China's patent practices should be closely monitored amid shifts in technology and policy

Chinese courts started using anti-suit injunctions against lawsuits in disputes over standard essential patents, or SEPs, in 2020, after a Shenzhen court’s ruling in favor of Huawei was later nullified by a US court that granted Samsung’s request for such an anti-suit injunction in 2018. The disputes come against the backdrop of Beijing's ambition to become an intellectual-property superpower.

While US courts also issue anti-suit injunctions, or ASIs, China’s measures come with a daily penalty against a violation of up to 1 million yuan (US$149,000), which gives their moves a protectionist flavor.

Because this practice has worked in favor of Chinese patent users at the expense of European SEP holders, the European Union has asked for consultations with the the World Trade Organization, or WTO. Japan has asked to join the consultations, along with the US and Canada.

The escalation of the dispute to the WTO comes at a time when Chinese companies have surpassed Japanese and US peers in terms of the number of their patent applications. China's share of global research and development expenditures surged between 2000 and 2019, exceeding that of Japan and coming close to the level of US spending, according to a report by the US Congressional Research Service published last September.

ASIs

In August 2020, China’s Supreme People’s Court granted Huawei’s request for an anti-suit injunction prohibiting Conversant from applying for the enforcement of a German court’s injunction, based on the Dusseldorf court’s finding that Huawei infringed SEPs held by Conversant.

“China’s ASIs seem to be motivated to make Chinese court rulings globally effective, and this has given a weapon to Chinese companies in their court strategies and settlement negotiations,” Kaname Matsumoto, IP Attaché in the Hong Kong office of the Japan External Trade Organization, or JETRO, told MLex.

Welcome move

A patent expert at the Japan Electronics and Information Technology Industries Association, or JEITA, welcomed Japan’s request to take part in the WTO consultations, even though he said China might reject Japan’s request.

“It’s a positive step, because this problem cannot be solved by one country but requires international coordination,” said Hiroshi Takahashi, chair of a working group on patent issues under the Ministry of Economy, Trade and Industry.

ASI disputes stem from the fact that SEP royalty rates under fair, reasonable and non-discriminatory, or Frand, terms should be determined globally, but in reality there’s no globally agreed forum or court that can determine the right rates applicable globally, he said, citing the UK Supreme Court ruling in the Unwired Planet v. Huawei case.

Takahashi added that China’s somewhat opaque ASI practices create some uncertainty for businesses. For instance, they may be used in the future for Chinese SEP holders to demand higher royalties, by prohibiting implementers from seeking lawsuits in other countries.

Eiichi Yamamoto, director of the intellectual property rights department of JETRO in Beijing, said that China seems to be trying to figure out the right way to use ASIs, given the global criticism and comments by some domestic scholars cautioning against frequent issuances of ASIs, which could trigger jurisdictional rivalry by courts in many countries.

“The WTO consultations may be effective as international pressure,” Yamamoto said.

Policy shift

Yamamoto said China’s patent situations are changing, as compensation for infringement increases, and companies such as Huawei, ZTE and OPPO are both SEP implementers and holders, amid Beijing’s push to strengthen intellectual property rights.

China amended its Patent Law, which last year introduced punitive damages of up to five times actual losses to deter willful infringements, for instance, and expressed its ambition last September to take part in the global governance of intellectual property, he said.

In addition, cultural differences between Japan and China regarding lawsuits — which are seen as a last resort in Japan but as a bargaining tool by many Chinese companies — means more lawsuits tend to be filed in China than in Japan, leading to the accumulation of Chinese legal precedents.

Two losses

Despite the victory rate of Japanese companies of around 70 percent in general patent infringement suits in China over the past three years, according to data from JETRO, when it comes to SEP battles, Japanese companies have experienced two major defeats.

In 2017, Sony Mobile Communications (China) lost a landmark suit against China’s Xi’an Iwncomm at the Beijing Intellectual Property Court. The court found that Sony infringed Xi’an’s wireless telecom SEPs, and ordered it to pay compensation of 9.1 million yuan ($1.3 million at the time).

And last August, Sharp lost its jurisdictional appeal in a suit against OPPO at the Supreme People's Court, after the Chinese smartphone maker accused Sharp and its affiliate of not licensing their SEPs under Frand terms. While confirming China’s jurisdiction over the case, the highest court also ruled that Chinese courts could determine global licensing terms.

This follows a lower court ruling in Shenzhen granting OPPO’s request for ASI against Sharp in 2020, prohibiting the Osaka-based manufacturer from seeking injunctions or filing lawsuits.

Sharp accepted the Chinese supreme court’s ruling, and agreed last October on global cross-licensing with OPPO.

Antitrust complaints

In addition to ASIs, Chinese SEP users sometimes use antitrust arguments by claiming that licensors have forced them to accept unreasonably high, or discriminatory, royalty rates, despite their commitment to Frand terms.

MLex reported last month that Japan’s IP Bridge is facing antitrust allegations from Chinese handset makers, because Chinese companies argued that the Tokyo-based non-practicing entity, together with electronics companies Panasonic, Fujitsu and Hitachi, might have acted abusively by forcing the Chinese companies to accept unreasonable SEP licensing fees or face infringement lawsuits.

China tends to take a tough stance toward non-practicing entities, such as IP Bridge, JETRO’s Matsumoto said.

Adapting to a new reality

“Now that China has become a major jurisdiction in global SEP disputes, Japanese companies must adapt,” said Yoshifumi Onodera, a partner at Mori Hamada & Matsumoto.

Chinese companies have carefully studied how Japanese and European companies have struggled with US patent trolls over 3G, 4G and LTE standards, and shrewdly took such measures as countersuits, antitrust arguments, and ASIs, he said.

When 5G technology becomes the main standard for wireless communications for connected cars and other Internet of Things devices, Chinese companies, including Huawei, OPPO, and ZTE, will likely become SEP licensors.

“Chinese companies are seriously considering how to assert their intellectual property rights from now on, and Japanese and other companies that are planning to use their licenses should learn from Chinese companies on how to use ASIs and other tools to pursue better deals in China,” said Onodera, who provides consulting services to both Chinese and Japanese companies.

Onodera said Japanese companies could even consider using ASIs to their advantage in China, as Samsung did in its suit against Ericsson at a Wuhan court in 2020.

Toshifumi Futamata, visiting researcher at the Institute for Future Initiatives at the University of Tokyo, also said that companies should grasp China’s evolving patent situation accurately and respond.

“Each company has strengths and vulnerabilities, and knowing the other party’s weaknesses would help its negotiations,” Futamata said.

-With additional reporting by Yang Yue and Yonnex Li.