This is an informal case summary prepared for the purposes of facilitating exchange during the 2024 WIPO IP Judges Forum.
Session 2: Standard Essential Patents
Supreme People’s Court of China [2023]: Advanced Codec Technologies, LLC v Guangdong OPPO Mobile Telecommunications Co., Ltd. (2022) ZGFZMZ Nos. 907, 910, 911, 916, 917, and 918
Date of judgment: December 12, 2023
Issuing authority: The Supreme People’s Court of the People’s Republic of China
Level of the issuing authority: Final Instance
Type of procedure: Judicial (Civil)
Subject matter: Patents (Inventions)
Plaintiff/Counterclaim defendant: Advanced Codec Technologies, LLC
Defendant/Counterclaim plaintiff: OPPO Guangdong Mobile Communications Co., Ltd.
Keywords: SEP, Terms of license, Comparable license agreement, Contracting fault, License fee
Basic facts: Advanced Codec Technologies LLC (hereinafter referred to as ACT) is the patentee of six Chinese patents (99813601.8, 00815854.1, 99813602.6, 99813640.9, 01803954.5, 99813641.7). On November 16, 2018, ACT filed six lawsuits against OPPO Guangdong Mobile Communications Co., Ltd. (hereinafter referred to as OPPO) in Nanjing Intermediate People’s Court, alleging that OPPO deliberately delayed the license negotiation for the six SEPs and claimed damages of 57 million yuan and reasonable expenses of 100,000 yuan per case.
On December 6, 2019, OPPO filed a counterclaim, alleging ACT violated the fair, reasonable, and non-discriminatory (FRAND) license negotiation obligations during the negotiation process with OPPO. OPPO asked the Court to establish that ACT violated its FRAND obligations and to determine the license fees for the manufacture and sale of the six patented intelligent terminal products in China. OPPO also claimed damages of 6 million yuan caused by six cases.
On November 22, 2021, Nanjing Intermediate People's Court made its first-instance judgment, holding that OPPO should pay ACT royalties of 13.06 million yuan for the six patents, dismissing other claims from both parties.
Both OPPO and ACT appealed to the Supreme People’s Court of China.
Held: The Supreme People’s Court ruled that OPPO should pay ACT royalties of 15,390,527 yuan and its interest accrued, as well as reasonable expenses of 0.6 million yuan.
Relevant holdings in relation to standard essential patents (particularly, the role of the court in SEP disputes and how to determine FRAND terms): The Supreme People’s Court held that this case is a contracting negligence liability dispute in nature. In China’s current legal system, as provided for in the Civil Code of the People’s Republic of China, disputes over contracting negligence liability are contract disputes.
The determination of the license rate is the core issue in the terms of an SEP license. In practice, approaches for determining the SEP license rate include the Comparable Agreement Approach, the Top-Down Method (to assess the market value of the SEPs), an approach considering the license terms from comparable patent pools, etc. The approach chosen in a specific case depends largely on the evidence provided by the parties. After a comprehensive evaluation of the evidence submitted by both ACT and OPPO, and having considered the admissibility of the evidence and the statements of both parties, the Court adopted the Comparable Agreement Approach to determine the license rate of the six SEPs involved in the six cases.
In selecting comparable license agreements, the following key factors should be taken into account:
1) The circumstances of the license negotiation, specifically the background of the transaction and transaction conditions, which are used to evaluate whether the agreement has been reached based on voluntary negotiation with no psychological compulsion (e.g., the license negotiation was accompanied by litigation or litigation threat, a court’s ruling of injunction or the threat of filing for an injunction) on the licensor or licensee.
2) Similarity of the licensing entities, including the similarity of the licensors and of the licensees, which can be evaluated based on business models, business scopes, and the relationship between the licensor and the licensee, etc.
3) Similarity of the licensed patent, e.g., whether the patent in the comparable agreement is consistent with or covers the patent involved in the current dispute, and whether they are of the same or similar quantity or quality.
4) Similarity of license terms, including the calculation of the license rate, license scope, time period of license, type of license and type of royalty payment.
In view of the aforementioned analysis, and considering that the licensors in almost all the license agreements submitted by ACT are ACT or its affiliates, and the agreed approaches and periods of licenses are essentially the same, the Court held that in deciding which agreements shall be chosen as comparable agreements, the following factors should be considered: the licensed subject (e.g., whether only the six patents involved are included); the situation of the licensee (e.g., whether the licensee is a well-known enterprise in China’s communications industry, like OPPO); the licensed territory (e.g., whether it is limited to China or worldwide); the circumstance of the license negotiations (e.g., whether there are relevant lawsuits between the parties during the license negotiations); and the scale of patent implementation.
After damages are determined, it is necessary to further reasonably allocate liability between the two parties according to factors such as the degree of fault of both parties and the consequent impact. Therefore, the degree of fault of the parties in the royalty negotiation process for the six patents is an important factor affecting the determination of liability.
