SEP lessons learned from Huawei v ZTE

A petition for injunction in itself of course has no legally binding power to change how an unauthorized technology implementer practices the invention. But the technology implementer has argued that even the threat of injunction can force it to accept the supra-competitive license terms. This argument indicates that the technology implementer believes that the court would likely issue injunction if the infringement case moves forward. Otherwise, the threat of injunction would have little teeth to change the parties' bargaining positions. But if the law permits the court to enjoin an unauthorized technology implementer from infringement and, at the same time, treats the SEP's petition for injunction as anti-competitive, the court's injunction power would become simply empty. Thus, the key issue may go to the legal standard by which the court would issue injunction against an unauthorized technology implementer, instead of whether the SEP owner seeks injunction in the first place.

Patent holdup v reverse holdup

The patent holdup theory argues that the SEP owner would demand supra-competitive license terms if it has injunction in its arsenal, because an infringing technology implementer will have greater difficulty coping with an issued injunction than any type of monetary awards. But this may over-simplify the complexity of SEP licensing negotiations. An SEP owner, especially one in the business of commercializing its SEPs, that would attempt to obtain supra-competitive royalty terms, would have to pin its hope for supra-competitive royalties on surviving years of costly and risky litigations and eventually persuading the court on the necessity of injunction – a difficult feat for any market participant. From a commercial perspective, the litigations may not bode well for the SEP owner's future negotiations with other licensees and its role in drafting and designing future generations of standards.

Meanwhile, SEP owners have expressed concerns that the restriction on the availability of injunctions could reduce the likelihood of the parties to reach a FRAND SEP license agreement. Because any technology implementer can exploit the patented inventions without authorization, there would be insufficient incentive for the technology implementers to engage in good faith negotiation for SEP licenses if the SEP owners' ability to seek injunction is severely curtailed. Even if both sides enter into licensing negotiations in good faith, the fact that the technology implementers would most likely be able to practice the patents regardless of the outcome of the negotiations may discourage any compromise on their part. This phenomenon is sometimes referred to as “reverse patent holdup,” which posits that SEP owners are placed in a disadvantageous position in licensing negotiations. In addition, the SEP owners' inability to seek injunctive relief in appropriate circumstances would likely reduce incentives for the innovators to spend their time and money on developing the next generation of technologies.

These theories highlight the delicate nature of SEP licensing negotiations, and the extreme precaution that authorities should undertake when involved in this type of dispute. Patent holdup argues that the SEP owner may use a future event (i.e. a court's possible issuance of injunction in an infringement proceeding) to force the technology implementer to accept supra-competitive license terms; whereas under the reverse holdup, the technology implementer would be incentivized not to accept SEP owner's FRAND offers with the knowledge that its exploitation of the SEPs is unlikely to be enjoined even if the SEP owner resorts to litigation.

Uncertainty of the FRAND requirements

The ECJ framework requires an SEP owner to first provide a written license offer on FRAND terms. But due to the uncertain nature of what constitutes FRAND terms, this may discourage the SEP owner from seeking an injunction in situations where it is permissible even under the ECJ guideline. While the Intellectual Property Policy of the European Telecommunications Standards Institute (ETSI), a prominent standardization body, requires an SEP owner to indicate whether it is prepared to grant FRAND licenses, the SEP owner does not have to make every offer in FRAND terms, in particular in the early stage of the negotiation. In the summary judgment for Microsoft v Motorola, the US District Court for the Western District of Washington held that the requirement that the SEP owner has to make FRAND offers in every attempt will discourage the SEP owner from making initial contact for fear that the initial offer may later be determined as not FRAND. Instead, it should be sufficient that the SEP owner makes an offer that conforms to the market practice which, unlike the amorphous FRAND obligation, which is a more fact intensive inquiry.

The requirement for a FRAND offer may also suffer from the different views on the scope of the FRAND requirement by authorities in different jurisdictions. This issue is highlighted in the Guangdong Higher People's Court's decision in Huawei v InterDigital.* In that case, InterDigital petitioned the United States International Trade Commission (USITC) for injunctive relief in an SEP infringement case against Huawei. The Guangdong court held that such petition with the USITC was an attempt to force Huawei to accept supra-competitive offers, thus a violation of FRAND principle as well as the PRC Anti-monopoly Law. But the issue that whether InterDigital satisfied its FRAND obligations was also before the USITC, where an administrative law judge reached a different conclusion and rejected Huawei's argument that InterDigital did not satisfy its FRAND obligations.

Thus, due to different views held by separate authorities, an SEP owner's petition for injunction may turn from a permissible wield of legal tools against an infringing technology implementer to being viewed as a ploy to force the technology implementer to accept supra-competitive license terms. In light of this conundrum, the availability of injunction should not be tied to the offers' compliance to the FRAND requirement, due to the uncertainty of how this legal issue may be interpreted in different jurisdictions. Instead, the ECJ or other authorities should focus their inquiries on the parties' behavior during the negotiations and tilt the balance against the party that has not displayed a good faith effort to reach an agreement on FRAND terms.

Future expectations

As the ECJ decision in Huawei v ZTE is only a preliminary ruling which sets the framework, we expect a more fact-oriented decision to be issued in the near future from the lower court. As similar issues have also been litigated in other jurisdictions, the increased judicial actions hopefully will provide clear expectations for the parties concerned, and the anti-monopoly tension of SEP licensing demands that the court strike a proper balance between protecting patents rights and maintaining market competition.

Fan Guo and Fang Qi, Fangda Partners, Beijing

*The authors were the attorneys for InterDigital in Huawei v InterDigital at the Guangdong Higher People's Court.