Across the Fault Lines: Chinese Judicial Approaches to Injunctions and SEP’s

As has been noted in the media, on April 26, 2018, the Guangdong High People’s Court (GHC) promulgated the Trial Adjudication Guidance for Standard Essential Patent Dispute Cases (the “Guangdong Guidance”). The Guangdong Guidance adhered to the basic framework of Beijing Higher Court’s (BHC) Guidance for Patent Infringement Determination 2017 (the “Beijing Guidance”) which itself appears quite similar with the basic framework set forth by Court of Justice of the European Union (CJEU) in its decision for Huawei v. ZTE, as well as in the recent decisions of Iwncomm v. Sony (see abridged English translation from the Comparative Patent Remedies blog here) in Beijing and Huawei v. Samsung in Shenzhen.  Taken together, these approaches depart from prior Supreme People’s Court (SPC) practices, and embody a “fault-based” conduct-evaluation framework. The Guangdong Guidance further suggests that courts which apply the fault-based conduct-evaluation framework may rely on a comparable license approach than other approaches to determine FRAND royalties.

At First the FRAND Licensor Is Barred from Seeking an Injunction

The earliest Chinese court’s attitude about determining injunctive relieves and royalties for standard-related patent infringement case can be found in the reply letter issued by the SPC on July 8, 2008 to the Liaoning High People’s Court (LHC).  The SPC instructed the LHC that once a patent holder participated in the standard setting process and agreed to have its patents adopted in the standard, the court shall deem the patent holder as having consented to license its patents to anyone who implements the standard.  The patent holder can charge the standard implementer for royalties, which, however, shall be less than the usual amount of royalty if a standard were not involved. The court would also implement the promise of a patentee to license on a royalty-free basis.

Subsequently, on October 16, 2013, the GHC upheld the Shenzhen Intermediate Court decision of Huawei v. InterDigital. In this case, the Chinese court held that once an implementer had indicated its willingness to conclude a license, a FRAND encumbered SEP owner shall have the obligation to make a FRAND offer to the implementer. The key to determining whether the offer was FRAND is the evaluation of the royalty rate. Their opinion may also be read to suggest that the courts might reject a FRAND-encumbered SEP owner’s petition for an injunction when an implementer expressed it willingness to conclude an agreement. However, the court did not address how to determine whether an implementer is willing to negotiate.

The SPC Picks up the Fault Factors First

On March 21, 2016, the Supreme People’s Court of China promulgated the Judicial Interpretation on Several Issues Regarding Legal Application in the Adjudication of Patent Infringement Cases II (the “Patent JI II). Article 24 of the interpretation stipulated that the Court shall not support the SEP owners’ petition for a permanent injunction if the SEP owner intentionally acted against its FRAND commitment made in the standardization process during the negotiation of licensing conditions with the accused infringer, and the infringer was not at “obvious fault” during the licensing negotiation. Paragraph 2 of this Article also provides that in determining licensing conditions, a court shall, in accordance with FRAND principles, comprehensively consider the contribution of the innovation and its role in the standard, the situation in the technical field of the standard, the nature of the standard, the scope of exploitation of the standard, the related licensing conditions and other factors. This Interpretation thus introduced the fault-based idea into Chinese courts’ consideration of whether to issue an injunction in a SEP related case. The types of standards referred by Article 24, according to its language, are limited to non-mandatory national, industrial and local standards. The promulgation of Patent JI II opened the gate for the Chinese courts to view FRAND obligations as imposing certain conduct behavior on both the SEP owner as well as the standard implementer.

One year later, with the promulgation of the Beijing Guidance, the BHC extended the fault-based test for determining an injunction from the SEP owner to the standard implementer. In the Beijing Guidance, BHC attempted to structure a more complete and balanced framework for SEP injunctions. Article 150 of the Guidelines stipulated that both parties shall negotiate in good faith during the SEP licensing negotiation. Article 152 of Beijing Guidance targets the situation in which both parties were not at obvious fault. It provides that if the infringer duly submitted the amount of royalty it offered or a deposit no less than that amount to the court, then the court shall not generally support the SEP owner’s petition for a permanent injunction. Article 152 also detailed the situations where the court can determine the SEP owner disobeyed its FRAND obligation. These principles were also articulated in Article 13 of the Guangdong Guidance with some difference in detail. Article 153 of the Beijing Guidance targets the situation in which the SEP owner disobeyed its FRAND obligation and simultaneously the accused infringer was also found acted at obvious fault during the negotiation. It provides that the decision to grant an injunction shall be based on which party is more blameworthy for the break-down of the negotiation. Article 153 also enumerated the situations by which a court can determine that the accused infringer acted at obvious fault, which is also articulated by Article 14 of the Guangdong Guidance with some difference in details.

