As China’s IP system continues to advance, the Beijing High Court has issued a new blockbuster decision on patents, FRAND and telecoms injunctions.
A new appeal decision from Beijing upholding the country’s first SEP-based injunction could set the stage for future patent litigation in the telecoms sector and beyond.
The April 2018 decision in IWNCOMM v Sony gives insight on how the Chinese legal system interprets Fair, Reasonable and Non-Discriminatory (“FRAND”) licensing obligations in telecoms cases, and gives guidance on the proper conduct of FRAND negotiations. It also gives clarity on more fundamental issues, including the tests for direct and indirect infringement, and calculation of damages in patent cases generally.
Ten years ago, China published its national strategy to improve its IP system, for the benefit of the Chinese economy as a whole. Since then it has updated its patent law, successfully opened a range of specialist IP courts, and started publishing its decisions. Progress is speedy: the Beijing IP Court has even launched an ADR App operating on top of the Chinese social media network, WeChat.
Perhaps most importantly, the Chinese courts have also established a new system of justice by precedent, aimed at addressing issues caused by “varying discretionary powers, application of law, and unequal standards of evidence” (in the words of Beijing Judge Yang Jing). This has been widely welcomed by the international community as a good move to increase transparency and consistency of justice in China.
So it’s clear that the appeal decision in IWNCOMM v Sony is intended to, and will, act as strong precedent for future patent cases in the region. The case (fully cited as Sony Mobile Communications Products (China) Co., Ltd. v Xi'an Xidian Jietong Wireless Network Communication Co., Ltd. (2017) Jingmin 454) is Sony’s appeal in a case originally brought in 2015 by Xidan Jietong, better known by its brand IWNCOMM.
IWNCOMM holds patents that are essential (standard-essential patents, or “SEPs”) to the Chinese standard known as WAPI. WAPI is a security layer process that is compatible with the more familiar WiFi communications standard that is used solely in China. Despite this, the issues are of wider significance: like other standard-setting organisations, members of the consortium behind the development of WAPI made declarations that essential patents would be licensed on FRAND terms.
Sony makes telecoms devices that are sold in China, and which comply with the WAPI standard. IWNCOMM entered into negotiations with Sony in 2009 to conclude a FRAND licence for use of its patented technology, but negotiations broke down. In 2015 IWNCOMM issued proceedings in the Beijing IP Court for infringement of patent ZL02139508.X: a method patent for establishing and authenticating a connection between a wireless access point and user equipment.
First instance & Appeal
The first instance decision found for IWNCOMM on every count. The patent was essential and infringed by Sony, and IWNCOMM’s claimed royalty rate was FRAND-compliant. More significantly, the court granted the country’s first ever injunction based on a SEP.
Sony appealed to the Beijing Municipal High People’s Court (the ‘Court’), who this month has handed down a decision confirming the first-instance result, the injunction, and the legal tests behind them. At a glance, the issues are:
a) clarity for the tests of direct and indirect infringement; b) the limits of exhaustion; c) FRAND used as a pure defence; d) injunctions for SEPs in China; and e) the conduct of FRAND negotiations: lessons to be learned.
Tests for infringement
IWNCOMM had alleged direct infringement against Sony on two heads, but only one survived the appeal: that during the design and development process, Sony had conducted equipment tests carrying out the entire method of both the access point and the user equipment (e.g. a handset). This was due to the fact that WAPI compliance testing requires interfacing a product with a test access point to see if the method is appropriately carried out.
The evidence submitted by IWNCOMM referred to the normal standardised testing that would normally be conducted, and was therefore a proxy – since evidence of Sony’s own conduct was not available to them. The Court concluded that the general practice of the industry was to apply such tests and that Sony likely had done so. On the second head, IWNCOMM had also alleged that Sony’s quality assurance tests might infringe when products were tested after manufacture. However, the general practice of the industry did not extend to full compliance testing at a factory, and the proxy evidence was not sufficient for that purpose.
The Court clarified the test for indirect (contributory) infringement and concluded that it was also made out on the facts of the case. The issue was this: in principle, contributory infringement must contribute to an actual case of direct infringement by a third party. But IWNCOMM could not prove that a direct infringement occurred on the facts, because end-customer users of mobile handsets were regarded as non-commercial users and therefore could not be liable. However, the court explained that the burden of proof on this point did not extend to proving any one particular act of infringement; simply that use of a product as intended would give rise to use of the patented method. The Court highlighted the following factors for success in such an allegation:
a) a party provides the raw material for (or products designed to facilitate) the implementation of a patented invention; b) that provision is made to others who will commit the direct infringement; c) the party knows that the raw material is to be used for this purpose; d) it is done commercially and without authorization from the patentee; e) that the product or raw material is substantially relevant to the implementation of the patented technology; and f) the products are not general-purpose or commonly-used products for any other economic or commercial purpose.
