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New lessons from a milestone SEP-based infringement litigation

Jacob Zhang and Li Yang of Lung Tin analyse the case of Iwncomm v Sony Mobile, in which the court made decisions around a variety of issues connected to standard-essential patents, including injunctions, patent exhaustion, contributory infringement and method claims

Perhaps the most notable litigation case before the Beijing Intellectual Property Court (the court) in the year of 2017 was the case Iwncomm v Sony Mobile, which is the first standard-essential patent (SEP)-based injunction granted by a Chinese court and involves several interesting topics, including infringement determination on method claims concerning multiple executing entities, infringement activity during research and development, manufacture and test, patent exhaustion on method of use patents, contributory infringement involving non-business user activity, injunctions in an SEP case and determination of damages based on royalty. This article will discuss this high profile case and these topics. More and more SEP-based infringement litigation cases have been emerging, and this article therefore also tries to provide some strategic suggestions for defendants in such litigation cases.

Background of the case

WAPI (Wireless Local Area Network Authentication and Privacy Infrastructure) is a Chinese national standard for wireless connection. The Chinese government promoted this standard as a Chinese domestic version of WiFi with better security performance, and the Ministry of Industry and Information Technology of China approved WAPI's compulsory use in mobile phones in 2009. Iwncomm, a Xi'an based company, is the major contributor to the standardisation of the WAPI standard. It made a declaration in 2003 with the National Information Technology Standardisation Committee of China stating that the WAPI standard might incorporate its patents and that it will license these patents to any implementers on fair, reasonable and non-discriminatory (FRAND) terms. Although it was not identified which patents were SEPs for the WAPI standard, Sony Mobile admitted during the litigation that the asserted patent ZL02139508.X was a WAPI SEP.

Iwncomm and Sony Mobile had a long licensing negotiation before the lawsuit was launched. Iwncomm demanded Sony Mobile sign a licensing agreement as early as 2009, but the two parties continuously argued on issues relating to claim chart and non-disclosure agreement from 2009 to 2015 and could not reach an agreement. Finally, Iwncomm filed the patent infringement lawsuit against 35 models of WAPI-compliant mobile phones, manufactured and sold by Sony Mobile, before the Beijing Intellectual Property Court in July 2015.

As a common measure, in response to the patent infringement lawsuit, Sony Mobile filed a jurisdictional objection, which was rejected initially by the Beijing Intellectual Property Court and then by the Beijing High People's Court in the appeal case. In the meantime, Sony Mobile also filed a patent invalidation request against the asserted patent of Iwncomm before the Patent Re-examination Board (PRB) of the State Intellectual Property Office of China, but the PRB confirmed the validity of the patent in February 2016. Regarding the patent infringement litigation case, the Beijing Intellectual Property Court held the first court hearing in February 2016, then several court discussions on cross-examinations and a last court hearing in December 2016. Finally, the court issued a judgment in March 2017 in Iwncomm's favour, with Sony Mobile determined as an infringer and subjected to an injunction and damages of over CNY 9 million (about USD 1.4 million).

Infringement determination on method claims involving multiple executing entities

Claims of the asserted patent ZL02139508.X protect methods of interactions among the mobile terminal (MT), the access point (AP), and the authentication server (AS) for establishing a WAPI connection, and were drafted as method steps executed by the three entities respectively. Such a drafting style is normally not recommended, since in most cases the three different entities are manufactured and sold by different parties (MT by Sony Mobile, and AP and AS by Iwncomm in this case), and no single party executes all the method steps. For methods involving interactions among different parties, it is generally advisable to draft several claim groups defining method steps executed by a single entity (for example, a claim group for methods comprising steps executed by MT only, and the other two groups for AP and AS) if claims drafted in this way still possess novelty and inventive step.

However, although the claims of the asserted patent seemed not to be drafted in the preferred style, the court found direct infringement by Sony Mobile determining that Sony Mobile conducted WAPI function tests during the process of research and development, manufacture and ex-factory test of the 35 models of WAPI-compliant mobile phones, and the WAPI function test, involving operations of all the three entities, applied the methods claimed in the asserted patent.

In view of the infringement determination approach applied by the court in this case, it seems that for at least electronic products having certain functions, a method claim involving multiple executing entities for implementing a function, like the claims in the asserted patent, does not have any drawback compared to a preferred method claim involving one single executing entity only. This is because it is presumed that the function will be tested at least in the ex-factory test process during which the manufacturer will employ all the related devices, like MT, AP and AS in this case, to execute the method steps as defined in the claim.

What could be done by a manufacturer of an electronic product to avoid patent infringement when it confronts a national compulsory standard like WAPI and a related SEP like the asserted patent? We propose two possible strategic solutions: (1) conducting the ex-factory test in a jurisdiction where no patent right is granted for the technology and (2) devising an ex-factory test approach designed around the patent. Considering the characteristics of electronic products, the manufacturer only has to conduct an ex-factory test of functions like WAPI for a small amount of finished products, and thus conducting the ex-factory test in a free jurisdiction is possible and does not incur much extra cost. Regarding designing around the patent, taking the WAPI function test for example, one possible approach is to not set up the whole test environment comprising all the three entities, but only test whether the mobile phone or mobile terminal (MT) could correctly transmit its certificate and receive an authentication result by setting up a different environment comprising MT only and a device other than AP and AS which could also receive the certificate from MT and transmit the authentication result back to MT. Furthermore, manufacturers should keep good evidence of the overseas test or the designing around patent ex-factory test work in case of an infringement assertion by the patentee.

