The nature and products of some industries, like wireless telecommunications, necessitate the incorporation of all essential patents related to the products into standards created by standardization setting organizations (“SSOs”). If they are to find buyers, manufacturers whether licensed or not must make products in accordance with the standards, therefore using standard essential patents (“SEPs”). Because of this, SEP licensing has become a focus of attention from anti-monopoly enforcement authorities around the world.
Before asserting their SEPs against infringers in China, aside from the usual risk of losing in court, multi-national companies (“MNCs”) with strong SEP portfolios, should evaluate the restrictions on patent rights arising from the P.R.C. Anti-monopoly Law (“AML”).
Restrictions on Abusive Intellectual Property Practices under the AML
Article 17 of the AML states that a business operator with a dominant position in the relevant market is prohibited from abusing its dominant position. Abuses include: unfair pricing, refusal to trade, cartels, tie-in sales or the imposition of unreasonable trading conditions, discrimination or other conduct forbidden by anti-monopoly enforcement agencies. Article 55 of the AML provides that the AML applies to a business’s intentional conduct to eliminate or restrict market competition by abusing their intellectual property rights. This demonstrates that although a patent right has a legitimate monopolistic character, its enforcement is still subject to the AML.
In Judicial Practice, Asserting SEPs is Subject to Anti-monopoly Examination
The Huawei v. InterDigital case provides an example of the fact that asserting SEPs in China is subject to anti-monopoly examination. In this case, the Guangdong High People’s Court held that the market for licences of every single SEP constitutes an independent relevant market, and the patentee has a dominant market position in that market. This kind of dominant position can be abused by SEP owners who are not manufacturing mobile devices, because they don’t need SEP licences from other SEP owners, so they are not subject to counterbalancing pricing from other manufacturer’s SEP fees that they need to make a product. To avoid abuse of such dominant positions, in licensing SEPs, the patentees are prohibited from misconduct like over pricing, discriminatory pricing, tie-in sales of non-SEPs, free grant-backs and the like.
Noticeably, in the Huawei case, the patentee’s application for an injunction before the ITC or the U.S. district court during the negotiation was also considered an abuse of dominant market position by the Chinese Court because this conduct aims to force the potential licensee to accept over-priced terms.
A written opinion from the EU chief judge at the request of a regional court in Germany pointed out that if an owner of SEPs, which has given a commitment to grant licenses to third parties on FRAND terms, seeks an injunction or other alternative measures (including call-back) without trying to negotiate with the infringers, then that would be an abuse of a dominant market position. Also, in a later judgment, the Court of Justice of the EU ruled that SEP owners may raise patent infringement suits against infringers, but negotiations with infringers under a FRAND offer are a necessary prerequisite for such legal action. This indicates that asserting SEPs is a limited remedy in the EU.
In a Reply expressing its opinion on a patent infringement lawsuit between Qiang Ji, Hui Liu and Chaoyang Xingnuo Co. Ltd. (“Reply”), the PRC Supreme Court found that the defendants’ use of SEPs incorporated in national or industrial standards would not constitute patent infringement, and the owner of these kinds of SEPs was only entitled to claim a royalty much lower than the normal rate. Accordingly the owners of Chinese national or industrial SEPs suffer restrictions when they assert their SEP rights. It is to be noted that the national and industrial standards mentioned here only refer to mandatory standards and not to recommended standards.
Moreover, the term “industrial standard” referred to by the PRC Supreme Court refers to a standard approved and published by ministries of the Chinese central government and which is uniformly adopted by the relevant industries. Taking the telecommunication industry again as an example, the standard published by the Chinese Ministry of Industry and Information Technology (“MIIT”), numbered “YD/T 1845-2015” and named “2 GHZ TD-SCDMA Technical Requirements of the Uu Interface RRC Layer of the Digital Cellular Mobile Telecommunication Network High-speed Uplink Packet Access (HSUPA)”, is an “industrial standard”. While the 3GPP standard corresponding to this HSUPA standard, numbered “3GPP TS 25.331 (v7.n.0), NEQ”, is a 3G technical standard rather than an “industrial standard” because it is released by an SSO rather a Chinese central government ministry. The industrial standard published by MIIT may adopt a part of the technical standards released by 3GPP, but would not be identical with all of them.
Litigation Strategy for Asserting SEPs in PRC Court Actions
MNCs should think carefully before asserting SEPs in a PRC court. In the telecommunication industry for example, MNCs often possess two types of SEPs. The first type, is incorporated in the industrial standards published by MIIT, and the second type, is not an MIIT industrial standard but merely a technical standard released by SSOs like 3GPP. Additionally most industrial standards published by MIIT are likely to be mandatory rather than recommended standards. According to the Reply, it is not viable for the owners of the first type of SEPs, incorporated in mandatory industrial standards, to assert these SEPs in infringement lawsuits because they are only entitled to claim royalties at a much reduced rate. As to the second type of SEPs, although infringement lawsuits are valid remedies, owners must attempt proper and sufficient negotiations with infringers before taking legal action. Unless an infringer expressly refuses to negotiate a licence, or engages in delaying tactics to avoid entering into a patent licensing agreement under FRAND terms, initiating patent infringement lawsuits based on this second type of SEP is not recommended either.
As an alternative, non-SEPs can create a stronger foundation for the assertion of rights. Non-SEPs are not essential elements of products, and there will be other designs available to manufacturers. Therefore, the market for a licence of a non-SEP will not be an independent relevant market. Manufacturers generally have options in choosing competitive or different technology or designs in relation to non-SEPs. It is wise for MNCs to file patent lawsuits based on non-SEPs, so as to avoid the potential risk of anti-monopoly allegations with lawsuits based on SEPs. However, it is to be noted that as non-essential patents are not necessarily exploited in a mobile product, the burden of proof of infringement is relatively heavy for the plaintiff. In addition, as non-SEPs are not essential and sometimes applications are made just for defensive use, they are likely to face a higher risk of invalidation by the Patent Review Board. When preparing to launch a patent lawsuit MNCs should identify valid non-SEPs that can clearly apply to the infringing products.
In conclusion, MNCs should be cautious in asserting SEPs against infringers in PRC. Proper and sufficient negotiation with infringers based on FRAND terms is highly recommended before initiating litigation so as to eliminate the possible risk of an anti-monopoly allegation. From another angle, non-SEPs may provide firmer rights, but comprehensive consideration of the validity and proof of infringement are needed for candidate non-SEPs to identify the best one suitable for litigation.