IWNCOMM v. Sony: Recent Development in FRAND Litigation in China

In the past few years, several commercial disputes concerning the licensing of standard essential patents (SEPs) have been litigated in Chinese courts. In March 2017, the Beijing Intellectual Property Court (the Court) ruled for the plaintiff in a case involving SEP licensing, IWNCOMM v. Sony (China). This case marks the first time an SEP-based injunction was granted in China. Treble damages were also awarded to the plaintiff SEP holder.

The plaintiff, IWNCOMM, owns a patent that is essential to China’s national standard GB 15629.11 for wireless local area network (WLAN). The GB 15629.11 standard’s security protocol adopts the WLAN Authentication and Privacy Infrastructure (WAPI) technology, developed by IWNCOMM. IWNCOMM had announced it would license its SEPs to any implementer on fair, reasonable and non-discriminatory (FRAND) terms. IWNCOMM and the defendant, Sony (China), engaged in licensing discussions from March 2009 through March 2015 and could not reach an agreement. Subsequently, IWNCOMM filed a lawsuit against Sony before the Court, alleging that Sony’s 35 models of mobile handsets that required WAPI testing to be sold in China infringed its SEP. Sony failed in challenging the validity of the patent and on jurisdictional issues in earlier proceedings. The Beijing Intellectual Property Court’s 2017 decision addressed the liability and damages issues. The Court determined that Sony committed both direct and contributory infringement, and rejected Sony’s defense based on patent exhaustion and Sony’s claim that the licensing of the SEP was implicitly granted by the mandatory national standard.

Article 66 of China’s Patent Law allows for an injunction as part of the patent infringement remedies. The Court noted that in China’s current legal framework, injunctive relief in patent infringement cases is generally applicable. The court also noted that when the relevant patents were SEPs and the patent holder had made FRAND commitments, implementing the SEPs was reasonable. However, the prerequisite for such reasonableness is good will negotiations between the parties. If no one is at fault, or if only the patent holder is at fault, then injunctive relief should not be supported to avoid possible abuse of the SEPs. If the patent holder is not at fault but the implementer is at fault, then injunctive relief should be supported to avoid possible reverse hold-up. If both are at fault, then the injunction decision rests on the balancing of the two sides’ interests and the degrees to which they are at fault. Such reasoning is consistent with the “Second Judicial Interpretation of the Legal Issues in Patent Infringement Cases” issued by China’s Supreme People’s Court in 2016. In this case, the Court determined that the defendant willfully delayed the negotiations and was at fault during the six years of negotiations. In particular, the Court noted that the defendant kept asking that the plaintiff provide the detailed patent claim chart without being covered by a confidentiality agreement. The Court determined that the defendant’s insistence on the patent claim chart was unreasonable given that WAPI had been a national standard, and the plaintiff had already provided sufficient documents for the defendant to determine whether their products infringed the relevant SEP. Moreover, the plaintiff’s insistence that it would provide the claim chart only under a confidentiality agreement was reasonable. As a result, the Court granted injunctive relief for the plaintiff.

The plaintiff asked for a royalty rate of 1 CNY (about 0.15 USD) per device. To support its position, the plaintiff submitted four licensing agreements with third parties where the royalty rate was 1 CNY per device. The defendant argued that those licensing agreements were not comparable because they were based on a portfolio of SEPs for the WAPI standard, but there is only one relevant patent in this case. The defendant submitted some U.S. court decisions on Wi-Fi royalty rates to prove that the 1 CNY per device rate the plaintiff asked for was inconsistent with the FRAND principles. The Court decided that the patent portfolios in the four licensing agreements were all related to the WAPI technology standard and the core patent was the one in the current case. Thus, these four licensing agreements were comparable to the current situation, and the royalty rate of 1 CNY per device could be used as a benchmark for this case. The Court did not consider the U.S. decisions on Wi-Fi royalty rates to be relevant to this case because they did not involve the WAPI technology.

Article 65 of China’s Patent Law provides a framework for determining damages from patent infringements. Several bases for estimating damages are given in order of preference: (1) actual losses suffered by the patentee, (2) profits illegally gained by the infringer, (3) multiples of licensing royalty, and (4) statutory damages. Article 65 also allows damages to include reasonable expenses. In this case, neither party submitted evidence regard- ing actual losses or illegal gains. Given the foundational nature of the patent involved and that the defendant was at fault, the court accepted the plaintiff’s request and calculated damages to be equal to three times the licensing royalty based on the government records of the number of Sony’s mobile handsets sold in China from 2010-2014 and the 1 CNY per device royalty rate shown in the four comparable licenses, plus attorney fees and other reasonable expenses. The total damages amounted to more than nine million CNY, or about 1.4 million USD.

The Court’s decision in IWNCOMM v. Sony affirms the emerging global consensus that injunctive relief is reserved against unwilling licensees in SEP licensing disputes. The decision also sheds light on some other important issues, such as what constitute comparable licenses and how damages might be determined in FRAND litigation before Chinese courts.

Su Sun has worked on antitrust and IP matters both in the U.S. and in China. He consulted for IWNCOMM on the licensing of its WAPI standard essential patents.