China: Antitrust Liabilities For SEP Holders - A Review Of Huawei v IDC

On February 10 2015, China's National Development and Reform Commission (NDRC) announced the results of its antimonopoly investigation of US-based Qualcomm. The commission found that the company held a dominant position in the market for the licensing of standard essential CDMA/ WCDMA/LTE patents for wireless communications and for baseband chips. The commission further found that the company had abused the dominant market position through several conducts including charging unfairly high patent royalties, tying licensing of non-standard essential patents without justifiable reasons, and adding unreasonable conditions to the sale of baseband chips. The commission ordered the company to cease its relevant illegal conducts and imposed a fine of Rmb6.1 billion ($974 million). This is a record fine imposed by China's anti-monopoly law enforcement agencies, and has drawn a high level of attention.

The Qualcomm case is an example of investigation and enforcement by government agencies regarding monopolistic conduct in China. Under the Chinese legal system, a victim of monopolistic conduct can also seek redress through the judicial system by filing a civil law suit with the People's Court against the offender. The trial of such cases involves a series of procedures including delineating the relevant market, determining whether the standard essential patent (SEP) holder has a monopolistic position in the delineated relevant market, and whether it has abused the dominant market position. The Chinese multinational company Huawei's law suit against InterDigital Company (IDC) over SEP royalties and abuse of dominant market position is a good example for examining these procedures in the Chinese 2 judicial system.

The Huawei case involves the application of the so-called FRAND principle (fair, reasonable and non-discriminatory) for SEPs as well as the rules and regulations of China's Anti-Monopoly Law. It is believed to be the world's first case in which an SEP holder assumed civil compensation liabilities under the Anti-Monopoly Law for violating the FRAND principle. Through the Huawei case, this article will discuss the relevant issues under the Anti-Monopoly Law for SEP holders.

Huawei v IDC background

The plaintiff Huawei is a major global supplier of telecommunication equipment. The defendant IDC holds a large number of essential patents and patent applications under 2G, 3G and 4G standards in wireless communications, including those in the US and China. The defendant admits that it holds SEPs in all of China's wireless communication standards (WCDMA, CDMA2000, TDSCDMA standards).

Since November 2008, the plaintiff has held several negotiations with the defendant regarding licence royalties for the relevant patents. However, as can be seen from its offers, the defendant intended to give the plaintiff global non-exclusive licences for which royalties must be paid for all of the defendant's patents, not just the SEPs for 2G, 3G and 4G. The defendant's offers also demanded that the plaintiff provide free licensing of all its patents to the defendant. Regarding the amount of royalties, it was clear that, whether according to the standard of the one-time payment, or according to the standard of the royalty rates, the amount of royalties that the defendant demanded from the plaintiff were much higher than those offered to other companies, such as Apple and Samsung.

The plaintiff believed that the defendant's conduct had abused its dominant market position and constituted a monopoly. It filed a law suit with the Shenzhen Intermediate People's Court on December 6 2011 against the defendant, in which the plaintiff requested the court to order the defendant to immediately cease abuse of its dominant market position in relation to the SEPs for 3G and award damages of Rmb20 million to the plaintiff. On the same day, the plaintiff filed another law suit against the defendant and requested the court to judge and determine the royalty rates or range of such rates under which the plaintiff should pay for the defendant's Chinese SEPs, including those for 2G, 3G and 4G, based on the FRAND terms.

Judgment

The Shenzhen Intermediate Court held that, within the relevant market scope, each of the defendant's essential patents under the 3G standard is unique and irreplaceable. In other words, each of the defendant's SEPs represents a unique market for licensing the patent and the defendant owns the whole market. Therefore, the defendant has the power to block or affect the entry of other business operators into the relevant market, thus holding a dominant position in the relevant market. By comparing the patent licensing conditions offered by the defendant to Apple and Samsung, whether according to the one-time payment patent royalties standard, or according to the patent royalty rate standard, the amount of patent royalties demanded from the plaintiff by the defendant are much higher than those offered to other companies. In addition, the defendant forced the plaintiff and its affiliated companies to give free licensing of all its patents to the defendant, which further indicates that the defendant has been engaged in overpricing and discriminatory pricing. The defendant took advantage of its dominant market position and demanded a tying sale of its non-essential patents.

