Patent Litigation in China2017-07-08

Disputes over standards essential patents are increasingly being exposed in the courts, as can be seen from the CJEU decisions (such as Huawei V ZTE) and in the UK in relation to the Unwired Planet litigation1, giving a detailed insight into a wide range of issues beyond simple infringement and validity. In his discussion of Sony's defeat in the recently established Beijing IP Court, Toby Mak shows that such cases in China are no different, with punitive damages and an injunction being granted, as well as (by Chinese standards) substantive costs.

On 22 March 2017, the Beijing Intellectual Property Court ("the Court") issued a decision confirming that Sony2 infringed an Iwncomm3 patent. The Court imposed punitive damages on Sony, which was ordered to pay Iwncomm 9,103,367 RMB (about £1.03 million). This included expenses for litigating the case of 474,194 RMB (about £53,750), and damages of 8,629,173 RMB (about £978,240). The Court also granted an injunction against Sony. According to reports of the Court's decision, Sony presented some very interesting, if not intriguing, arguments to defend against Iwncomm's infringement claim, which could be illuminating4.

After setting out the background, this article focuses on the following issues:

Why Sony failed to defend itself against infringement.

Why punitive damages were invoked, and an injunction granted.

Why compensation of 9.1 million RMB awarded against Sony was reached.

As usual, my personal comments are in square brackets.

Background

The technology involved in this case was the WLAN Authentication and Privacy Infrastructure, or "WAPI". This is a security protocol for wireless networks (WLANs). More commonly known wireless network security protocols include WEP, WPA, and WPA2. [Comment: If you have tried to set up your own WLAN security with your router, this is one of the options you need to choose.] WAPI became a Chinese national standard in 2003. China tried to make this an ISO standard, but this was rejected in 2006, and the attempt was finally withdrawn in 2011. However, WAPI remains a Chinese standard, and each and every mobile phone having a WLAN function is required to be tested for compliance with this WAPI standard if it is to be sold in China.

No need to guess - Iwncomm, a Chinese company, has a Chinese patent, Patent No. ZL02139508.X (ZL '508) covering the WAPI standard. As such, to sell a mobile phone with WLAN function in China, it is necessary to obtain a licence from Iwncomm. ZL '508 has family members in the US (US8726022), Europe (EP1589695B), Japan (JP4286224B), and South Korea (KR100832893B), and according to the online records, art least US8726022 and EP1589695B are in force.

ZL '508 has only one independent claim covering how a mobile terminal (MT), like a mobile phone, interacts with an access point (AP), and an authentication server, (AS), in order for the mobile terminal (MT) to gain access to a wireless network provided by the AP. [Comment: Apparently, when this CN patent was drafted, claims directed to the MT, AP, and AS were not considered individually. Otherwise, Sony might have been caught by direct infringement on the claims for the MT individually. Instead, Iwncomm had to rely on additional infringement arguments for indirect infringement.]

Iwncomm offer licences in respect of ZL '058. Again, no need to guess - Sony did not obtain a licence from Iwncomm. Iwncomm had tried to get Sony on board to take a licence in respect of the WAPI technology, including ZL '058 since 2009. However, Sony continuously refused to obtain a licence , first denying that their mobile phones selling in China infringed the above Chinese patent, and requesting Iwncomm to provide details to substantiate Iwncomm's claim, for example by providing claim charts. Then, after Iwncomm agreed to provide claim charts if Sony signed a non-disclosure agreement (NDA), Sony refused to sign the NDA. The negotiations finally broke in 2015, and Iwncomm sued Sony shortly thereafter.

Sony tried to invalidate ZL '508 by filing an invalidation petition on 23 July 2015, but this failed. (Apple also tried to invalidate ZL '508 with an invalidation petition filed on 10 May 2016; that also failed.) [Comment: It appears that Sony's invalidation petition was filed shortly after the negotiations with Iwncomm broke down.]

Sony has registered the exact number of mobile phones qualified to be sold in China with the Telecommunication Equipment Certification Center of the Ministry of Industry and Information Technology of the Chinese government.

Iwncomm's standard licence fee is 1 RMB per mobile phone according to four licence contracts submitted by Iwncomm, with evidence of official Chinese payment receipts from Iwncomm's licensees.

Why Sony failed in its defence against infringement

As ZL '508 does not have any claim directed to the mobile terminal on its own, i.e. Sony's mobile phones individually, Iwncomm's claim of direct infringement was denied by the Court. However, Sony was found to indirectly infringe '508. Sony defended in the following ways, all of which failed.

Sony's mobile phone is not specifically made for performing WAPI

Sony argued that, as with other mobile phones, their phones carriedout other functions including making phone calls, taking photos, connecting WIFI, and therefore are not specific devices for performing WAPI. [Comment: If this argument got through, then mobile phones would not infringe many standard essential patents (SEPs).]

The Court did not agree, stating that the WAPI function module in Sony's mobile phone has no other substantive uses other than performing the WAPI function, and therefore ruled that Sony infringed.

