Standard Essential Patents—Should Secret Chinese Lawsuits Define What is Fair and Reasonable?

by Jonathan H. Spadt & Christopher H. Blaszkowski

Not long ago, legal work on standard essential patents (“SEPs”) was largely limited to the telecommunications industry.  With the expansion of communication software and protocols into nearly every industry today, however, having knowledge of the issues relevant to SEPs and the associated obligations of SEP holders to license their SEPs on fair, reasonable, and non-discriminatory (“FRAND”) terms is something with which more and more lawyers should familiarize themselves.  If you have clients whose products or services even touch the relatively recent development of today’s Internet of Things (“IoT”), please read on.

By way of background, SEPs relate to a particular industry standard (e.g., cellular or wireless standards).  The technology claimed in SEPs is usually required to practice that particular industry standard.  They are subject to special rules promulgated by a Standard Setting Organization (“SSO”), and are generally required to be licensed on FRAND terms.

SEP holders usually have relevant patents in many countries.  As such, case law governing SEPs and FRAND has been developed across many jurisdictions, including by courts located in the United States, the United Kingdom, Germany, and China.  FRAND disputes are generally, by nature, cross-jurisdictional disputes.

Bringing lawsuits in each country in which the SEP owner has relevant patents is time consuming and costly.  But the avoidance of numerous, piecemeal lawsuits around the world requires one or more courts to decide FRAND issues on a global basis (e.g., to bind the parties to global license terms).  This is a murky area because determining a worldwide FRAND license requires the deciding court(s) to consider the scope of rights present in other jurisdictions.

UNWIRED – ONE COURT TO RULE THEM ALL AND UNDER FRAND TERMS BIND THEM

The ability of a single court to set a global FRAND license emerged abruptly last year in Unwired Planet International Ltd. v. Huawei Technologies Co Ltd. [2020] UKSC 37.  Here, the UK Supreme Court considered three related appeals concerning the global obligations of SEP owners bound by a telecommunications SSO.  The UK Supreme Court affirmed that a global license (not a UK-only license), under threat of injunction, properly satisfies FRAND requirements and is appropriate for a licensor having a multi-national patent portfolio, such as Unwired, and a licensee having a global sales market, such as Huawei.

Huawei and ZTE challenged the jurisdiction of the UK courts to fashion a global FRAND license based on principles of international comity.  The Court disagreed that a global FRAND license would interfere with foreign jurisdictions.  The trial court did not establish itself as a “de facto tribunal” because the principles and approaches used in the determination were “consistent with several judgments” in the United States, Germany, China, Japan, and the European Commission.  Finding that, with the exception of China, all jurisdictions affirmatively adopted similar principles, the Court dismissed the jurisdiction challenge.

Huawei and ZTE also challenged the UK as an inappropriate forum that was selected to avoid Chinese jurisdiction, which would have likely produced a “less generous outcome” for the SEP holder.  However, the global nature of the SEP portfolio supported any number of alternative forums in which the SEP holder could have brought suit.  Finding that undue harm to the SEP holder would hinder enforcement of patents that were nearing expiration, the Court dismissed the forum challenge.

Beyond the dismissal of the jurisdiction and forum choice challenges, the Court determined that the “contractual arrangement which [the SSO] has created in its IPR Policy…gives the court jurisdiction to determine a FRAND license.” The Court’s jurisdiction to enforce the contractual obligations pursuant to the IPR Policy requires a recognition of existing commercial practices, including routinely taking “global licenses of a portfolio of patents, without knowing how many…are valid or infringed.”  Ultimately, in reaching its decision, the Court predominantly considered the underlying principles of the SSO’s IPR Policy and analyzed the issues in the context of industry practices.

SAMSUNG – ANTISUIT INJUNCTIONS AND ANTI-ANTISUIT INJUNCTIONS

It was not a question of whether, but when and how SEP holders and licensees would leverage the ruling in Unwired that a single court can set a global FRAND rate.  The answer to both questions came at the very end of 2020, following several months of failed negotiations between two majors in the telecom industry—Ericsson and Samsung.  The negotiations began following the expiration of a prior cross-license between the parties and concerned a new cross-license of each parties’ respective SEPs directed to 4G and 5G technology.

Ericsson brought suit against Samsung on December 11, 2020 in the United States District Court for the Eastern District of Texas, alleging various counts relating to FRAND obligations (“the EDTX case”).  Ericsson’s complaint alleged that Ericsson sought to negotiate the cross-license on FRAND terms (which included a sizable balance due by Samsung to Ericsson), but Samsung rejected those offers.  The EDTX case is pending before Judge Rodney Gilstrap.

Allegedly unbeknownst to Ericsson at that time, Samsung had already secretly filed a FRAND action 4 days earlier against Ericsson on December 7, 2020 in the Wuhan Intermediate People’s Court in China (“the Wuhan case”).  After learning of the EDTX case, Samsung took additional steps to prevent other jurisdictions from exercising any control over the dispute.  Before Ericsson even learned of the Wuhan case, Samsung quickly sought an antisuit injunction (“ASI”) in Wuhan on December 14, 2020.  The ASI was granted and announced to Ericsson on Christmas morning.  Pursuant to the ASI, Ericsson was enjoined from seeking:  1) injunctive relief on 4G and 5G SEPs globally; 2) a FRAND adjudication anywhere other than Wuhan; and 3) an anti-anti-suit injunction (also known as an “anti-interference injunction”) requiring Samsung to stop participating in the Wuhan case. The ASI required Samsung to post a $7.5 million bond.

