A new benchmark for standard essential patent litigation in China

Since 2016, Huawei and Samsung have squared off in high-profile patent battles both in the United States and in China. One recent judgment in this storied legal saga has catapulted global recognition of China’s emerging intellectual property landscape. In this article, Zhen (Katie) Feng and Adrian Emch of Hogan Lovells detail the licensing case that could make China’s courts a patent suit destination.

China has become a new battlefield in the global patent war among tech giants in the telecommunications (telecoms) industry. On 4^th January, the Shenzhen Intermediate People’s Court (Court) rendered a landmark judgment in the Huawei v Samsung standard essential patent (SEP) case that is expected to reshape the relationship between SEP licensors and licensees. On 21^st March, the Court released the non-confidential version of its judgment to the public.

The Court ruled in Huawei’s favour, finding that Huawei had fulfilled its obligations under the fair, reasonable and non-discriminatory (FRAND) principle, but Samsung had not. Based on that finding, the Court granted an injunction against Samsung, forbidding any future infringement of Huawei’s SEPs from the commercialisation of Samsung’s devices. This resulted in the Court developing a fault-based approach to evaluating Samsung’s and Huawei’s actions during licensing negotiations.

The Court’s judgment was not the last thing said about this particular case. After the District Court of the Northern District of California upheld Samsung’s anti-enforcement injunction against Huawei, these rulings are currently under appeal before the Court of Appeals for the Federal Circuit.

Case background

SEPs are patents which are meant to be used for a product implementing a standardised technology. The SEPs involved in the Huawei v Samsung case concern patents for telecommunication technologies, in particular what is known as 2G, 3G and 4G mobile communication standards

Both Huawei and Samsung own extensive patent portfolios including numerous SEPs. In this particular case, the concern was over Huawei’s SEPs. In particular, to what extent Samsung was allowed to use those SEPs in its communication devices, such as mobile phones and tablets, without having to obtain a formal licence from Huawei. Huawei brought its court action alleging that Samsung’s devices infringed its SEPs and asked the court to grant an injunction against Samsung. Huawei argued that Samsung, by selling communication devices compliant with 2G, 3G and 4G standards, had by definition implemented Huawei’s SEPs. The Court accepted these arguments without much discussion.

The only area where the Court made an in-depth analysis was whether Huawei was entitled to seek an injunction based on its SEPs, as these types of patents are subject to a specific set of conditions. When a patent is incorporated into an industry standard and the patent holder believes it may become essential to its implementation, it must promise to license the patent to all interested parties on FRAND terms.

Both Huawei and Samsung agreed to license their communication SEPs on FRAND terms. The question before the Court was whether during the negotiations to cross-license their patent portfolios, each of the companies had complied with their FRAND obligations. The Court re-framed FRAND analysis to assess whether the SEP holder was “at fault” in their procedural actions during the negotiation phase. It examined the extensive records of Huawei and Samsung’s licensing negotiations and determined that Samsung deliberately “delayed negotiations” that began in July 2011 and was “clearly at fault.”

The Court reached this conclusion in two steps: first, it assessed the relative strength of Huawei’s and Samsung’s SEP portfolios, and second, it compared licensing offers by the two companies with the respective strength of their SEP portfolios.

After analysing their SEP portfolios, the Court found that Huawei’s number was higher than Samsung’s. Thus, the Court held that the relative strength of Huawei’s and Samsung’s SEPs was similar around the world, with Huawei’s being stronger in China.

Then, the Court also looked at the substance of the respective licensing offers – i.e. whether the royalty rates that each party offered were compliant with the FRAND principle.

The Court examined Huawei’s and Samsung’s licensing offers in quite some detail and concluded that Huawei’s proposed royalty was, and Samsung’s was not, in compliance with the FRAND principle. This finding was made against the backdrop that the parties were discussing an SEP cross-licence agreement and Samsung asked for a royalty three times as high as Huawei. Having concluded before that Huawei’s SEP portfolio was at least as valuable as Samsung’s, the Court decided that Samsung’s demand was not reasonable and in line with the FRAND requirement.

Conclusions

The Court’s judgment in Huawei v Samsung establishes a new approach for SEP licensing, which means examining the conduct of both parties, from a procedural and substantive perspective, to assess whether they behaved on FRAND terms.

The judgment is in line with the outcome in Xi’an Iwncomm v Sony, where the Beijing High People’s Court at second instance affirmed that the licensor (Iwncomm) had complied with FRAND obligations when negotiating SEP licensing with Sony. However, the Huawei v Samsung judgment departs both in outcome and analysis from a prior key judgment from the same court in Huawei v InterDigital. Since a couple of SEP cases are pending before the Chinese courts, it will be interesting to see whether the Huawei v Samsung judgment indicates a shift to a more pro-licensor position more generally.

Zhen (Katie) Feng is a partner of the Intellectual Property practice group in the Shanghai office at Hogan Lovells. Her practice focuses on IP litigation and brand protection. Adrian Emch is a partner of the Regulatory practice group in the Beijing office at Hogan Lovells. His practice focuses on competition/antitrust law, including merger control, cartel/abuse of dominance investigations, and antitrust counselling.

Being one of the largest foreign law firms on the ground in China, Hogan Lovells understands the country’s complex and evolving cultural and regulatory environment. From Shanghai to Beijing and beyond, their market-leading corporate; intellectual property; regulatory; and litigation, arbitration, and employment teams are ready to assist.