22 September 2020

‘Anti-suit’ injunctions in China and further updates on the Huawei and Conversant SEP royalty dispute in China

As reported in November 2019, the Nanjing Intermediate Court made a first-instance decision between Huawei and Conversant in a standard essential patent (SEP) royalty dispute in China. This article provides two recent updates.

The use of an ‘anti-suit’ injunction in China

Conversant filed an appeal on 18 November 2019 to the first-instance decision at the Chinese Supreme People’s Court (CSPC). The appeal is still pending.

On 8 August 2020, one of Conversant’s Chinese patents, ZL200580038621.8, concerned in the first-instance decision was revoked and this decision was appealed.  On 27August 2020, Düsseldorf Regional Court ruled on the  corresponding German case that Huawei infringed Conversant’s patent EP1797659 (the same family with ZL200580038621.8), and Conversant didn’t violate its FRAND obligation. Düsseldorf Regional Court has prohibited Huawei’s activities in Germany, including selling UMTS (Universal Mobile Telecommunications System)-enabled devices.

Huawei immediately applied to the CSPC for an ‘anti-suit’ injunction against the German decision on the same day. The CSPC granted Huawei’s request just one day later to temporarily prohibit Conversant from enforcing the Düsseldorf Regional Court’s decision until the CSPC makes decisions for the Chinese appeal case. In case of violation of this decision, a fine of RMB 1,000,000 (around GBP 114,300) per day will be imposed from the date of violation.

The CSPC explained that the decision was made based on the following considerations:

  1. if Conversant enforces the Düsseldorf decision, it would have a negative effect on the Chinese appeal case;
  2. it is absolutely necessary to grant the injunction because of the irreparable damage that would be made to Huawei;
  3. the damages to Huawei caused by not granting the injunction outweighs the damages to Conversant by granting the injunction;
  4. granting the injunction is not detrimental to the public interest; and
  5. the decision is in accordance with the principle of international comity because the first-instance Chinese case was established earlier than the German case and the decision only has an interim effect.

August was indeed a very busy month for Huawei and Conversant. Behind the long-running litigation, we are now starting to see the use of ‘anti-suit’ injunctions.  It will be interesting to see how their use develops globally. We will of course continue to watch the ongoing cases.

Calculation of the Chinese SEP royalty rate

It has been known that the Nanjing Intermediate Court chose to use the ‘top-down’ approach formula to calculate the Chinese SEP royalty rate. In the recently published full first-instance decision, a detailed calculation has been set out as follows:

Step 1. Calculating the cumulative royalty in China from the global cumulative royalty

Based on general industry perceptions, the Nanjing Intermediate Court first determined that:

  • 2G: the cumulative royalty of 2G standard in China is 2.17%
  • 3G: the cumulative royalty of 3G standard in China is 2.17%
  • 4G: the cumulative royalty of 4G standard in China is in the range of 3.93 – 5.24%

Step 2. Calculating the numbers of Chinese SEP patent families

The Nanjing Intermediate Court relied on the numbers of Chinese SEP families for 2G/3G/4G, as calculated by an IP consulting firm used by Huawei. Conversant, however, did not accept Huawei’s data, and further did not provide any approved data or sufficient evidence to overturn Huawei’s data.  Therefore:

  • 2G: 517 families were identified as a Chinese SEPs;
  • 3G: 1,218 families were identified as a Chinese SEPs;
  • 4G: 2,036 families were identified as Chinese SEPs.

Step 3. Calculating the royalty rate for a single-mode mobile terminal product

For each standard, dividing the cumulative royalty in China by the number of Chinese SEP families gives the base rate of the SEP royalty of a single patent family for a single-mode mobile terminal product:

  • 2G: 2.17% ÷ 517 = 0.0042%;
  • 3G: 2.17% ÷ 1218 = 0.0018%;
  • 4G: [(3.93-5.24)% ÷ 2036] = (0.0019-0.0026)%.

Then, the royalty rate for a single-mode mobile terminal product is calculated based on the base rate and the true value of SEP families. Here, N2, N3 and N4 are the true value of SEP families in the concerned patent package. In Huawei’s accepted evidence, N2 and N3 are 0 and N4 is 1. On balance, the court decided the royalty rate for a single-mode 4G terminal product is 0.00225% based on the range (0.0019-0.0026)%.

2G: 0.0042% × N2 = 0.0042% × 0 = 0

3G: 0.0018 % × N3 = 0.0018% × 0 = 0

4G: (0.0019-0.0026)% × N4 = (0.0019-0.0026)% × 1= (0.0019-0.0026)%

Step 4. Calculating the royalty rate for a multi-mode mobile terminal product

Considering 2G, 3G, and 4G technologies contribute differently to the total value of an individual product, the weights (contribution ratios) of the three technologies are different. Therefore,

the royalty of a 2G/3G/4G multi-mode terminal product = (0.0042% × N2 × weight2) + (0.0018% × N3 × weight3) + [(0.0019-0.0026)% × N4 × weight4].

Here the weight2, weight3 and weight4 for 2G, 3G and 4G are 10%, 10% and 80%. Then, the royalty of a 2G/3G/4G multi-mode terminal product = 0.0042% × 0 × 10% + 0.0018% × 0 × 10% + (0.0019-0.0026)% × 1 × 80% = (0.0019-0.0026)% × 80% = (0.00152-0.00208)%.

On balance, the court decided the royalty for multi-mode 2G/3G/4G terminal products is 0.0018%, based on the range (0.00152-0.00208)%.

As seen above, the final calculated SEP royalty rates ruled by the Nanjing Intermediate Court are:

  • single-mode 2G or 3G terminal product: 0;
  • single-mode 4G terminal product: 0.00225%;
  • multi-mode 2G/3G/4G terminal product: 0.0018%.