Global Antitrust Institute Releases Its Comments on NDRC IP Abuse Rules

Attached are the English and Chinese comments of George Mason’s University Global Antitrust Institute (GAI) on the draft NDRC Guideline on Abuse of Intellectual Property Rights.  The comments were prepared by Koren W. Wong-Ervin, Professor Joshua Wright, Judge Douglas Ginsburg, and Professor Bruce Kobayashi.

I previously distributed on this blog the GAI’s response to the NDRC questionnaire here. Overall, these additional comments of GAI urge the NDRC to recognize throughout its Draft Guideline an IPR holder’s core right to exclude as a “legitimate” or “legal” use of IPRs, and to incorporate the “but-for” approach taken by the U.S. antitrust agencies of comparing the competitive impact of the IPR use against what would have happened in the “but for” world in the absence of a license.

The GAI’s comments also focused on the issues of applying “unfairly high price” prohibitions on IPR royalties. The GAI asked the NDRC to 1) explicitly recognize that “reasonable” compensation should reflect the risk-adjusted break-even price; and (2) state that, in determining whether a particular royalty is “unfairly high,” the NDRC will calculate a reasonable royalty as a minimum floor baseline using the hypothetical negotiation framework from U.S. patent damages law. The patentee should have the opportunity to prove, in addition, its lost-profits as part of its damages, which would seem to be equal to the profits denied by the “unfairly high” pricing provision.  GAI emphasized that the goal of a reasonable royalty calculation is to replicate the market reward for the invention in the absence of infringement, and explained that comparable licenses are often the best available evidence of the market value of the patent. The comments also discuss use of the “Georgia-Pacific” methodology to help determine minimum rates for what a willing licensee and a willing licensor would otherwise have negotiated if an unfair pricing calculation is to be applied.

The comments also consider complex portfolio licensing by urging NDRC not to unduly take into account whether some expired patents are included in a portfolio. The commenters suggest that it would be impractical, if not impossible, for portfolio owners to constantly renegotiate licenses (or provide updated patent lists) every time an IPR in a licensed portfolio expires or, conversely, every time new IPR is added to the portfolio, both of which occur commonly.  As GAI notes, portfolios include patents with a variety of expiration dates and the parties to the license take the variety of expiration dates into account when negotiating a price.   Moreover, patent claims may change due to reexaminations, court and administrative proceedings, which can affect how they read on a particular technology over time.   In my own experience, most licensees are seeking freedom to operate from parties asserting patents, rather than a technical solution found in the patent itself.  Indeed, former Chief Judge Rader at a recent conference hosted by SIPO noted that one of the biggest differences he saw between being a judge and a private practitioner is that judges (and enforcement agencies) may look at litigation as patent-based or even claim-based, while the real commercial world is concerned with portfolios and freedom to operate considerations  I would add one other factor that the comments don’t mention involving licensing expired patents – the patents may still have some litigation value and considerable commercial value post expiration if relevant statute of limitations have not expired. In many cases, such as pharma patents, the principal value is to be found towards the end of the patent term. Moreover, if global licenses are entered into, longer statute of limitations in countries like the United States, (six years versus two years in China, and ten years in many other countries) should necessitate that Chinese licensees actively consider taking licenses on expired patents up until the relevant statute of limitations’ expiration.

The drafters also suggest rejecting that a refusal to license constitute an abuse of IP, noting that a patent exhaustion doctrine could also make refusals to license difficult to apply since licensors may choose to license its patents to a manufacturer, user or distributor.

The comments also suggest a cautious approach, using an effects analysis, in looking at discriminatory analysis. My own personal perspective is that China’s regulatory regime insures that non-discriminatory licensing is almost impossible to universally achieve. More specifically, there will likely be a certain amount of discriminatory licensing, as foreign licensors to Chinese licensees have to provide indemnities, non-mandatory grantbacks and access to markets under Chinese law which they will not need to provide elsewhere, or which Chinese licensors do not need to provide in their own domestic market or to foreign licensees.

