The Supreme People’s Court IP tribunal (“SPC”) recently published a list of 100 cases in celebration of its 5th year anniversary, which included several FRAND judgments. One of which, under the illustrative category of “Strengthening IP Protection”, is the SPC judgment issued in favour of Iwncomm against Apple on 30 December 2022. Iwncomm is the owner of a number of patents declared essential to WAPI, which is a compulsory Chinese national standard for wireless LAN. The SPC judgment was only published recently.
In this article we take a look at the SPC’s judgment and how it may impact on future licensing negotiations for SEPs (Standard Essential Patents) in China.
Case background
In 2010, the implementer reached a licence agreement with the patentee for a portfolio of 51 patents and patent applications, including the asserted Chinese patent ZL 02139508.X in the lawsuit. The licence term is from 2010 to 2028. However, only the lump sums payable in respect of sales from 2010 to 2014 are stipulated in the agreement. The royalty payable in respect of sales from 2015 and beyond are subject to further negotiations under the agreement. The licence has a dispute resolution clause submitting all disputes arising from the contract to HKIAC arbitration.
The parties started to negotiate the 2015+ royalties from November 2014 onwards. The implementer raised a number of questions regarding the value of the patents and whether the royalty sought was justified. On 11 April 2016, the patentee brought the present lawsuit.
In March 2018, the implementer brought an arbitration in Hong Kong. The arbitral tribunal reached a decision on 7 April 2021. The Shaanxi High People’s Court reached the first instance judgment on 30 December 2021, and the SPC issued the appeal judgment on 30 December 2022. Meanwhile, the patent expired on 6 November 2022.
What is the rate?
In the first instance ruling, the Shaanxi Court granted an injunction and damages in the sum of RMB 142.8 million (around US$21.4 million) in respect of the infringement of the ZL 508 patent. The lump sum was calculated on the basis of:
- RMB 141 million corresponding to 47 million units of handsets, and
- RMB 1.84 million in respect of 613,000 units of computers.
This is equivalent to an implied per unit rate of RMB 3 (US$0.42). During the appeal, the patent expired, and therefore the injunction became moot. The damages sum was upheld, but on an adjusted ground.
A per unit rate of RMB 3 is also the amount awarded by the Beijing Court against Sony Mobile in 2018 for the same patent, arriving at a lump sum of RMB 8.6 million.
Does negotiation behaviour impact on the FRAND rate in a SEP case?
First instance ruling
Iwncomm v Apple is a patent infringement case. It is noteworthy that the Shaanxi Court used a 3x multiplier to the FRAND rate from comparable licences in its assessment of damages. The award of triple royalty is linked to the implementer’s fault in negotiation. Another reason is that the actual number of sales units of the infringing products cannot be accurately ascertained but is likely to exceed the number used by the patentee in calculation. The ruling is consistent with the parallel judgment of Iwncomm v Sony Mobile. In that case, damages were similarly awarded in the sum of 3x per unit royalty rate of RMB 1 for infringement of the same patent.
Contrasting decision
By contrast, the SPC rejected a request for 3x royalties in the more recent case of ACT v Oppo/ Vivo (2023). The SPC found that ACT and OPPO/Vivo were equally liable for the failure in negotiation (see our article, SEP case update ACT v OPPO Vivo).
The SPC explained that “In the case the actual damages suffered by ACT can be ascertained… the actual damages can be calculated [by late payment interests] and it is not necessary to go to the alternative basis of using a reasonable multiplier of patent licensing royalty fees.” The SPC said OPPO’s fault (also Vivo’s fault) means it should bear 50% of the late payment interests added to the FRAND rate.
SPC ruling
In the appeal judgment of Iwncomm v Apple, the SPC upheld the finding that the implementer has obvious fault in negotiation. However, the SPC does not characterize the award as punitive damages, but as a reasonable assessment of damages when the claimant’s loss or the defendant’s gain cannot be accurately ascertained.
The SPC considered a number of factors in finding that the damages award is reasonable:
- The obvious fault of the implementer during negotiation and its refusal to disclose actual sales records is considered as the first factor.
- The second reason is that the sales units used in the damages assessment is likely to be far lower than the actual sales units by the implementers. In Iwncomm’s damages calculation, model A was estimated to have sold 40 million units from 2015 to 2017, and model B was estimated to have sold 7 million units. According to the MIIT records, the corresponding numbers are more likely to be 69 million units and 22 million units. The number of tablets is more likely to be 618,033 units. In view of the under-estimation, the multiplier is closer to 1.5.
- The third reason is that the SPC considered the asserted patent is the key patent with significant value in Iwncomm’s WAPI portfolio. Also, Apple did not pay any royalty for the remaining 51 patents in the portfolio during the process of the infringement litigation.
Consequently, the SPC concluded that the damages award is not too high.
In respect of the overlapping arbitral award and damages award, the SPC said the patentee can decide which one to execute and deal with any duplicative payment then.
The trend from these cases shows that the impact of negotiation fault on the calculation of royalty payment has been reduced but not eliminated. The SPC judgments still leave open the possibility of fault being an aggravating factor in some situations, such as when the patentee’s loss in royalty payment cannot be accurately ascertained.
