A FRAND decision in China between Huawei and InterDigital how patents could be relevant

The decision reported below is the second instance decision, an appeal against the first instance decision handed down by the Shenzhen Intermediate People’s Court in 2011. This second instance decision was handed down by the Guangdong High People’s Court on 21 October 2013, and has recently been published.

Huawei as a patent infringer?In the first instance decision, Huawei requested the Shenzhen Intermediate People’s Court to rule that:

a) InterDigital immediately stop manipulating infringement actions against Huawei including overpricing, discriminatory pricing, tieing sales, the addition of unreasonable transaction terms, and therefusal to do business.

b) Compensation to Huawei’s economical loss of 20,000,000 RMB.

c) Compensation for reasonable costs incurred by Huawei to defend its rights, including investigation, notarisation, and attorney fees.

Huawei based these requests on the Chinese anti-trust law. At first instance, the Shenzhen Intermediate People’s Court considered the following:

• Huawei’s situation, including its place of business, research spending, number of employees, number of patent applications and patents granted in China and overseas, and its annual turnover.

• InterDigital’s situation, including various companies in its group, and statements made in InterDigital’s annual reports.

• 2G, 3G, and 4G communication standards, and standards organizations that InterDigital joined including the European Telecommunications Standards Institute (ETSI) and its policies

• Patents declared by InterDigital at ETSI to be essential to various telecommunications standards, and the uses of these patents in China

• Negotiations between Huawei and InterDigital. Huawei apparently disclosed all of the negotiation details to the court, and, as such, various details regarding such negotiations including the specific terms offered were redacted in the decision, presumably at the request from InterDigital as trade secrets.

• Information on transactions between InterDigital with various companies including Intel, Apple, Samsung and LG, RIM, and HTC. Such information, according to the decision, was obtained from public information disclosed by InterDigital to various parties including the US Securities and Exchange Commission, news reports, and InterDigital’s annual reports.

• Evidence submitted by InterDigital relating to transactions involving patents in the telecoms field, including the acquisition of Motorola by Google, in which the decision disclosed Google’s admission of Motorola’s preparedness to offer a licence fee of 2.25% per terminal device for its standard essential patents.

The decision of the first instance court mentioned that, as fellow readers could expect, InterDigital did not provide details of its licence agreements with various companies including Apple and Samsung. On the other hand, Huawei provided an analysis report from research institute, Strategy Analytics, in which the total sales among various companies including Samsung, LG, Apple, RIM, and HTC were mentioned. Such figures were used by the first instance court to assess the fairness of the licence fees offered by InterDigital to Huawei. InterDigital tried to challenge the authenticity of this report by pointing out the discrepancies between the sales figures in this report for Apple, and those in Apple’s annual report. This challenge was unsuccessful as Huawei defended the discrepancies, on the basis that they were due to the difference of the dates in two reports. (Strategy Analytics’ report calculated the figures from 1 January to 31 December, while Apple’s annual report calculated its figures from September to September.)

• Infringement actions brought by InterDigital against Huawei in the US. Specifically, InterDigital had sued Huawei for potential infringement of US patent numbers 7349540, 7502406, 7536013, 7616070, 7706332, 7706830, and 7970127 in Delaware, and on the same date requested ITC to initiate unfair competition investigations against Huawei.

• The Annual Report from InterDigital disclosing various facts, including the number of patents InterDigital had, the licence fees collected by InterDigital, and so on.

• Evidence from Huawei on loss. However, Huawei only provided photocopies of invoices for attorney and notarization fees in the US, and such invoices were challenged by InterDigital due to lack of notarization and legalisation.

i. Issue regarding definition of the scope of market

The first point of contention is on the definition of the scope of market. Huawei asserted that the scope of market was China and US, while InterDigital asserted that the scope of market was worldwide, in an attempt to avoid jurisdiction of the Chinese court. The court of the first instance affirmed Huawei’s assertion on the following basis:

• Both parties agreed that InterDigital owns patents essential to the standards of 3G and 4G and ETSI, and these essential patents have corresponding US and Chinese family members.

• Huawei’s manufacturing activities are mainly in Shenzhan, China, and the products would be exported to the US.

• InterDigital owns 3G standard essential patents worldwide, including China and the US, and such 3G standard essential patents are unique and non-replaceable.

The above facts were affirmed by the court of the second instance. At the appeal, InterDigital argued that 3G standard could be replaced by 2G and 4G standards, and therefore these 3G essential patents are replaceable. The court of the second instance ruled that at the beginning of establishing a standard, players in the field could still easily abandon technology and use an alternative one. However, following increased investments into the standard and an increase in cost to shift to another standard, the transfer becomes more difficult. 2G, 3G and 4G standards are different standards established at different times in the telecommunication field, and each essential patent in each essential standard is still unique and irreplaceable.

InterDigital also argued in the appeal that Huawei’s products are exported throughout the world, and therefore the geographic scope should be worldwide. However, the court of the second instance disagreed on the basis that intellectual property is territorial.

