How far should courts’ jurisdiction for SEPs reach?
Wu Dongliang, Echo Lin and Simon Tsi of Chang Tsi & Partners evaluate the decision of the UK High Court to issue a global FRAND licence in Unwired Planet v Huawei, provide an insight into the way in which Chinese courts determine royalties for SEPs, and advise Chinese businesses on how to manage SEP litigation
In March 2014, Unwired Planet brought an action against Huawei, Samsung and Google for the infringement of its UK patents, including five standard essential patents (SEPs) covered by 2G, 3G and 4G telecommunication standards. After technical trials concerning the validity and infringement of the patents at issue, two of these SEPs were held valid and infringed. Since Google and Samsung settled with Unwired Planet during the proceedings, only non-technical issues concerning competition law and FRAND remained to be resolved between Huawei and Unwired Planet. In April 2017, the High Court of England and Wales (hereinafter referred to as the English High Court) issued a judgment on the non-technical issues (hereinafter referred to as Unwired Planet v Huawei). In this judgment, Mr Justice Birss issued a novel and interesting opinion regarding the meaning of FRAND, FRAND royalties and injunctions, which led to intense discussion in academic and legal practice circuits.
The English High Court's decision, which held that Unwired Planet and Huawei should accept a global FRAND licence for the SEPs, may have exceeded the territorial reach of the English court since the jurisdictional reach of a court typically only extends to patent rights granted in that jurisdiction. Any determination of patent royalties outside the jurisdiction, which stems from patent rights granted by foreign jurisdictions, would exceed the territorial reach of the court. Huawei appealed to the England and Wales Court of Appeal (hereinafter referred to as the English Court of Appeal), contending that the imposition of a global licence on terms decided by a national court based on a national finding of infringement was wrong in principle and led to manifestly unjust results. However, the English Court of Appeal upheld the decision of the English High Court, though it disagreed with the view that there is only one set of FRAND licence terms. This decision is likely to impact the IP strategy of Chinese companies in the field of SEP litigation and negotiation.
Negative impact of Unwired Planet v Huawei
Patents are territorial in nature, and the principles of territoriality cannot be casually breached. Nevertheless, the English court decided to award global royalties for Unwired Planet's SEPs, including those valid in China, without the mutual consensus of Unwired Planet and Huawei.
The rights granted by a patent are restricted to the country or region where the patent is granted, and courts in other countries cannot decide the validity of this patent. In addition, the value of the patent should be determined by courts in the country or region where the patent is granted, in accordance with national and local law. On the basis of the doctrine of international comity, courts in other countries should not overstep these territorial boundaries.
However, according to paragraph  in Unwired Planet v Huawei ( EWHC 711 (Pat)), the English High court considered the scale and geographical scope of Unwired Planet's portfolio, and held that only a global licence would comply with FRAND, because "a licensor and licensee acting reasonably and on a willing basis would agree on a worldwide licence. They would regard country by country licensing as madness. A worldwide licence would be far more efficient." Similarly, the English Court of Appeal also held at paragraph  in Unwired Planet v Huawei ( EWCA Civ 2344): "It may be wholly impractical for an SEP owner to seek to negotiate a licence of its patent rights country by country, just as it may be prohibitively expensive for it to seek to enforce those rights by litigating in each country in which they subsist." As a result, Huawei was required to reach a licence agreement with Unwired Planet based on global royalties and terms established by the English High court. Without an SEP licence, Huawei's marketing activities would be blocked by an injunction. This effectively meant that, without the licence, Huawei's mobile phones and servers would be prohibited from sale in the UK. This decision is a violation of the principle of territoriality, because the English High court also decided royalties for the SEP valid in China when awarding global royalties for Unwired Planet's SEPs.
The judicial determination of royalties in other territories should be based on an agreement between SEP owners and licensees. However, in Unwired Planet v Huawei, the English court decided global royalties and ordered both parties to reach a global licence agreement, despite Huawei's objections.
Normally, global licences are concluded on the basis of a consensus between SEP owners and licensees, after they consider all commercial aspects, for example, transaction costs, in terms of worldwide patent portfolios covered by international standards. Thus, global licences are the embodiment of the freedom of commerce and the autonomy of parties. SEP owners and licensees can also agree to a national licence.
In Unwired Planet v Huawei, Unwired Planet's proposal included offers of a worldwide SEP portfolio licence and a UK SEP portfolio. Huawei had expressed willingness to conclude a licence based on the UK patent portfolio, and a willingness to accept any royalties and terms determined by the English High Court as they related to the UK patent portfolio. In this scenario, the English High Court insisted on the validity of the global licence, and forced Huawei to conclude a licence agreement with global royalties under the threat of an injunction.
