Huawei uses AML to fight back

On October 28 2013, the Guangdong Higher People's Court (Guangdong Court) fined US based Inter Digital (IDC) for abusing its dominant market position in relation to the licensing of standard-essential patents (SEPs) for 3G wireless communication devices. This is the first case relating to SEPs in China. The court decision highlights the role that anti-monopoly litigation in China can play in international patent disputes. The issues raised in this case, such as extra-territorial jurisdiction and appropriate royalty rates, are worth exploring. Due to the fact that this case is subject to commercial confidentiality, the court decisions have not been published. This means that the information used in this article is based on the articles written by the judges involved in this case and various media reports.

Huawei Technologies is a Chinese telecommunications equipment and services company headquartered in Shenzhen, Guangdong. It is the largest telecommunications equipment maker in the world. IDC is a US-based licensor of SEPs for 2G, 3G and 4G mobile communication devices and accessories. Its business model is for patent licences only and it does not engage in any real production.

On July 26 2011, IDC submitted a complaint to the US International Trade Commission (USITC), while also filing a civil court case in Delaware, alleging that Huawei's 3G products infringed on seven of its patents. USITC began a Section 337 investigation on Huawei's 3G and 4G wireless devices on January 31 2013 for patent infringement. On December 19 2013, USITC published its final determination, which found no violation of Section 337 by Huawei.

First instance

On December 5 2011, after IDC began the patent infringement litigation in Delaware, Huawei filed two antitrust complaints against IDC simultaneously at the Shenzhen Intermediate People's Court (Shenzhen Court). In the first, Huawei argued that IDC had applied a discriminatory royalty rate, tied the licensing of SEPs with non-essential patents and tied the licensing of all SEPs in 2G, 3G and 4G in different countries and regions together as one global package licence during licensing negotiations. In this action, Huawei sought damages of Rmb20 million (US$3.25 million). Huawei requested that the Shenzhen Court determine an appropriate royalty rate by applying fair, reasonable and non-discriminatory (FRAND) principles.

On February 4 2013, the Shenzhen Court ruled that IDC had violated the Anti-monopoly Law (AML) and ordered it to compensate Huawei for damages of Rmb20 million. The Shenzhen Court held that each of IDC's SEPs constitutes a separate product market and all of these separate markets then formed a combined relevant product market in the case. The relevant geographic markets in this case were defined as China and the US, respectively. The Shenzhen Court found that IDC held a dominant position in each of these relevant markets and had abused its dominant market position with unfair high pricing and discriminatory pricing. IDC had failed to comply with its FRAND commitments in relation to its SEPs by: requiring Huawei to pay royalties which were dozens of or even 100 times higher than those paid by Apple and Samsung (this was particularly inappropriate and unreasonable considering that Huawei's global sales of mobile phones were much lower than those of Apple and Samsung); asking for a royalty-free cross-licence from Huawei; and using the pressure of the Section 337 investigation and IP rights infringement litigation to force Huawei to accept the relevant licensing conditions.

The Shenzhen Court rejected Huawei's claim that IDC's tie-in licensing of all its SEPs in 2G, 3G and 4G in different countries and regions as one global package licence was an abuse and thus violated the AML. The Shenzhen Court ruled that it is a common practice and widely adopted approach in the wireless communication sector that the holder of SEPs put all SEPs in each country and region together as one global package instead of licensing them based on the national or regional borders. The Shenzhen Court also claimed that this tie-in approach could generate efficiency for global players, such as Huawei, and did not constitute an abuse of dominance. Therefore, the Shenzhen Court rejected Huawei's claim relating to the tie-in global package licence.

The Shenzhen Court ruled that IDC had violated the AML and ordered IDC to compensate Huawei for damages of Rmb20 million. It also ruled that the royalty rate licensed to Huawei for IDC's Chinese ESPs in wireless communications should not exceed 0.019% of the actual sales prices of Huawei's wireless devices. The royalty rate decided by the Shenzhen Court was less than 1% of the original rate asked by IDC (during the negotiations, IDC had asked for a royalty rate of 2%).

Appeal

Both Huawei and IDC appealed to the Guangdong Court after the verdict by the Shenzhen Court. On October 28 2013, the Guangdong Court upheld the Shenzhen Court's finding that the royalty rate offered to Huawei was discriminatory because it was disproportionately higher than those offered to other cell phone manufacturers that had a much bigger sales volume in the market, such as Apple and Samsung. This constituted an abuse of IDC's dominant position under the AML. Therefore, the Guangdong Court confirmed that Huawei should be awarded damages of Rmb20 million.

The Guangdong Court upheld the Shenzhen Court's decision on the so-called global package licence since it found that the bundled licensing of all SEPs globally could be justified on efficiency grounds and that IDC's practice of binding all SEPs in different countries into a global one did not violate the AML.