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Competition Law and Intellectual Property in China edited by Maniatis, Spyros; Kokkoris, Ioannis; Wang, Xiaoye (31st January 2019)

7 SEPs and Competition Law: From the Perspective of Huawei v IDC Case

Xiaoye Wang, Yajie Gao

From: Competition Law and Intellectual Property in China

Edited By: Spyros Maniatis, Ioannis Kokkoris, Xiaoye Wang

From: Oxford Competition Law (http://oxcat.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: null; date: 23 October 2019

Monopoly — Patents and know how — Jurisdictions

(p. 124) SEPs and Competition Law

From the Perspective of Huawei v IDC Case

1.  Introduction

Standard Essential Patents (‘SEPs’) refer to the indispensable and unsubstitutable patents to a technical standard. Or put it another way, SEPs are patents that have to be applied when enforcing a technical standard. Technical standard is a compulsory requirement for relevant undertakings, if it has been widely used so as to become an industrial standard or state compulsory standard, and products or services that cannot meet such a ‘threshold’ are prohibited from entering into the market. Due to the openness of the standard, technology licence related to SEPs concerns public interest. On the other hand, however, SEP is similar to general patent, both of which are private properties. In order to pursue economic interests, SEPs-holders may raise patent royalties unfairly or exclude other competitors with help of a ‘lock-in’ effect deriving from the SEP. Industry standards are widely acknowledged to be one of the engines driving the modern economy. Standards can make products less costly to produce and more valuable for consumers. They can increase innovation, efficiency, and consumer choice; foster public health and safety; and serve as a ‘fundamental building block for international trade’.1 Against this background, how to compromise protection of SEPs-holders’ legitimate rights and interests and openness and social publicity of SEPs has become an important issue to be resolved in the intersection of anti-monopoly law and intellectual property rights (‘IPRs’) law.

(p. 125) Since implementation of the Anti-Monopoly Law of the People’s Republic of China (‘AML’), there have been a number of cases involving SEPs. On 9 February 2015, the National Development and Reform Commission (‘NDRC’) fined Qualcomm Incorporated (‘Qualcomm’) RMB 6.088 billion for charging unfairly high royalties for its SEPs, which set the highest record for an administrative fine in China.2 As one of the three competition authorities in China, the Ministry of Commerce (‘MOFCOM’) has also dealt with several cases concerning SEPs, such as Google’s acquisition of Motorola Mobile (‘Motorola’) cleared subject to conditions on 19 May 20123 and Microsoft Corporation’s (‘Microsoft’) acquisition of Nokia’s Devices and Services business (‘Nokia’) cleared subject to conditions on 8 April 2014.4 Case Huawei Technology Co. Ltd. v InterDigital Technology Corp.5 (‘Huawei v IDC’) is China’s first antitrust litigation involving SEPs that has been accepted and decided by the Chinese courts with final judgment. In this case, Huawei (the plaintiff) is a manufacturer of wireless communication devices, while IDC (the defendant) holds numerous SEPs in 2G, 3G, and 4G standards within area of wireless communication technology. The plaintiff and the defendant had held multiple negotiations on patent royalties since November 2008. However, no agreement was reached for the reason that the royalties requested by IDC to Huawei were extremely higher than those requested to Apple Inc. (‘Apple’) and Samsung Corporation (‘Samsung’). In July 2011, IDC filed lawsuits of SEPs infringement to a US federal court and the US International Trade Commission (‘USITC’) against Huawei, and requested for an injunction and cease of tort. On 6 December 2011, Huawei filed two complaints before the Shenzhen Intermediate People’s Court of Guangdong Province, with one for cease of IDC’s abuse of market dominance and compensation for damages, while the other for determination of royalties that should have been requested by IDC based on principle of fairness. In February 2013, the Shenzhen Intermediate People’s Court came out with the first-instance judgment,6 and the Guangdong High People’s Court posted the final judgment in October 2013.7 From the perspective of Huawei v IDC, this chapter discusses (p. 126) several key issues concerning SEPs related anti-monopoly litigation. Section 2 talks about whether a proprietor of SEPs enjoys dominant market position, which is also the foundation of Huawei’s charge against IDC for its abuse of dominance. Section 3 deals with how the court determines fair, reasonable, and non-discriminatory (‘FRAND’) royalties of SEPs, which is the core of Huawei v IDC. Section 4 discusses the right of SEPs-holders to request an injunction, and this is also a novel issue in China’s AML enforcement. This chapter ends with several inspirations and thoughts as a result.

2.  Whether a Proprietor of SEPs Holds Dominant Market Position?

Huawei sued IDC on the grounds that the latter abused its dominant market position as proprietor of SEPs. However, in order to decide whether an undertaking has abused its dominance or not, determination of dominance by law enforcement agency is the prerequisite. Dominant market position reflects the relationship between an undertaking and the market, which confers on an undertaking the freedom to set price or make business decisions without consideration of reactions from competitors or customers. The case of Huawei v IDC involves mainstream technological standards of wireless communication, such as 2G, 3G, and 4G (especially 3G), which relate to international spectrum resources distributed uniformly by the International Telecommunications Union (‘ITU’) and need coordination and cooperation between governments all over the world. Hence, almost all the countries and regions have adopted these standards. Any proprietor of SEPs naturally enjoys dominance in the technological SEPs licensing market in this regards. However, in Huawei v IDC, IDC refused to admit its dominant market position, let alone the abuse, though it holds a lot of SEPs in the 2G, 3G, and 4G standards. Accordingly, whether a proprietor of SEPs enjoys dominant market position in the relevant SEPs licensing market becomes the first issue to be resolved.

2.1  Definition of relevant market

In order to determine whether an undertaking has obtained dominant market position, relevant market should first be defined scientifically and reasonably. Only (p. 127) through defining relevant market could both existing competitors and potential competitors be recognized so as to calculate market share and concentration degree of relevant undertakings and then decide whether market position/conducts of undertakings would have side effect on competition. Defining relevant market is usually the starting point in analyzing competitive activities.8 When defining relevant market, relevant product and geographic scope affected by relevant product of a case should be taken into consideration, which are called ‘relevant product market’ and ‘relevant geography market’ respectively.9

As for relevant product market, what competition authorities mainly focus on is demand substitution of consumers. According to Article 3 of the Guidelines of the Anti-Monopoly Commission of the State Council on Defining Relevant Markets, ‘A relevant product market shall mean a market compromising of a group or a category of products which are regarded as interchangeable or substitutable by consumers for the reason of products’ characteristics, intended use and prices.’ In Huawei v IDC, acting as a manufacturer of wireless communication devices, Huawei has to obtain IDC’s license for using 3G wireless communication SEPs set and released by 3GPP, 3GPP2, and other international standard setting organizations (‘SSOs’).10 The court observed that ‘technical standard’ is a set of unified technical specifications with the aim of securing the interchangeability, compatibility, and universality of products or services. It is a mandatory request for manufacturing undertakings.11 Accordingly, technical standardization unifies technical specifications on one hand, and eliminates competition in relevant technical market on the other hand. In the context of technical standardization, there wouldn’t be any technical competition which could have happened before or without the standardization. Due to functional diversities among different SEPs within a standard, manufacturers need to negotiate with proprietors of all the SEPs for use. In this case, every single essential patent within a standard could be recognized as an independent relevant product market. Huawei v IDC concerns IDC’s essential patents within 3GPP and 3GPP2 wireless communication technical standard. There is no alternative technology in the market either. So it is no doubt that relevant product market in this case is every single essential patent owned by IDC within the 3GPP and 3GPP2 technical standards. We could also find similar expression in the EU Commission’s (‘Commission’) decision on Samsung (‘Samsung Case’), ‘… the relevant product markets encompass the licensing of the technologies as specified in the UMTS standard technical specifications, on which each of Samsung’s UMTS SEPs reads. … for manufacturers of UMTS standard-compliant mobile devices in (p. 128) the EEA, there are no substitutes to the technologies as specified in the UMTS standard technical specifications, on which each of Samsung’s UMTS SEPs reads’.12

