those involving damages.  Was he also including recent SEP cases?  No doubt there will be more cases before these matters more fully settle out, and damages/remedies will be an important part of that discussion.