The complete general principles of deciding whether to issue permanent injunctions in SEP involved infringement cases was firstly laid out in the decision for Iwncomm v. Sony by BHC on March 28, 2018. The court reiterated that in a SEP licensing negotiation, both parties should negotiate in good faith. The decision to enter a permanent injunction should be based on which party is to blame for the break-down in negotiations by considering the performance of both parties during the process of negotiation as well as the substantial terms offered to conclude the agreement. The court enumerated four general situations:

  1. If the SEP owner intentionally acted against its FRAND commitment which led to the break-down of the negotiation, and the infringer was not at “obvious fault”, the court shall not support the SEP owner’s petition for permanent injunction;
  2. If the SEP owner was not at “obvious fault” during the negotiation, and instead, it was the infringer that at “obvious fault”, the SEP owner’s petition for permanent injunction shall be supported by a court;
  3. If evidence indicates that both parties were not at “obvious fault”,and the infringer duly submitted the amount of royalty he offered or a deposit no less than that amount to the court, the court shall not sustain the SEP owner’s petition for permanent injunction;
  4. If both parties are found acted at fault, the decision of whether to grant an injunction depends on an assessment of the faults of both parties.

Comparing these principles with the language in the Beijing Guidance, where the SEP owner acted at obvious fault while the accused infringer did not, it appears that submitting a deposit to a court is no longer the premise for the court to deny an injunction request. The deposit is only specifically required in the situation where both parties were not at “obvious fault.” In Iwncomm v. Sony, Sony, the accused infringer, was found to be intentionally engaging in delaying tactics and was therefore at obvious fault.  The BHC upheld the Beijing Intellectual Property Court’s decision of granting a permanent injunction. This case was also discussed in the Comparative Patent Remedies blog,

Huawei v Samsung And the Shenzhen Court Flexes its Muscles…

On January 4th, 2018, about two months before BHPC came to its conclusion on Iwncomm v. Sony, the Intellectual Property Division of the Shenzhen Intermediate People’s Court granted injunctions against Samsung in two separate decisions in Huawei v. Samsung. After detailed examination of the performance of both parties in the past licensing negotiation process and the court mediation process, the court then found Samsung was at “obvious fault” and that it acted against FRAND principles. Thus, a permanent injunction was granted. The court also ruled that in the light of the different nature of SEP and non-SEP cases, the two parties are allowed to continue negotiating licensing terms after the judgment, and the injunction will not be enforced on the condition that the parties reach an agreement later or Huawei consents not to enforce it.

The court’s injunction absent licensing-decisive negotiations or the probability of Huawei’s decision not to enforce the injunction was the basis for Judge Orrick’s Anti-Suit Injunction in the US counterpart case that enjoins Huawei from enforcing the Shenzhen Court’s injunction.

In Judge Orrick’s view, his court was the first to hear the case even if it were not the first to decide it, upon the petition of the same party (Huawei), and any decision to enjoin activity in Guangdong would undercut the possibility of a global settlement, which is the basis of Huawei’s claim before his court. Unlike the Chinese courts to date, Judge Orrick does undertake a lengthy comity analysis to justify his decision. Judge Orrick’s decision stands in stark contrast to another, earlier Shenzhen decision, Huawei v InterDigital (2013) which determined that InterDigital’s seeking an injunction (exclusion order) at the USITC was an abuse of its rights as a SEP holder, and arguably showed no deference to a previously initiated US litigation. Judge Orrick may have been taking prophylactic measures to ensure that US courts retain jurisdiction over disputes, and to deny a Chinese party “two bites” of the apple by undercutting a case that the Chinese plaintiff initiated at essentially the same time as a Chinese litigation.