Geographic scope of relevant product should also be considered when defining relevant geographic market. On the one hand, Huawei manufactures and sells wireless communication devices in the Chinese market. The products should comply with three standards, which are CDMA2000, WCDMA, and TD-SCDMA, within the Chinese 3G wireless communication area. On the other hand, Huawei also exports wireless communication devices to the U.S., which applies CDMA2000 and WCDMA standards on the basis of international standards (3GPP and 3GPP2). It means that Huawei couldn’t sell its products to either PRC nor the US if it cannot obtain SEPs licence from IDC. So, even if IDC licenses SEPs of the 3GPP and 3GPP2 standards globally, relevant geographic markets of this case are PRC and the U.S. for the reason that Huawei only needs to obtain the licence for these areas. In summary, relevant markets in this case are every single essential patent within 3G wireless communication standard of IDC in both PRC and the U.S. Since proprietor of all these SEPs is IDC, relevant market could be regarded as an aggregate of IDC’s SEPs within 3G wireless communication standard in PRC and the U.S.13

Nevertheless, IDC didn’t agree with the court’s observation of defining its SEPs within 3G technical standard as relevant product markets for the reason that: ‘According to particularity of SEPs, no terminal product could be produced only basing on technologies covered by IDC’s essential patents.’14 It means that IDC treated terminal product covered by 3G standard as relevant product market. Put it in another way, the demanding party is terminal consumer of wireless communications devices instead of Huawei. The proposition put forwards by IDC couldn’t stand. Though protection of consumers is an important purpose of anti-monopoly law, it doesn’t mean that the law protects terminal consumers as a whole abstractly. As for who exactly the ‘consumer’ is in a particular case, it depends on specific circumstances. Parties closely connected with the case economically should be considered. They could be household consumers or productive consumers. In cases concerning technology licence, procurement of raw materials, or semi-manufactured products, the demanding party should be the licensee of related technology or consumer of related raw materials or semi-manufactured products. Cause of action of this case is that Huawei requested IDC to license its SEPs within 3G wireless communication technology standard on FRAND conditions. So the demanding party in this case is Huawei. It is odd for IDC to treat terminal consumers as the demanding party in this case, since the terminal consumers are neither in need of obtaining right to (p. 129) use IDC’s essential patents, nor will they seek for legal remedies concerning IDC’s patent licence.

The analysis mentioned above proves that definition of relevant market in Huawei v IDC is clear and scientific. The focus of the court was that IDC’s essential patents within 3G wireless communication standard obtained by Huawei constituted an indispensable link of its production and operation activities. That is to say, even if there are hundreds of standards within a smartphone or a computer, and hundreds of thousands of essential patents within every standard, every single SEP could constitute a relevant product market, since every single SEP is indispensable for the potential licensees’ production activities. As pointed out by the Commission in Decision on Google’s acquisition of Motorola, ‘The specificity of SEPs is that they have to be implemented in order to comply with a standard and thus cannot be designed around, i.e. there is by definition no alternative or substitute for each such patent. Therefore, each SEP constitutes a separate relevant technology market on its own.’15

2.2  Market position of IDC

It is much easier to determine whether IDC holds a dominant position in the 3G wireless communication SEPs licensing market after the relevant market is defined. As pointed out by the court:

In this case, IDC is proprietor of essential patents within WCDMA, CDMA2000 and TD-SCDMA standards in 3G communication field all over the world, including PRC and the U.S. Due to the uniqueness and un-substitutability of every essential patent within 3G standard, IDC has 100% market share in the licensing market of every essential patent within the 3G standard, empowering it to hinder or restrict other undertakings from entering into relevant market.’16

That is to say, in the SEPs licensing market, proprietors do enjoy dominant market position. During NDRC’s investigation into the Qualcomm case, Qualcomm ‘failed to deliver any evidence to prove that it didn’t have dominant position in wireless SEPs licensing market’.17 In Huawei’s litigation against Zhongxing Telecommunication Equipment Corporation (‘ZTE’) dealt with by a German court, there wasn’t any controversy concerning the proprietor’s dominant market position between these two parties.18

(p. 130) However, in Huawei’s litigation against IDC, IDC put forward an opposite proposition according to Article 1919 of AML. It was of the opinion that the number of SEPs owned by IDC was far less than half of all the SEPs due to the huge number of essential patents included in 2G, 3G, and 4G wireless communication standards. So it didn’t hold dominant market position.20 IDC also supplemented that exercise of its rights would definitely be affected by the whole wireless communication market and development of wireless communication technology, although it is a proprietor of essential patents.21 This proposition cannot stand either. It is clear that relevant product market in this case is not all the essential patents included in 3G wireless communication standard, but only those owned by IDC. Since there is no alternative to IDC’s essential patents in the relevant market, there is no doubt that IDC accounts for 100 per cent of every single essential patent licensing market share. Similarly, in the Samsung Case, the Commission concluded preliminarily that Samsung holds a dominant position in the markets for the licensing of the technologies as specified in the UMTS standard technical specifications, on which each of its UMTS SEPs reads, on foundation of two reasons mentioned below. First, Samsung holds a 100 per cent market share in each of the relevant markets. Second, the widespread adoption of the UMTS standard in the EEA is due, to a significant extent, to Decision 128/1999/EC. (PS: Decision 128/1999/EC required Member States to take all actions necessary in order to allow the coordinated and progressive introduction of UMTS services on their territory by 1 January 2002. In line with the requirements of Decision 128/1999/EC, the UMTS standard was implemented in most Member States by that date.)22

3.  FRAND Royalty of SEPs

If considered by the court of having dominant position in SEPs licensing market, according to Article 17 of AML, IDC shouldn’t abuse its dominance, including but not limited to being prohibited from ‘selling commodities at unfairly high prices’; ‘refusing to enter into transactions with their trading counterparts’, ‘conducting tie-in sale of commodities’, ‘adding other unreasonable trading conditions to transactions’, or ‘applying differential prices and other transaction terms among their trading counterparts who are on an equal footing’ without justifiable reasons, etc. Acting as a proprietor of essential patents, IDC has made FRAND (fair, reasonable, and non-discriminatory) commitment to SSOs, obliging itself to license SEPs to third parties under FRAND conditions. The focal issue in this case is to (p. 131) determine FRAND royalty requested by IDC to Huawei. How did the court determine FRAND royalty? What’s the relationship between FRAND commitment and anti-monopoly law? Should FRAND royalty be determined in accordance with contract law?

3.1  Determination of FRAND royalty

From judgment of Huawei v IDC, we could find that the central idea of FRAND royalty are reasonable and non-discriminatory principles, while the former one is the key. It comprises both reasonableness of royalty itself and reasonableness of comparison among royalties requested to different licensees.23

When analysing FRAND royalty, the court took several elements into consideration: (1) As regards how much the royalty should be, the court could consider profits derived from exploitation of relevant patents or alternative patents, and the percentage of profits mentioned above in the licensees’ profits or revenues derived from sales of relevant products. Since the final profits of a product are decided by technology, capital, operation work, and other elements, the patent royalty should only account for part instead of all of profits. Besides, in view of a proprietor’s inability to provide all the technologies contained in a product, it should only be entitled to profits in proportion to the percentage of his or her patents in all technologies. (2) What a proprietor contributes is the innovative technology. So it should only be rewarded in accordance with relevant patents, instead of additional benefits simply due to a patent being included into the standard. (3) Proprietor of SEPs should only request royalty for the essential patents, excluding non-SEPs, since it is not reasonable. (4) The patent royalty shouldn’t exceed a certain percentage of product profits, and patentees should distribute such royalty of proper percentage among them reasonably.24 Nevertheless, the court realized that elements mentioned above did bring help to determine whether licence of SEPs is reasonable or not, but the method to determine royalty accordingly is only an idealized choice. In practice, one high-tech product may consist of numerous technical standards. For example, there are hundreds of standards within a computer. Furthermore, thousands of essential patents might be included in one standard. What’s worse is that practical experience of evaluating quality of these essential patents and their contribution to terminal products is in shortage. All of them make it a huge difficulty for a court to assess whether the royalty of an SEP is fair and reasonable.25

