This is the second article on recent research on Chinese IP law and practice. The focus of this blog is a widely read article of Judge Zhu Jianjun, Shenzhen Intermediate Court, Intellectual Property Tribunal. His article “Research on Judicial Judgment Issues of SEP Global Royalty Rates” was published in Intellectual Property, Issue 10, 2020, pages 3-12, and has since been distributed on Wechat. A slightly edited machine translation of the Wechat text is found here.
Judge Zhu is a prominent IP judge who has adjudicated a number of SEP-related disputes, including one of the earliest SEP cases involving Huawei and Interdigital, and more recently, Huawei v. Samsung. He published an article on Huawei v. Interdigital with his fellow judges in 2013 (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). In addition to his case load, and publishing articles on SEPS and IP-related matters, Judge Zhu is scheduled to speak on January 22, on day two of the forthcoming Berkeley-Tsinghua program on transnational IP litigation.
The views expressed by Judge Zhu are not necessarily those of his court. By the same token, Judge Zhu’s views are controversial among many in the West, and my repeating them here does not necessarily mean that I subscribe to them.
Judge Zhu is concerned about the circumstances where, in his view, a SEP right holder does not abide by the FRAND commitment, and a national court voluntarily sets a global licensing rate by issuing an injunction to the implementer as a coercive force. In his view, this practice does not comply with FRAND principles. Judge Zhu expresses particular concern about Unwired Planet v. Huawei (“UWP” and the “UWP case”), where the Supreme Court of the United Kingdom determined that Huawei infringed the two British standard requirements of UWP’s patent rights and adjudicated the global licensing terms of UWP’s patent portfolio.
In his article, Judge Zhu encourages China to take a more aggressive posture towards extra-territorial jurisdiction of foreign courts. In his view, the courts of major countries in the world other than the United Kingdom will not ordinarily take the initiative to determine the global standard-essential patent license rate for both parties in the case. In the UWP case, Huawei was required to pay damages to UWP for infringing two patents unless Huawei signed a FRAND clause binding both parties under threat of a UK-wide injunction. The British courts, in Judge Zhu’s words, took the initiative to decide “the global rate of the standard essential patents for both parties in the case where … a ban on the sale of wireless communication products guaranteed enforcement.”
Judge Zhu notes, based largely on Microsoft v. Motorola, that “the U.S. court will only judge the global FRAND rate of the standard essential patent portfolio involved in the dispute when the parties in the dispute agree, and will not actively set the global fee for both parties.” In the Sisvel case in Germany, Judge Zhu notes that the decision “is based on whether the quotations given by the two parties in the negotiation process conform to the FRAND principle as an important condition for judging whether to issue an injunction.” With regard to global rate setting, Judge Zhu notes that German courts recognized that “acceptance of global patent portfolio licenses cannot be used as a criterion to measure whether a party fulfills FRAND obligations. Standard-essential patent implementers are allowed to explain why they do not accept global licenses. Non-discriminatory licensing does not require that all licensees be given the same licensing conditions under any circumstances.” The German approach appears important to Judge Zhu to justify lower, China-specific rates. Based on Samsung v. Apple in Japan, Judge Zhu also notes that Japanese courts regard whether the parties comply with the FRAND principle during the negotiation process as a condition for issuing the injunction, and will not take the initiative to determine the global licensing rate of a SEP patent portfolio.
Judge Zhu concludes that “the practice of the British courts taking the initiative to judge global rates for both parties in the case is contrary to the mainstream practice of the international community.” To me this approach sets up a conflict between antitrust jurisdiction and traditional IP jurisdiction. In the Huawei v. InterDigital decision, for example, Judge Zhu took the view that the filing of a USITC action by InterDigital was an abuse of dominance under Chinese antitrust law. In separate decisions the court awarded antitrust damages and set a FRAND rate, with the foreign antitrust decision acting as another “coercive force.” The most recent Chinese court to blend antitrust jurisdictional concepts in a FRAND IP dispute appears to be the Wuhan Intermediate Court IP case of Samsung v. Ericsson.
In determining whether to issue an injunction, Judge Zhu notes that “the Chinese court will judge whether the standard essential patent portfolio quoted by both parties in the negotiation process conforms to the FRAND principle, as an important condition for judging whether the parties should be given an injunction.” For example, with respect to the Huawei v Samsung case, Judge Zhu notes that the Shenzhen Court determined that Samsung carried relative fault in the negotiations, and it was ordered to stop infringing Huawei’s patent rights. The standards for determining fault are articulated in the Guangdong SEP guidance, and other judicial documents.
In Judge Zhu’s view, the UK Supreme Court in UWP was seeking to force Huawei to accept higher licensing fees. Another view is that Chinese courts are charging unfairly low licensing fees. Judge Zhu also notes this wide disparity in his article when he discusses the German UWP case: “[t]he German court determined that Unwired Planet complies with FRAND’s Chinese licensing rate quotation, which is 18.3 times higher than the Chinese fee rate confirmed by the Nanjing Intermediate People’s Court in the first instance.” This huge gap in understanding between Western and Chinese courts of what constitutes a FRAND rate calls into question whether the Chinese courts are behaving in a results-oriented manner. This is also substantiated by a lack of proportionality between China’s low rate setting decisions and its more aggressive decisions regarding abusive licensing practices. NDRC’s penalty of $975 million against Qualcomm was was 13,000 to 50,000 times higher than the average patent damage award at that time. By contrast, the Chinese lower court decision in Huawei v InterDigital awarding InterDigital a rate of 0.019% was miniscule.