The court ordered the defendant to immediately stop the monopolistic conducts of overpricing and tying sales and awarded damages of Rmb20 million to the plaintiff, but rejected the plaintiff's other claims. Both parties appealed to the Guangdong High People's Court. The appellate court made, through trial, a final judgment to reject the appeals and uphold the original judgment.

In the separate case regarding royalty rates, the Shenzhen Intermediate Court first stated that, according to Chinese laws, the defendant should license the SEPs to the plaintiff based on FRAND terms. The court further stated that as far as the royalties of SEPs are concerned, if the parties reach a licensing agreement, there is no need to involve the judicial authority. However, since 2008, when the parties started negotiation, there has been discriminatory treatment of overpricing by the defendant to the plaintiff, as compared with the SEP royalties given by the defendant to other companies. As such, the defendant violated the FRAND principle. Were the plaintiff not to seek judicial remedy, there would be no room for negotiation unless the plaintiff accepted the defendant's unilateral conditions. According to Chinese law, based on the evidence submitted by both parties in this case, the following factors should be considered in a holistic manner in determining a reasonable royalty rate: the quantity, quality, and value of the defendant's SEPS; the relevant licensing situations in the industry; and, the share of the defendant's Chinese SEPs. According to article 4 of the General Principles of the Civil Law and articles 5 to 6 of the Contract Law, it is ruled that the royalty rate of the defendant's Chinese SEPs to the plaintiff, calculated with actual selling prices of relevant products, should be not more than 0.019%.

The defendant did not accept the first instance judgment, and made an appeal. The second instance court made, through the trial, a final judgment to reject the appeal and uphold the original judgment.

A milestone case

The Huawei case demonstrates a range of factors in the determination of FRAND terms and the application of anti-monopoly laws regarding SEPs, making it a milestone case in the field. The case clarifies several issues. Holders of SEPs have a duty to license patents to implementers under the FRAND principle. When an implementer cannot reach an agreement with the SEP holder regarding licensing terms, it can file a law suit and ask the court to determine a reasonable rate under the law. The court, in its determination of reasonable royalties, should consider factors such as the quantity, quality, and value of the SEPs, the relevant licensing situations in the industry, and the share of the Chinese SEPs among all the SEPs of the holder. Each SEP forms its own relevant market, in which the holder of the patent has a dominant position; if, during its negotiations with the implementer of the patent, the patent holder abuses its market-dominant position, it will bear the legal consequences under China's Anti-Monopoly Law, including ceasing monopolistic conduct, and compensating the implementer's loss due to its monopolistic conducts.

Patent rights and the Anti-Monopoly Law

It is normal business conduct for SEP holders to exercise their rights in negotiating with and licensing patents to the standard implementers according to FRAND principles. As such, anti-monopoly law enforcement seldom intervenes in patent holders' exercising their rights. Nevertheless, if the patent holder exercises the rights improperly, including breaking the FRAND principle and demands unreasonable royalties, it is possible that the conduct may constitute the monopolistic behaviour of abusing dominant market position. In the Huawei case, the plaintiff filed such an anti-monopoly civil law suit on the grounds that the defendant abused its dominant market position.

Definition of relevant market

According to the PRC's Anti-Monopoly Law, the relevant market means the range of commodities for which, and regions where, business operators compete with each other during a given period of time for the specific commodities or services. The relevant market covers a relevant commodity market and a relevant regional market. In the enforcement of the Anti-Monopoly Law in IP-related technology trades, and licensing for example, the definition of a relevant technology market may also be required.

In SEP FRAND licensing, technologies protected by each essential patent in the standard constitute an independent relevant market. In the Huawei case, both the first instance and the appellate court determined that every essential patent licensing market under the China 3G wireless communication standard is unique and irreplaceable, therefore constituting an independent market. Meanwhile, because of the regional features of patent rights of the relevant regional market, the defendant owns regional markets for licensing of 3G SEPs in China and the US, two independent regional markets.

According to PRC's Anti-Monopoly Law, a dominant market position means 'the market position that gives a business operator the power to control product pricing, quantity, and other transaction conditions, or to hinder or affect the entry of other business operators into the relevant market'. When determining whether a business operator holds a dominant market position, factors such as the market share of the business operator in the relevant market and the competition conditions of the relevant market should be taken into account. In the technology market formed by every essential patent under the standard, the patent holder occupies 100% market share in the market because of the uniqueness and irreplaceability of the patent technology. Therefore, the patent holder holds a dominant position in each of the markets.

