There is no doubt that we are living in an era filled with electronic audios and videos. Cell phones, headphones, stereos, microphones, TVs and other audio and video devices surround us all the time. To realize the interoperability of different devices, all devices that are capable of transmitting sound and images follow specific coding and decoding standards. The patented technologies adopted for use in those standards constitute standard essential patents (SEPs) .
Because SEPs form part of the standards, the owners of SEPs must make a FRAND commitment, that is, the owners promise that they will license their patents in a fair, reasonable, and non-discriminatory (FRAND) manner when their patented technologies are adopted into the standards.
However, any text is naturally ambiguous and interpretable. Given the naturally antagonistic positions of the owner and the implementer of SEPs, the two parties routinely accuse the other side of failing to comply with the FRAND principle during licensing negotiation. Resulting litigations are proliferating around the world. China, as a country with rapid technological development and a huge market, is certainly no exception.
In January 2024, China's Supreme People's Court (SPC) issued its final judgment in the case of Advanced Codec Technologies LLC ("ACT") v OPPO Guangdong Mobile Communications Co., Ltd ("OPPO"). This is the second standard-essential royalty rate case decided by the SPC, but it is the first case on royalty rates for standard essential patents in the field of audio and video coding and decoding.
Background
The dispute originated in November 2018. ACT filed a lawsuit with Nanjing Intermediate People's Court, claiming that OPPO had intentionally delayed licensing negotiations for six SEPs. ACT requested compensation of RMB 342 million (USD 48 million).
In December 2019, OPPO filed a counterclaim with the court. It requested the court to confirm that ACT's conducts during license negotiations had breached its FRAND obligations. OPPO also requested the court to rule on royalty rates for the standard essential patents involved by OPPO in China, and to order ACT to compensate OPPO for economic losses incurred by ACT's alleged breaches of FRAND obligations.
The trial court confirmed that the six patents involved in this case were standard-essential, and ruled that OPPO should pay the corresponding license fees. Both parties chose to appeal to the Supreme People's Court (In China, the second instance of technologybased intellectual property cases go to the SPC directly).
The gist of the decision
Common methods of calculating license fees for SEPs include the top-down method, the comparable agreement method, and the bottom-up method. Therefore, the first issue to be resolved by the SPC in this case is to establish a rule on how to choose the calculating method. The rule it established is that the court will choose the calculation method, based on evidence adduced by the parties.
In this case, ACT submitted several patent license agreements with different parties outside the case, and explicitly requested the court to apply the comparable agreement method to this case. The submitted agreements and their data successfully tilted the direction of the case towards the comparable agreement method, which the SPC finally confirmed would be the method to be used in this case.
We believe that, in the future this will greatly encourage SEP holders and implementers to actively provide evidence on applicable and suitable methods of calculating the royalty rate because parties can effectively influence a court's choice of methodology by evidence and facts.
Best match
Once the calculation method has been determined, the next issue to be solved was to select the most appropriate comparable agreement among those agreements at hand, and to use that as a basis for calculating a specific royalty rate in the case. On this, the SPC established the following four considerations:
- The environment of the license negotiation;
- The similarity of the licensees;
- The similarity of the licensed patents;
- The similarity of the terms of the license agreement.
The environment of license negotiation specifically refers to the background and the conditions of negotiation between the two parties of a transaction. This may include whether a comparable agreement was concluded through natural and amicable negotiations; for example, whether the comparable agreement was made in the context of an accompanying litigation or threat of litigation, or any injunction or substantial risk of injunction by a court. In other words, the SPC established it would give more weight to agreements obtained through consensual negotiation when choosing the comparable license agreement.
On the similarity of the licensees, and among other factors, the SPC took into account the business model, the scope of the business, and the relationship between the licensor and the respective licensees.
The similarity of the licensed patents means, for example, whether licensed patents in a comparable agreement were the same as the patents in the case, or at least cover the latter, and whether patents in a comparable agreement were of the same or similar quantity and quality as the patents in the case at issue.
In its judgment, the SPC indicated that the similarity of the terms of licences could be considered in terms of the calculation method of the royalty rate, the geographical scope of the licence, the term of the licence, the manner of licensing and the manner of payment of royalties.
Notably, the first factor (negotiating environment) was analysed in detail for the 1st time by the SPC in its judgment. The SPC made clear that it needed to consider whether litigation, or at least a threat of litigation, was connected with the comparable agreement, or whether the comparable agreement was an agreement reached in a fair and reasonable atmosphere.
The author believes that the thinking put forward by the SPC for this factor has certain similarities with the hypothetical negotiation approach in the US. The SPC prefers to award a licence fee that is closer to that which the parties would have reached by consensus in commercial practice.
In this case, two comparable agreements drew the SPC's special attention. These were agreements that ACT had entered with other implementers, and which we will refer to as agreement B and agreement C. Agreement B was ultimately identified by the SPC as the most appropriate comparable licence agreement for this case. The reason was that, while there was some ongoing litigation during the negotiation process of agreement B, the patents relied upon in those actions did not overlap with the patents involved in this case. In addition, those litigations took place sufficiently long before the negotiation of agreement B. Therefore, the SPC believed that the impact of the litigations on agreement B was minimal.
In other words, agreement B was a result of natural and amicable negotiations between the parties without the influence of external litigation. The SPC considered agreement B to be the closest to that which would have been reached by the parties on the basis of commercial considerations alone.
In contrast, agreement C was highly overlapping with the licence agreement in the present case in terms of some important factors, such as the number of patents, the profile of the licensee and the scope of the agreement. However, the negotiation of agreement C was accompanied by patent infringement lawsuits between the parties of agreement C in Germany and in the US.
Thus, in the SPC's view, agreement C was an agreement reached in the presence of parallel external litigation and could not be seen as simply reflecting the commercial considerations of the licensor and the licensee. As a result, agreement C was ultimately excluded by the SPC.
This case is labelled with all the hot buttons: SEP, licence fee calculation method, FRAND, breach of FRAND promise, and so on. It will be a focus of attention for a long time. The author believes that the rules and methodology established by the SPC in this case for adjudicating SEP royalties will be carefully studied and cited by SEP owners and implementers as a guide for such cases for an extended period of time.
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.
