Shenzhen court issues written judgment in Huawei v Samsung case

The heat of the Chinese telecoms fire kept the
AmeriKat nice and toasty, but perhaps too toasty...

Things have been heating up in Chinese telecoms patent litigation recently.  The latest is the SEP dispute between Huawei and Samsung.  Over to Richard Vary (Bird & Bird) who brings us up to speed:

"In January this year the Shenzhen Intermediate court held a live broadcast of its announcement of the judgment on two SEPs infringement cases filed by Huawei against Samsung (reported here). Samsung was found to infringe, but had raised a FRAND defence. The Shenzhen court has now handed down two written judgments. They are substantial, at more than 350 pages. Me and my colleagues Yang Li and Christine Yiu have written a fuller report here, but for your Sunday evening read, the key take homes are as follows:   

• FRAND binds the affiliates of the SEP holder and implementer. The Defendants were three Chinese subsidiaries of Samsung, but the acts that Huawei complained about were carried out by their parent company. The Shenzhen court found that the acts of the parent company were relevant in deciding whether to grant relief against the subsidiaries.

• The court criticised four aspects of Samsung's licensing negotiation:

• Samsung insisted upon discussing a licence covering both Huawei's SEPs and non-SEPs (a practice known as "bundling"). It is interesting that the court criticised this in Samsung because bundling is an allegation usually levelled at the SEP owner rather than the implementer.

• Samsung did not always reply promptly in negotiations. The court did not accept that Samsung was overloaded with its litigation cases.

• The court found that Samsung rejected Huawei's arbitration proposals without justified reasons. It noted Samsung's commitments to the EU Commission's anti-trust investigation in 2014, in which Samsung accepted portfolio resolution by arbitration. The court found that this rejection was not consistent with FRAND negotiation.

• The court criticised Samsung for not providing a new offer in the court-organized mediation. 

• The Shenzhen court compared three measures of the strength of the parties’ portfolios:

• The court compared the number of technical proposals accepted by 3GPP. This is a contrast to Judge Selna in TCL v Ericsson (report here[2]), who dismissed Ericsson’s approach to valuation based on SSO contributions, holding that contributions do not necessarily give rise to patents. 

• The court compared the number of declared SEPs and the number of truly essential patents owned by the parties. To do so, it looked into a number of third party reports submitted by the parties. 

• The court took into account the results of eight invalidation proceedings in China (four on each side), in which more Huawei patents were upheld than Samsung patents.

• The court did not take into account a Thomson Reuters report submitted by Samsung and a forward citation analysis because these were only based on US patents.

• To compare the offers, the Shenzhen court carried out a “top down” analysis. It found that Huawei held 5% of the total numbers of 3G SEPs. It found an aggregate royalty rate for 3G of 5%. For 4G, it found that Huawei held about 10% of the total number of 4G SEPs, and the aggregate royalty rate for 4G would be 6%-8%. 

• Samsung argued that it would be unable to generate a reasonable sales profit if it accepted Huawei's royalty offer (a "royalty stacking" defence). The court found that ability to make a profit also depended on their efficiency and other factors in the market. Against this, the court also had to ensure that the SEP holder could get reasonable return for their investments.

The Shenzhen court granted an injunction.

This is a detailed and reasoned decision. The eventual approach: the determination ultimately of a simple yes/no question about whether to grant an injunction based on party negotiation conduct is closer to the German court's approach in applying Huawei v ZTE. But the much more detailed analysis of what is a FRAND rate adopts the greater economic detail of the UK and US court's recent decisions. In moving beyond simple patent counting and allowing evidence relating to the rate of acceptance of contributions to standards-setting organisations, the decision takes a step further.

We may see more portfolio determination cases in China. The Guangdong Higher People's Court is in the process of drafting a Trial Guideline relating to SEP disputes. One provision suggests that an implementer could apply to the court for a stay of injunction if it accepts the FRAND rate as determined by the court."