(p. 132) In this context, the court focused on analysing the ‘non-discriminatory’ principle of FRAND commitment. Or put it in another way, acting as the proprietor, whether IDC requested almost the same royalty or royalty rate to similar counterparties. The judgment pointed out that, ‘If the royalty rate requested by the proprietor to a certain licensee is lower than that to another, then the latter would have reason to believe that it is treated discriminately through comparison. Proprietor of SEPs has breached the non-discrimination commitment accordingly.’26 In this case, the court compared transactions between IDC and RIM, LG, Intel Corporation, Beijing New Coastline Mobility, HTC, et al. For two reasons to be listed below, the court mainly compared royalties requested by IDC to Apple and Samsung. Firstly, acting as manufacturers of wireless communication devices, both Apple and Samsung are similar to Huawei, who is in need of SEPs licensed by IDC. Secondly, both Apple’s and Samsung’s sales volume of mobile phone top the global list, ranking far above Huawei. Royalty rate requested by IDC to the two companies could be a sound reference for royalty rate that should have been requested to Huawei.27 However, considering a huge difference still exists between the way royalty rate was achieved between IDC and Apple or Samsung, the court mainly compared the royalty rate requested by IDC to Huawei to that requested by IDC to Apple. While the royalty rate requested to Samsung was achieved through litigation, the royalty rate requested to Apple was achieved through equal and voluntary negotiation.28 The court found that royalty requested by IDC to Apple from 2007 to July 2014 was USD 56 million, accounting for 0.0187 per cent (royalty rate) of Apple’s total sales revenue (at least USD 300 billion) during these seven years.29 Nevertheless, taking the fourth order offered by IDC to Huawei in 2012 as an example, any royalty rate concerning 2G, 3G, and 4G technical products requested by IDC to Huawei during 2009 to 2016 (seven years in total) accounted for 2 per cent of Huawei’s sales revenue.30 Normally speaking, the profit rate of ordinary industrial product is around 3 per cent. If Huawei accepted the royalty offered by IDC, then the royalty itself would hollow out almost all of Huawei’s profits. So the court was of the opinion that royalty rate requested by IDC to Huawei was unreasonably high, and compared the royalty rate requested by IDC to Apple, concluding that the royalty rate requested by IDC to Huawei shouldn’t be higher than 0.019 per cent.31

(p. 133) IDC argued that the court determined the royalty rate which should be requested by IDC to Huawei through comparing the lump sum royalty requested by IDC to Apple, converting to certain percentage of Apple’s sales revenue, was incorrect.32 The court did accept the difference between lump sum royalty and royalty rate based on sales revenue. However, the court could only resort to the annual report of IDC, sales revenue of other licensees, and other information available so as to decide FRAND royalty that IDC should have asked from Huawei, when IDC refused to disclose any information in this regard.33 Both the method and conclusion of the court are correct. On the one hand, if the court determined the royalty that Huawei should pay to IDC on foundation of the lump sum royalty paid by Apple to IDC, then the pre-condition is that sales revenue of both Huawei’s and Apple’s technical products making use of SEPs licensed by IDC are the same. However, huge difference exists between the sales revenue of Huawei and Apple. On the other hand, it is only the licensor who has access to confidential information as regards whether there is any price discrimination among different licensees or not due to information asymmetry. If the licensor didn’t disclose information in this regard, the court would have to try its best to investigate and solve the problem. In fact, even if the lump sum royalty were compared, IDC cannot deny the fact that it overcharged Huawei, since the royalty requested to Huawei is much higher than that to Apple.

On the basis of FRAND commitment made by IDC, the court further analyzed the non-legitimacy of excessive royalty charged by IDC to Huawei. Firstly, IDC admitted in its annual financial report that the revenue from patent licence was going down from 2009 to 2011, since royalty correlated with product pricing. However, compared with the licence agreements between IDC and Apple, Samsung or other undertakings, the royalty charged by IDC to Huawei soared, which was obviously unfair.34 Secondly, besides the excessive royalty, there is also a cross-licence provision, with IDC requiring Huawei to license all its patents to IDC for free.35 Cross-licence is not necessarily unreasonable, according to the court. However, besides the excessive royalty, IDC also requested Huawei to license all its patents to IDC for free under circumstance that both the number and quality of Huawei’s patents are much higher than that of IDC’s, thus worsening IDC’s unfair pricing. All the analysis mentioned above illustrated that the court had fully considered the FRAND principle in SEPs licensing, and royalty that Huawei should pay to IDC was determined as such.

(p. 134) 3.2  FRAND royalty and anti-monopoly law

As a legitimate exclusive right, patent entitles the proprietor two basic rights, with prohibiting third parties from obtaining or making use of the patent for the first, and setting licence conditions as one would like to for the second. Especially when it comes to determination of royalty, the proprietor could set it all by itself in reward for the previous R&D and innovation.36 However, as for SEPs, if a standard is widely used and, for example, becomes an industrial standard or even an international standard, then it will bring about lock-in effect. That is to say, competitive technology would be excluded from the scope covered by the standard, and production of relevant product has to apply patents essential to the standard. Proprietor of SEPs obtains dominance in the licensing market naturally and could easily earn more money accordingly. In this situation, if the proprietor is allowed to choose any licensee or to impose adverse licence conditions at its will, such as charging excessive royalty, then it would bring serious side effects to business activities of the counterparties, and commercial exploitation of technical standards would be severely restricted or even decrease sharply, leading to products of technical standardization inaccessible to consumers, which is totally against the purpose and original intention of technical standardization. In order to avoid dominant market position being abused by the proprietor, SSOs usually request the proprietor to commit FRAND terms when licensing its patents to all the producers, exploiters, or relevant sales personnel in the future before the essential patents are included in the standard. This kind of commitment is called ‘FRAND Commitment’ or ‘RAND Commitment’.37 For example, according to Intellectual Property Rights Policy issued by the European Telecommunication Standards Institute (‘ETSI’) in 2008:

When an essential IPR relating to a particular standard or technical specification is brought to the attention of ETSI, the Director-General of ETSI shall immediately request the owner to give within three months an irrevocable undertaking in writing that it is prepared to grant irrevocable licenses on fair, reasonable and non-discriminatory terms and conditions under such IPR.38

On the one hand, it is no doubt that voluntary FRAND commitment would definitely bring benefits to the proprietor, helping manufacturers obtain more sales opportunities. For undertakings engaging in R&D, the commitment would facilitate wider application of the patents so as to make it easier for the proprietor to broaden (p. 135) its product/technology market, and obtain more economic benefits within the protection period. Nevertheless, on the other hand, FRAND commitment is also a kind of restriction to the proprietor, prohibiting it from requesting excessive royalty at its will, refusing to license without good reasons, or imposing discriminatory or other unreasonable trading conditions. In a nutshell, FRAND commitment requests the proprietor neither to abuse the dominant position acquired through its patent being included in the standard, nor to grab unreasonable economic interests by virtue of the dominance. As pointed out by Alexander Italianer, former Director General for Competition of European Commission:

Ownership of intellectual property rights essential to standards can confer market power. This is why commitments to license these rights in the context of standardization agreements are extremely important in preventing IPR holders from making the implementation of a standard difficult. This could happen by refusing to license or by requesting excessive fees after the industry has been locked in to the standard, or by charging discriminatory royalties.39

Judge Richard Posner of the United States Court of Appeals for the Seventh Circuit also mentioned that, ‘[t]he purpose of the FRAND requirements is to confine the patentee’s royalty demand to the value conferred by the patent itself as distinct from the additional value—the hold-up value—conferred by the patent’s being designed as standard-essential’.40

From the analysis mentioned above, we could regard FRAND commitment as agreement between SSOs and proprietor of SEPs, aiming to restrict conducts of proprietors. That is to say, due to the dominant market position obtained in SEPs licensing market, the proprietor might abuse the position, and coerce/ ‘kidnap’ potential licensees to accept un-FRAND provisions accordingly, thus constituting concern of the market competition. This logic corresponds with anti-monopoly law’s regulation on undertakings with dominant market position. Or put it in another way, when an undertaking is partly or even totally not constrained by competition, it might take action which has no possibility of being taken in an effective competitive market.41 That is to say, there should be a supervision mechanism targeted at undertakings with dominant position from under-competitive market so as to prevent the abuse of such a dominant position. In order to bear due responsibilities, SSOs request proprietors to make FRAND commitment. It is also one type of trade-off among rights and interests of various members within SSOs. Considering that it is not possible for one proprietor to obtain all the patents within a standard, (p. 136) members of a SSO could be the licensor sometimes, while acting as the licensee at other times. Furthermore, SSOs are always welcoming new members. That’s the reason why IPRs policy of SSOs reflects rights and interests of both the licensor and the licensee inevitably. Or put it in another way, FRAND commitment should guarantee the patentee’s right to obtain fair and reasonable royalty so as to maintain the motive of innovation and active participation in technical standardization, on the one hand.42 On the other hand, FRAND commitment requests the proprietor to bear FRAND responsibilities with the purpose of prohibiting patent hold-up, to name excessive royalty as an example. Similar to general proprietors, those of SEPs are free to participate in economic activities or to sign agreement in principle. Nevertheless, the abuse of dominant position is forbidden.