The court of the second instance also explained that licensing and all related activities of InterDigital’s Chinese patents are within China and are therefore covered by the Chinese anti-trust law. With regard to InterDigital’s US patents, the court of the second instance ruled that these could substantially affect the manufacturing activities, export opportunities and transactions of Huawei in China, and are therefore also under the jurisdiction of the Chinese anti-trust law.

ii. Issue regarding whether InterDigital dominates the market

The court of the first instance ruled that InterDigital dominates the market on the following basis:

InterDigital does not manufacture but only engages in licensing, and as such, Huawei cannot constrain InterDigital through cross licensing. [The writer: so, in this way, patent trolls are now punished?]

The court of the second instance affirmed the above views, and therefore also the decision of this point from the court of the first instance.

iii. Huawei’s accusation that InterDigital abused use its market dominance

It is difficult to report and/or comment on this section as much information in this section is not published due to its trade secret character. Specifically, Huawei handed in information on the offers made by InterDigital, including the price and any additional offers. The writer will try to report as much as he can.

[There are really a lot of asterisks and stars in this section…]

InterDigital’s price to Huawei is much higher than that to Apple, Samsung, RIM, and HTC, mainly based on the report from Strategy Analytics.

•   The number of research staff, patent applications, patents granted, and proposals to standard organizations from Huawei well exceed those from InterDigital. The court of the first instance then, “logically” deduced that the quantity and quality of patents owned by Huawei far exceed those of InterDigital, and in other words, the value of Huawei’s patents well exceeded that of InterDigital [Where is the application form for the course Logic 101?].

•   InterDigital filed lawsuits against Huawei in the US during negotiation, and these were considered as malicious in order to force Huawei to accept the terms from InterDigital.

•   InterDigital’s tie-in of some patents to Huawei, which were considered to be replaceable. Unfortunately, all such information was concealed in the decision.

•   Interestingly, the court of the first instance ruled in favour of InterDigital on tie-in of some of its patents on the basis that this is the industrial norm. However, again, as all such information was concealed, it is not clear how this conclusion was reached.

On appeal, InterDigital argued the following:

•   The comparison between InterDigital’s offer to Huawei and the licence fees to other companies were inappropriate due to these discrepancies in how the licence fees were collected. However, the court of the second instance ruled against InterDigital, as InterDigital refused to disclose any details of its licence arrangements with other companies, and InterDigital was never able to deny that the licence fee to Huawei were apparently unreasonably higher than to other companies. Further, InterDigital disclosed in its annual reports that the licence fees collected every year from 2009 to 2011 were decreasing. The lawsuits in the US filed by InterDigital also backfired here.

•   With regard to the tie-in allegations, the court of the second instance maintained the decisions from the court

However, it is not clear from both decisions how this figure was reached. It was only stated in the decision in the court of the second instance that this figure was set after considering the nature of the infringement by InterDigital, the period of infringement, the  effects  of  the  infringement, and  the reasonable costs of  Huawei to  investigate and  stop the infringement action. [The writer: Huawei’s headquarters is in Shenzhen, Guangdong… and have a look at the two courts involved …]

In additional to the above points, InterDigital also did the following in the appeal. These were all not considered:

•   InterDigital submitted seven pieces of evidence including the ranking of Huawei’s relevant business in the world and China, the report of Huawei’s mobile phone sales figures, decisions from US and Europe on infringement, licensing, and anti-trust cases, and so on. However, Huawei contested these on the basis that they were irrelevant and could not be compared in the current case.

•   InterDigital hired an expert to present an opinion during the court hearing to support InterDigital’s assertions. Again, the expert opinion was contested by Huawei on the basis that it was only an opinion without relevant data and investigation to support.

How patents may be relevant in an anti-trust case in China?


It can be seen from the above that whether a patent would impact anti-trust cases in China depends on whether it is unique and irreplaceable. According to the decisions, this would also affect the determination whether a company has market dominance, which is a necessary characteristic in anti-trust cases. Standards essential patents will, by definition, fall within this category.

Further, “uniqueness and irreplaceability” of a patent also affects determination on whether there are tie-in sales, but will be less influential as the norm of the industry would be also be considered. For example, if it is the norm of industrial (particularly the telecoms industry) to tie-in licence of non-standard essential patent, then such acts may be allowed under the anti-trust law in China.

Although starting patent infringement proceedings in the US may be usual during licence negotiations, the current decisions show that this will backfire in China. The writer is interested to know whether this would also backfire in Europe.

These decisions also show that as long as a patent would affect business operations in China, an inter-trust action could be started in China, even though the patent involved is not a Chinese patent.

Note:

The writer is the  first to say that  he  is not  an  expert in the  topics of FRAND (fair, reasonable, and non-discriminatory) licensing obligation, as required by standards organizations, and  anti-trust law. Consequently, this article only reports the  facts in this case, and discuss how patents could be relevant when involved in such decisions in China. The writer welcomes FRAND and  anti-trust experts to provide their further comments on this case.

 

Author: Toby Mak, Tee  &  Howe Intellectual Property Attorneys. ©2014.

These articles were published in the August 2014 issue of the UK Chartered Institute of Patent Attorneys (CIPA) Journal, and are re-posted here with the kind permission from the UK CIPA. The UK CIPA Journal covers updates, articles and case law reviews on IP in the UK, Europe, and around the world. The Journal is available for subscription at GBP130 per year.

Further articles of the author can be accessed here.