Wuhan and Anti-Suit Injunctions

Wuhan, China is currently a destination jurisdiction for anti-suit injunctions (ASI) and anti-anti-suit injunctions (AASI).  Although the first AASI was issued in a Wuhan maritime case in July 2017, the IP judiciary started to more seriously consider ASI’s. The ramp-up occurred around the time of a conference that I attended in China in mid-January of 2020 on the subject of ASI’s.  At that conference, Chinese judges noted that the Civil Procedure Law (Article IX, Sec. 100) regarding “action preservation” would encompass anti-suit injunctions and that ASI’s should be issued by the Chinese courts. Subsequent to that conference, an ASI was issued by a Wuhan court in the Xiaomi v. Interdigital case, which was followed by an AASI from the Delhi High Court in India (discussed in the excellent blog of Yang Yu and Jorge Contreras).  This December, Samsung also filed a suit against Ericsson in Wuhan and obtained an ASI to counter Ericsson’s earlier-filed suit against Samsung in the Eastern District of Texas.  Today, December 28, 2020, the Eastern District of Texas granted an AASI against Samsung in response to an ex parte  motion of Ericsson filed on the same day (Ericsson Inc. v. Samsung Electronics Co., Ltd, Civil Action No. 2:20-cv-380-JRG) (the “Order”).

Ericsson is seeking to resolve a FRAND dispute with Samsung. Ericsson publicly filed its case in Texas on December 11, 2020.  Ericsson first became aware of the Wuhan lawsuit on December 17, 2020.  Ericsson claims that the Wuhan suit was secretly filed on December 7, 2020 and was hid from Ericsson for ten days. Samsung sought an ASI from Wuhan on December 14, 2020.   Ericsson had “no advance notice of the Wuhan antisuit injunction until the moment it was issued” on Christmas morning, December 25, 2020. Ericsson’s request for an AASI, styled as an “Emergency Application for Temporary Restraining Order and Anti-Interference Injunction Related to Samsung’s Lawsuit Filed in the Wuhan Intermediate People’s Court of China”  was filed on Dec. 28, 2020, the Order was issued shortly thereafter on that same day.

Please note that I have not yet seen copies of any of the Wuhan filings.  I am accepting all its allegations for purposes of this blog as true.

The facts alleged do not present an unusual situation.  They are similar to other cases in China where the lack of transparency had been leveraged for strategic advantage and a case was prosecuted at an odd time in an odd court.  The Veeco case, for example, involved an injunction issued “without providing notice …  and without hearing”  in order to undermine a foreign proceeding.  The case was also filed at less well-known for court for semiconductor related litigation that had gained a recent reputation for issuing preliminary injunctions, As in the Samsung case, the Chinese court also had little relationship with either of the parties. Relief was also granted by the Chinese court against a US party within days of a US holiday.   A similar issue involving non-transparency arose with respect to the Inter Digital case.  Issues involving the actual date of filing of a “secretly” hidden case have also arisen from time to time, particularly under former civil procedure rules which permitted courts to avoid disclosing a filing of a case until 10 days after the case had been formally “established” and thereby led to suspicions of backdating of case filings.   

The ASI issued by the Wuhan court bars Ericsson from (1) seeking injunctive relief on 4G and 5G SEPs around the world; (2) seeking a FRAND adjudication anywhere other than Wuhan; and (3) seeking an AASI.  To counter this ASI, Chief Judge Gilstrap’s AASI: restrains Samsung from seeking injunctions that would impair the jurisdiction of the US court or from filing lawsuits or administrative actions to enforce or defend its United States patent rights; indemnifies Ericsson; and requires Samsung to provide Ericsson with copies of all court papers in the Wuhan matter.

At one time Chinese courts generally ignored ASI’s.  However, as I have previously noted, it is now “wrong to assume that Chinse courts take a strictly ‘hands-off’ attitude towards foreign proceedings.”  ASI’s are increasing.  There are, however, certain systemic problems and strategic considerations that should be considered by China in granting ASI’s.

Among the procedural challenges are the lack of transparency in China’s civil procedure and preliminary injunction practice, including problems concerning service of process, and special rules that apply to foreign service of process.  The problem of lack of transparency in preliminary relief in China is one that I have discussed several times in this blog. There are also inherent strategic advantages in China’s expedited civil process that may mitigate against issuance of an ASI. A Chinese court can reach a decision well in advance of most foreign courts and leverage its automatic injunction to help compel settlements, thereby averting the need for an ASI in some instances.

Substantive adjudication is also impaired by notions of judicial sovereignty  and overly aggressive jurisdictional reach.  Judicial sovereignty has become an increasing concern of China’s leadership, but it is not the same as comity, which seeks to minimize the impact of one court’s decision on another court’s legitimate interests.  Ericsson sought to address comity concerns in its motion by noting that the Wuhan suit’s claims were a subset of the US court action.  Ericsson argued that it was “not asking this Court to stop Samsung from proceeding in the Wuhan suit. Rather, Ericsson is asking this Court to order Samsung not to further pursue or enforce injunctions from other courts that would interfere with the jurisdiction of this Court.”  Foreign courts that directly or indirectly seek to restrain or adjudicate matters involving US patent validity or infringement are likely to raise serious concerns with US judges about comity.  Chief Judge Gilstrap addressed this issue by reaffirming the primacy of his court in the AASI in ensuring that Ericsson has the ability “to enforce or defend its United States patent rights.”

This case may present another example where a perceived lack of due process in a court proceeding provides no advantage in the court of public opinion or before non-Chinese judges.  In the Inter Digital case, the Delhi District court, similarly noted in its AASI decision that the Wuhan case “appear[s] to have been less than fair, not only to the plaintiff, but also to this Court.”

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.