In the Huawei case, the court determined that the defendant owns essential patents under WCDMA, CDMA2000 and TD-SCDMA standards of the global (including China and the US) 3G wireless communication field. Based on the uniqueness and irreplaceability 5 of each of the es- sential patents under the 3G standard, the defendant owns all the market shares for licensing each essential patent under the 3G standard. Therefore, the defendant has the power, in the relevant market, to hinder or affect the entry of other business operators into the relevant market. Further, because the defendant does not conduct any substantive production activity, but merely takes the patent licensing as its business operation pattern, the plaintiff has no way to constrain the defendant by using cross licensing of the SEPs. Therefore, for this case, the defendant has the power to force the plaintiff to adopt the prices, quantities and other transaction conditions of its essential patents under the 3G standard when negotiating with the plaintiff about the essential patent licensing under the 3G standard. Based on the above factors, the court determined that the defendant holds a dominant market position in the relevant market.

Abuse of dominant market position

The PRC's Anti-Monopoly Law lists conducts that amount to abusing dominant market position, including: selling commodities at an unfairly high price; refusing to undertake transactions with their trading counterparties without justifiable reasons; conducting a tying sale of commodities or imposing supplementary unreasonable trading conditions during transactions without justifiable reasons; and, applying differential treatments to trading counterparties with the same conditions in terms of transaction conditions without justifiable reasons.

In the Huawei case, the court determined that the defendant abused its dominant market position by overpricing of relevant licence royalties. That the defendant charged the plaintiff with excessive essential patent royalties is reflected mainly in the following two aspects: (i) the defendant demanded much higher royalties from the plaintiff than from other companies, such as Apple and Samsung, even while they remained one of the top global mobile phone manufacturers and the plaintiff was not yet in the top ranking list; (ii) the defendant demanded the plaintiff and its affiliated companies to provide free non-exclusive licensing of their patents within the global range to the defendant. However, the technology and market ranges of the plaintiff's patents far surpass those of the defendant's. This further resulted in the defendant charging excessive and unreasonable patent royalties.

It should be noted that the defendant's conduct should be viewed as overpricing in nature, rather than refusing transactions, as claimed by the plaintiff.

As prescribed in the provisions of article 50 of the PRC's Anti-Monopoly Law, business operators causing others to suffer losses as a result of their monopolistic conducts should bear civil liabilities. Civil liabilities include cessation of infringement and compensation for damages, which also include reasonable expenses that the plaintiff has paid for investigating and deterring monopolistic conduct. The civil liability of cessation of infringement prescribed in Chinese law is equivalent to a permanent injunction in English or American law. Compensation for damages is a major component of civil liabilities and the plaintiff should bear the burden of proof regarding the amount of damages. Actual losses suffered by the plaintiff and illegal gains made by the defendant, as a result of the defendant's illegal act, are the main evidences considered. In a case where the actual losses or illegal gains are difficult to determine, the court can decide a damage amount.

In the Huawei case, the court decided that the defendant should bear damages of Rmb20 million because it held that both the plaintiff and the defendant failed to provide solid evidence for 'the damages suffered by the plaintiff or the amount of profits gained by the defendant, as a result of the infringement'. In this case, the court specifies the factors in determining the amount of damages as follows: reasonable expenses that the plaintiff has paid for deterring the monopolistic conduct of the defendant, including the attorney fees paid by the plaintiff in both China and the US; competing interest losses and the like; and, other factors, such as the nature of the defendant's infringement, the level of subjective mistakes, and the severity of damage caused to the plaintiff.

Lessons learned from the first of its Kind

The Huawei case was the first case where the FRAND royalty rate and liabilities of an SEP patent holder under the PRC's Anti-Monopoly Law have been determined through judgments, and the Chinese court made a constructive exploration of relevant key issues. While SEP holders and the standard implementers should be largely left alone to make good faith negotiations under the FRAND principles, civil enforcement of the Anti-Monopoly Law provide a legal restraining system for the conduct of SEP patent holders in exercising 6 their rights.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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