Ericsson responded with its own motion for TRO and preliminary injunction to preserve jurisdiction in the EDTX case.  On December 28, the same day Ericsson filed this motion, Judge Gilstrap entered a TRO set to expire on January 11, which required Samsung to indemnify Ericsson for any damages that may result from Ericsson’s violation of the ASI in the Wuhan case.  In the TRO, Judge Gilstrap also set forth the briefing schedule for Ericsson’s anti-interference injunction request and for the associated hearing, which occurred on January 7.

The parties’ briefing in the EDTX case quickly unfolded, with Samsung urging, inter alia, that the ASI was properly granted and that Ericsson’s anti-interference injunction would upset principles of international comity.  Samsung urged that it followed the procedures in China—one of only two forums in the world (the other being the UK) which (so far) purport to have the power to set global FRAND rates.

Ericsson focused on due process and its lack of meaningful (or any) opportunity to participate in the secretly filed Wuhan case before the ASI issued.  Ericsson also attacked Wuhan as having no relationship to the parties or the dispute and as only standing to resolve part of the overall dispute between the parties—i.e., only as to Ericsson’s 4G and 5G patents (not the 2G and 3G technology).  Ericsson would be left without any relief as to Samsung’s SEPs (despite that Ericsson’s FRAND commitment hinges on a cross-license of Samsung’s SEPs).

Most notably, two retired Federal Circuit Chief Judges—the Honorable Randall R. Rader and the Honorable Paul R. Michel—weighed in, taking opposite positions in the EDTX case.  Judge Rader, in a declaration submitted by Samsung, described his experience with the Chinese legal system and offered his views of China as an “appropriate and fair venue” for the resolution of global FRAND disputes.  According to Judge Rader, the Wuhan Court was appropriate for a global FRAND determination because it is one of the “specialized tribunals acknowledged by the Supreme People’s Court [as] featuring competent judges with expertise in IP disputes.”

Perhaps to level the playing field, and given the significance of the issues at stake, Judge Paul Michel offered an amicus brief in support of Ericsson’s position.  In his words, “[i]mportant global disputes about critical intellectual property should not devolve into a mere question of who filed first.”

Judge Michel emphasized “the likely implications” of Judge Gilstrap’s TRO given “the complex and [] controversial” “interaction between U.S. and Chinese patent law.”  He identified “substantial notice and due process concerns” stemming from the Wuhan court’s ASI.  These concerns included Ericsson’s apparent lack of opportunity to be heard before the “relatively unknown court in Wuhan” issued its injunction, as well as the lack of any apparent procedure for Ericsson to be heard ex ante (whether by the Wuhan court or an appellate court).

Judge Michel contrasted the U.S.’s meaningful notice and opportunity to be heard with the Wuhan court procedures, which “divest[ed] this Court—as well as every other non-Chinese court—of the authority to litigate a live FRAND dispute at its earliest stages ….”  He used Judge Gilstrap’s TRO to illustrate these procedural concerns—it was granted upon ex parte application, and set to expire after a very limited duration.

Judge Gilstrap awarded Ericsson’s preliminary injunction, requiring Samsung to, inter alia, “take no action to interfere with [the Eastern District’s] jurisdiction” and to continue to indemnify Ericsson for any penalties levied against Ericsson in the Wuhan case relating to the ASI.  The anti-interference injunction was, according to the Court, narrowly tailored such that both the EDTX and Wuhan cases could proceed in parallel.  He also found the legal questions posed in the EDTX and Wuhan cases to be sufficiently different—he would decide whether the parties breached their mutual FRAND obligations, while in the Wuhan case, a global royalty rate would be decided for Ericsson’s SEPs.  Samsung’s appeal of Judge Gilstrap’s order is now pending before the United States Court of Appeals for the Federal Circuit.

DOES COMITY PERMIT PIECEMEAL FRAND LITIGATION?

Because the Wuhan case and the EDTX case concerned different legal questions, Judge Gilstrap did not identify international comity concerns.  But in a footnote, Judge Gilstrap acknowledged at least the possibility that certain legal questions—including whether the Wuhan case judgment could have res judicata effect(s)—could converge as both proceedings continue in parallel.  Indeed, could a damage assessment from Ericsson’s pending patent infringement counts asserting its 4G/5G SEPs against Samsung in the EDTX case contravene the global royalty number the Wuhan case is set to decide?

Could conflicting results between EDTX and Wuhan result in a de facto jurisdiction-specific license?  If FRAND litigation becomes a mad dash to the courthouse (or to multiple courthouses, as in the Samsung Ericsson dispute), and principles of international comity are discarded, are we diminishing an important aspect of FRAND licensing and heading backwards towards piecemeal litigation?  Having to litigate in separate forums will undoubtedly result in additional trade barriers and expenses (the brunt of which are likely to be borne by the consumer).

It will be interesting to see how this dispute further defines (or repudiates) the single court concept presented in Unwired.

About RatnerPrestia

RatnerPrestia is a law firm expert in all things IP. The Firm handles procurement, enforcement, licensing, commercialization, global strategic IP planning, and all related business aspects of IP. The Firm has attorneys experienced and successful in all relevant U.S. jurisdictions, including the U.S. Patent and Trademark Office, The U.S. International Trade Commission and Federal Courts, both trial and appellate. This expertise extends to all areas of IP protection, including patent, design, copyright, software, trademark, and trade secret protection.