A telecoms blockbuster: Beijing High Court upholds patent injunction in IWNCOMM v Sony

The AmeriKat bundled warmly in blanket of FRAND and
SEP injunctions...

Miserable, cold and windy.  Another Spring weekend in London.  So if you are looking for something to warm your cockles and put a spring in your step, look no further than China.  Yet again China’s IP system is heating up, most recently with the Beijing High Court's blockbuster decision on patents, FRAND and telecoms injunctions.

Tristan Sherliker (Bird & Bird) reports on the recent decision.  Over to Tristan:

"A new appeal decision from Beijing upholding the country’s first SEP-based injunction could set the stage for future patent litigation in the telecoms sector and beyond. 

The April 2018 decision in IWNCOMM v Sony gives insight on how the Chinese legal system interprets FRAND licensing obligations in telecoms cases and gives guidance on how to conduct FRAND negotiations, as well as addressing core issues of indirect infringement.

Background

In the last 5 years, China has been making swift advances in its specialist IP courts. Perhaps most importantly, they have established a new system of precedent. This has been widely welcomed by the international community as a positive move to increase transparency and consistency of justice in China.

So it is clear that the appeal decision in IWNCOMM v Sony is intended to, and will, act as strong precedent for future patent cases in the region. The case (fully cited as Sony Mobile Communications Products (China) Co., Ltd. v Xi'an Xidian Jietong Wireless Network Communication Co., Ltd. (2017) Jingmin 454) is Sony’s appeal in a case originally brought in 2015 by Xidan Jietong, better known by its brand IWNCOMM.

IWNCOMM holds SEPs for the Chinese standard known as WAPI. WAPI is a security layer process used only in China, that is compatible with the more familiar WiFi communications standard. The technology is backed by a FRAND promise as with other standard-setting organisations.

Sony of course makes telecoms that comply with the WAPI standard. Sony and IWNCOMM negotiated from 2009 to 2015 for a FRAND licence, but negotiations ultimately broke down. In 2015 IWNCOMM issued proceedings in the Beijing IP Court for infringement of patent ZL02139508.X: a method patent for establishing and authenticating a connection between a wireless access point and user equipment.

First instance & Appeal

The first instance decision found for IWNCOMM on every count. The patent was essential and infringed by Sony, and IWNCOMM’s claimed royalty rate was FRAND-compliant. More significantly, the court granted the country’s first ever injunction based on a SEP.

Sony appealed to the Beijing Municipal High People’s Court (the "Court"), who this month has handed down a decision confirming the first-instance result, the injunction, and the legal tests behind them. At a glance, the issues are as follows.

(1) clarity for the test of indirect infringement
(2) the limits of exhaustion
(3) FRAND used as a pure defence
(4) Injunctions for SEPs in China
(5) Conduct of FRAND negotiations: Lessons to be learned

Test for contributory infringement

The Court clarified the test for indirect (contributory) infringement. The issue was this: in principle, contributory infringement must contribute to an actual case of direct infringement by a third party. But IWNCOMM could not prove that a direct infringement occurred on the facts, because end-customer users of mobile handsets were regarded as non-commercial users and therefore could not be held liable. However, the court explained that the burden of proof on this point did not extend to proving any one particular act of infringement; simply that use of a product as intended would give rise to use of the patented method. The Court highlighted the following factors for success in such an allegation (reordered here for ease of presentation):

(1) a party provides the raw material for (or products designed to facilitate) the implementation of a patented invention; 

(2) that provision is made to others who will commit the direct infringement; 

(3) the party knows that the raw material is to be used for this purpose; 

(4) it is done commercially and without authorization from the patentee; 

(5) that product or raw material is substantially relevant to the implementation of the patented technology; and 

(6) the products are not general-purpose or commonly-used products for any other economic or commercial purpose.

The limits of exhaustion

Sony had also claimed an exhaustion defence based on the sale of WAPI testing equipment from IWNCOMM to Sony. This equipment put the patented method into practice to ensure compliance.

The Court analysed this argument and found that the Chinese patent law did not support a finding that method claims of a patent could be exhausted.

The dividing line was that the Chinese doctrine of exhaustion (under Article 69 of the Chinese Patent Law) applies only to a product “obtained by using the patented method”. On the other hand, the rights conferred by a patent under Article 11 extend further, and expressly include the right to “use a patented method” – a right that is missing from the exclusions of Article 69.  Therefore, the omission is taken to reflect the intentions of the legislature and the doctrine cannot be expanded beyond that.

Injunctions: the test in China

After finding for IWNCOMM, the Court turned to relief and set out the circumstances that should be taken into account. The heart of it was the question of fault: why did negotiations break down?

In the UK and US markets, these issues are commonly discussed and referred to in terms of hold-up, hold-out, FRAND rates and whether a party is a willing or unwilling licensee. In the case of the Chinese courts, essentially the same issues were considered but couched more directly, in terms of blame and delay.

Who was to blame for breakdown in negotiations? If it was the patentee, they will not have complied with their FRAND obligations and an injunction will not be appropriate. On the other hand, if it was the implementer who was at fault, an injunction may well be justified. In the case that blame is shared, the court will weigh the balance of fault.

On the facts, the Court concluded that IWNCOMM was blameless, and therefore upheld the injunction from first instance.

Lessons to be learned: FRAND conduct 

In considering the negotiations, the Court referred to particular elements of the negotiations. These were material to the ultimate finding and therefore provide a useful lesson for the industry about the conduct of FRAND negotiations. There were four major issues as follows.

1. Claim charts. It was a major contention that IWNCOMM had not provided the customary claim charts to Sony.  As a result, Sony could not properly understand the issues.  But the reason for this was Sony’s apparent reluctance to enter into confidentiality terms. The Court found that confidentiality arrangements were not unreasonable, and were in fact common practice in the industry. Therefore, Sony’s refusal to enter into terms was viewed as a delaying tactic. It was also found that Sony should, on the facts, have been aware of the mapping because the method of the patent was clearly applicable to the standard.

2. Procrastination. In 2015, Sony had said words to the effect that it could not conclude any business with IWNCOMM until it had fully investigated all patents in the portfolio. The Court frowned on this position, taken as it was 6 years after negotiations had commenced, and considered it to be “merely procrastination”.

3. Statements made. The Court also highlighted several statements made in the course of negotiations that it considered to show Sony to be an unwilling participant. These included statements to the effect that Sony did not consider it necessary to conclude a licence at all, and requests by Sony for supplementary information that would be difficult for IWNCOMM to obtain.

4. In combination. Combining the previous three points, the Court found that Sony had delayed throughout negotiations and therefore was at fault for the breakdown that led to litigation. Finally, the Court highlighted that Sony had not improved on this position during litigation, for example by clearly demonstrating that it was willing to take a licence.

Summary

Only last month, the English Patents Court was hearing arguments in the case of Conversant v ZTE about the Chinese courts’ familiarity with FRAND proceedings (see IPKat report here), in connection with a jurisdiction challenge. But despite some obvious differences with the Chinese legal system, my view is that those familiar with proceedings in Europe and the USA will find the approaches taken in IWNCOMM v Sony traverse familiar territory. This case may therefore stand as precedent not just as to the application of Chinese law, but could be used by some litigants to show that the Chinese courts are taking an approach that is broadly in line with what is expected in other major jurisdictions.

Given the size and nature of the Chinese economy and the way it is advancing, the telecoms industry will be wise to pay attention to the development of IP decisions in China."