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China Law Insight

International Trade

Patent Disputes and Article 24 of Judicial Interpretation II

Posted in International Trade

by Li Zhongsheng, King & Wood Mallesons’ IP group

li_zhongshengOn behalf of Qualcomm Incorporated, King & Wood Mallesons (“KWM”) recently asserted several standard essential patents (SEPs) against Meizu, a Zhuhai-based handset manufacturer. Meizu concluded a license agreement with Qualcomm on fair, reasonable, and non-discriminatory (FRAND) terms, in settlement of the royalty dispute after it was threatened with an injunction.. Article 24 of the Supreme People’s Court Interpretation of Issues of Application of Laws in the Handling of Patent Infringement Disputes (II) (“Judicial Interpretation II”) was the legal basis on which Qualcomm accused Meizu of patent infringement. This essay is a preliminary consideration of that article.

Article 24 of Judicial Interpretation II (“Article 24”) consists of four paragraphs.

Paragraph 1 states: “Where any recommendatory national, industrial or local standard expressly incorporates information relating to an SEP, a non-infringement defense by an accused infringer on the grounds that no license from the right holder is needed to practice the standard will not be supported by the people’s court.

First, in China there are two kinds of standards, recommendatory and compulsory. Since Article 24 specifies recommendatory standards and not compulsory ones, it does not apply to circumstances involving a compulsory standard. For example, it does not apply to pharmaceutical patents that are subject to compulsory standards.

Second, there are official and non-official standards. The reference to “national, industrial or local standards” instead of non-official standards developed by enterprises, industrial associations or international organizations means that it is only dealing with official standards issued by State standardization authorities, national government ministries or commissions, or local governments.

Third, a declaration of will may be express or implied. While an implied declaration of will is given without taking any action, an express declaration of will is the actor’s active, direct and explicit manifestation of his intention. As Judicial Interpretation II does not state who has expressly disclosed SEP information, it could be expressed by either the standard setting organization (“SSO”) or the patentee who was involved with standardization. Although it is not important who discloses the SEP information, the means by which the SEP information is disclosed is of great importance. In judicial practice, the means by which the SEP information is disclosed varies depending on the party making the disclosure. An administrative authority’s disclosure is valid as soon as it publicizes the relevant information, e.g., on its website, without needing to personal delivery to the interested party. But the patentee’s disclosure of SEP information on its website is not necessarily effective disclosure.  Delivery of SEP information by a patentee must be, evidenced by the service of it on a standard practicing entity by post or email.

Fourth, “information relating to an SEP” is aimed at the relationship between a patent and a standard. A standard is designed to set out technical or safety requirements while a patent in essence demonstrates a technical solution. The difference in function means that their relationship is not a simple one-to-one correspondence. Before making an effective disclosure, a party must ensure that the patented technical solution is incorporated somehow into the relevant standard. The minimum disclosure of SEP information is the patent numbers granted in various countries, and the mapping analysis, which should be the duty of the standard practicing entity, is not necessary.

Fifth, the Supreme People’s Court held (in a reply letter– reference number (2008) Min Ta Zi No.4) that a patent holder who engaged in standard setting or agreed to include a patent in a national, industrial or local standard, would be deemed to have licensed others to implement the patent in carrying out the standard; an implementation in these circumstances would not constitute patent infringement under Article 11 of the Patent Law. This judicial policy, however, was overturned by the first paragraph of Article 24, which says “a non-infringement defense raised by an accused infringer on the grounds that no license from the patentee is needed to practice the standard will not be supported by the people’s court”. In lawsuits over infringement of SEPs, the people’s court, in general, will not grant injunctive remedies except in limited scenarios. However, Judicial Interpretation II confirms that in the above case, the court may grant an injunctive remedy.

Paragraph 2 of Article 24 provides: “Where a recommendatory national, industrial or local standard expressly incorporates information relating to an SEP, if the patentee, in negotiations with an accused infringer on patent licensing terms, deliberately breaches his undertaking to license his patent on fair, reasonable and non-discriminatory terms in setting the standard, resulting in failure to enter into a patent licensing agreement, the people’s court will not support the patentee’s demand that the accused infringer cease practicing the standard, provided that the accused infringer commits no material fault during the negotiations.”

This paragraph has three aspects. The first refers to the patentee’s undertaking made in the course of setting a standard. An SEP is a patent that cannot be circumvented to practice a standard. When included in the standard, the patent, which in essence is a private right, acquires the benefits of a standard. A patent included in a standard will facilitate the implementation of a private right, bringing incremental benefits to the patentee. Therefore, Judicial Interpretation II, striving to balance the interests of different parties, provides that a patentee must make FRAND commitments to an SSO in consideration for having their private right incorporated in a standard.

From a legal perspective, an undertaking is an obligation that a patentee voluntarily assumes based on the policy of the SSO. On its face, it is made to the SSO, but in essence, it is made to a non-specific potential standard practicing entity through the SSO. Despite different IPR policies among SSOs  imposing different undertaking requirements, the patentee’s undertaking should be understood as an ex-parte declaration of will made without specific counterparties. Once made, it is irrevocably binding upon the patentee.

On the one hand, Judicial Interpretation II imposes on the right holder an undertaking obligation and on the other hand, it provides a balancing mechanism, whereby a right holder which has fulfilled its obligation may seek injunctive relief through litigation.