As the recent decisions in Wuhan suggest, Chinese judicial activism in this area has not focused on preserving a Chinese rate setting for China which might nominally be within the scope of Chinese “judicial sovereignty”, but instead, as Profs. Contreras and Yu have pointed out, enabling Chinese courts to engage in global rate setting under the compulsion of a global anti-suit injunction. This also facilitates implementation of Chinese government industrial policies to increase China’s global licensing balance of trade. It is not surprising that Samsung recently saw a similar opportunity by bringing a case in Wuhan to obtain a global ASI as part of its toolbox of remedies, despite Samsung and Ericsson having a small market presence in China when compared to the United States.
Without the benefit of ASI’s, Chinese courts already enjoyed the advantages of a forum that automatically grants injunctions, grants them quickly, and grants them over the huge Chinese market for companies that sell or manufacture there. Even if a company does not manufacture in China, the automaticity of Chinese injunctions provides significant advantages. Another advantage for plaintiffs, as the Samsung v. Ericsson case revealed, is that China is non-transparent prior to the long period that extends from case acceptance to international service of process. Moreover, forum non conveniens decisions, where the court relinquishes jurisdiction in favor of a more appropriate forum, are rare.
An additional reason for lower values in China, according to Judge Zhu, may also be higher invalidation rates for foreign patents filed in China, which may be “due to language translation and other reasons” which places those patents in an “unstable state.” Another translation issue occurs with respect to rate setting when “it is difficult to separate the standard-essential patent fee rate in Chinese jurisdictions because the description of the prior patent package fee rate agreement is generally very general or very vague.” Judge Zhu also does not discuss another factor that tilts the scale in favor of low foreign portfolio values, namely over-reliance on Chinese patent quantities to judge patent values.
For Judge Zhu, the UWP case involved a plaintiff who “had only 3 months of contact and negotiation with Huawei. It can be said that when the negotiation has just begun and there is no sign that the negotiation cannot proceed, UWP immediately filed a case with the British court… It is difficult to say that UWP’s behavior conforms to FRAND principles.” There may be, of course, different foreign perceptions of what constitutes reasonable or fair behavior. Foreigners making decisions regarding when and where to file court cases may need to consider such factors as: the short statute of limitations of Chinese court cases; the rapid time to trial and appeal of a Chinese case; a lower licensing rate if the case were filed in China; delays in service of process from Chinese courts; the flexibility of Chinese courts in setting their docket when a foreign party is involved; the aggressive use of ASI’s; difficulties of a Chinese court relinquishing jurisdiction; and other factors which may lead to a truncated period of negotiations prior to a foreign court case. Considering these uncertainties, courts may also need to be cautious in assessing what does not constitute a FRAND pre-trial offer.
Judge Zhu suggests several strategies to address the challenges posed by the UWP case: Chinese companies should seek to invalidate patents in China, and Chinese companies should initiate a lawsuit against the Chinese court for the licensing rate of standard essential patents. Judge Zhu also believes that when a Chinese company requests a ruling on the standard-essential patent license rate in the Chinese jurisdiction, regardless of whether the time of litigation is first or later, the Chinese court is required to determine the rate in the Chinese jurisdiction. Therefore, extraterritorial courts should exclude the trial of standard essential patent licensing fees in a Chinese jurisdictions. Consistent with that view of exclusive jurisdiction over Chinese rate setting, China should establish an anti-suit injunction system for handling SEP disputes in China: “[t]he practice of foreign courts issuing anti-suit injunctions to civil litigants in China has caused great obstacles to the normal exercise of rights by litigants in civil litigations in China. At the same time, it has also caused a greater impact on the legal exercise of jurisdiction by Chinese courts.”
In the few months that have passed since this important article was published, the global environment for SEPs has become more complex, largely due China’s decisions to issue its own global anti-suit injunctions. Some of these, such as the recent Samsung v. Ericsson case in Wuhan, addressed issues that were within the sovereign jurisdiction of other countries. The issuing of global ASI’s by China is now less inconsistent with the UK approaches.
Another concept that may not have survived well may be Judge Zhu’s analysis of when extraterritorial courts voluntarily ruling on global rates “would violate a [Chinese] principle of the closest connection in the jurisdiction of intellectual property cases.“ Judge Zhu cites the example of the UWP case. In that matter, In that case, Huawei’s global sales business primarily involved products that are produced in China and the main market is also in China. I do not know the jurisdictional basis in China of the Samsung v Ericsson case, In that case, however, the United States appears to offer a closer connection to both parties.
If, on the other hand, if the UWP dispute were heard in China and one were to apply Article 34 of the Civil Procedure Law of China to the UK case, jurisdiction would have been appropriate. It only requires an “actual connection” for a court to take jurisdiction in a contract or property dispute. This threshold is quite low. As Prof. Vivienne Bath has noted, only when “a judgment of a foreign court has been recognized in China must the court reject a suit on the same dispute.” Furthermore, the United States and many other foreign courts’ judgments are rarely enforced due to the lack of a bilateral agreement.
Judge Zhu’s article is an important introduction to Chinese perspectives on extraterritorial jurisdiction over SEP matters. At a conference that Judge Zhu and I both attended in January 2020 at Renmin University, I raised concerns to the audience about China’s lack of familiarity with concepts of comity as an important factor in drafting ASI’s by Chinese courts. Addressing extraterritoriality and interference in a country’s legal system with appropriate deference to the proceedings of other courts and respect for their legal system is a necessary next step for China’s judiciary in order to be perceived a fair venue for all parties to resolve their IP disputes.
Judge Zhu as well as Prof. Vivienne Bath are scheduled to speak at the forthcoming Berkeley-Tsinghua program on Transnational IP litigation on January 22, 2021. The SEPS panel will also include Chief Judge Randall Rader (ret.), Judge Andrew Guilford (ret.) and former USPTO Director David Kappos, among other notable speakers. Profs. Robert Merges and Hao Yuan will be moderating.
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