China: Patents: SEP ruling addresses exhaustion, contributory infringement and injunctions

On March 22, the Beijing IP Court issued a decision addressing standard essential patents (SEPs) related to a China standard – WLAN Authentication and Privacy Infrastructure (WAPI). The Court ruled in favour of the plaintiff – a Chinese technology development company IWNCOMM against Sony, which sells mobile handsets. The Court awarded more than Rmb9 million ($1.3 million) in damages. But what is more noticeable in the decision is the Court's rulings on the doctrine of patent exhaustion, indirect infringement, injunctions for SEPs and the determination of damages.

The patent in suit relates to a method of secure access to WLAN and secret communication, which is performed with the participation of a mobile terminal (MT), an access point (AP) and an authentication server (AS). Clearly, this is a system level claim involving multiple parties. Sony made MT, but used AP and AS which are purchased lawfully from IWNCOMM. Accordingly, Sony argued that the patent right was exhausted.

The Court held that the patent exhaustion doctrine in China only applies to apparatus claims or manufacturing method claims (a product derived directly from such a manufacturing method patent). The Court took an unusual step to interpret the relevant clause in the patent law and concluded that the patent law never meant to exhaust "use method claims". It will be interesting to see how the appellate court will deal with the ruling in this regard. The ruling in this case brings to mind the US Supreme Court's decision in Quanta v LGE. Finally, the Chinese courts have now addressed the exhaustion issues related to method claims.

IWNCOMM contended that Sony's mobile handsets are essential for contributing to the performance of the patented invention. IWNCOMM's independent claims cover three distinct components. It is very difficult to identify a single player that performs all the steps.

The Court held that indirect infringement generally requires the existence of direct infringement, which however does not mean that the patentee has the burden to prove another entity has already performed direct infringement. Instead, it is sufficient to prove that the all-elements rule will be met if a user uses the accused infringing product in its preset manner. As to whether the user shall be liable for his/her acts, it is irrelevant to prove the case of indirect infringement. The Court held that Sony knew that a combination of WAPI functional modules built into the accused infringing products was a device specially designed for practising the patent in suit, but still provided the products for business purpose to others to practise the patent in suit, which constituted contributory infringement.

Notably, patent infringement act in China must be something for a business purpose. Consumers' personal use of patent claims is not liable for patent infringement. The Supreme Court's patent infringement judicial interpretation clearly emphasises that establishment of indirect infringement shall require the presence of direct infringement. It seems that the Beijing IP Court has some different thinking. This may become a hot issue at appeal.

The Court's judgment reveals something interesting about how Chinese judges may issue injunctions for SEPs. The patent in suit relates to a national compulsory WLAN standard, which has a long history going back to early 2000. One of the factors that the Court was looking at in determining whether or not the injunction should be granted is who is to blame for the dead end in the licensing negotiation. When the patentee initiated the licensing negotiation, according to the factual findings in the decision, Sony required IWNCOMM to provide a claim chart to show the infringement. IWNCOMM countered by asking Sony to sign a non-disclosure agreement before providing the claim chart, which caused the negotiation to end in deadlock.

The Court held that a claim chart is not necessary for starting the negotiation, especially when Sony would be able to assess the infringement based on the fact of using the WAPI software in its handsets. And the court ruled that it is reasonable for the patent owner to ask Sony to sign a NDA before providing a claim chart. Therefore, it is Sony's fault for failing to do so, which somehow led to fallout of the licensing negotiation. Among other conditions, the court finally approved IWNCOMM's request for an injunction.

Again, the appellate court may have to examine why Sony has to use the WAPI standard and whether the delays are really some kind of fault. Chinese judges increasingly use a fault-based approach in deciding whether injunctions should be granted. This is a trend both sides should take a note of.

Finally, when it comes to damages, the Court made another unusual move. The Court used the IWNCOMM's other licences to determine the suitable royalty rate. But beyond this, the Court held that the asserted patent is a fundamental invention in the national WLAN security standard receiving technology awards and Sony was at fault in the negotiation process. Therefore, the Court awarded three times the royalty. Again, it is expected that Sony will challenge the findings of fact and law in this part.

The Beijing IP Court has been actively setting precedents in many fronts. This case is another example. Whatever the final outcome at appeal, this case may shape the way software patents and SEPs are litigated in China.

Steve Song	Liu Liangyong

AnJie Law Firm26/F, Tower D, Central International Trade Center6A Jianguomenwai Avenue, Chaoyang District, Beijing 100022, PR ChinaTel: +86 10 8567 5988Fax: +86 10 8567 5999wuli@anjielaw.comwww.anjielaw.com