In a second aspect, if a patentee deliberately breaches its undertaking, resulting in a failure to conclude a patent license agreement with a counterparty, the court may reject the patentee’s claim for injunctive remedies. A deliberate breach means that the patentee intended to violate its binding unilateral obligation, and actually violates its FRAND obligations by 1) unreasonably refusing or delaying the grant of a license, or 2) seeking unreasonable licensing terms by abusing its dominant market position, leading to a failure to license its patent to potential users of the SEP. Although Judicial Interpretation II additionally requires that to defend an application for an injunction an accused infringer must not be obviously at fault in negotiating licensing terms with the patentee, the court should not grant the patentee an injunction, even in a mixed fault scenario where the accused infringer commits an obvious fault but the patentee has also been at fault. An injunction is only granted if the patentee has strictly fulfilled its undertaking yet encounters unreasonable opposition such as where a standard practicing entity refuses to pay royalties, delays negotiations, seeks unfair licensing rates or other terms..

The third aspect concerns the definition of fair, reasonable, and non-discriminatory terms. Fairness relates mainly to the pricing of an SEP. A fair royalty rate should accurately reflect the value and innovativeness of the patent, the technological field the standard belongs to, and the scope of application of the standard. The rate should be comparable with past royalty standards and consistent with the license fees for the product as a whole, and should not impair the healthy development of the relevant industry. Reasonableness suggests that no unreasonable terms should be attached to an SEP., for example: undue reverse patent licensing, exclusive grant-back, or prohibition on challenges to the validity of the patent. The non-discriminatory requirement prohibits a patentee from treating in a discriminatory manner licensees who are substantially the same. Given licensees’ different circumstances, the law does not require uniform license rates or terms. Whether terms are non-discriminatory should be judged by comparing the similarities of each licensee’s scope of application of the patent, capacity and competitiveness, and how other commercial arrangements between the patentee and the licensee possibly impact the licensing terms.

Paragraphs 3 & 4 of Article 24 provide: “The licensing terms of practicing an SEP shall be negotiated between the patentee and the accused patent infringer. If no agreement is reached after sufficient negotiation, the parties may request a people’s court to determine the terms. In  determining the licensing terms, the people’s court shall take account of the degree of innovation in the patent and the patent’s role in the standard, the field of technology the standard belongs to, the nature of the standard, the application scope of the standard, and relevant licensing terms on the principles of fairness, reasonableness and non-discrimination. Where laws or regulations otherwise stipulate implementation of any patent in a standard, such laws or regulations shall prevail.”

Firstly, although a patentee is voluntarily making FRAND commitments when joining an SSO, in practice, there is much bargaining room for both parties due to the diverse circumstances of different patent users, and these must be addressed through meticulous negotiations. In light of the theme of Judicial Interpretation II, that being the application of law in the trial of patent infringement disputes, the parties in the context of the paragraph will be a patentee and an accused infringer. That means the two parties will be negotiating under the auspices of a judge in a court proceeding, or consulting together following guidance by the court.

Secondly, “if no agreement is reached through sufficient negotiation, the parties may request a people’s court to determine the terms.” In negotiating licensing terms, the two parties are equal in legal status, rights and obligations. The patentee’s FRAND commitments will not put them at a disadvantage in such negotiations. Judicial Interpretation II does not say who is responsible for initiating negotiations. Both parties must actively engage in negotiations in good faith. “Sufficient negotiation” is a recommended but not compulsory requirement. Whether sufficient negotiations have been held is not a prerequisite for a patent infringement case to be heard or determined. Negotiations on licensing terms presided over by the court should be carried out under the law and on a voluntary basis.

If no agreement is reached after sufficient negotiations, either party may petition the court trying the infringement dispute to determine the licensing terms. To determine the licensing terms, the court will take into consideration the degree of innovation in the patent and the patent’s role in the standard, the field of technology the standard belongs to, the nature of the standard, the application scope of the standard and relevant licensing terms based on the principles of fairness, reasonableness and non-discrimination. This provision emphasizes that licensing fees will be determined according to the merits of the individual patent in dispute. In addition, relationships between the patent in dispute and other relevant patents not involved in the case should also be considered. Taking a cellphone with more than 5,000 patented technologies for example, it is difficult to compare the values of various technologies with different functions, such as power management and video playing functions. Therefore, it is difficult for a court to make an accurate quantitative decision using the above-mentioned qualitative guide lines. Also, there are few res judicata to follow. To determine a fair royalty rate, in addition to the factors in Judicial Interpretation II, a reasonable royalty rate for all patents used in the disputed product as a whole should be considered so as to balance the interests of various patentees, the interests of all patentees and the patent user in the lawsuit, facilitating the development of the whole industry and the survival of individual enterprises. Lop-sided license fees should be avoided.

It should be noted that this provision is applicable only when a patent infringement dispute is taken to court. In practice, however, some parties may wish to have a court determine licensing terms where there is no patent infringement litigation. Where no patent infringement litigation exists, this provision is no answer to any request for a court determination of licensing terms. In Huawei vs IDC and Qualcomm vs Meizu, Huawei and Qualcomm asked the courts to determine their license fees. As there was no patent infringement litigation on foot, the courts heard the two cases on a declaratory judgment basis.

Since judicial interpretations merely guide the application of laws and regulations the courts will not make decisions that conflict with legislation. Hence paragraph 4, which provides that where laws or regulations otherwise stipulate the role of any patent in a standard, such laws or regulations shall prevail.