17 November 2021
Standard-Essential Patents ("SEPs") are patents which protect technology essential to compatibility with technical industry standards.
To avoid abuse by patent holders, SEPs are typically required to be licensed on Fair Reasonable and Non-Discriminatory (FRAND) licensing terms. However, what constitutes a FRAND rate is often unclear and can lead to protracted negotiations, hold-ups, and ultimately, litigation. FRAND disputes are notoriously complex and lie at the intersection of contract, patent, and antitrust law.
Chinese enterprises are increasingly familiar with FRAND disputes. The groundbreaking case was in 2013, when Huawei Technology Co., Ltd. (“Huawei”) litigated Huawei v Interdigital, the first FRAND dispute where a Chinese court publicly ruled on interpreting and enforcing FRAND commitments pledged by an SEP holder to a Standard Setting Organization (“SSO”). In the ensuing years, outbound Chinese tech champions like Huawei and ZTE Corporation (“ZTE”) also became important litigants in overseas disputes over FRAND-encumbered patents. Among the more prominent disputes, they were appellants in a landmark 2020 UK ruling, Unwired World/Conversant v Huawei/ZTE ("Conversant").
Conversant is a noteworthy ruling where the UK Supreme Court ("UKSC") interprets the policy of a foreign SSO. Namely, that of the European Technical Standards Institute ("ETSI"). In its decision, the UKSC allowed itself to rule on the language and drafting history of ETSI policy, and reached conclusions about the intent of that language. This ruling forced a hold-out licensee to accept a global patent portfolio, and was a blow to the use of protracted, jurisdiction-by-jurisdiction FRAND negotiations by SEP implementers.
August 2021 marked the start of a related new trend: not only Chinese companies, but now also Chinese courts are assuming a greater role in global SEP licensing disputes. Ruling over the dispute between Sharp Corporation, Saenbacher Hippo Co., Ltd. ("Appellants"), OPPO Guangdong Mobile Communications Company Ltd., and OPPO Guangdong Mobile Telecommunications Co., Ltd. Shenzhen Branch ("Respondents", the "Oppo" case), the Intellectual Property Division of the Supreme People's Court ("SPC IP") affirmed Chinese jurisdiction over a global SEP patent licensing rate dispute.
In Oppo, the SPC IP not only affirmed jurisdiction but laid out a test for lower courts to follow when deciding whether to accept jurisdiction over such disputes. Specifically, it set out an “or” elements test for determining whether a global SEP licensing dispute has a sufficient enough connection with China for a Chinese court to accept jurisdiction. These include whether China was the jurisdiction which issued the patent, where the patent is exploited, where the patent license contract is executed or negotiated, where the patent license contract is performed, or whether the place where the property subject to seizure or enforcement is located in the territory of China. As long as one of the above places is within the territory of China, the case is deemed to have appropriate connections with China, and the PRC courts have jurisdiction over the case.
This jurisdictional test applies to global SEP patent license disputes generally. Ruling on whether it is appropriate for a PRC court to interpret the global licensing conditions of a disputed SEP, the decision determined the criteria outlined above based on the fact that "there is a willingness of the parties concerned to conclude a global license," the principle of "closer connection", and the convenience of the court. The SPC IP further ruled that even when the parties concerned did not express jurisdictional consensus on the global licensing conditions at issue, where the case has a closer overall relationship with PRC courts, it is still appropriate for PRC courts to rule on the global licensing conditions of the disputed SEPs.
Thus, the ratio from Oppo is that where the parties show a willingness to conclude a global (rather than localized) patent license, and there is a nexus with China, Chinese courts may claim jurisdiction. Moreover, absent a clear intent from the parties to conclude a global license, a sufficiently close connection to China will still allow a People’s Court to accept jurisdiction.
This is the first time that the SPC IP has clarified its jurisdictional rules on global patent licenses for SEPs. It marks a milestone on China’s road to more active participation in the formulation of global IP governance rules and precedents.
While the SPC IP only clarified the rules for jurisdiction, and did not go so far as to interpret the language of a foreign SSO and set rates itself in this case, it affirmed the Shenzhen court of first instance's ruling doing just that, leaving the door open for other Chinese lower courts to follow suit.
Other observers have noted that because the SPC IP in Oppo rules on other markets' rates, including the US, Germany, and Japan, it engages issues of sovereignty. This concern was also raised in the wake of Conversant. So far, comity towards foreign decisions like the UKSC’s in Conversant has avoided an international clash among judiciaries in rate-setting decisions. It remains to be seen whether the same deference will be extended to Oppo.
If the ruling in Oppo were to hold, China's courts may very well begin to regularly serve as a forum for breaking through logjammed SEP licensing negotiations, so long as those cases have a sufficient connection to China. In fact, due to the patent exhaustion doctrine and to electronics being heavily produced in China, even years prior to this decision some authors wagered that China could become the most important jurisdiction when it comes to setting FRAND licensing terms and royalty rates. Should Chinese courts take the initiative and accept jurisdiction over such disputes, this prediction may become reality.
However, cases less intimately intertwined with China may be distinguished from Oppo by Chinese courts. Oppo stood out because most of the patents at issue were Chinese, Defendants' principal place of business is China, negotiations were conducted in Shenzhen, China, and Defendants' assets were located principally in China. While the SPC IP, by endorsing an "or" test in deciding jurisdiction, sent a strong signal that the patent's place of issue, the parties' place of business, place of negotiations, or the place where their assets are located may all engage a sufficient "nexus" with China, lower courts may avoid applying this dogmatically where parties satisfy the letter but not the spirit of this new guidance. In particular, they may be wary of parties abusing the courts' newly enlarged jurisdiction in a bid to conduct strategic forum-shopping.
Conclusion
Chinese tech-champions like Huawei and ZTE have played an increasingly prominent role in the development of global SEP jurisprudence, as recently as last year litigating issues of jurisdiction over SEP disputes in Conversant. This year, Chinese courts have shown themselves ready and willing to decide cases involving foreign SEP rates litigated on Chinese soil. Going forward, FRAND rates set by Chinese courts will — to the extent tolerated by international comity — apply to foreign patents licensed beyond China's borders.
These courts and tech-champions, located principally in Beijing, Shanghai, and Shenzhen, have picked up quill and ink and are now comfortable contributing and adding to the global FRAND precedents written in foreign jurisdictions. Left unchallenged, these decisions bind entities both inside and outside of China, engaging sovereignty concerns. While presently, comity has allowed such decisions to stand, the true test for global FRAND licensing rules will come when unsatisfied parties, having exhausted all avenues of appeal in one jurisdiction, try their luck in the next, potentially rekindling the very jurisdiction-by-jurisdiction FRAND disputes which decisions like Oppo and Conversant specifically sought to snuff.
For further information, please contact:
Song Ying, Partner, AnJie law firm
mailto:songying@anjielaw.com