The Guangdong Guidance was promulgated with all of the foregoing Chinese cases and judicial practices in mind. Article 10 of the Guidance explicitly reiterated that whether a permanent injunction is granted shall depend on whether the SEP owner or the implementer was at fault. Article 11 provides that when deciding whether the parties were at fault comparing with ordinary business practices, the factors that a court shall consider include: (1) the entire history of the negotiation; (2) the timing, tactic and content of negotiation of the parties; (3) the cause of deadlock, and; (4) other facts. Article 12 generally restates the principles of whether granting a permanent injunction set forth by the BHC in Iwncomm v. Sony. Article 13 and 14 followed the basic idea and structure of Article 152 and 153 of the Beijing Guidance for conduct-evaluation for both parties with some differences in detail.

Article 13 provides that if the SEP owner’s conduct met any one of the following situations, a court may determine the SEP owner disobeyed its FRAND obligation. The situations include: a SEP owner who (1) did not notify the implementer, or notified the implementer but didn’t list the scope of the patent in dispute according to the ordinary business practice; (2) did not provide the implementer with explanatory claim charts, patent lists and other patent information according to the ordinary business practice after the implementer had clearly expressed its willingness to negotiate the license; (3) did not provide the implementer with licensing conditions and the method of calculating the royalty, or provided obviously unreasonable licensing conditions, which result in failure to reach an agreement; (4) did not reply to the counter party within reasonable time; (5) impeded or interrupt the negotiation without justifiable reasons, and; (6) practiced other conduct at obvious fault.

Article 14 enumerates the situations that the court may determine an implementer disobeyed its FRAND obligation accordingly. The situations include an implementer who (1) refused to receive the negotiation notice from the SEP owner, or did not respond to the SEP owner within a reasonable time after it had received the negotiation notice; (2) refused to sign a confidentiality agreement, and thus led to a deadlock in negotiation; (3) did not make a material response to the SEP owner within a reasonable time after the SEP owner had provided explanatory claim charts and patent lists; (4) did not make a material response to the SEP owner within a reasonable time after the SEP owner offered its licensing conditions; (5) provided obviously unreasonable licensing conditions, which resulted in failure to reach an agreement; (6) delayed to or refused to negotiation without justifiable reasons, and; (7) practiced other conduct at obvious fault.

While the Chinese fault-based conduct-evaluation frameworks borrowed ideas from the CJEU’s decision for Huawei v. ZTE, the starting point of the Chinese framework is in different from the CJEU framework. The direct objective of CJEU framework was to answer the question whether a SEP owner’s action for seeking injunction breaks EU competition laws, specifically the Article 102 of TFEU. Logically speaking, courts that follow the CJEU’s framework do not need to answer whether an injunction should be granted. On the other hand, the Chinese framework directly addresses whether an injunction should be granted without reference to antitrust principles.

A Break With Tradition and A Rush to Change?

After these various developments, it can be said that Chinese courts now view the FRAND commitments as a universal principle binding both the SEP owner and the implementer. This approach leaves open where the implementors’ obligations of negotiating in good faith come from and when and how such obligations are triggered. Historically, Chinese courts also do not consider the infringer’s state of mind when deciding whether to issue a permanent injunction, nor are such standards part of the Patent Law (Art. 118, 134) or the General Principles of the Civil Law of the People’s Republic of China (Art. 179 ) or the more recent General Rules of the Civil Law of the People’s Republic of China. The framework introduces new judicial doctrines to determine a permanent injunction into Chinese patent law practice, which is also atypical for Chinese legal practice.  However, as China is currently considering introducing punitive damages in next revision of the patent law, fault-based factors may become more important and, indeed, fault factors involving punitive damages and an implementer’s state of mind in SEP negotiations could conceivably overlap.

It also worth noting that the judicial evaluation of royalties still plays an important role in this fault-based conduct-evaluation framework.  In determining whether an offer or a counter offer are FRAND, the court may rely much more on the comparable license approach. Article 18 of the Guangdong Guidance provides that in determining SEP royalties, the methods a court may refer to include: (1) comparing the comparable licenses; (2) measuring the market value of the SEP in dispute; (3) comparing the licensing information of comparable patent pools, and; (4) other methods. Last but not least, Article 16 of the Guangdong Guidance also confers the courts with the jurisdiction of setting royalties beyond its jurisdictional territory under one party’s petition as long as the counter -party does not file an objection or the objection is found to be unjustified.