In SEP litigation and negotiation, the judicial determination of global royalties without the consent of both SEP owners and licensees may cause the hold-up of royalties worldwide. For example, in the event of a dispute under the jurisdiction of Chinese courts, the conduct of the English court may have a negative effect on patent licences in China. It may force Chinese enterprises to accept unreasonable royalties (i.e. Huawei in this case) or otherwise abandon the UK market. In the meantime, it may encourage some non-practising entities (NPEs) to forum shop in order to choose one favourable jurisdiction for the sake of achieving a global licence for their SEP.
Accordingly, the judgment in Unwired Planet v Huawei is likely to cause an increasing number of SEP owners to bring an action against Chinese enterprises for patent infringement in the UK in order to seek global royalties. This will have negative ramifications for Chinese enterprises.
The rules on the jurisdiction of SEP litigation in the framework of Chinese Patent Law
Article 16 of the Guidelines of Guangdong High People's Court on Adjudicating Cases of Disputes over Standard-Essential Patents (Trial) stipulates that, "where the claimed territorial scope of the relevant licensed SEP on which judicial determination is requested by the patentee or the licensee of the SEP exceeds the territorial scope of the court, and the other party does not explicitly raise an objection in the judicial proceeding, or the objection raised is deemed unreasonable after examination, determination can be made on the royalty for such claimed territorial scope."
Royalties to be determined are limited to the territorial reach of the court
The case of Huawei v IDC ((2013) Yue Gao Fa Min San Zhong Zi No. 305) concerned a dispute about SEP licence royalties. In this case, IDC held patents essential for the 3G standard. It participated in the relevant standard-setting organisation and provided a FRAND commitment. The two parties held a long-term negotiation, but they did not reach an agreement on the amount of licensing fees. As a result, Huawei initiated an action and asked the court to determine the licence royalties in accordance with FRAND principles.
Based on Chinese law, the Guangdong High People's Court comprehensively considered the quantity, quality, and value of the relevant SEPs, the share of patents in the standard, and the relevant licensing conditions. The court finally determined that the licensing rate should not exceed 0.019%. The royalties decided by the Guangdong High People's Court were what Huawei needed to pay IDC for Chinese SEPs in China. Note that its decision was limited in scope to royalties in China, instead of globally.
Whether global royalties comply with FRAND based on the negotiation between SEP owners and licensees
In the case of Huawei v Samsung ((2016) Yue 03 Min Chu No. 816), Huawei, as an owner of the SEP for the 3G standard, claimed that Samsung manufactured, sold, promised to sell, and imported handsets implementing 3G communication standards without permission. In the negotiation for SEP cross licences between the two parties, FRAND principles were violated and the negotiation was delayed. After this, Huawei requested an injunction for patent infringement. The Shenzhen Intermediate People's Court analysed this issue and found that Huawei did not violate FRAND principles, while deciding that Samsung did. Therefore it granted an injunction against Samsung.
In order to reach a licence agreement for the worldwide SEP portfolio, the subject matter of the negotiation between Huawei and Samsung involved a worldwide cross licence. Therefore, the Shenzhen Intermediate People's Court determined that the global royalties Huawei offered Samsung were in conformity with FRAND principles, based on the negotiation between Huawei and Samsung.
In contrast to the decision in Unwired Planet v Huawei, Chinese courts can decide on royalties for Chinese patents in China, or decide on whether global royalties comply with FRAND based on negotiations between SEP owners and licensees.
Advice for Chinese enterprises regarding SEP litigation
Considering the negative impact of Unwired Planet v Huawei, we believe that Chinese enterprises should not abandon their rights in SEP disputes in Chinese courts. The available options are, for example, asking the court to determine SEP licence royalties, challenging the validity and essentiality of the SEP, seeking a finding of non-infringement, or bringing an antitrust claim against the SEP owner.
In terms of worldwide SEPs, if the relevant patents are valid in China, Chinese courts have jurisdiction over disputes concerning the relevant patents. In Huawei v IDC, IDC objected to the jurisdiction of the court. IDC argued that the negotiation between IDC and Huawei focused on worldwide patent portfolios covered by international standards, rather than merely on Chinese patents. The parties had never negotiated a specific patent licence in a particular country. Nevertheless, the Guangdong High People's Court held that this case was under the jurisdiction of the original court where the harm caused by the infringement occurred.
