(By You Yunting) The anti-monopoly litigation of Huawei v. InterDigital caused the attention of intellectual property bound in China. Huawei had filed litigations in China accusing InterDigital of discrimination in patent licensing. Recently, Guangdong Higher People’s Court published its rulings in Huawei v. InterDigital. In today’s post, we will present the judgment of this case and address our comments in the following.
Introduction to the Case:
Appellant (Plaintiff in the first instance): Huawei Technologies Co., Ltd (the “Huawei”)
Appellant (Defendant in the first instance): InterDigital Technology Corporation, InterDigital Communications Inc., and InterDigital Inc. (all the “InterDigital”)
Court of first instance: Shenzhen Intermediate People’s Court No.: (2011)深中法知民初字第858号
Court of second instance: Guangdong Higher People’s Court No.: (2013)粤高法民三终字第306号
InterDigital owns of a portfolio of patents in high-speed wireless communication, while Huawei is a Chinese multinational networking and telecommunication equipment and services company.
On December 6, 2011, Huawei filed an action against InterDigital with Shenzhen Intermediate People’s Court, alleging that, by engaging in various international ruling-making in wireless communication, InterDigital had made its patents directly or indirectly into the international wireless communication standard and thus formed its dominant market position.
Huawei claimed that, “relevant markets” in this case referred to licensing markets of InterDigital’s essential patents, while “relevant territorial scope” referred to the Chinese market and America market all over the world essential patent licensing markets. When InterDigital is in the dominant market position, InterDigital failed to fulfill its pledge to license patents on fair, reasonable and non-discriminatory terms (the “FRAND Principle”), demanded excessive royalties in the patent licensing and even set up stricter discriminative terms of trade from Huawei than from other similar licensees. Besides, InterDigital imposed unreasonable trading conditions and suspected of tie-in sales without justified reasons. By engaging in filing two lawsuits at the US International Trade Commission (ITC) and the US Federal Court, InterDigital refused to make trades with Huawei and its affiliates in America abusing its dominant market position. Such conducts impaired the competitive order and led substantive damages to Huawei, which threatens the normal operation in relevant markets of Huawei and caused great losses to Huawei.
For these reasons, Huawei claimed that InterDigital must cease monopolistic civil infringement, make compensation for Huawei’s losses and undertake the litigation expenses and other reasonable costs.
InterDigital argued that:
1) InterDigital delayed the division of relevant markets claimed by Huawei. On the circumstances that InterDigital is unable to produce any terminal commodities by the use of its patented technologies, the relevant market in this case must be the global markets instead of Chinese market and America market claimed by Huawei;
2) InterDigital doesn’t have dominant market position in China and furthermore have no abilities to exclude or restrict competition;
3) InterDigital has not implemented any violation of the Anti-Monopoly Law nor engaged in conducts of restricting competition;
4) InterDigital has not caused actual damages to Huawei.
The court of first instance found the facts and held that:
1) InterDigital shall cease the excessive royalties targeted at Huawei and monopolistic civil infringement conducts of tie-in sales;
2) InterDigital shall make compensation of RMB 20 million;
3) The court determined to reject the other claims of Huawei.
Dissatisfied with the ruling of first instance, both Huawei and InterDigital appealed. The court of second instance found that the major focuses in this case are following: first, whether the legal proceeding first instance is justified; second, how to define the relevant market; third, whether InterDigital has dominant market position; forth, whether the suspected conducts of InterDigital constituted the abuse of dominant market position; fifth, whether the compensation is reasonable.
Regarding how to define the relevant market, the second instance held that the following aspects shall be taken into consideration:
1) Fundamental nature and characteristics of essential patents. When one patented technology became a essential patent into a standard patent, the manufacturers or service providers participating into this field shall provide qualified commodities or services and thus are likely to mean that the manufacturers and service providers have to put the patented technology into use, unable to use circumvention technology preventing from the patented technology.
2) Analysis on demand substitution. Both parties acknowledged that InterDigital have large amounts of essential patents under the standards of 3G wireless communication respectively in China and America. On the facts that its patented technologies are essential in 3G wireless communication consisting of WCDMA, CDMA2000 and TD-SCDMA, any licensing refusal of any essential patented technology would make manufacturers unable to use the relevant technologies, so that manufacturers cannot produce qualified products and being excluded from the entrance of targeted markets.