Chinese courts’ approach appears to reflect the increasing global experience in adjudicating FRAND-encumbered patent infringement matters.  The fault-based approach also helps address the problem of Chinese implementers delaying in taking licenses and using the FRAND obligation as a sword to deny a patentee access to judicial relief, at possible risk of a licensor being on the receiving end of an antimonopoly action.  The approach also appears to reflect Chinese, and especially Guangdong-based companies, rapidly growing role as both a patent implementer and a contributor to important emerging standards, such as 5G. Nonetheless it is concerning that the pioneering cases noted here ruling in favor of a licensor acting in good faith and being entitled to obtain injunctive relief have all occurred where the licensor was Chinese (Iwncomm v Sony, Huawei v Samsung).    This is a scenario not that different from what some observers thought was the problem behind the President taking the unusual step of denying relief to Samsung in the Apple vs Samsung 337 litigation in the US – the binary observation is that it seems to be easier to make precedent eroding/strengthening IP rights when the party adversely affected/benefitted is foreign/domestic. For previous information about the Obama administration’s refusal on USITC’s order, please see here, here, here, here and here.

Written by Yabing Cui, LLM of Berkeley Law 2018 and Ph.D. Candidate of Peking University Law with the the assistance of Mark Cohen.  Yabing can be contacted at cuiyabing@berkeley.edu.

April 10 – 16, 2018 Updates

1.New Policies for  Innovative Drugs in China.  Premier Li Keqiang held an executive meeting of the State Council on April 12, 2018 to adopt a series measures to encourage the importation of innovative medicines into the Chinese market, to enhance intellectual property protection, and to lower the price of medications. The measures involve the exemption of cancer drugs from customs duty, reduction of drug prices, expedition and optimization of the process for authorization on the commercialization of imported innovative medicines, enhancement in intellectual property protection and quality monitoring.

The measures on enhancement in intellectual property protection includes the 6-year maximum data exclusivity period for innovative chemical medicines.  Further, a maximum of 5 years’ compensation of patent term will be offered for innovative new medicines which are applied for commercialization on domestic and overseas markets simultaneously (which appears to be a patent term extension system). See more discussion of the original CFDA proposals which these these appear to draw on here.  It’s still unclear how such policies will be implemented, The specific policies announced by the official in English is available here.

2.China to introduce punitive damages for IP infringements. According to an interview with Shen Changyu on April 12, China will soon introduce punitive damages for IP infringements. Shen said a fourth revision of the Patent Law will come faster than expected. “We are introducing a punitive damages system for IPR infringement to ensure that offenders pay a big price.” Shen also called on foreign governments to improve protection of Chinese IPR.

3.Commerce Blocks China’s ZTE from Exporting Tech from U.S.  The U.S. blocked Chinese telecommunications-gear maker ZTE Corp. from exporting sensitive technology from America.  According to a statement by the Commerce Department, ZTE made false statements to the Bureau of Industry and Security in 2016 and 2017 related to “senior employee disciplinary actions the company said it was taking or had already taken.”. ZTE did not disclose the factthat it paid full bonuses to employees who engaged in illegal conduct, and failed to issue letters of reprimand, the Department said.  Alleged export control violations had also been implicated in the NDA dispute between Vringo and ZTE involving settlement of patent claims, which were previously discussed here.

4.Judge Orrick Issues Anti-suit Injunction Against Huawei.  In the continuing transpacific saga of Huawei v Samsung, Judge Orrick of the N.D. of California issued an anti-suit injunction against Huawei’s implementing a Shenzhen intermediate court’s injunction against Samsung for the same patents in suit.  A good summary from the essentialpatentblog is found here.  The redacted decision is here.   One possible explanation for Huawei’s strategy might be that Huawei was trying to get a quick decision from Shenzhen, its home court, on a matter also involving an overseas litigation, such as Huawei obtained in the Interdigital dispute, and is also a common enough Chinese litigation tactic.  Such a decision might have tied Judge Orrick’s hand on at least the Chinese patents in suit, as well as on licensing behavior.  Judge Orrick in fact noted that “Chinese injunctions would likely force [Samsung] to accept Huawei’s licensing terms, before any count has an opportunity to adjudicate the parties’ breach of contract claims.”  (p. 17). 

