12 January, 2018
Yesterday morning the Shenzhen Intermediate Court held a live broadcast of its announcement of the judgment on two SEPs infringement cases filed by Huawei against Samsung. The full judgment (some 300 pages, including economic expert evidence) will be handed down in writing, but not for 5 days or so in order to allow the parties a chance to comment.
The court's decision is closer to the German approach to SEP infringement than the approaches that we have seen in the UK's Unwired Planet v Huawei decision in April 2017 or the recent TCL v Ericsson case in the Central District of California. Rather than impose a licence on the parties, as Judge Selna did in TCL, or set the terms of a licence which the implementer could accept in order to avoid injunction as Judge Birss did in Unwired Planet, the Shenzhen Court has issued a final injunction against future infringement. It did so after considering the licensing behaviour of the parties. It concluded that the SEP owner had not violated its FRAND obligations, but that the implementer had erred in its approach to licensing negotiations.
This is not the first time that a Chinese Court has adopted this approach. In the Iwncomm v. Sony case, the Beijing IP court also considered whether to grant an injunction for an SEP. The Beijing court in Iwncomm took the approach that:
- if the patentee is at fault but the implementer is not, the patentee's claim for injunctive relief would be denied;
- if the patentee is not at fault but the implementer is at fault, an injunction would be granted; and
- where both parties are at fault, the court should consider the level of fault of the patentee and the implementer to balance the interests of both parties, and to decide whether the patentee's injunction relief should be supported.
These rules were codified in the Beijing High Court Guidelines on Trial of Patent Infringement Disputes (2017). Though the Beijing High Court Guidelines are not binding on courts in other areas of China, it appears that the Shenzhen Intermediate Court has adopted the same approach.
The approach adopted by the Chinese courts has been far closer to the approach of the German courts to SEP infringement cases and the CJEU's Huawei v ZTE decision than it is to the recent US TCL and UK Unwired Planet cases. Although it puts the patent owner to the cost of establishing that it has valid and infringed patents, an injunction in a market as large as China gives SEP owners contributing to the standard a strong hand in subsequent licensing negotiations.
Huawei's two patents in suits are ZL201110269715.3 (case no.816 of 2016) and ZL201010137731.2 (case no.840 of 2016). The Shenzhen court found both to be essential to the LTE 4G standard, and found the accused Samsung products to infringe. Interestingly, the court considered essentiality of the patents by reference to the published 3GPP Technical Specifications, rather than the official Chinese telecom standards YD/T. The Court recognised that the 3GPP Technical Specifications are the de facto 4G/LTE standard, showing a practical and open minded approach, and recognizing Huawei’s contributions to global innovation and standardization.
The court considered the licensing behaviour of both parties. Whilst it could find no obvious faults in Huawei's licensing approach, it found that Samsung had not acted as a willing licensee or cross-licence party:
- In their cross-licence negotiations, Huawei offered to discuss an SEP licence, but Samsung would only discuss a licence covering both Huawei's SEPs and non-SEPs.
- The court found that Samsung employed delay tactics in technical discussions – they failed to reply or failed to reply in a timely manner to the claim charts provided by Huawei.
- From 2011 to 2017, Huawei proposed 6 licensing offers. Samsung only provided one counteroffer after Huawei proposed its 5th offer. Samsung did provide a 2nd offer during a court-organised mediation, but the court considered that the 2nd offer was not substantially different from their first offer.
- In 2016 Huawei offered to submit the dispute to arbitration. The court commented that an arbitration offer was consistent with a recognized negotiation practices, but Samsung could not give any adequate reason why it rejected Huawei's proposal.
The Court found no basis to criticise Huawei's negotiation approach. During the licensing negotiations, Huawei had acquired some patents from Sharp and proposed to license those patents to Samsung. When Samsung asked the number of patents acquired from Sharp, Huawei initially failed to provide the information, although ultimately did so. The court found that the delay was not a significant fault.
The court found that the level of Huawei's licensing offers were consistent with FRAND. Huawei's top down approach to its licensing offers appears to have been as follows:
- For 3G, Huawei assumed that a reasonable aggregate royalty rate would be 5% (the same rate adopted by Judge Selna). Huawei argued that it has 5% of the total number of 3G essentials, so the royalties to be paid by Samsung would be 5% x 5% x a base price. It appears from the Court's announcement that the base price against which the royalties are calculated was 65% of the full retail price of the Samsung device. The 65% figure would be consistent with the settlement reached between Qualcomm and the NDRC. It is not the approach that has been adopted in the US and UK, both of which have accepted that patent licensing in the industry, and participants' announcements about cumulative royalty rates, have used the end user price as the royalty base.