No patent exhaustion on method of use patents

Controversially, this is the first court decision in China that excludes the application of exhaustion on method of use patents. Specifically, the court did not uphold the two arguments presented by Sony Mobile regarding exhaustion of patent right on the grounds that (i) chips it purchased from Qualcomm were exclusively used to implement the patent and had no other non-infringing use and (ii) the AP and AS it used in the ex-factory test were purchased from Iwncomm. The court literally interpreted Article 69 of Chinese Patent Law which only explicitly prescribes application of exhaustion on product patents and product by process patents and drew a conclusion that exhaustion is not applicable to method of use patents.

Sony Mobile has appealed this case to the Beijing High People's Court. Interestingly, in Article 131 of the Guidelines for determining Patent Infringement (guidelines) issued in April 2017 by the Beijing High People's Court, it is stipulated that after a device exclusively used to implement a patented method is sold by the patentee or licensee of the method patent, anyone using the device to implement the method patent shall not be deemed as infringing on the patent right, which indicates that exhaustion shall apply to both the method of use patent and the product by process patent.

The court decision is also contrary to the practice in other jurisdictions. For example, the US Supreme Court held in the Quanta v LG case in 2008 that a method patent might be exhausted if the only reasonable use of a product was to implement the method patent and the product had included all the inventive aspects in the method patent. The US Supreme Court also opined that eliminating exhaustion for method patents would seriously undermine the exhaustion doctrine, and patentees seeking to avoid patent exhaustion could simply draft their patent claims to describe a method rather than an apparatus; by characterizing their claims as method instead of apparatus claims, or including a method claim for the machine's patented method of performing its task, a patent drafter could shield practically any patented item from exhaustion.

In view of the above, the opinion of no patent exhaustion on method of use patents by the court is controversial. We look forward to seeing developments regarding this issue in further litigation cases in China. If this court opinion is widely accepted in future cases in China, it is advisable for patent applicants to draft their apparatus claims into method of use claims, or at least include a set of method of use claims to avoid exhaustion of patent right.

Contributory infringement involving non-commercial user activity

Unlike the US practice, Chinese Patent Law provides that only activities for production or business purposes can constitute patent infringement, and non-business user activities are normally considered as non-infringement. Hence, traditionally, patent drafters have always tried to avoid including participation of users when drafting patent claims. However, for method claims defining operations at the user end, user activities inevitably exist, either explicitly or implicitly. As a result, determination of patent infringement for such type of claims has been a challenge in patent litigation cases in China.

Since operations involving non-business user activities may not constitute direct patent infringement, patentees try to rely on indirect infringement. However, the Interpretation of the Supreme People's Court on Several Issues Concerning the Application of Law in the Trial of Disputes over Infringement of Patent Rights (II) (Interpretation (II), effective since April 1 2016) provides that where a party, clearly knowing that a certain product is a raw material, equipment, component or intermediate specially used for implementing a patent, supplies such a product to another party who commits an act of patent infringement, if the patentee claims that the provider's activity is contributory infringement, the courts shall uphold such a claim, meaning that the contributory infringement, as a type of indirect infringement, shall be based on direct infringement. Further, very similar or identical provisions are also stipulated in the proposed amendments of Chinese Patent Law and the above-mentioned guidelines of the appellate court, the Beijing High People's Court. In the absence of direct infringement, the manufacturer or seller who provides a product specially used for implementing a patent to a user will not be deemed as a contributory infringer.

This case is indeed a breakthrough for this issue. The court held that Sony Mobile was liable for contributory patent infringement as long as the end user implemented the patented method, but the user did not have to be the direct infringer. The court further stated the reason for the above opinion was that for method claims regarding some patents, the entity implementing all the technical features was normally the user, and the user's implementation did not constitute patent infringement due to non-production and non-business purpose; if the doctrine that direct infringement should be the precondition of the establishment of indirect infringement was inflexibly applied, such patents of method claims could not be protected, which would be a violation of the primary intent of granting patent rights for such method claims by Chinese Patent Law.

The above court opinion is the first one in China determining indirect infringement without the basis of direct infringement, which shows the court's determination to provide strong protection of intellectual property rights. This opinion is even more controversial, since it is obviously not consistent with all the above-mentioned provisions of the Interpretation (II), the proposed amendments of Chinese Patent Law, and the guidelines. If this opinion in favour of patentee is adopted in future cases, patent applicants may no longer have to avoid user elements when drafting claims, which will be a very important incentive for filing more patent applications for innovations involving user operations. However, it is still recommended at this stage to draft the patent claims without the user elements or implicitly include the user elements.