FRAND commitment is one type of restriction to the proprietor, but not the decisive one. Since SEP-holders have to abide by anti-monopoly law anyway, no matter whether FRAND commitment has been made or not. The reason behind this is simple. A competitive market is the pre-condition for autonomy of will in private law. Refusing to deal or requesting excessive royalty is lawful in a competitive market, but turns out to be unlawful if monopoly or dominant position exists. Hence, there is always the possibility for proprietor of SEPs to be sued in the court or under investigation of competition agencies, as long as patent hold-up exists.

3.3  FRAND royalty and contract law

If the proprietor requests excessive royalty, refuses to license, sets discriminatory price, ties in or imposes other unreasonable licence terms, then it is going be recognized as against FRAND commitment. Then someone would be of the opinion that the court should solve disputes between Huawei and IDC on basis of contract law, since IDC has made FRAND commitment to SSOs and should bear the responsibility of licensing its SEPs to Huawei under FRAND conditions. However, this opinion needs to be discussed further.

It is undeniable that there indeed is a FRAND royalty case judged on basis of contract law in other jurisdictions, such as the case of Microsoft v Motorola decided by District Court, WD Washington in April 2013.43 Motorola accused Microsoft of infringing its patents essential to an ITU advanced video coding technology standard called the ‘H.264 Standard’ and an Institute of Electrical Electronics Engineers (‘IEEE’) wireless local area network (‘WLAN’) standard called the ‘802.11 Standard’, and requested Microsoft to pay royalty of 2.25 per cent of sales (p. 137) revenue of Windows and Xbox. On 9 November 2010, Microsoft initiated an action against Motorola, claiming that Motorola had breached the RAND commitments made to the IEEE and the ITU. Microsoft claimed itself beneficiary of the commitment. Judge in charge of this case was James L. Robart.

Judge Robart referred to the case Georgia-Pacific Corp. v United States Plywood Corp. judged in the 1970s,44 presuming that the licensor and the licensee had negotiated on royalty and series of elements which should be taken into consideration when calculating reasonable royalty. All these elements are called ‘Georgia-Pacific Elements’. Since Microsoft v Motorola concerned RAND royalty of SEPs instead of the general patents, Judge Robart brought huge modifications to the traditional Georgia-Pacific Elements, especially from the following perspectives.

Firstly, technical standardization can bring public interests. SSOs should actively promote the wide use of technical standards, which help expand production, promote price competition, and benefit the economy as a whole. FRAND commitment is a kind of promotion measure.45 Public interest requires the proprietor to license its SEPs under RAND conditions instead of negotiating relevant terms with the counterparty privately.

Secondly, license of SEPs might lead to patent hold-up or royalty stacking, since technical products, such as computers or smart phones, often apply countless technical standards, and one technical standard often includes hundreds of thousands of essential patents. So royalty stacking is of great concern. In order to maximize profits, almost all of the proprietors would charge excessive royalty to the licensees, leading to the licensees not being able to afford such SEPs. The result is lack of access to the public of the products concerned. Considering the fact that thirty-five American undertakings own 2,500 patents essential to the H.264 standard and the number of standards owned by other nineteen undertakings was not clear, while 802.11 is a technical standard developed by more than 1,000 undertakings, Judge Robart observed that:

There are at least 92 entities that own 802.11 SEPs. If each of these 92 entities sought royalties similar to Motorola’s request of 1.15% to 1.73% of the end-product price, the aggregate royalty to implement the 802.11 Standard, which is only one feature of the Xbox product, would exceed the total product price.46

Thirdly, in order to avoid patent hold-up and royalty stacking, Judge Robart regarded comparable patent pool as (calculation) parameter for the royalty of 802.11 (p. 138) standard and H.264 standard. When calculating royalty of 802.11 SEP, Judge Robart was of the opinion that Marvel should pay US ¢3 per chip, since the royalty producer Marvell has to pay to ARM (proprietor of 802.11 SEP) accounts for 1 per cent of the price of one chip and Microsoft has to pay Marvel 3 USD per chip to produce Xbox.47 Besides, Judge Robart also took into consideration of Via 802.11 patent pool, research data of InteCap (a consulting company), the number of SEPs held by Motorola, importance of these patents to the standard etc, and decided that the ‘range’ of royalty requested by Motorola for 802.11 SEP should be US ¢0.8–19.5 per product, while the reasonable royalty paid by Microsoft should be US ¢3.471 per Xbox. Basing on the same method of calculation, Judge Robart concluded that the computed RAND royalties fall in the range of US ¢0.555–16.389 for H.264. It was reasonable for Microsoft to pay US ¢0.555 per product.48 Judge Robart cut the RAND royalty requested by Motorola to Microsoft significantly. Microsoft was ordered to pay Motorola USD 1.8 million for the SEP royalty every year, which was less than 1/2000 of USD 4 billion requested by Motorola to Microsoft before.49

Closed with a judgment of 207 pages, Microsoft v Motorola was the first case concerning RAND royalty of SEPs judged by the court in American history. It was regarded as a landmark accordingly.50 Judge Robart contended that RAND royalty and its ‘range’ were determined to make clear whether Motorola had born the RAND commitment it had made to SSOs. Though it was a contract case,51 and Microsoft v Motorola was dealt with from perspective of contract law, the court calculated RAND royalty in the same way with competition concern analysis in anti-monopoly cases. For example, taking into consideration public interests related to SEPs, patent hold-up, and royalty stacking brought by SEP-holders’ elimination and restriction of competition, especially Motorola’s patent hold-up, the court determined RAND royalty that should be charged through comparing patent pool. Furthermore, on condition that Microsoft had applied patents but never paid the relevant royalty to the proprietor, the court still treated the excessive royalty requested by Motorola against contract law as the main issue, which was obviously (p. 139) not according to general contract relationship.52 Therefore, some scholars contended that even if conducts in breach of RAND commitment didn’t constitute dishonesty to the SSOs, it could still be recognized as monopoly directly.53

There are still several confusions in theory, where legal issues concerning FRAND or RAND royalty of SEPs were treated as contract ones. Firstly, although SSOs request proprietors to license their SEPs under FRAND terms, these kind of agreements don’t stipulate what measures the SSOs could take if FRAND commitment were breached. Secondly, SSOs request proprietors to license their essential patents in accordance with FRAND terms, but there is no definition of FRAND commitment in the agreement. In fact, it is not possible for a SSO to set fair and reasonable royalty for each essential patent, since it is not able to evaluate the quality of hundreds of standards within a technical product and thousands of patents contained in each standard, let alone the reasonable distribution of royalty among tens of thousands of essential patents. In another word, the FRAND commitment made by proprietors to SSOs is only theoretical and lacks operability. Thirdly, in terms of the relationship between proprietor of SEPs and potential licensee, contract concerning the royalty is not established if they haven’t entered a licensing agreement from the perspective of continental law system, even if the proprietor has made FRAND commitment to the SSO.54 For example, in Motorola v Microsoft, the German court was of the opinion that there wasn’t any agreement concerning royalty of SEPs requested by Motorola.55 In Huawei v ZTE, neither the German court nor the European court making preliminary judgment was of the opinion that the parties had entered into any agreement concerning FRAND royalty.56 Actually, in Microsoft v Motorola judged by the American court, acting as the respondent, Motorola rebutted the conflict being treated as a contract case, since it had never entered into any agreement with Microsoft regarding the royalty. Not satisfied with the judgment favourable to Microsoft made by Judge Robart, Motorola contended that the case did not belong at the Ninth Circuit, because it involved important (p. 140) patent law issues that must be resolved by the Federal Circuit, which has sole jurisdiction over patent cases.57

