On 10 June 2015, InterDigital announced that they had entered into a settlement agreement with Arima Communications Corporation (“Arima”), a mobile equipment manufacturer based in Taiwan, concerning ongoing antitrust disputes related to patent licensing. According to this agreement, the parties will maintain their existing patent license agreement, and dismiss all pending litigations and arbitrations in all jurisdictions. Meanwhile, Arima will withdraw its complaint filed with the Taiwan Fair Trade Commission.

1. Background

    In 2005, InterDigital and Arima reached a patent license agreement. However, due a dispute on the payment of royalties, InterDigital requested arbitration in the United States.

     In July 2014, the arbitration commission awarded InterDigital a total of USD 23.6 m in unpaid royalties, including arbitration costs and expenses paid by InterDigital. On 21 August 2014, Arima filed a cross-petition with the US Delaware District Court to vacate or modify the arbitration award.

     Challenging the unfavorable arbitration award, Arima initiated antitrust actions in Mainland China and Taiwan, alleging that InterDigital abused its dominant position.

(1) Antitrust actions in Mainland China

    On 9 July 2014, Arima filed an antitrust lawsuit with Jiangsu High People’s Court, accusing InterDigital of abuse of a dominant position. In its complaint, Arima alleges that InterDigital abuses its dominant position by:

- licensing its patents at unfairly high prices;

- imposing discriminatory treatment in royalties;and

- attaching unreasonable trading conditions.

    Arima sought relief in the amount of RMB 120 million (USD 19.6 million), and an order requiring InterDigital to license all of its patents to Arima on a FRAND basis.

    On 16 January 2015, the Jiangsu High People's Court held a hearing regarding the issue of jurisdiction. The court is yet to make a ruling on this issue.

 (2) Antitrust actions in Taiwan

   On 25 July 2014, Arima filed a lawsuit in Taiwan’s Intellectual Property court, accusing InterDigital of abusing its patents. Arima alleged that InterDigital forced Arima to sign a patent license agreement with it in 2005, setting an unreasonably high and discriminatory royalty rate, and attaching abusive and discriminatory provisions in the license agreement, in violation of Taiwan's Fair Trade Act. Arima sought damages in the amount of NTD 10 million (approximately USD 3.2 million), and that this amount be trebled as an intentional violation. Meanwhile, Arima filed a motion to the court, requesting the court to grant a preliminary injunction against InterDigital, in order to bar InterDigital from collecting royalties, claiming its licensing terms violated Taiwan's Fair Trade Act.

     In a hearing in Taipei on 24 March 2015, the judge heard arguments from both sides, but did not make a decision on the motion.

2. Comments

(1) Can the royalty rate of 0.019% be universally applied?

    A SEP royal rate of 0.019% was affirmed by the Guangdong High People’s Court in an appeal on the royalties of Standard Essential Patent (“SEP”) between InterDigital and Huawei. It is likely that Arima believed its case would be successful on the basis of the Guangdong decision.

    According to public information, Guangdong High People’s Court estimated the SEP royalty rates licensed to Apple and Samsung by InterDigital to be 0.0187% and 0.19% respectively. However, public information also reveals that, the royalty rate InterDigital intended to license to Huawei was 2%, which is over 100 times of that licensed to Apple. Referring to the royal rate licensed to Apple, the Guangdong High People’s Court imposed a SEP royal rate of 0.019% to Huawei within the territory of China.

    This judgment possibly saved billions of dollars of royalty for Huawei; in the meantime, the case has become a landmark IP case, and has global influence.

    However, the Huawei case may be unique. Judging by the outcome of the settlement between Arima and InterDigital, the SEP royal rate of 0.019% is not universally applied, otherwise, Arima would not have given up on their claim and settled.

(2) How to determine the SEP royalty rate?

    Although Arima v InterDigital case ended with a settlement, the controversy over the calculation of the SEP royalty rate is yet to be finished. Some consider that the royalty rate in a concluded license agreement is already a FRAND rate, because it has been determined in the market. Some consider that the practice of “getting on the bus first and buying the ticket later” by mobile equipment manufacturers may lead to an unfair and unreasonable price being imposed when it comes time to buy the ticket. 

    In Microsoft Corp. v. Motorola, Inc. and In re Innovatio IP Ventures, LLC, the US courts held that FRAND royalties should limit the patent holder to a reasonable royalty on the economic value of the patented technology itself, apart from the value associated with the patent’s incorporation into an industry standard, and in determining a FRAND royalty rate, courts should consider comparable licenses.

    If people’s court in China determines a FRAND royalty rate, there are many issues need to be addressed:

- If royalty rate in a comparable license agreement will be considered, does it constitute a “comparable license”?

- Should the Judge limit the royalty base to the smallest salable patent practicing unit (“SSPPU”)? Otherwise the patentee will be improperly compensated for non-infringing components of that product.

- To avoid royalty stacking, should the Judge consider the aggregate royalties that would apply if other SEP holders made similar royalty demands?

    As the State Council is promoting innovation, we may observe more Chinese manufacturers will be on both sides of the table – as both defendants and claimants in FRAND rate disputes. This suggests that, ultimately, they should all have an interest in finding a neutral way to determine the SEP royalty rate. Arima v InterDigital ended with a settlement. We are expecting the next landmark case in China to touch above issues.