What kind of negotiation behaviours is considered as wrong?
The SPC found that the implementer had seriously delayed the negotiation for a post-2014 licence. The implementer had raised unjustified challenges on the need to obtain a licence when the negotiation was supposed to be on the rates only.
A summary of the negotiation history is as follows:
- On 20 November 2014, the patentee sent a notice to the implementer asking for royalty payment assessed at RMB x/ unit.
- From 26 November 2014 to 24 December 2015, several chaser emails were sent.
- On 1 January 2015, the implementer requested to schedule a meeting and said this was because its person-in-charge had changed.
- On 9 January 2015, the patentee made a lump sum offer.
- From February to May 2015, the parties tried to schedule a meeting.
- On 7 May 2015, the implementer acknowledged the receipt of technical information.
- In May and June 2015, the patentee chased for a reply and continued to ask for RMB x/ unit. The patentee said the US$5 million counteroffer for five years was too low. If the implementer did not want to license anymore, it should notify the patentee.
- On 12 June 2015, the implementer asked for inspection of a third-party licence which might give rise to exhaustion issues. [Our best guess is that this is Broadcom, as Apple sought for inspection of the licence between Iwmcomm and Broadcom through S1782. In the negotiation history, Iwmcomm also mentioned that they don’t understand why BCM’s contract is relevant, BCM may stands for Broadcom]. The parties then argued on this point for the next four months.
- On 27 October 2015, the implementer further enquired about the details of the chip licence, and whether there are other comparable licenses which could be relevant. The implementer also asked for the detailed calculation basis for the offer and said in their view they had not infringed the patents.
- On 30 March 2016, the implementer disputed the sales estimates and the level of use of WAPI technology by the consumers.
- On 11 April 2016, the patentee sued.
The Shaanxi Court found that the implementer did not invite negotiation knowing that the sum payable from 2015 onwards had not been agreed. From November 2014 to May 2015, the implementer did not respond substantively to the patentee’s offer. Rather, the implementer raised challenges on whether a licence was necessary. The Shaanxi Court said that the objection that a third-party licence may raise exhaustion issues has no basis, and it was raised only after months of delay. Therefore, it was just an excuse for delay.
SPC ruling
On appeal, the SPC upheld the first instance ruling and found that the implementer had “delayed the negotiation for a post 2014 license without justifiable reasons and challenged the necessity to obtain a patent license.” The patentee was found to have no fault both in the arbitration and in the court proceedings. Although this would have entitled the patentee to an injunction, the SPC also called for consideration on the necessity (factors such as public interest, balance of interest between the parties) of granting an injunction.
If an injunction is still necessary, a conditional injunction may be awarded. On the one hand, under special circumstance, the implementer could be given a reasonable time to amend its technical solution before the enforcement of the injunction. On the other hand, the injunction would no longer need to be enforced if the implementer has paid sufficient damages or FRAND royalties (This appears to affirm the approach adopted by the Shenzhen Intermediate Court in Huawei v Samsung – a China style FRAND injunction). In Iwncomm’s case against Apple, the injunction is no longer necessary as it is superseded by the arbitral award and the expiry of the asserted patent. The SPC judgment has refined the threshold of whether challenging essentiality and validity of the patent would consider fault in negotiation. In ACT v OPPO, the SPC said that generally speaking these objections are not viewed as a fault. The Iwncomm v Apple case has reached a contrary finding when the challenge was made during renewal negotiations.
Price negotiations might impact on the final rates unpacked
The SPC judgment also recites a finding by the Shaanxi Court that the per unit rate is ascertained by looking at “the true intention expressed by the parties during negotiations”. In assessing whether the per unit rate is FRAND, the Shaanxi Court said that both parties used past sales in predicting future forecast, and the lump sum largely corresponds to multiplying the per unit rate with the past sales from 11 months prior to the signing of the licence. Also, the parties only negotiated on the sales estimate. Although the running royalty proposal was rejected and a lump sum payment was adopted in the end, the implementer did not expressly object to the per unit rate proposed by the patentee. Although the implementer has raised doubts when comparing the licensing rates of WiFi with WAPI, this was not a basis of calculation used in the offers and counteroffers.
There are opposing views amongst the economists on whether the unpacking of a comparable licence should be based on objective sales forecast or take into account the parties’ subjective views. In China, at least, the prevailing views by the Courts are to consider information exchanged by the parties during negotiations. The reason could be that the rules for contractual interpretation under Chinese laws is to look at the true intention expressed by the parties.
Consequently, when conducting negotiations with a view to the possibility that the licence may become a comparable to be unpacked by a Chinese court, every price exchange and explanation of the basis of the calculation must be made with this consequence in mind. This could have the advantage of providing some certainty about the price that the parties will ultimately agree. An undesirable consequence is that it may steer the negotiation more like a lawyer’s race to raising objections, rather than a good-faith dialogue where the mindset should be one of seeking common grounds and willing to compromise. But such is the status quo. Que sera, sera, until the next case comes.
Other issues
The SPC judgment also covers a number of other interesting issues, including contributory infringement liability for a multi-actor patent claim, the number and type of comparable licences, and whether there is infringement when there is a licence with a missing price term.