It is worth mentioning that even if conflicts concerning FRAND royalty shouldn’t be treated as a contract case, it doesn’t mean that the case has no connection with civil law. On the contrary, principles of ‘fair trade’ and ‘good faith’ that should be respected in civil activities are also applicable to SEPs licence and other anti-monopoly cases. For example, all the abuses explicitly prohibited by Article 17 of AML are qualified with ‘unfair’ or ‘without justification’. In reality, anti-monopoly law is a type of fair trade law,58 which is the reason why a lot of agencies in charge of anti-monopoly enforcement are called ‘fair trade commission’.59 It means that anti-monopoly law is closely connected with civil law, since both of them aim at advocating and promoting fairness and justice. Nevertheless, it is better to deal with a breach of FRAND commitment in accordance with anti-monopoly law, instead of contract law or civil law, since proprietors of SEPs making such FRAND commitment don’t have any competitors in the relevant technical market after all. Because of the effect of competition elimination on relevant market, patent hold-up should be treated the same as exploitative or other exclusive conducts of general monopolists, both in theory and practice. Under this situation, even if SEPs proprietors have made FRAND commitments to SSOs, anti-monopoly law still applies if it is not enough for such ‘agreement’ to protect public interests.60

4.  Injunction Sought by SEPs Proprietors

In Huawei v IDC, the court observed that acting as proprietor of 3G SEPs, IDC abused it dominant market position through charging excessive royalties. IDC was also found to have asserted related patents against Huawei in Investigation Number 337-TA-800 before the USITC and seeking injunctions barring Huawei from using, making, importing, offering for sale, and/or selling various accused products in the U.S. with 3G and 4G capabilities in the United States District Court for the District of Delaware. The court concluded that the injunction sought by IDC constituted abuse of dominant market position, since it was only a measure taken by IDC to push Huawei to accept the unreasonable licence conditions, while Huawei was acting in good faith. It was against the FRAND commitment IDC had made and should be stipulated by anti-monopoly law.61 Since there was no provision in (p. 141) AML treating seeking unreasonable injunction as abuse of dominant market position until then, the judgment of Huawei v IDC was of great significance to the development of China’s anti-monopoly law.

4.1  Limitation to the injunction sought by SEPs proprietors

In light of traditional civil law, a rights holder is entitled to request the court for cessation of infringement or compensation for damages, if relevant rights, including IPRs, are infringed. That’s the reason why objects of various property rights have the characteristic of exclusivity.

However, due to the intangibility of IPRs, a request for cessation of infringement to IPRs is not like that of general rights, which can be limited to a particular scope. Proprietors would make use of it to grab improper economic interests, or eliminate or restrict competition so as to stifle innovation. This could mostly be found in industries closely related to technology standardization, such as wireless communication, semi-conductor, and software, since patent hold-up is more likely to happen in these areas. On the one hand, proprietors try their best to make FRAND commitment to SSOs in order to have their technologies included in the standard. On the other hand, however, they might refuse to license, or request excessive royalty, even through litigation on purpose, which is called ‘patent troll’. Under this situation, if a licensee could only apply the patent after being licensed, then a proprietor might impose the licensee to accept unreasonable contractual terms through requesting the court to issue an injunction or compensation for damages so as to obtain excessive royalties. Right of injunction or compensation for damages shouldn’t be regarded as a proprietor’s absolute right. For potential licensees, compared with costly litigation, it is more cost-effective to accept excessive royalties. Gradually, right of injunction or compensation for damages would twist methods of negotiation for royalties, and raise royalty to unreasonable high level in the end. In the decision of Samsung Case, the Commission concluded that Samsung’s seeking of injunctions against Apple was capable of: (i) excluding the rival manufacturer of UMTS-compliant mobile devices from the market; and (ii) inducing the licensee to accept disadvantageous licensing terms, compared to those which the licensee may have accepted in the absence of injunctions being sought.62

Due to the motivation of ‘patent hold-up’ behind tort or injunction litigation, which is against FRAND commitment, and the original intention of technical standardization as well, public interests, including those of consumers, would be harmed in the end. Some anti-monopoly agencies and courts have already recognized the necessity to limit right of proprietors to request for tort or injunction litigation. For example, Policy Statement on Remedies for Standards-Essential Patents Subject to Voluntary F/(p. 142) RAND Commitments published by U.S. Department of Justice (‘US DOJ’) and U.S. Patent and Trademark Office (‘US PTO’) jointly on 8 January 2013 pointed out that A patent owner’s voluntary F/RAND commitments may also affect the appropriate choice of remedy for infringement of a valid and enforceable standards essential patent. In some circumstances, the remedy of an injunction or exclusion order may be inconsistent with the public interest.63

4.2  Pre-condition of application for and defence of injunction

The court emphasized efforts made by Huawei to negotiate sincerely with good faith with IDC (Huawei expected IDC to license its SEPs under FRAND commitment) when concluding that IDC abused its dominant market position through applying an injunction to an American court and the USITC. This showed that the court recognized the right enjoyed by the proprietors to apply for an injunction.

An SEP-holder is entitled to take reasonable steps to protect its interests by seeking injunctions against a potential licensee in, for example, the following scenarios: (1) a potential licensee is in financial distress and unable to pay its debts; (2) a potential licensee’s assets are located in jurisdictions that do not provide for adequate means of enforcement of damages; or (3) a potential licensee is unwilling to enter into a licence agreement on FRAND terms, with the result that the SEP-holder will not receive FRAND compensation for the use of its SEPs, etc.64 The right to claim for injunction or cessation of infringement is essential to the proprietor, without which the legitimate rights and interests of the proprietor might be damaged due to the speculating mentality of licensees or potential licensees. For example, a potential licensee in need of a license may in some circumstances refuse to pay the royalty or unreasonably delay negotiations to the same effect, which could be categorized as ‘reverse patent hold-up’.65 It is no doubt that ‘reverse patent hold-up’ makes it harder for the proprietor to get reasonable compensation for its innovation and invention, and could also stifle the initiative to participate in the technical standardization, which would bring serious long-term damages to industry development and social welfare. Then, under what circumstances could a proprietor’s application for injunction or cessation of infringement be upheld by the court? Furthermore, (p. 143) what kind of ‘good faith’ should the potential patentees responding to injunction application have?

In the decision of Orange-Book-Standard (Az KZR 39/06) issued on 6 May 2009, the Federal Court of Justice of Germany (German: Bundesgerichtshof, BGH) listed two pre-conditions for defence against an injunction that might be put forward by potential licensees. Firstly, the potential licensee has made an unconditional and irrevocable offer to proprietor of SEPs in line with commercial customs and relevant laws and regulations, and agreed to stick to such an agreement. Secondly, the potential licensee has paid to or promised to pay to the SEPs proprietor through an escrow account for the royalty that should be paid.66 The judgment triggered considerable controversy in Germany, especially the requirement for potential licensees to pre-pay royalty. The decision was welcomed by the majority of commentators. The court had managed to balance the parties’ interests, safeguarding interests of the patentee by avoiding application of SEPs without due authorization/license.67 The opponents contended that the court didn’t take the key issue into consideration, which is SEP. The potential licensee might be hijacked by the proprietor if a court required it to make acceptable and unconditional offer to the proprietor or promise to pay the royalty, since right to use is essential for the potential licensee to enter the market.68 Mr. Advocate General Wathelet contended that it was obviously excessive protection for the proprietor if the Orange-Book-Standard were applied to SEPs directly. Considering that the Orange-Book-Standard was a de facto industrial standard, the owner of the patent at issue had not given any commitment to grant licences on FRAND terms. It could be understood that an action for injunction sought by the proprietor would not be regarded as abusive as long as the royalty demanded is not clearly excessive.69

