Chinese Courts Can Set Global SEP License Terms, Rules Supreme People’s Court

  • September 10, 2021
  • Category: Patent Litigation Feature

China’s highest court has upheld a landmark ruling on standard essential patent (SEP) licensing, confirming in Oppo v. Sharp that Chinese courts can set the terms of a global fair, reasonable, and non-discriminatory (FRAND) license. The Supreme People’s Court (SPC) decision, dated August 19 but not reported until early September, details the requirements for courts to establish jurisdiction over such SEP disputes as well as the legal basis for issuing such rulings despite competing foreign litigation.

The judgment below by the Shenzhen Intermediate People’s Court followed another major opinion on global SEP disputes, one issued by the UK Supreme Court in August 2020 in Unwired Planet v. Huawei. That milestone decision marked the first time that a national court held that it may set the terms of a FRAND license for a multinational SEP portfolio. Unwired Planet established that UK courts have jurisdiction to hear such disputes under contract law, since a patent owner’s FRAND commitment flows from the contractual commitment made to a standard-setting organization (SSO), and because national courts may adjudicate such contract terms.

In a similar vein, in a ruling reportedly handed down in October 2020 and disclosed more widely in December, the Shenzhen court held that it would decide a global FRAND license in litigation between Oppo and Sharp, rejecting a jurisdictional challenge from Sharp. In deciding that it could hear the case, the court characterized FRAND disputes as distinct from pure contract or patent infringement cases. It also determined that a Chinese court may adjudicate such a dispute involving a foreign party if the dispute has an “appropriate connection” with China, which can be established if that country is where the defendant is located, where the patent is to be enforced, or where a contract is signed or performed, among other factors—an even a broader basis for establishing jurisdiction than in Unwired Planet.

Ruling on appeal, the SPC affirmed the Shenzhen court’s ruling that Chinese courts have jurisdiction over such FRAND disputes and held that it is appropriate for a court to set the terms of a global license to the SEP portfolio at issue. (The analysis below is based on a machine translation of an unofficial version of the original Mandarin-language opinion.)

As to the jurisdictional issue, the SPC echoed the lower court’s ruling by noting that SEP disputes are “special types of disputes” that share characteristics with both contract and patent infringement cases: the former, because such disputes may require courts to resolve disagreements over license terms; and the latter, due to the need to determine whether a patent subject to a license is essential to a standard, whether the defendant has infringed the patent, and whether the patent is valid. However, the SPC found that on balance, SEP disputes are more contractual, since the resulting litigation asks a “court to determine specific licensing conditions or content, prompting the parties to finally reach a license agreement or perform a license agreement. Therefore, it can be regarded as a special type of dispute with a relatively more contractual nature”.

In light of these distinct “characteristics” inherent to SEP disputes, the SPC ruled that an “appropriate connection” with China can be established if China is the “place where the patent right is granted, the place where the patent is implemented, the place where the patent license contract is signed, or the place where the patent license is negotiated”, and if China is the “location of the property for seizure or execution”. The SPC held that just one of these factors is sufficient to establish an “appropriate connection”, and thereby provide jurisdiction to a Chinese court: “As long as one of the aforementioned locations is within Chinese territory, it should be deemed that the case has an appropriate connection with China, and the Chinese court shall have jurisdiction over the case”.

Applying this standard to the dispute at hand, the SPC found that the Shenzhen court had two bases for establishing jurisdiction. First, Oppo manufactures products practicing the SEPs at issue in Shenzhen, Guangdong Province, making the Shenzhen court the proper “standard essential patent application court”. Second, the parties held licensing negotiations for those same SEPs in Shenzhen, also rendering the Shenzhen court the “court of consultation on patent licensing”. As a result, the SPC rejected the defendants’ request to transfer the case to the Guangzhou Intellectual Property Court.

Next, the SPC held that whether a Chinese court may set a global license depends on the facts relevant to jurisdiction considered in light of the “particularity” of SEP disputes, as detailed above. In the present case, the SPC justified its ruling in the affirmative based on two factors. First, the court found that the parties both demonstrated a willingness to reach a global license. Second, the SPC determined that the dispute was “obviously more closely linked to China”, based on the fact that most of the patents at issue are Chinese, China is the primary location where the patents have been implemented by Oppo as well as the company’s main place of business and source of revenue, China is where license negotiations took place, and China is the location of the property that could “seized or enforced” by the licensor. Based on the aforementioned willingness on both sides to establish a global license, and because the above facts established jurisdiction, the SPC determined that the Shenzhen court was not wrong to decide that it could set a global license. However, the SPC emphasized that while parties may agree to have a SEP dispute adjudicated in a particular country, such agreement is not required for a court to set the terms of a global license.

The SPC also acknowledged that licensing issues in this case could conflict with prior litigation in other jurisdictions, including Japan, Germany, and Taiwan, as those cases will likely address licensing fees when calculating damages. However, the court outlined two reasons why its ruling was nonetheless justified. First, the SPC stated that it “believes” those foreign cases to be primarily focused on patent infringement (and, therefore, damages) rather than licensing. Second, under Chinese law, “even if a parallel lawsuit in a certain case is being heard in a foreign court, as long as the Chinese court has jurisdiction over the case in accordance with the law”, then the foreign “litigation does not affect the Chinese courts’ jurisdiction over the case”.

Oppo v. Sharp is just the latest salvo in an escalating international battle over the power to set global licenses—a battle to which the SPC has further contributed by endorsing the use of anti-suit injunctions to block the enforcement of foreign SEP injunctions against Chinese companies. Specifically, in April 2021, the SPC reported what it considered the top IP rulings from 2020, providing a list of “typical” (exemplary) decisions, including one from Huawei v. Conversant that marked the first time that a Chinese court issued an anti-suit injunction in an IP case. The SPC characterized that ruling—which led to a settlement that ended parallel litigation in other countries—as having “achieved good legal and social effects”. Chinese courts have continued to issue such orders in other cross-border SEP disputes, including a battle that began late last year between the Wuhan Intermediate People’s Court and the Eastern District of Texas over dueling anti-suit injunctions (and anti-anti-suit injunctions) that has since ended due to settlement as well. Time will tell if the SPC’s Oppo decision will cause even more parties to race to the courthouse now that courts in at least two countries are willing to tackle global licenses.

Finally, the limited availability and belated release of written opinions like Oppo highlight a parallel issue related to judicial transparency in China, where courts generally report a far more limited set of data than in other jurisdictions like the US. Even major decisions are often not officially reported for months, and such delays—combined with the relative scarcity of official guidance on those rulings’ proper application—have led some stakeholders to protest the resulting lack of insight into Chinese courts’ approach to SEP issues. Notably, in July 2021, the World Trade Organization (WTO) sought further clarity from China on recent SEP cases through a request for information submitted pursuant to Article 63.3 of the TRIPS Agreement. The request noted that despite the significant changes in SEP jurisprudence that have recently been reported, most of the underlying decisions had not published on the SPC’s “China Judgements [sic] Online” website—including the Shenzhen court’s decision in the Oppo case. As a result, the WTO asked China to provide that written opinion and two others of consequence, also seeking information on the precedential impact of the SPC’s case designations—i.e., “big” and “typical” decisions—and further details on the scope of Chinese anti-suit injunctions (as well as the process courts must follow to issue them). On September 7, the Chinese government issued a one-page response, explaining that “big” and “typical” rulings are “cases for reference and have no legal effect of general application”. Otherwise, the statement asserted that China is not obligated to provide the requested information under the TRIPS Agreement, instead countering that the country stands ready to have bilateral discussions on these topics through the existing China-European Union IP Working Group.

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