The limits of exhaustion
Sony also defended based on exhaustion. In addition to an allegation of pass-through licences from chip supplier Qualcomm (a defence that failed on the facts), they alleged exhaustion because the testing apparatus referred to above was sold to Sony by IWNCOMM. This, they argued, exhausted IWNCOMM’s rights because it was equipment specifically designed to carry out the patented method, and IWNCOMM had already benefitted from that sale.
The Court analysed the arguments and found that the Chinese patent law did not support a finding that method claims of a patent could be exhausted.
The dividing line was that the Chinese doctrine of exhaustion (under Article 69 of the Chinese Patent Law) applies only to a product “obtained by using the patented method”. On the other hand, the rights conferred by a patent under Article 11 extend further, and expressly include the right to “use a patented method” – a right that is missing from the exclusions of Article 69. Therefore, the omission is taken to reflect the intentions of the legislature and the doctrine cannot be expanded beyond that.
FRAND as a defence?
Sony ran a creative defence: that IWNCOMM’s FRAND obligations meant that Sony could not be held liable for infringement, because a licence was already available to it.
This was rooted in a technicality, because Sony regarded WAPI-compliance as being compulsory according to Chinese government tests. The Chinese standardisation law provides that an implementer does not need express permission to implement a patented technology, if that technology is part of a standard that is officially mandated by the Chinese government. In this case, the WAPI standard was drafted as a mandatory standard but the mandate was never officially carried into effect.
The Court concluded that even though compliance was an effective requirement for Sony to pass regulatory tests, the standard was nevertheless a ‘recommended’ one. It also remarked that SEPs were not treated differently to normal non-SEP patents for the purposes of enforcement, even if they are incorporated into a standard. The fact that a standard is mandatory does not, therefore, appear to restrict enforcement so long as a patentee complies with its FRAND obligations.
Injunctions: the test in China
Having found for IWNCOMM, the Court turned to relief and set out the circumstances that should be taken into account. The heart of it was the question of fault: why did negotiations break down?
In the UK and US markets, these issues are commonly discussed and referred to in terms of hold-up, hold-out, FRAND rates and whether a party is a willing or unwilling licensee. In the case of the Chinese courts, the same issues were considered but couched more directly, in terms of blame and delay. Who was to blame for breakdown in negotiations? If it was the patentee, they will not have complied with their FRAND obligations and an injunction will not be appropriate. On the other hand, if it was the implementer who was at fault, an injunction may well be justified. In the case that blame is shared, the court will weigh the balance of fault.
On the facts, the Court concluded that IWNCOMM was blameless, and therefore upheld the injunction from first instance.
Lessons to be learned: FRAND conduct
In considering the negotiations, the Court referred to particular elements of the negotiations. These were material to the ultimate finding and therefore provide a useful lesson for the industry about the conduct of FRAND negotiations. There were four major issues as follows.
- Claim charts. It was a major contention that IWNCOMM had not provided the customary claim charts (infringement mappings between the standard and the patent) to Sony, and therefore that Sony could not properly understand the issues it. But the reason for this was Sony’s reluctance to enter into confidentiality terms. The Court found that confidentiality arrangements were not unreasonable, and were in fact common practice in the industry. Therefore, Sony’s refusal to enter into terms was viewed as a delaying tactic. It was also found that Sony should, on the facts, have been aware of the mapping because the method of the patent was clearly applicable to the standard.
- Procrastination. In 2015, Sony had said words to the effect that it could not conclude any business with IWNCOMM until it had fully investigated all patents in the portfolio. The Court frowned on this position, taken as it was 6 years after negotiations had commenced, and considered it to be “merely procrastination”.
- Statements made. The Court also highlighted several statements made in the course of negotiations that it considered to show Sony to be an unwilling participant. These included statements to the effect that Sony did not consider it necessary to conclude a licence at all, and requests by Sony for supplementary information that would be difficult for IWNCOMM to obtain.
- In combination. Combining the previous three points, the Court found that Sony had delayed throughout negotiations and therefore was at fault for the breakdown that led to litigation. Finally, the Court highlighted that Sony had not improved on this position during litigation, for example by clearly demonstrating that it was willing to take a licence.
Only last month, the English Patents Court was hearing arguments in the case of Conversant v ZTE about the Chinese courts’ familiarity with FRAND proceedings, in connection with a jurisdiction challenge. But despite some obvious differences with the Chinese legal system, those familiar with proceedings in Europe and the USA will find the approaches taken in IWNCOMM v Sony to be comfortable territory. This case may therefore stand as precedent not just as to the application of Chinese law, but to show that the Chinese courts are taking an approach that is broadly in line with what is expected in other major jurisdictions.
Given the size and nature of the Chinese economy and the way it is advancing, the telecoms industry will be wise to pay attention to the development of IP decisions in China.