Injunction and damages in SEP cases

The above mentioned Interpretation (II) of the Supreme People's Court of China provides in Article 24 regarding SEPs that where recommended national, industrial or local standards explicitly disclose information on an essential patent that is relevant to such standards, and the patentee is intentionally in breach of its licensing obligations on FRAND terms, when the patentee and the accused infringer negotiate about the patent licensing conditions, thereby resulting in failure to reach a patent licensing agreement, and the alleged infringer has no obvious faults in the negotiations, the courts generally shall not uphold the patentee's claim of injunction.

The above Interpretation (II) provision indicates a general standard for determining whether or not to grant injunctive relief based on willingness and fault of the patentee and the alleged infringer during the SEP licensing negotiations, and the court in this case further detailed the standard under different possible actions of the patentee and the alleged infringer. Specifically, the court held that: (i) the injunction claim of the patentee should not be upheld when both parties have no fault, or when the patentee was at fault and the SEP implementer has no fault, which was the circumstance for another high-profile case Huawei v InterDigital in 2013; (ii) the injunction claim of the patentee should be upheld when the patentee has no fault and the SEP implementer was at fault to prevent the reverse hold-up; and (iii) whether or not to grant the injunctive relief should be determined on the basis of degree of fault of both parties when they both have faults. Further, the above-mentioned guidelines of the Beijing High People's Court provide that during the SEP licensing negotiations, the patentee should notify the SEP implementer of information of the SEP and the infringement by the implementer, offer reasonable FRAND licence terms after the implementer shows its interest in a FRAND licence and provide the implementer with a reasonable period to consider the terms. The SEP implementer should respond to the patentee's infringement notice and the proposed FRAND licensing terms within a reasonable period, and should not propose unreasonable licence terms during the negotiation. The above provisions in the guidelines are substantially identical to the decision made by the Court of Justice of the European Union in the Huawei v ZTE case in 2015. The Interpretation (II), the guidelines, and the court decision in this case have shown a clear picture on how Chinese courts determine the fault of parties during the SEP licensing negotiations and whether or not to grant injunctive relief in litigation cases.

During the long negotiations between Iwncomm and Sony Mobile from March 2009 to March 2015 in this case, Sony Mobile expressed doubts about whether its mobile phones infringed Iwncomm's patent right and requested Iwncomm to furnish a detailed claim chart. It insisted that the claim chart should be provided without a non-disclosure agreement. The court stated that the claim chart was not necessary in this case since the patent was an SEP for the WAPI technology and had been compulsorily implemented since 2009, and Iwncomm had explained to Sony Mobile the WAPI technology and provided the patent list and licensing agreements. Furthermore, the court considered that the claim chart might comprise opinions and claims of the patentee on the features of the patent claims and the alleged infringing products, and thus the request by the patentee of signing a non-disclosure agreement for the claim chart was reasonable. Hence, the court held that Sony Mobile deliberately delayed the negotiation process, rendering the parties unable to enter into a formal licensing negotiation procedure. The fault belonged to Sony Mobile, and the injunction claim of Iwncomm should be upheld. This was the first SEP-based injunction granted by a Chinese court. The court further upheld the damage claim by Iwncomm of three times of the royalty Iwncomm granted to third party licensees, considering that the patent was a fundamental invention in the field of wireless local area network security and was an SEP, and Sony Mobile was at fault during the negotiation.

In view of the Interpretation (II), the guidelines and the court decision, the SEP owner and the SEP implementer should both show good faith and willingness to reach an SEP licensing agreement, offer reasonable FRAND licence terms, provide responses within a reasonable period and not delay or hinder the negotiation process. Considering the position of the defendant in this case, if it saw no infringement after receiving the patentee's infringement notice, it should have actively discussed the case with the patentee in a timely manner and proposed non-infringement arguments to the patentee by including grounds like those it proposed in the litigation case. By taking these actions, the defendant might not have been considered by the court as the party at fault during the negotiation, and might not have been subject to an injunction and high damages by the court, since this case involves several legal issues which have not been clarified in China in the past, including patent exhaustion on method of use patents and contributory infringement involving non-business user activity. Thus the arguments discussing these issues might have been deemed by the court as reasonable claims during the negotiation.

As mentioned above, the court decision is in certain ways contradictory to the guidelines issued by the appellate court, the Beijing High People's Court, and we look forward to the decision of the Beijing High People's Court in the appeal case regarding these issues.

Jacob Zhang
Mr Zhang is a partner at Lung Tin. His practice focuses on patent litigation, patent invalidity, patent prosecution, patent due diligence, freedom-to-operate investigations and anti-counterfeiting, mainly in the technical areas of computer software and hardware, the internet, electronics, telecommunications, semiconductors, mechanics and automation. One of the invalidity cases handled by Mr Zhang was selected as the number one case in the top 10 cases of the Patent Re-examination Board in 2016.

Li Yang
Mr Li is a partner at Lung Tin where he focuses on all patent matters, with particular expertise in patent invalidation and litigation mainly in the technical areas of telecommunications, computers and electronics. Prior to joining Lung Tin in 2013, Mr Li was a senior examiner at SIPO and a deputy director in the telecommunications section of the Patent Re-examination Board, in charge of re-examinations and invalidations from 2003 to 2013.

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