According to Article 533 of Interpretations of the Supreme People's Court on the Application of the Civil Procedure Law of the People's Republic of China, "where both a court of the People's Republic of China and a court of a foreign country have jurisdiction over a case, if one party files a lawsuit in a foreign court, and the other party files a lawsuit in a court in the People's Republic of China, the People's Court can accept the lawsuit."
Moreover, Su Hua suggested in her article Standard essential patent disputes: jurisdiction, licences and antitrust – from the perspective of Unwired Planet v Huawei, if the judicial determination of global royalties is requested, Chinese courts are more suited to make this decision because Huawei's products are sold on a small scale in the UK while its products are manufactured entirely in China.
The provisions of Chinese law should be referred to and applied when competent Chinese courts adjudicate SEP disputes. In China, the application of patents should be governed by the rules of Chinese patent law. Also, regarding protection for patents after they are granted, matters such as the duration of the patent and procedures should follow the provisions of Chinese law, rather than following the rules of the applicant's place of domicile or the rules of other countries.
Article 8 of the Guidelines of Guangdong High People's Court on Adjudicating Cases of Disputes over Standard-Essential Patents (Trial) provides that for adjudication of disputes concerning SEPs, with regard to issues including, but not limited to, the interpretation of FRAND principles, the determination of the scope and exercise of the rights of the relevant SEP, and the definition of the nature of related actions, the court shall in general consider applying the local laws of the place where the protection is claimed or the lex fori.
In Huawei v IDC, the court held that, firstly, this case was about SEP licence royalties. The dispute between the two parties was not about whether Huawei and IDC should participate in the ETSI agreement, or whether the relevant provisions of the ETSI agreement were appropriate. Secondly, according to Huawei's claim, the SEPs in this case only pertained to those granted in China, not those granted in France or other countries. In other words, the subject matter of the dispute was IDC's patents or patent application in China. Thirdly, there was no agreement between Huawei and IDC on the law to be applied in case of a dispute over SEP royalties. Huawei, due to its domicile, had the closest relationship with China. Fourthly, the SEPs in this case were granted in accordance with Chinese patent law. Therefore, Chinese law should be applied in this case.
Finally, when the same subject of a case litigates the same subject matter in different jurisdictions, the initiation of litigation in China will have a substantial impact on the rights and obligations on the SEP. For example, in Huawei and IDC, IDC sued Huawei for patent infringement in the United States and requested an injunction, while Huawei accused IDC of abusing its dominant position in China ((2013) Yue Gao Fa Min San Zhong Zi No. 306). The Guangdong High People's Court finally requested that IDC immediately stop the overpricing, differential pricing, tie-in selling, attaching unreasonable trading conditions, and refusing to trade. The court also agreed with the damages requested by Huawei and decided that IDC should compensate Huawei for economic losses of RMB 20 million. This judgment has helped Huawei reduce its burden of patent infringement cases launched by IDC in the United States.
In conclusion, when Chinese enterprises encounter SEP litigation with foreign enterprises in foreign countries, they should respond actively, and ensure the issue is litigated before Chinese courts.
Managing partner Simon Tsi is one of China’s most fearsome litigators and has a background working with government organisations. With strong experience in arbitration, corporate law, security and finance law, construction and real estate law, and IP, he has overseen some of China’s biggest corporate takeovers. Tsi, who specialises in legal risk prevention and control, has won landmark trademark infringement and unfair competition cases on behalf of Honeywell International, Kraft, and Johnson & Johnson.
In 2016, Tsi obtained a rare preliminary injunction on behalf of Under Armour in the high court of Fujian’s IPR tribunal – the second such injunction the court has ever issued. Tsi has long-term working relationships with many of China’s most successful business people and specialises in connecting them with overseas firms. He has worked for China’s Department of Justice, the Ministry of Personnel, and the State Power Grid Construction Corporation.
Mr Wu Dongliang specialises in patent infringement, copyright infringement, trademark infringement, unfair competition litigation related to intellectual property, enforcement of intellectual property rights through administrative procedures and patent validity. Mr Wu is both an attorney-at-law and patent attorney. Mr Wu has a unique understanding of mobile telecommunications patent litigation, software patent litigation and copyright litigation related to the internet.
Echo Lin is in charge of Japanese clients and case management and media matters for Chang Tsi & Partners. She specialises in legal risk prevention, strategy, copyright infringement, corporate law, unfair competition, trademark law, anti-counterfeiting strategy, and cyber infringement. Echo is skilled at providing a cost-efficient opinion