Although FRAND commitments are not made to a specific implementer, they are the common practice adopted by mainstream international standardization organizations for including patents into a proposed standardized technical solution, so implementers or potential implementers in relevant industries will have reasonable confidence in these FRAND commitments. Accordingly, in the Chinese legal system, patentees are subject to the provisions of the Civil Code of the People’s Republic of China on the principle of good faith (Article 7), the non-abuse of civil rights (Article 132), and the liability of contractual negligence (Article 500). Thus, once an implementer requests licensing from the patentee to implement the patent, the patentee without reasonable cause shall not, in principle, refuse licensing, and the willingness to grant a license is no longer a core issue. Rather, it is the issue of license terms, in particular royalties, which is at the core of the license contract negotiated between the patentee (the licensor) and the implementer (the licensee). In accordance with the aforementioned provisions of the Civil Code, the contracting parties shall abide by the principle of good faith to conclude the contract. The principle of good faith stipulated in the law is mainly reflected in the FRAND principle generally recognized and followed by the industry in the license negotiations for SEPs.
When analyzing whether any party had faults during the negotiation process, the core is to examine whether both parties have and have shown a sincere willingness to reach a license agreement.
In determining whether the SEP holder in an SEP license negotiation is at fault, the following factors should be taken into account:
1) Whether the SEP holder directly filed a judicial lawsuit for determination of a royalty rate without delivering a written infringement notice to the implementer;
2) Whether the SEP holder explicitly rejected the implementer’s request for a license;
3) Whether the SEP holder repeatedly threatened or directly took action to file an infringement lawsuit or file for an injunction during the negotiation;
4) Whether the SEP holder interrupted the negotiation without a justifiable reason;
5) Whether the SEP holder refused to disclose necessary patent information to the implementer (e.g., the amount of SEPs or the exemplary claim charts);
6) Whether the SEP holder refused to disclose to the implementer the amounts of royalties or the calculation method of the royalty rate;
7) Whether the SEP holder’s offer to the implementer was significantly or unreasonably higher than to other competitors in the same industry without an explanation as to reason;
8) Whether the SEP holder provided feedback to the implementer within a reasonable time period after receiving the implementer’s counteroffer; and
9) Whether the SEP holder rejected the implementer's request for clarification of relevant technical issues without a justifiable reason.
In determining whether the implementer is at fault in an SEP license negotiation, the following factors should be taken into account:
1) Whether the implementer responded within a reasonable time period after receiving the written infringement notice from the SEP holder or informed the SEP holder of its refusal to negotiate;
2) Whether, after receiving the conditions, the implementer actively responded within a reasonable time period regarding whether to accept;
3) Whether the implementer, believing the offer issued by the SEP holder to be unreasonable, promptly made a counteroffer or license proposal that it considered to be fairer and more reasonable, or timely escrowed the royalties corresponding to the counteroffer;
4) Whether the implementer delayed or interrupted the negotiation without a justifiable reason; and
5) Whether the implementer proposed obviously unreasonable license conditions to the SEP holder.
Where the implementer expresses a willingness to reach an agreement with the rights holder but voices doubts about the patent’s essentiality or validity, it shall not be deemed at fault.
The license negotiations between the two parties before and during the litigation, as found in the second instance proceedings, established that both parties have basically shown their willingness to reach a license agreement. Meanwhile, based on the performance of both parties in the license negotiations, it was found that both parties had certain faults, which had a significant impact on the eventual failure to reach a license agreement. Therefore, considering that both parties were equally at fault for failing to conclude license contracts for the six patents involved, each party should bear 50% responsibility for the losses caused.
It is precisely because of the failure to conclude a contract due to the contractual negligence of both the patentee and the implementer that the implementer committed patent infringement in these six cases. Accordingly, the liability for patent infringement, especially the liability for compensation, shall be determined primarily based on how seriously each party was at fault in the contracting, which differs from the unilateral liability of the implementer in the infringement of non-SEPs.
In these six cases, the losses suffered by ACT were mainly caused by the failure to reach a license contract for the six patents involved with OPPO. Strictly speaking, the losses are the differences between the existing benefits of ACT and the benefits to be obtained by ACT on the assumption that the parties reached a timely license contract on FRAND terms. The loss suffered by ACT due to the failure of the two parties to conclude the contract is essentially the loss of interest during the period when it should have obtained all the royalties, that is, the loss of interest that can be reasonably foreseen under normal circumstances and should be shared according to how serious the fault of each party is for the failure to conclude the contract. Therefore, the amount of damage that the patentee of an SEP receives from the implementer shall consist of: 1) the principal of the royalties that it should receive; and 2) the interest losses, calculated based on the interest on the overdue principal of the royalties of the SEP patentee due to its delay in obtaining the royalties, multiplying the contracting fault ratio of the implementer. Accordingly, the amount of damage that OPPO should pay to ACT is the total royalties of the six patents involved and 50% of the interest losses.
Relevant legislation: Article 7, Article 132, and Article 500, item 3 of the Civil Code of the People’s Republic of China; Article 11, paragraph 1 and Article 65, paragraph 1 of the Patent Law of the People’s Republic of China (2008 Amendment); Article 24 of Interpretation (II) of the Supreme People’s Court on the Application of Laws in the Trial of Disputes Regarding the Infringement of Patent Rights (2020 Amendment).