The commenters also suggest that that “the NDRC not impose an AML sanction for merely seeking injunction relief” when a standards essential patent is involved, or at worst only deny injunctive relief when the licensor seeks “supra-competitive” royalties, i.e., is engaged in patent hold-up by seeking royalties that are not consistent with prior commitments by the SEP holder. Finally, the commentators direct NDRC to consider as a last alternative adopting a rule similar to the European Court of Justice decision in Huawei vs. ZTE. That case would provide a safe harbor for an SEP holder seeking an injunction that (1) prior to initiating an infringement action, alerts the alleged infringer of the claimed infringement and specifies the way in which the patent has been infringed; and (2) after the alleged infringer has expressed its willingness to conclude a license agreement on FRAND terms, and presents to the alleged infringer a specific, written offer for a license, specifying the royalty and calculation methodology.  The ECJ would then put the burden on the alleged infringer to “diligently respond” to that offer, “in accordance with recognized commercial practices in the field and in good faith,” by promptly providing a specific written counter-offer that corresponds to FRAND terms, and by providing appropriate security (e.g., a bond or funds in escrow) from the time at which the counter-offer is rejected and prior to using the teachings of the SEP.  This approach is necessary to take into account the conduct of both the patentee and the accused infringer when considering whether to impose an AML sanction and is especially useful in the Chinese context where the data suggests there is a high degree of under-licensing.

The GAI also provided comments on numerous other provisions, such as refusals to license, the essential facilities doctrine, bundling, cross-licensing, grant backs, and no-challenge clauses.

Thanks to GAI for making these comments publicly available. Distributing comments such as these, when affected parties may be unaware of the opportunity to comment, and in order to encourage more informed public discourse.

Vringo vs ZTE: What the NDA Dispute in New York Suggests For Licensing Strategies

As many of my readers may know, I was not a fan of the Chinese courts’ decisions in Huawei vs. Interdigital in Shenzhen and Guangdong, which raised a number of process and substantive concerns.  A key question raised in that case was 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.”    The decisions in those cases plus the Qualcomm investigation has also raised many substantive and procedural concerns, including concerns regarding how to license IP within China in an environment that is increasingly seen as nationalistic, whether foreigners have been singled out, and counter-strategies to deal with Chinese companies inclined to seek protection under China’s antitrust laws.

Prof. Epstein expressed similar concerns in a policy brief  and a Forbes Magazine article earlier this year: “Far from being a device to promote competition, the AML is used to harass foreign firms that provide much needed competition to China’s state-protected agencies….The antitrust laws should not be applied so as to single out patents or any other intellectual property rights for special treatment; all property deployed in the marketplace should be treated equally under the competition laws.”

Two interesting decisions from Judge Kaplan in the Southern District of New York in the matter of Vringo vs ZTE Corp (14-CV-4988) highlight strategic responses to this perception of an aggressive posture of the Chinese courts and administrative enforcement authorities on alleged abusive licensing practices.

By way of background, Vringo has raised money from venture capital firms and is a licensor of telecomm patents, including patents formerly held by Nokia Corporation and Alcatel-Lucent.  From the perspective of a Chinese licensee, of which ZTE may be typical, Vringo is engaged in “abuses of intellectual property” as a “non-practicing entity” that uses “the threat of litigation and injunction to support [its] demands for unfair licensing fees.”  Vringo claims that patents it is asserting are standards essential.  Moreover, it has brought litigation in such places as Australia, Brazil,  France,  Germany,  India,  Malaysia,  the Netherlands, Romania, Spain, and the United Kingdom against ZTE for their alleged infringement.

In a June 3, 2015 decision by Judge Kaplan of the Southern District of New York regarding a July 2014 action filed by Vringo for breach of a Non-Disclosure Agreement (NDA) related to possible settlement of these litigations and any other disputes between them, Judge Kaplan issued a preliminary injunction to enjoin ZTE from further disclosing information subject to the NDA in antitrust matters in the EC and China brought by ZTE. The NDA specifically required that confidential information disclosed could not be used in “any existing or future judicial or arbitration proceedings” or “for [their] commercial advantage, dispute advantage, or any other purpose.”

Judge Kaplan’s decisions are suggestive of possible strategies for companies concerned about entering into settlement discussions without increasing Chinese AML litigation risks through well drafted NDA’s. Here is what I derive:

