November 6, 2019
The recent ruling of the Nanjing Intermediate People’s Court of Jiangsu Province in a standard essential patent (SEP) royalty dispute between plaintiff Huawei Technologies Co., Ltd., Huawei Terminal Co., Ltd. and Huawei Software Technology Co., Ltd. and defendant Conversant Wireless Licensing Co., Ltd. provides a useful insight into how Chinese courts measure the value of SEPs in the Chinese market.
After acquiring three CN SEP patents (ZL00819208.1, ZL200580038621.8, ZL200680014086.7) from Nokia in 2011/2012 as part of a large patent portfolio acquisition, Conversant contacted Huawei in 2014 about some of the SEPs of the 2G, 3G, 4G and other communication standards used by Huawei that they would need to license from Conversant. However, no agreement was reached between these two companies. In February 2017, Conversant sent a public letter to Huawei, stating that the SEP royalty rate proposed by Huawei in their previous communications did not meet the FRAND requirement.
Meanwhile, in July 2017 in the UK, Conversant sued Huawei and its UK affiliates in the UK High Court, requesting the English court to determine that Huawei infringed four UK patents and rule on the global FRAND license rate for its global patent portfolio (read more here). The court held that Conversant is entitled to enforce its UK SEPs including a FRAND injunction.
Back in China in January 2018, Huawei initiated a non-infringement action against Conversant in the Nanjing Intermediate Court, and requested a determination of SEP royalties for SEPs families including the above three CN patents. Meanwhile, Huawei invalidated all three CN patents, which was been immediately appealed by Conversant. At present, the invalidation case is still under investigation.
In the trial, the dispute centred on the calculation of SEP royalty rates. Conversant proposed to use the Comparable Licenses approach (proposed rates as seen in the left column of the table below), while Huawei proposed to use the Top-Down approach. These two approaches are commonly used in SEP royalty disputes. In the Top-Down method, ‘Top’ refers to the industry’s cumulative royalty, and ‘Down’ refers to the SEP royalty charged by the patentee. In the Comparable Licenses approach, the rates are determined based other license agreements of the same patent. The Nanjing Intermediate Court eventually chose to use the Top-Down approach and set the formula to calculate the Chinese SEP royalty in the present case: the SEP royalty of a single patent family = the cumulative royalty of the standard in China × the contribution ratio of the single patent family. The final calculated SEP royalty is seen in the right column of the table:
Table: A comparison of FRAND royalty proposed by Conversant and ruled by Nanjing Intermediate Court
Mathys & Squire has a dedicated China team with experts from our various sector groups, including IT & software, who keep up to date with the latest industry news in this area. For more information, get in contact with us.
This article was written by technical assistant Sally Gao and managing associate Andrew White.
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