Although anti-suit injunctions may be more common in common law jurisdictions,  it is wrong to assume that Chinese courts take a strictly “hands-off” attitude towards foreign proceedings.  One aggressive Chinese response might be to borrow a page from a Chinese (Wuhan) maritime court decision of last year, where the Chinese court issued an anti-anti-suit injunction, ordering a foreign ship owner to withdraw an anti-suit injunction in Hong Kong.  Commentators have also suggested that generally Chinese courts more commonly ignore these injunctions entirely.  Another approach was taken by the Shenzhen court in Huawei v Interdigital,  where the court imposed imposed damages on a US party seeking injunctive relief (an exclusion order) in a US Section 337 proceeding involving FRAND-encumbered SEP’s.   This did not constitute an anti-suit injunction, but rather “anti-suit damages.”  These actions may be based more on notions of judicial sovereignty than comity.  Judge Orrick for his part, did undertaken a comity analysis in rendering his decision, which is part of the non-confidential order he signed.

Probably the best approach however is for the parties to amicably resolve their disputes through arbitration or mediation. After all, even Huawei and Interdigital were ultimately able to settle their differences.

March 13 – 19, 2018 Updates

1. China’s export of IP royalties increased 311.5% in 2017  According to the statistics of the State Administration of Foreign Exchange, the volume of trade of Chinese IP royalties totaled 33.384 billion USD in 2017, a 32.7 percent increase from 2016. The amount of exports of IP royalties totaled 4.786 billion USD, a 311.5 percent increase from 2016, which ranked No.1 in terms of the speed of growth in service trade. The exports and imports of IP royalties for manufacturing industry ranked No. 1, at 3.793 billion USD, a 544 percent increase from 2016.  The import amount totaled 20.753 billion USD, up 16 percent. In terms of category. The amount of exports of replication/distribution computer software ranked No.1. at 3.405 billion USD, up 652 percent from 2016. In terms of region, Guangdong province was the No.1 in amount of export and import of IP royalties in 2017. Its export amount totaled 4.013 billion USD, up 591.9 percent from 2016 and its import amount totaled 7.525 billion USD, up 9.8 percent from 2016.

Despite the significant increase in the amount of exports of IP royalties in 2017, China still has a trade deficit in IP royalties. The amount of the deficit totaled 23.812 billion USD, which increased by 0.978 billion USD. About 60% of the deficit reportedly originated from the United States, Germany, and Japan.

IP commercialization and utilization has been a focus of China’s IP efforts since the third plenum of the Communist Party in 2014. However, foreigners continue to view China as very challenging licensing environment despite China’s claims of a licensing “deficit”. China’s technology import/export regulations had been one of the challenges that foreigners expressed special concern. In the US Chamber’s recently released IP Index, it was noted that IP commercialization in China was hampered by “[s]ubstantial barriers to market access and commercialization of IP, particularly for foreign companies.” China received zero points for “Regulatory and administrative barriers to the commercialization of IP assets.”  Here is a link to the discussion of Chinese licensing practices. The US Chamber’s conclusion is not unlike that of the Global Innovation Index (2016) which, as we previously reported, scored intellectual property payments according to a formula as a percentage of total trade. China came out at 72nd place, while it ranked number 1 in high tech exports. Similar concerns were also voiced by USTR in the recently released Section 301 report.

2.SIPO takes efforts to develop ability and capacity of IP mediation entities.  SIPO recently issued a “Notice on Developing the Ability and Capacity of Intellectual Property Mediation Entities” (“Notice”), as part of its effort to strengthen the role of mediation in IP dispute and the overall IP protection system. According to the Notice, SIPO will select 20 to 30 existing IP mediation entities every year as the target for ability and capacity development and help with such development for two years. After the two-year period, SIPO will release the basic information as well as specialties of entities that made great progress. Selection and review of existing entities will start this year, which is done by SIPO. Entities can apply either through local IP offices or to SIPO directly.

Within the region, Japan is also considering the use of mediation system to resolve IP disputes. The Japan Patent Office (JPO) intended to introduce an ADR system to determine appropriate license fee of SEPs in 2017. However, the ADR SEP system is likely to be deferred, as reported after a JPO committee meeting in November 2017.

3.  Huawei v Samsung patent decision released by Shenzhen IP Court. The recent decision in Huawei v Samsung was released by the Shenzhen IP Court.  The case involves assertion of two SEP’s by Huawei, and the grant of an injunction against further infringement.