  1. Insist on Appropriate Governing Law, Know Chinese Legal Arguments and Make Sure Your NDA Has A Close Nexus to the Jurisdiction. Judge Kaplan applied New York law, and rejected ZTE’s arguments that Chinese law should govern the NDA and that that ZTE was required to provide the information to Chinese authorities.   Based on an affidavit submitted by my friend Doug Clark, a Hong Kong barrister with considerable Chinese patent experience, Judge Kaplan characterized ZTE’s assertions that it needed to disclose confidential information, as “nothing more than gamesmanship.”  Also of dispositive importance was that Vringo maintains its principal place of business in New York and sought protection under its laws when entering into the NDA.  ZTE voluntarily consented to New York law knowing this background.
  2.  Enter Into Settlement Discussions To Support Resolving Resolve Litigation. Judge Kaplan also rejected ZTE’s argument that the NDA is unenforceable under New York law as “an agreement to suppress evidence.”  The NDA was a permissible agreement between private parties about use of information in private litigation.  New York has a strong public policy encouraging settlement and “[t]here can be no doubt that the NDA was entered into for the explicit purpose of facilitating candid settlement discussions.”  Moreover, “it was entirely lawful for Vringo and ZTE to agree that they would not use information exchanged in settlement discussions in any judicial proceedings.”
  3. Make Out a Case for Irreparable Harm and Appeal to the Courts Sense of Equity. Judge Kaplan found that the irreparable harm requirement was met because “Vringo … probably would suffer injury in the future that could not be undone even if it prevails in this action.”  As with any well-crafted NDA, this NDA also contemplated the availability of equitable remedies for breach including by providing for procedures for the parties to seek a protective order from a court and by reciting, “that money damages may not be a sufficient remedy for any breach of this Agreement and that, in addition to all other remedies to which it may be entitled, the Parties will be entitled to seek equitable relief, including injunction and specific performance, for any actual or threatened breach of the provisions of this Agreement.” Judge Kaplan also noted that Vringo had not been made informed of the initiation of civil litigation or the unauthorized disclosure of its confidential information in an administrative action filed by ZTE in China, which had further compromised its position in those matters. Although he didn’t discuss the fast pace of litigation in China, which I have raised elsewhere in this blog, I am glad to see judges and rightsholders recognize how critical timing is to IP and antitrust matters involving China.

Note that Judge Kaplan did not enjoin ZTE from filing an AML action in China, but only from using the information obtained in violation of the protective order. Although the facts and circumstances are different, from the perspective of the Huawei vs InterDigital case, Judge Kaplan showed deference to the parties’ choice of law and did not take steps to interfere with decisions to file legal proceedings in other jurisdictions.  Of course, from ZTE’s perspective, it was likely being deprived of  information that it thought would be highly valuable to Chinese authorities.

In a more recent, July 24, 2015 decision, Judge Kaplan threatened sanctions against ZTE’s counsel for interposing objections that appear to be intended to delay or harass the deposition of ZTE’s counsel in what appears to have been subsequent discovery related to the above mentioned brief of the ZTE/Vringo NDA. This order appears to have been issued to support Vringo’s allegations that ZTE’s counsel “had an active role in coordinating pressure tactics by Chinese authorities in response to Vringo’s licensing demands.”   ZTE’s counsel have been ordered by Judge Kaplan to show cause why they should not be sanctioned under F.R.C.P, Rule 11.

The spate of IP-related Chinese licensing and antitrust decisions has also come at a time when the US and Chinese judicial and administrative systems are increasingly interacting, sometimes with a deepening sense of each other’s legal system or the comity that may be afforded to another court, or the different time frames that US and Chinese courts operate under.

The opinions expressed here are the author’s own academic perspectives and should not be taken as a reflection of any opinion of any client or employer, past or present, or a reflection on any market valuation of any stock or equity of any kind. Please email me with any corrections to this or any other posting, or feel free to post your own commentary on this blog.

China’s Rising Presence in the IPO Top 300

Intellectual Property Owners (IPO) recently released its top 300 organizations granted US patents in 2014.  Many Chinese companies made the top 300.  TSMC was the top amongst Mainland or Taiwan companies, ranking number 26, with 1,446 US patents. Huawei was 48 with 872 patents; ZTE was 63 at 705.  ZTE also showed a 58.2 increase over last year.  Hon Hai (Foxconn) was number 68 with a drop of 33.8 percent in patent filings to 665, and a drop in rank from number 35 in 2013.   Hong Fu Jin was number 85 ( a decrease of 47.9 percent), and Shenzhen China Star Optoelectronics showed the highest increase of any Chinese organization amongst the top 300, with a total of 431 filings.  This 318.4%  increased earned it the number 93 spot.

Patent grants increased for both Chinese and Taiwanese cell phone companies.  Amongst Taiwanese cell phone companies, HTC also made the top 300.  It received 210 patent grants, with an increase of 44.3% earning it the 157th place.