In this case, in order to perform 3G wireless communication, Huawei has invested so much which cannot be withdrawal. If Huawei immediately changed the technology standards of WCDMA, CDMA2000 and TD-SCDMA into another technology standard, Huawei will undertake the great losses of previous investment and even bear great switching costs as well as market risks. It is difficult and even impossible for Huawei to change technology standard.
3) Analysis on supply substitution. As previously stated, when the patent is combined with technology standard, essential patents must be the unique implemented technology, while the right holder of essential patents will be the unique supplier. As such, in the involved licensing market of essential patent, there is no one who can compete against InterDigital. Thus, any InterDigital’s licensing market of essential patents in China and America is considered to form an independent “relevant market”
As for the focus whether InterDigital is in the dominant market position, the court of second instance decided in the following:
The first is to define “relevant market”. Every licensing market of essential patents owned by InterDigital respectively in China and America should be an independent “relevant market”. Considering InterDigital is the unique supplier of the involved essential patents, InterDigital’s technology standards of 3G wireless communication will have full market share in every licensing market of essential patents and thus InterDigital is fully capable of preventing the other manufactures from entering into the relevant market.
Furthermore, under the circumstances that InterDigital uses the patent license as its business operation without participation into actual manufacturing, it doesn’t need to rely on or subject to cross-licensing of another essential patent owner and thus its dominant market position will not be constrained. As such, the court of second instance affirmed the ruling that InterDigital has a dominant market position in the relevant licensing market of essential patents.
Upon whether InterDigital demands of excessive royalties, the court held the following:
1) Essential patent licensing fees from the several offers between InterDigital and Huawei were significantly higher than that of the other companies;
2) InterDigital’s demand of excessive royalties lacked of justification;
3) IterDigital’s tie-in conditions, including instituting litigation in America, expanded the irrationality and unfairness of excessive royalties.
Built on the above reasons, the court first instance determined that the essential patent licensing fees charged by InterDigital constituted selling commodities at unfairly high prices, under the comprehensive consideration on different factors. Therefore, the court of second instance affirmed the judgments and rejected the appeal.
Lawyer’s Comment:
As for litigations resulting from discrimination of essential patent owners against the licenser, as far as we know, there are two litigations: one is this case and the other is that Microsoft sued Motorola Mobility in violation of FRAND Principle. In the latter case, Microsoft awarded 14.5 million dollars. In this case, Chinese courts also determined InterDigital constitute the abuse of dominant market position.
In the ruling on the definition of relevant market, every licensing market of essential patents owned by InterDigital respectively in China and America should be an independent “relevant market”, and InterDigital has full market share in relevant market. This ruling complies with international standards. However, the implementation in China may expand the application scope of the Anti-Monopoly Law. Because, in others horizontal anti-monopoly litigation, plaintiff does not need to prove the market share of the defendant in the relevant market.
As such, in every dividend competitive market, a competitor could be deduced to be within full market share according to the above reasoning. If so, the majority of enterprises by the use of its dominant position may be under a violation of the Anti-Monopoly Law. However, such reasoning is manifestly inconsistent with the judgment standard of horizontal monopoly.
In the previous litigations, including Tangshan City Renren Information Service Co., Ltd v Beijing Baidu Network Technology Co., Ltd, Li Fangping v. China Netcom (Group) Co., Ltd Beijing Branch, Beijing Sursen Electronic Technology Co., Ltd v. Shanda Interactive Entertainment Ltd and Shanghai Xuanting Entertainment Co., Ltd, China courts rejected their claims, on the grounds that their claims lacked of facts and legal facts, because the plaintiff cannot prove the defendant to have dominant market position and abuse its dominant market position. However, Baidu Network Technology Co., Ltd, Shanda Interactive Entertainment Ltd and China Netcom (Group) Co., Ltd are respectively considered to have more than 50 percent of market share separately in the market of search engines, online literature and fixed-line phone.
Certainly, in my opinion, the above-mentioned litigations, the rejections failed to compliance with the Anti-Monopoly Law. Therefore, the judgment in this case returned to the right direction. However, the result of this case is that domestic companies protected its right against foreign companies in China with a breakthrough of the judgment standards on “relevant market”. As such, foreign companies may be not sincerely convinced by this judgment.
Lawyer Contacts
You Yunting:86-21-52134918 youyunting@debund.com/yytbest@gmail.com
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First, I think it would be better if the word “American” at many places in this article could be changed into “America”.
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