The judgment of the Orange-Book-Standard made by the Federal Court of Justice of Germany is not widely recognized worldwide. This is because the mainstream view of the competition authorities in both the EU and U.S. is that injunctive relief is not proper as long as the proprietor could be fully compensated in accordance with FRAND commitment.70 For example, in the Samsung Case, the Commission (p. 144) observed that, an SEP-holder is generally entitled to seek injunctions as part of the exercise of its IP rights, which in itself cannot constitute abuse of dominant position. The exercise of an exclusive right by its owner may, however, in exceptional circumstances and in the absence of any objective justification involve abusive conduct.71 The Commission preliminarily concluded that the exceptional circumstances in this case are: (i) The UMTS standard has been widely implemented in the EEA. The industry is thus locked-in, with the risk that each holder of UMTS SEPs may hold up implementers either by refusing to license the necessary IP or by demanding excessive royalties; and (ii) The SEP-holder has agreed to license its UMTS SEPs on FRAND terms, and expects to obtain remuneration for its SEPs by means of licensing revenue rather than using these patents to exclude others.72 In one word, if a technical standard has been widely used, such as becoming industrial standard, the injunction application is not fair as long as a proprietor has made a FRAND commitment and potential licensees haven’t explicitly refused to accept such a commitment. Besides, the holding of IPR itself cannot constitute an objective justification for the seeking of an injunction by a SEP holder against a potential licensee that is not unwilling to enter into a licence agreement on FRAND terms.73 Mr. Advocate General Wathelet also expressed a similar opinion in this regard. A mere willingness on the part of the infringer to negotiate in a highly vague and non-binding fashion cannot, in any circumstances, be sufficient to limit the SEP-holder’s right to bring an action for injunction.74

A preliminary ruling recently issued by the European Court of Justice (‘ECJ’) made clear the pre-conditions for proprietors to apply for injunctions and potential licensees to file a defence accordingly.75 ECJ and Mr. Advocate General Wathelet shared similar opinions, which was to compromise the Orange-Book-Standard and the Samsung Case.76 The most obvious difference of ECJ’s observation from Orange-Book-Standard is that, it is for the proprietor of the SEPs, (1) to alert the alleged infringer by designating the SEPs and specifying the way in which it has been infringed in writing; and (2) to present the infringer a specific written offer for a licence on FRAND terms, specifying in particular the amount of the royalty and (p. 145) the way in which that royalty is to be calculated after the alleged infringer has expressed its willingness to conclude a licensing agreement on FRAND terms.77 The limitation put forward by ECJ to proprietors of SEPs is reasonable since (1) it is not certain that the infringer of one of those SEPs will necessarily be aware that it is using an SEP both valid and essential to a standard in view of the large number of SEPs composing a standard;78 and (2) where the SEP-holder has made commitment to SSOs to grant its patents to third parties on FRAND terms, it can be expected to restrict the licence terms accordingly. Furthermore, in the absence of a public standard licensing agreement, and where licensing agreements already concluded with other competitors are not made public, the proprietor of the SEP is better placed to check whether its offer to the alleged infringer complies with the condition of non-discrimination.79

Differing from the Samsung Decision made by the Commission, ECJ emphasized good faith the alleged infringer should have when negotiating with the proprietor for royalties before the injunction is applied. Firstly, it is for the alleged infringer to respond to the offer in accordance with recognized commercial practices and in good faith with no delaying tactics. Should the alleged infringer not accept the offer, it must submit to the SEP-holder in question, promptly and in writing, a specific counter-offer that corresponds to FRAND terms.80 Furthermore, where both parties cannot agree on the counter-offer provided by the alleged infringer, they should request an independent third party to decide licence conditions in question without delay. It is for the alleged infringer to provide appropriate security, in accordance with recognized commercial practices in the field, for example by providing a bank guarantee or by placing the amounts necessary on deposit in this situation.81 That is to say, the proprietor of a SEP who has committed to grant a licence to third parties on FRAND terms does not abuse its dominant position by seeking an injunction or requesting the alleged infringer to provide a guarantee for expected royalties, as long as the alleged infringer continues to use the patent in question, but does not diligently respond to the proprietor’s offer in accordance with recognized commercial practices in good faith, such as the delaying tactics.82

Huge difference exists between opinion of the ECJ and Policy Statement on Remedies for Standards-Essential Patents Subject to Voluntary F/RAND Commitments jointly (p. 146) issued by US DOJ and US PTO in January 2013. The latter focuses more on competition twist and harm to public interests that might be brought by injunction,83 while the former (ECJ) emphasizes the importance of striking a balance between IPRs protection and free competition.84 FRAND commitment doesn’t mean that the proprietor has given up the right to seek an injunction.85 The authors agree with the opinion of the ECJ. Beside ‘patent hold-up’, there is also ‘reserve patent hold-up’, where the alleged infringer tries every effort to delay the negotiation with SEP-holder for royalties. ‘Reverse patent hold-up’ could also twist the competition and harm public interests, just like the effect of an injunction sought by the proprietor might have on the market. Both are not tolerated by anti-monopoly agencies and courts of course.

5.  Several Inspirations and Thoughts

Huawei v IDC is the first anti-monopoly litigation concerning SEP in China. The Chinese courts concluded that IDC abused its dominant market position through charging excessive royalties to Huawei on the basis of AML, FRAND commitment IDC has made to SSOs, and similar cases closed by EU or U.S. anti-monopoly agencies and courts as well. The logic of analysis in this case is reasonable, and the method is also scientific, reflecting fairness and justice which should be maintained by law. The judgments of case Huawei v IDC have also triggered several inspirations and thoughts.

5.1  Application of AML to SEPs enforcement

Though SSOs generally request SEPs-holders to make FRAND commitment, practice shows that conflict between the proprietor’s ‘patent hold-up’ and openness of the standard is inevitable. For example, SEPs-holders may refer to injunction or tort litigation in the name of IPRs protection, while potential licensees or alleged infringers would defend themselves on the basis of anti-monopoly. Huawei v IDC appears to be an IP case judged in accordance with anti-monopoly law. The court analyzed the nature and specialty of SEPs in the first place, recognized the dominant position held by IDC in the SEPs licensing market, and concluded that IDC had abused its dominance through charging excessive royalties and seeking injunction in America. It shows that competition law prevails when there is conflict between it and IP law, especially when it concerns SEPs. So SEPs-holders should foresee the potential investigation initiated by anti-monopoly agencies or anti-monopoly litigation brought by licensees when exercising patents improperly.

(p. 147) In some foreign jurisdictions, FRAND commitment is recognized as an agreement between the licensor/proprietor and the licensee: conflicts arising accordingly could be resolved in accordance with contract law. In reality, a proprietor is obliged to license its patent on fair and non-discriminatory conditions in accordance with anti-monopoly law, no matter whether it has made FRAND commitment or not, considering the competition in relevant technology market excluded by technical standardization. Of course, not all the cases related to SEPs should be decided as anti-monopoly ones, since patent law applies when a SEPs holder seeks for reliefs when there is ‘reverse patent hold-up’. For example, the potential licensees delay the negotiation without good reasons or are reluctant to pay royalties. Put it in another way, application of law depends on nature and specific circumstances of a case, instead of agency in charge of the case.

5.2  Problem of Article 55 of the AML

IP law and competition law complement each other, since both of them aim to encourage competition and innovation, increase efficiency, and help broaden public interests. However, Huawei v IDC indicates that conflict still exists. In order to make clear the relationship mentioned above, Article 55 of AML stipulates that, ‘This Law is not applicable to undertakings who exercise their IPRs in accordance with the laws and administrative regulations on IPRs; however, this Law shall be applicable to the undertakings who eliminate or restrict market competition by abusing their IPRs.’ The problem here is, does the ‘abuse’ have to be out of scope of IPRs protection? From Huawei v IDC, we could find that enforcement of IPRs in accordance with IP laws cannot exempt the proprietor from application of anti-monopoly law. For example, the excessive royalty requested by IDC to Huawei and injunction sought by IDC in an American court when Huawei hadn’t paid the royalty were not against patent law,86 but recognized as abuse of dominant market position, according to anti-monopoly law. There is an application problem as regards sub-paragraph 1 of Article 55 of AML.

Before the 7th amendment in 2005, there was similar problem in German Act against Restraints of Competition (‘German Competition Act’). Articles 17 and 18 of German Competition Act prohibit conducts which are out of the protection scope of IPRs law, while those within the scope could be exempted. However, the two articles were deleted by the 7th amendment, and there was no provision defining IPRs, either. Professor Josef Drexl explained it in a competition conference in Beijing that though people keep requesting competition agencies and courts to make clear the relationship between IPRs law and competition law, there is almost no special provisions concerning IPRs within competition law. This is not in compliance with (p. 148) the importance and complexity of the problem. Even if there were such an article, what it emphasizes would be the characteristics of both set of laws, whereas the frontier still needs to be made clear in practice in the future.87 This problem is initiated again by Huawei v IDC. So there is necessity for IPRs exemption regulated in Article 55 of AML to be discussed further by the Chinese legal society.