Tsinghua University retained its rank as the top Chinese university patent filer, ranking number 153 with 230 patents in 2014.  Amongst well-known universities, Tsinghua retained the enviable position of being behind the University of California system (number 91) and MIT (number 135) and ahead of Stanford (181), and Caltech (196).

Chinese “Top 300” changing ranks may be contrasted with overall patent grant trends at USPTO.  Patent grants from all countries, increased at USPTO last year, from 301,962 in 2013 to 326,039.  This was an increase of  about 8 percent.  Chinese patent grants increased from 6597 to 7921, an increase of  about 20 percent.

China is receiving more patents in both relative and absolute terms.   There were however many outliers in China’s overall growth.  While many Chinese organizations received patents in numbers that were well in excess of the overall growth rate at USPTO, as noted above several organizations experienced negative growth (Foxconn, Hong Fu Jin).

Of course, increases in patent grants do not necessarily translate into patent quality or commercial value.   Other patent data, including data on allowance rates, pendency rates and technology rate can help in further understanding overall patent data.  Data on licensing flows can also assist in understanding China’s role as technology importer and an emerging technology exporter.

Licensing: A Forthcoming Program and Some Historical Perspective

With recent antitrust investigations in China, as well as China’s design to have more market-oriented targets for IP, export growth in IP rights from China is slated to grow from 1.36 billion USD in 2013 to 8 billion USD in 2020, according to the Action Plan for the National IP Strategy.  Commercialization-related goals were also found in the Third Plenum, to increase IP utilization generally.

In this light, attached is the agenda for a forthcoming USPTO-SIPO program on licensing of intellectual property, which will take place April 15 in Beijing.  There is no fee for the program.  Seats are currenlty only available on a wait-list basis.   U.S. companies and their counsel can wait -ist for the program by contacting Ms. Liu Jia at the USPTO office in Beijing: jia.liu@trade.gov.

I also recently recovered from my own files an unpublished case on technology transfer from China to the United States, from over 10 years ago in the Eastern District of Texas.  The case involved a Chinese university professor that licensed his technology to a US company to collect revenue and litigate, as necessary.   I was an expert witness in that case, involving Infineon Technologies.  Although China’s tech transfer regime has since changed considerably, as I recall the case dealt with using US choice of law for the licensing of a Chinese-owned Chinese patent and US patent, including whether defects in Chinese ownership or regulatory approval for the license could be cured after the case was filed.

In a previous blog post, I noted that “choice of law in IP and technology transfer contracts is a “sleeper” issue – i.e., one that is too infrequently considered for all its strategic implications.  There may be situations where foreign law is preferred for a Chinese contract, or when Chinese law is preferred for a contract to be implemented overseas, or where choice of Chinese law brings some unhappy surprises.”  Although the choice of US law was ultimately sustained by the court, this decision demonstrated that there could be “unhappy surprises” in China’s then-existing over-regulation of technology contracts, including choosing United States law as a means to avoid these controls.

Since this case, China’s antitrust regime has interjected another level of uncertainty into licensing contracts for standards setting including by substituting Chinese law for a previously agreed choice of law.  .

Here’s a link to recent testimony I gave in an official capacity on licensing challenges in China. 

As always, this blog reflects my non-official, personal views.

WIPO, SIPO and USPTO: US-China Patent Filing Trends

Chinese Activity at WIPO

A WIPO report released on March 19 noted that Huawei, with 3,442 published PCT applications, overtook Panasonic as the largest applicant in 2014. Qualcomm was the second largest applicant in 2014, with 2,409 published applications. ZTE Corp. took third place with 2,179 PCT applications.

These top three applicants have similar patent filing profiles, with digital communication accounting for the bulk of their total filings.

The report highlights some weakness amongst Chinese academic institutions: among the top 25 educational institution filers, there were only two Chinese academic institutions – Peking University (no. 19) and Tsinghua (no. 23).

United States Activity at SIPO

SIPO’s 2014 Statistical Report (no. 164), analyzes filing trends from foreign countries, including the United States that further underscores the competition amongst Qualcomm, Huawei and ZTE and in the ICT sectors.

United States China invention patent applications with SIPO amounted to 135,138 pieces over the previous five year period analyzed.   The annual growth rate during this period was 8.3%. In 2013 United States patent applications were 29,992, about 1.4 times 2009.

According to SIPO, the following companies from the United States filed more than 3,000 patents from 2009-2013: Qualcomm (6,029); GE (5,875); General Motors (5,697); Microsoft (3,957) and IBM (3,293). Also of note during this period, Apple’s patent filings have increased rapidly, while Microsoft’s decreased after 2011 to 327 in 2013, falling to 11th place among US applicants.