- For 4G, Huawei claimed about 10% of the total number of 4G essentials. It argued that a reasonable cumulative rate for 4G would be about 6% – 8%. To determine the royalty base for 4G, it seems that Huawei chose two Samsung devices of the same model (one 3G version, the other 4G version). It calculated the royalty base as (the price of the 4G device – the price of the 3G device).
This is an interesting and different approach. Huawei's 3G approach is closer to the approach adopted by Judge Selna, using the device itself as the royalty base. But for 4G multimode devices, using as a royalty base the mark-up price between 3G and 4G devices would tend to give a lower value to 4G than using the device price itself, or adopting the 70%:20%:10% weighted blended approach to 4G, 3G and 2G adopted by Judge Birss in Unwired Planet. It would also mean that only 6-8% of the pure value added by 4G cellular technology to an otherwise identical device would go to the creators of that technology, leaving over 90% of the value added to the implementer. That allocation may attract some comment in coming weeks.
In considering the relative strengths of the portfolios, it appears that the Court considered both the ETSI declaration records and the technical proposals accepted by 3GPP. In considering acceptance rates, the Shenzhen Court may have chosen a different approach to the method adopted by the California court in TCL. In TCL, Ericsson had also advanced an approach based on rates of acceptance of technical proposals by 3GPP, but this was rejected by Judge Selna in favour of a pure patent-counting approach.
Samsung presented a Thomson Reuters report to demonstrate that they had a stronger portfolio than Huawei. The Shenzhen Intermediate Court did not adopt this because the Thomson Reuters analysis was only based on US patents and patent applications. Although it employed a forward citation analysis, this only looked into how often the US patents analysed were cited by other US patents. Consequently, the Thomson Reuters report did not provide a comprehensive review of the parties' global portfolios. In the end, the court found that the size and the strength of the 3G and 4G essential patent portfolios of both parties was similar, although Huawei had a larger China portfolio.
Having concluded that both portfolios were similar in strength, the court observed that Samsung's offer to license Samsung patents to Huawei was 3 times higher than Huawei's offer to license Huawei's patents to Samsung. It used this as another basis on which to rule that Samsung's offer was not FRAND.
Samsung put forward a comparable licences approach, comparing Huawei and Samsung's portfolios with IDC. The court accepted the comparable licence approach. But it rejected this particular comparable because it found that IDC as a non-practising entity was not a similarly situated party, and because IDC's portfolio was not as strong as the portfolio of Huawei or Samsung. It is not clear what steps were adopted to compare the IDC portfolio with Huawei and Samsung.
Samsung raised an argument that Huawei's patents were exhausted through being incorporated in Qualcomm's CPU and baseband chips which were then used in the Samsung products. The court found that Huawei did not grant any 4G licence to Qualcomm, and that there could be no exhaustion.
Notably, once again there appears to be no Smallest Saleable Patent Practising Unit argument advanced by either party in this action.
The Court has enjoined Samsung from manufacturing and selling devices in China which infringe either of the two Huawei patents in suit. Although the infringing devices were handsets, the injunction would cover all devices (terminal or network) using these patents. Samsung will need to agree a license with Huawei if it wishes to continue manufacturing and selling in this major market.
The Court's approach to the award of an injunction is likely to be cautiously welcomed by SEP owners, even if the calculation of royalties may not be. However, interested parties will need to wait to see the final 300 page written decision. In certain respects, in particular the finding that an SEP holder is not obliged to offer its non-SEPs as part of an SEP licensing deal, the decision provides some useful clarifications for parties. The finding that an implementer's refusal of portfolio arbitration may be grounds for an injunction is more or less aligned with Europe's Huawei v ZTE approach, and may assist the industry in moving away from patent-by-patent and country-by-country litigation towards a system of global portfolio determination.
There are several mobile telecoms patent cases pending in China, so watch out for further interesting decisions in the coming year…
For further information, please contact:act:
Yang Li, Bird & Bird
yang.li@twobirds.com