5.3  Issues to be resolved after Huawei v IDC

The highlight in Huawei v IDC is that, starting from FRAND commitment made by IDC, the court stressed the obligation IDC should bear when licensing its SEPs on FRAND conditions, and calculated the FRAND royalty rate IDC should have requested to Huawei through comparing with license conditions IDC offered to Apple. The analysis and final decision are innovative and reasonable. However, how will the court decide the royalty IDC should request for its SEPs if IDC hasn’t licensed its SEPs to Apple or Samsung? Even if the court took lots of elements into consideration, such as profits that could be obtained from exercise of the patents or similar patents, percentage of the profits mentioned above in the total profits of products sold by the licensee, or the profits in sales revenue, the judge admitted the idealization of this method to calculate due FRAND royalty. Since it is very hard to be put into practice,88 will an organization concerning technical standard, such as SSO, make more efforts in this regard, considering that it is not easy for both anti-monopoly agencies and courts to determine an accurate royalty of a SEP?89

Another issue is that potential licensee or the alleged infringer should also act in good faith, even if the SEP-holder is restricted when seeking for injunction or cessation of infringement, according to practice both home and abroad. Whereas various courts and anti-monopoly agencies define ‘good faith’ differently, such as the high requirements put forward by German Orange-Book-Standard,90 and ‘the potential licensee not unwilling to enter into a license agreement on FRAND terms’ requested by the Commission to the alleged infringer in the Samsung decision,91 etc. Then, what is ‘willing to enter into a license agreement on FRAND terms’? Could oral acceptance of FRAND terms be categorized as ‘good faith’? What other efforts should a potential licensee make if oral acceptance is not enough? Considering that increasing SEPs conflicts in high technology industry attract public attention nowadays, this issue is in urgent need of being resolved in practice.


Professor at Hunan University and at Chinese Academy of Social Sciences, Expert of Consultation Group of Antimonopoly Commission of the State Council

**  2017 PHD candidate of the Queen Mary University of London

1  The US Department of Justice and the Federal Trade Commission, Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition (April 2007) 33 (hereafter The US DOJ and FTC, Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition).

2  Administrative Punitive Decision of the National Development and Reform Commission (hereafter NDRC), FA GAI BAN JIA JIAN CHU FA (2015) No 1.

3  Announcement of the Ministry of Commerce (hereafter MOFCOM) No 25 of 2012 ‘Announcement of Anti-Monopoly Review Decision on Conditional Clearance of Google’s Acquisition of Motorola Mobility’.

4  Announcement of MOFCOM No 24 of 2014 ‘Announcement of Anti-Monopoly Review Decision on Conditional Clearance of Microsoft’s Acquisition of Nokia’s Devices & Services Business’.

5  The respondents in this case include InterDigital Technology Corporation, InterDigital Communication Inc., InterDigital Inc., and IPR Licensing Inc., all of which are subsidiaries wholly owned by InterDigital Corporation and called ‘InterDigital Group’ by the public. All the respondents in this case were abbreviated as ‘IDC’ by the court.

6  (2011) SHEN ZHONG FA ZHI MIN CHU ZI No 857 and (2011) SHEN ZHONG FA ZHI MIN CHU ZI No 858.

7  (2013) YUE GAO FA MIN SAN ZHONG ZI No 306 and (2013) YUE GAO FA MIN SAN ZHONG ZI No 305.

The Guangdong High People’s Court dismissed the appeal and almost upheld the original judgment made by the Shenzhen Intermediate People’s Court. The former reversed one of the latter’s conclusion that IDC engaged in tie-in sales related to standard essential patents (hereafter SEPs). Since packaged sales of essential patents on a global scale is in line with the efficiency principle when cooperating with transnational companies, to name Huawei as an example. This chapter makes no difference when referring to judgments made by the two courts mentioned above in the main text, but would mention the exact case number in the citation.

8  Guidelines of the Anti-Monopoly Commission of the State Council Concerning the Definition of Relevant Markets, Article 2.

9  Xiaoye Wang, Anti-Monopoly Law (Law Press 2011) 85–88.

10  (2013) YUE GAO FA MIN SAN ZHONG ZI No 306, 40.

11  Ibid, 41–42.

12  Samsung-Enforcement of UMTS Standard Essential Patents (Case 39939) Commission Decision of 29.4.2014, paras 41–42 (hereafter Samsung-Enforcement of UMTS Standard Essential Patents).

13  (2013) YUE GAO FA MIN SAN ZHONG ZI No 306, 40–41.

14  (2011) SHEN ZHONG FA ZHI MIN CHU ZI No 858, 13.

15  Google/Motorola Mobility (Case M.6381) Commission Decision of 13.2.2012, paras 54, 61 (hereafter Google/Motorola Mobility).

16  (2013) YUE GAO FA MIN SAN ZHONG ZI No 306, 43.

17  Administrative Punitive Decision of the NDRC [2015] No 1.

18  Case C 170/13 Huawei Technologies Co. Ltd. v ZTE Corp., ZTE Deutschland GmbH [2015] ECLI:EU:C:2015:477, para 43 (hereafter Huawei Technologies Co. Ltd. v ZTE Corp., ZTE Deutschland GmbH).

19  Anti-Monopoly Law of the People’s Republic of China (hereafter PRC), Article 19 (hereafter AML).

20  (2011) SHEN ZHONG FA ZHI MIN CHU ZI No 858, 13.

21  Ibid.

22  Samsung-Enforcement of UMTS Standard Essential Patents (n 12), paras 45–46.

23  (2013) YUE GAO FA MIN SAN ZHONG ZI No 305, 46.

24  Ibid, 46–47.

25  Jianjun Zhu and Wenquan Chen, ‘Justiciability of Conflicts Concerning SEPs Royalty Rate’ [2014] The People’s Judicature 4, 9 (hereafter Zhu and Chen, ‘Justiciability of Conflicts Concerning SEPs Royalty Rate’).

26  (2013) YUE GAO FA MIN SAN ZHONG ZI No 305, 70.

27  Ibid, 72.

28  Ibid, 72–75.

29  Ibid, 74.

30  Ling Zhang and Jinzi Wen, ‘Shenzhen Released “White Paper on IPRs Protection”, while Case Huawei v IDC Becoming a Classic One’ (24 April 2014), available at <://news.eastday.com/eastday/13news/auto/news/china/u7ai1314419_K4.html> accessed 15 June 2016.

31  Taiwan Science & Technology Policy Research and Information Center, ‘Guangdong High People’s Court Determined the Royalty Rate Requested by IDC to Huawei not Exceeding 0.019%’ (24 April 2014), available at <http://iknow.stpi.narl.org.tw/Post/Read.aspx?PostID=9585> accessed 15 June 2016.

32  (2013) YUE GAO FA MIN SAN ZHONG ZI No 306, 56.

33  Ibid, 70–71.

34  Ibid, 71.

35  Ibid, 71–72.

36  For example, Patent Law of the PRC, Articles 11(1), 12; The Agreement on Trade-Related Aspects of Intellectual Property Rights TRIPS, Article 28.

37  The US DOJ and FTC, Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition (n 1) 36.

38  ETSI Rules of Procedure, Annex 6: ETSI Intellectual Property Rights Policy (26 November 2008) Article 6.1, available at <http://www.etsi.org/WebSite/document/Legal/ETSI_IPR-Policy.pdf> accessed 15 June 2016.

39  Alexander Italianer, ‘Innovation and Competition’ (21 September 2012), available at <http://ec.europa.eu/competition/speeches/text/sp2012_05_en.pdf> accessed 15 June 2016.

40  Apple, Inc. v Motorola, Inc., 869 F Supp 2d 901, 913 (ND Il 22 June 2012), appeal pending, Nos 2012-1548, 2012-1549 (Fed Cir) (hereafter Apple, Inc. v Motorola, Inc.).