SIPO’s description of Qualcomm’s role in communication technologies underscores highly competitive relationships in China:

Over the five year period of this survey, Qualcomm’s 5-year filings have ranked amongst the top three United States applicants. Chinese enterprises have also substantially increased their communication invention patents, and this substantial growth has a number of advantages. However, in key areas such as mobile phone chips, Qualcomm still owns core IP. It provides licenses to patented technology to Chinese communications equipment and consumer electronics equipment enterprises, and uses this technology to charge exorbitant license fees.

What about Chinese activity in the US?

USPTO’S Fiscal Year Report (ending September 30, 2014), provides partial data on Chinese filing trends in the United States. In 2013, there were 15,496 patent applications from China, having nearly doubled from 8,358 in 2010. Patent grants to Chinese residents more than doubled from 2010-2014 from 3,059 to 7,717.

Additional data is necessary to compare Huawei and ZTE’s filing trends in the United States and whether they reflect similar competitive trends in PCT filings and in China.

Federal Circuit Affirms Findings of Non-Infringement and Invalidity in Interdigital 337 Appeal

In a non-precedential opinion authored by Chief Judge Prost and released today, the Federal Circuit  affirmed findings of non-infringement or invalidity in the five patents asserted by InterDigital in Certain Wireless Devices with 3G Capabilities and Components  thereof,Inv. No. 337-TA-800 (Dec. 19, 2013), in which Huawei and ZTE, amongst others, were respondents.  Huawei initiated  law suits in China in response to InterDigital’s original 337 filing, including claims for prospective damages for abuse of dominance by reason of InterDigital’s seeking an exclusion order at the ITC for claimed standards essential patents.

 

InterDigital Settles With NDRC

According to a May 22 press release (http://online.wsj.com/article/PR-CO-20140522-903952.html) , InterDigital has settled antimonopoly charges with the National Development and Reform Commission of China.

InterDigital’s commitments regarding licensing of its patent portfolio for wireless mobile standards to Chinese manufacturers of cellular terminal units (“Chinese Manufacturers”) are as follows:

1. Whenever InterDigital engages with a Chinese Manufacturer to license InterDigital’s patent portfolio for 2G, 3G and 4G wireless mobile standards, InterDigital will offer such Chinese Manufacturer the option of taking a worldwide portfolio license of only its standards-essential wireless patents, and comply with F/RAND principles when negotiating and entering into such licensing agreements with Chinese Manufacturers.

2. As part of its licensing offer, InterDigital will not require that a Chinese Manufacturer agree to a royalty-free, reciprocal cross-license of such Chinese Manufacturer’s similarly categorized standards-essential wireless patents.

3. Prior to commencing any action against a Chinese Manufacturer in which InterDigital may seek exclusionary or injunctive relief for the infringement of any of its wireless standards-essential patents, InterDigital will offer such Chinese Manufacturer the option to enter into expedited binding arbitration under fair and reasonable procedures to resolve the royalty rate and other terms of a worldwide license under InterDigital’s wireless standards-essential patents. If the Chinese Manufacturer accepts InterDigital’s binding arbitration offer or otherwise enters into an agreement with InterDigital on a binding arbitration mechanism, InterDigital will, in accordance with the terms of the arbitration agreement and patent license agreement, refrain from seeking exclusionary or injunctive relief against such company.

A quick read of these commitments suggests that item 1 is a re-commitment by InterDigital to F/RAND licensing of its SEP’s,  Item 2 reflects Chinese antipathy to mandatory grantbacks of technology in a technology transfer agreement, including imposing non-essential requirements on the technology transfer agreement under the Contract Law and related Judicial Interpretation and  Item 3 reflects the interest in many parties in seeking mandatory arbitration to resolve increasingly complex F/RAND SEP disputes, including questions concerning the availability of injunctive relief in light of F/RAND licensing commitments. 

My personal observation: the news release does not indicate under what circumstances a Chinese licensee would have lost the right to an arbitration by reason of a lack of good faith in negotiating licensing terms and thereby does little to incentivize licensors entering into negotiations at an early stage after a standard has been determined.  However, it does appear to offer the possibility of expedited arbitration for licensor and licensee in lieu of the licensor’s seeking injunctive relief, thereby potentially mitigating losses of a licensor due to unreasonable delay.