Chinese court judgment on SEP royalty dispute between Huawei and Conversant

The recent ruling of the Nanjing Intermediate People’s Court of Jiangsu Province in a standard essential patent (SEP) royalty dispute between plaintiff Huawei Technologies Co., Ltd., Huawei Terminal Co., Ltd. and Huawei Software Technology Co., Ltd. and defendant Conversant Wireless Licensing Co., Ltd. provides a useful insight into how Chinese courts measure the value of SEPs in the Chinese market.

Background

After acquiring three CN SEP patents (ZL00819208.1, ZL200580038621.8, ZL200680014086.7) from Nokia in 2011/2012 as part of a large patent portfolio acquisition, Conversant contacted Huawei in 2014 about some of the SEPs of the 2G, 3G, 4G and other communication standards used by Huawei that they would need to license from Conversant. However, no agreement was reached between these two companies. In February 2017, Conversant sent a public letter to Huawei, stating that the SEP royalty rate proposed by Huawei in their previous communications did not meet the FRAND requirement.

Meanwhile, in July 2017 in the UK, Conversant sued Huawei and its UK affiliates in the UK High Court, requesting the English court to determine that Huawei infringed four UK patents and rule on the global FRAND license rate for its global patent portfolio (read more here). The court held that Conversant is entitled to enforce its UK SEPs including a FRAND injunction.

Back in China in January 2018, Huawei initiated a non-infringement action against Conversant in the Nanjing Intermediate Court, and requested a determination of SEP royalties for SEPs families including the above three CN patents. Meanwhile, Huawei invalidated all three CN patents, which was been immediately appealed by Conversant. At present, the invalidation case is still under investigation.

Decision

• The court did not support the request by Huawei to confirm that making, disposing and offering to dispose mobile terminal products in China does not infringe the three patents owned by Conversant.
• The SEP royalty rate between Huawei and Conversant in the present case has been confirmed. More details will be discussed in the following section.
• Huawei only needs to pay the above SEP royalty for the 4G mobile terminal products for one patent (ZL200380102135.9).

SEP royalty dispute

In the trial, the dispute centred on the calculation of SEP royalty rates. Conversant proposed to use the Comparable Licenses approach (proposed rates as seen in the left column of the table below), while Huawei proposed to use the Top-Down approach. These two approaches are commonly used in SEP royalty disputes. In the Top-Down method, ‘Top’ refers to the industry’s cumulative royalty, and ‘Down’ refers to the SEP royalty charged by the patentee. In the Comparable Licenses approach, the rates are determined based other license agreements of the same patent. The Nanjing Intermediate Court eventually chose to use the Top-Down approach and set the formula to calculate the Chinese SEP royalty in the present case: the SEP royalty of a single patent family = the cumulative royalty of the standard in China × the contribution ratio of the single patent family. The final calculated SEP royalty is seen in the right column of the table:

Table: A comparison of FRAND royalty proposed by Conversant and ruled by Nanjing Intermediate Court

Conclusion

• This decision provides a useful indication as to how Chinese courts evaluate the value of SEPs in China using the standard of the Chinese market.
• The Comparable Licenses approach in China may be not as important as in other countries because China is not a ‘case-law’ country.
• While the three IP courts (Beijing, Shanghai and Guangzhou) keep holding their dominant position in IP litigation, a few regional courts have also become popular choices for handling IP cases, for example, the Shenzhen Intermediate Court, the Hangzhou Intermediate Court and the Nanjing Intermediate Court. The Nanjing Intermediate Court is known for speedy trials of technical cases with the help from technical experts, and this case is Nanjing Intermediate Court’s first decision on a SEP Royalty Dispute. We will keep watching whether this decision sets a national standard for SEP Royalty calculation in China.
• As we reported earlier, the IP Tribunal of the Chinese Supreme People’s Court (CSPC) has become a national appeal court since 1 January 2019. In the first trial, the CSPC IP tribunal closed the case within an impressive 50 days, from case acceptance to decision delivery. The decision here of the Nanjing Intermediate Court is open to appeal to the CSPC, and because the CSPC IP tribunal is known to be very fast we would expect a speedy decision if Conversant were to make an appeal to the CSPC IP tribunal.

Mathys & Squire has a dedicated China team with experts from our various sector groups, including IT & software, who keep up to date with the latest industry news in this area. For more information, get in contact with us.

This article was written by technical assistant Sally Gao and managing associate Andrew White.