41  Comparing to AML (n 19), Article 17.

42  Rajendra K. Bera, ‘Standard-Essential Patents (SEPs) and “fair, reasonable and non-discriminatory” (FRAND) licensing’, available at <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2557390> accessed 15 June 2016.

43  Microsoft Corp. v Motorola, Inc., No C10-1823JLR, 2013 WL 2111217 (WD Wash. April 25, 2013) (hereafter Microsoft Corp. v Motorola, Inc.).

44  Georgia-Pacific Corp. v United States Plywood Corp., 318 F Supp 1116, 1120 (SDNY 1970), modified and aff’d, 446 F 2d 295 (2d Cir 1971) (hereafter Georgia-Pacific Corp. v United States Plywood Corp.).

45  Microsoft Corp. v Motorola Inc. (n 43), para 13.

46  Ibid, paras 72, 92, 112, and 456.

47  Ibid, para 93.

48  Dennis Crouch, ‘SO THAT’S WHAT “RAND” MEANS?: A Brief Report on the Findings of Fact and Conclusions of Law in Microsoft v Motorola’ (27 April 2013), available at <http://patentlyo.com/patent/2013/04/so-thats-what-rand-means-a-brief-report-on-the-findings-of-fact-and-conclusions-of-law-in-microsoft-v-motorola.html> accessed 15 June 2016.

49  Ibid.

50  Aaron Vehling, ‘Motorola Urges 9th Circ. To Overturn Landmark RAND Ruling’ (18 November 2014), available at <https://www.law360.com/articles/607864/motorola-urges-9th-circ-to-overturn-landmark-rand-ruling> accessed 15 June 2016 (hereafter Vehling, Motorola Urges 9th Circ. To Overturn Landmark RAND Ruling’).

51  Microsoft Corp. v Motorola, Inc. (n 43), para 3.

52  William H. Page, ‘Judging Monopolistic Pricing: F/RAND and Antitrust Injury’ (2014) 22 Tex Intell Prop LJ 181, available at <http://scholarship.law.ufl.edu/facultypub/588/> accessed 15 June 2016.

53  Joseph Kattan, ‘FRAND Wars and Section 2’ (Summer 2013) Antitrust 30, 32.

54  For example, Article 85 of General Principles of the Civil Law of the PRC stipulates that, ‘A contract shall be an agreement whereby the parties establish, change or terminate their civil relationship.’

55  The case was originally filed by Microsoft against Motorola in the Western District Court of Washington on 9 November 2010, claiming that Motorola had violated its reasonable and non-discriminatory licensing agreement to which Microsoft was a third-party beneficiary. While the US domestic contract litigation had been proceeding, Motorola sued Microsoft in Germany for patent infringement in July 2011. The German district court granted Motorola an injunction prohibiting Microsoft from selling allegedly infringing products in Germany based on German patent law. Then, Microsoft sought an anti-suit injunction against an injunction of patent infringement in Germany. See: Microsoft Corp. v Motorola Inc. (n 43).

56  Huawei Technologies Co. Ltd. v ZTE Corp., ZTE Deutschland GmbH (n 18), para 54.

57  Vehling, Motorola Urges 9th Circ. To Overturn Landmark RAND Ruling’ (n 50).

58  Such as the Fair Trade Act of Taiwan, PRC.

59  Such as the Japan Fair Trade Commission and the Korea Fair Trade Commission.

60  William H. Page, ‘Judging Monopolistic Pricing: F/RAND and Antitrust Injury’, 22 Tex Intell Prop LJ 181 (2014), 133, available at <http://scholarship.law.ufl.edu/facultypub/588/> accessed 15 June 2016.

61  (2013) YUE GAO FA MIN SAN ZHONG ZI No 306, 50.

62  Samsung-Enforcement of UMTS Standard Essential Patents (n 12), para 62.

63  The US Department of Justice and Patent and Trademark Office, Policy Statement on Remedies for Standards-Essential Patents Subject to Voluntary F/RAND Commitments (8 January 2013) 6–7 (hereafter The US DOJ and PTO, Policy Statement on Remedies for Standards-Essential Patents Subject to Voluntary F/RAND Commitment).

64  Samsung-Enforcement of UMTS Standard Essential Patents (n 12), para 67.

65  The United States, INTELLECTUAL PROPERTY AND STANDARD SETTING (17–18 December 2014) 13, available at <http://www.oecd.org/officialdocuments/publicdisplaydocumentpdf/?cote=DAF/COMP/WD(2014)116&docLanguage=En> accessed 15 June 2016.

66  Orange Book Standard, Case No KZR 39/06, Decision of the Federal Supreme Court (Bundesgerichtshof) [6 May 2009], para 29-b; IIC 3/2010, 369-75 (hereafter Orange Book Standard).

67  Philipp Maume, ‘Compulsory Licensing in Germany’ 13, available at <http://ssrn.com/abstract=2504513> accessed 15 June 2016.

68  Hanns Ullrich, ‘Patents and Standard- A Comment on the German Federal Supreme Court Decision Orange Book Standard’, IIC 3/2010, 337–51.

69  Case C-170/13 Huawei Technologies Co. Ltd. v ZTE Corp., ZTE Deutschland GmbH [2014] ECLI:EU:C:2014:2391, Opinion of AG Wathelet, paras 48–51 (hereafter Opinion of AG Wathelet of Huawei Technologies Co. Ltd. v ZTE Corp., ZTE Deutschland GmbH).

70  The US DOJ and PTO, Policy Statement on Remedies for Standards-Essential Patents Subject to Voluntary F/RAND Commitment (n 63) 1.

71  Samsung-Enforcement of UMTS Standard Essential Patents (n 12), paras 55–56.

72  Ibid, paras 56–61.

73  Ibid, para 66.

74  Opinion of AG Wathelet of Huawei Technologies Co. Ltd. v ZTE Corp., ZTE Deutschland GmbH (n 69), para 50.

75  Request for a preliminary ruling under Article 267 TFEU from the Landgericht Düsseldorf (Germany), made by decision of 21 March 2013, which was received at ECJ on 5 April 2013. This request for a preliminary ruling concerns whether judgment made by the German court corresponded with EU laws. ECJ came out with the preliminary ruling on 16 July 2015. See Huawei Technologies Co. Ltd. v ZTE Corp., ZTE Deutschland GmbH (n 18).

76  Ibid, para 55; Opinion of AG Wathelet of Huawei Technologies Co. Ltd. v ZTE Corp., ZTE Deutschland GmbH (n 69), para 52.

77  Ibid, paras 61–63.

78  Ibid, para 62; Opinion of AG Wathelet of Huawei Technologies Co. Ltd. v ZTE Corp., ZTE Deutschland GmbH (n 69), para 81.

79  Ibid, para 64; Opinion of AG Wathelet of Huawei Technologies Co. Ltd. v ZTE Corp., ZTE Deutschland GmbH (n 69), para 86.

80  Ibid, para 65.

81  Ibid, paras 66–68; Opinion of AG Wathelet of Huawei Technologies Co. Ltd. v ZTE Corp., ZTE Deutschland GmbH (n 69), paras 88–89.

82  Ibid, para 77.

83  The US DOJ and PTO, Policy Statement on Remedies for Standards-Essential Patents Subject to Voluntary F/RAND Commitment (n 63) 6–7.

84  Opinion of AG Wathelet of Huawei Technologies Co. Ltd. v ZTE Corp., ZTE Deutschland GmbH (n 69), para 59.

85  Ibid, para 61.

86  Comparing to Article 12 of the Patent Law of the PRC, ‘Any organization or individual that intends to exploit the patent of another person shall conclude a license contract with the patentee and pay the royalties.’

87  Josef Drexl, ‘Abuse of Dominant Market Position and IPRs Law’ in Xiaoye Wang (ed.), Hot Issues on Anti-Monopoly Legislation (Social Sciences Academic Press (China) 2007) 77.

88  Zhu and Chen, ‘Justiciability of Conflicts Concerning SEPs Royalty Rate’ (n 25) 9.

89  Mark A. Lemley and Carl Shapiro, ‘A Simple Approach to Setting Reasonable Royalties for Standard-Essential Patents’, Berkeley Technology Law Journal (Volume 28, Issue 2 Fall).

90  Orange Book Standard (n 66).

91  Samsung-Enforcement of UMTS Standard Essential Patents (n 12), para 66.