Huawei uses AML to fight back

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.

No cause for concern

In this case, the judges at both the Shenzhen Court and Guangdong Court have correctly defined the relevant markets (both relevant product market and relevant geographic market) and this approach is consistent with international practice regarding the SEPs market. Both domestic and international companies should not have any concerns regarding the above approach. However, they should pay close attention to the following issues raised in this case which will have impact on their SEPs practices.

Extraterritorial jurisdiction

Perhaps the most notable aspect of the decision relates to jurisdiction. Under Article 2 of the AML, the Law is applicable to both anti-competitive behaviour in China and anti-competitive behaviour outside China if it eliminates or restricts competition in the Chinese market. From this we can see that China adopts the so-called “effects doctrine”. According to this doctrine, domestic competition laws are applicable to firms located outside the state's territory, when their behaviour or transactions produce an effect within the domestic territory. The nationality of firms is irrelevant for the purposes of antitrust enforcement and the effects doctrine covers all firms irrespective of their nationality. Many other nations, like the US and EU, have already adopted the effects doctrine for giving extra-territorial effect to their own competition laws. Under the US Foreign Trade Antitrust Improvements Act of 1982, for example, US antitrust laws apply to foreign conduct that affects US exports provided the effect is direct, substantial and reasonably foreseeable.

In Gencor Ltd v Commission of the European Communities, the EU Court of First Instance also stated that the application of the Merger Regulation to a merger between companies located outside EU territory “is justified under public international law when it is foreseeable that a proposed concentration will have an immediate and substantial effect in the Community”. Therefore, Article 2 of the AML is consistent with the practice adopted in major competition law regimes.

When the case was initially accepted by the Shenzhen Court, IDC had filed an opposition to jurisdiction. IDC argued that because the alleged abuse of dominance occurred in the US and IDC had no domicile in China, the Chinese court had no jurisdiction over the case. The Shenzhen Court rejected IDC's arguments and held that the AML has extra-territorial effect and applies in cases even where the abuse of dominance had taken place overseas if the abuse has an effect in the domestic PRC market. The Shenzhen court claimed that the alleged anti-competitive behaviour affected the Chinese manufacturing market and the Chinese exporting market of wireless communications products with a large and substantial influence that can be realistically predicted. Therefore, the Shenzhen Court held that it had jurisdiction in this case.

Some foreigners have argued that Article 2 of the AML is itself very general and does not provide detailed rules, conditions and criteria on its application. It is true that Article 2 of the AML is very short. However, it does not apply to any anti-competitive behaviour outside China. In fact, it only applies to anti-competitive behaviour outside of China which eliminates or restricts competition in the Chinese market. Although it does not use the terms “direct, substantial and reasonably foreseeable”, the competition effect must be direct, substantial and reasonably foreseeable under the AML, otherwise such anti-competitive behaviour will not eliminate or restrict competition. This means that companies located outside of China should not worry that China will exercise its extra-territorial jurisdiction without any restriction when enforcing the AML. This case reinforces the assumption that the effects doctrine is embodied in Article 2 of the AML and that it has extra-territorial jurisdiction. Therefore, not only companies in China but also companies located outside China should pay close attention to the AML and make sure their behaviour is compliant. These companies should add the Chinese elements to their global competition compliance programmes.

Appropriate royalty rates

Huawei asked the Shenzhen Court to decide on the appropriate royalty rate of IDC's IP rights. Based on FRAND principles, the Shenzhen Court determined that the appropriate royalty rate should not exceed 0.019% of the actual sales price of each Huawei product. In determining the appropriate royalty rate, the Shenzhen Court considered the following factors:

• general profit margins in the wireless communication industry;

• the quantity and quality of IDC's patents, the company's reputation, and its R&D costs;

• the royalty rate offered to other companies, such as Apple and Samsung; and

• the applicable jurisdiction for determining issues relating to the licensing of SEPs.

These principles are still very general. Due to the lack of detailed information, it is very hard to know how the court reached its conclusion on the appropriate royalty rate in this case. Determining the appropriate royalty rate could become very controversial, if not done properly. The US has developed very detailed rules and principles through its case law. It will take time for China to develop detailed rules and guidance on this matter. Companies should pay close attention to how Chinese courts develop these rules and guidance on determining the appropriate royalty rate since the practices will have a significant impact on their finances.

Lessons for future cases

This is an important decision under the AML. It highlights the willingness of the Chinese courts to both accept jurisdiction in litigation relating to foreign-owned SEPs and apply the FRAND principles to determine appropriate royalty rates. It demonstrates the potential impact of Chinese antitrust litigation risks on patent licensing and standard-setting across the world.

In this case, Huawei has successfully counterattacked IDC's active role in pushing forward the Section 337 investigation upon Huawei. Some judges in this case have publicly encouraged Chinese companies to follow Huawei's example. For example, the chief judge in this case, Qiu Yongqing, who is also the chief judge in Apple's iPad brand case, stated that other Chinese companies could learn lessons from Huawei since Huawei had successfully used the AML to fight back against patent predators. He suggested that Chinese companies use antimonopoly litigation as a tool to break through the technology fortress in order to gain their own space to develop.

Compared with western companies, Chinese companies are still at a disadvantage regarding the development of their own IP rights. If Huawei's practice is copied by other Chinese companies, there will be more tit-for-tat retaliations in the future. Foreign companies with many IP rights need to be prepared.

Zhaofeng Zhou, Taylor Wessing, Beijing