Sony activities were covered by exhaustion of rights

While the access point, AP, and authentication server, AS, used by Sony "during research and development" were all sold by Iwncomm, Sony argued the components in Sony's mobile phones which implemented the WAPI function were from chip suppliers Qualcomm and Broadcomm, who had themselves obtained licences from Iwncomm.

The Beijing IP Court asked Qualcomm several questions, including whether Qualcomm had obtained a licence in respect of WAPI by Iwncomm. Qualcomm said it had not obtained a licence to Iwncomm's WAPI patent, but only a licence in respect of copyright and trade secrets from Iwncomm, and that Qualcomm does not pre-install software on chips provided to Qualcomm's customers except for the necessary basic operating system software. [Comment: My immediate reaction when I saw Qualcomm's answer in the decision is, "what on earth is this?"5 On the other hand, the decision did not mention whether Broadcom was asked if it had obtained a licence on WAPI from Iwncomm, or Broadcom's answer.]

Regarding the access point, AP, and authentication server, AS, the Court stated that exhaustion of rights for method claims is only applicable to products obtained directly from a manufacturing method; method of use claims do not have an issue of exhaustion of rights, as the relevant article 69 of the Chinese Patent Law does not provide for products involved in method of use claims, which are sold by the patentee giving rise to exemption from patent infringement.

[Comment: This follows German practise. As the readers may know, China is strongly influenced by Germany in patent law. This is different from the view from the US, see Quanta v LG, 553 U.S. 617 (2008), which requires the items sold to embody essential feature(s) of the patented invention such that its only reasonable and intended use is to practice the patent. See also KeurigInc. v Sturm Foods Inc. (2013-1072, Oct. 17, 2013). I will be grateful to readers enlightening me on the situation in the UK.

It should be noted that article 69 of the Chinese Patent Law specifically stipulates that patented products and products obtained directly from a patented manufacturing method sold by the patentee and its licensees would be exempted thereafter from patent infringement with respect to use, offer for sales, sales and import of that product.]

Sony did not use the process during production

As Sony assembled its mobile phones using the WAPI chips which had been provided by the Qualcomm and Broadcom, Sony argued that no use of the method in the patent was necessary during any production process.

Sony's submission to the Beijing IP Court under the Court's instructions clearly admitted that the WAPI function was tested in some of Sony's mobile phones during the research- and-development stage, but the WAPI functionality was never tested during the production stage. Therefore, Sony argued that the method of ZL '508 was not used. Further, In relation to the "WAPI Wireless AccessPoint" of Iwncomm bought by Sony, Sony asserted "these prototypes are only used for assessment, test and verification, but are not to be used for sales" in the photos submitted to the Court.

[Comment: Below is the voice in my mind when I read the above in the decision, but please feel free to ignore:

While Sony provided WAPI testing results to the Chinese authority to obtain approval for sales in China, Sony never even tried to verify whether their mobile phones comply to the WAPI standard during production. That is, what happened appears to be, as long as sales authorization could be obtained, whether the products complied with the required standard is of no concern to Sony.6]

In the decision, the Court stated:

"If the defendant (Sony) asserted that they did not execute this standard, the defendant should provide internal quality management documents, including the internal testing protocols and so on, to the Court as proof. The defendant is a legally registered Chinese enterprise. It is reasonable for the Court to believe that the defendant has specific, strict quality management requirements - the defendant either designs and formulates internal rules on quality management, or follows the standards of Quality Management Systems Requirements. [Comment: Both require Sony to test that their mobile phones produced work with WAPI.] Since the defendant refused to provide the testing standard used for realising the WAPI function, demanded by the Court, the Court holds the opinion that the defendant admitted testing the WAPI function on some models of the allegedly infringing products during the research-and-development stage. Additionally, the Court reasonably presumes and believes that the defendant followed the standards of Quality Management Systems Requirements to perform WAPI test during production and the involved mobile phones are released to the market."

[Comment: Sony had placed itself in a Catch 22 situation, and the Court pushed back - Sony must have performed a WAPI test, and therefore had performed the method of ZL '508 on their mobile phones, or their mobile phones should not appear on the market in China.]

Sony did not encourage or teach the user to use WAPI

There were no teachings in Sony's mobile phone itself or its manual to use WAPI, while WAPI's signal and installation of WAPI's certificate were all started by WAPI's AP. [Comment: The Court did not comment on this point, which appears to be irrelevant in the first place with respect to direct infringement.]

WAPI is a Chinese national standard and therefore could not be infringed

Iwncomm is obliged to license ZL '508, and therefore Sony's acts were not infringing. Further, as Iwncomm's patents led to the establishment of the WAPI's standard, and Iwncomm did not specifically refuse to license [the patent on which the standard it is based], it should be considered as allowing others to practice the invention of ZL '508.

This argument was simply denied by the Court on the basis that whether or not the relevant patent is a standards essential patent does not affect the decision on infringement; and a FRAND licensing statement from Iwncomm does not mean a licence has been granted. [Comment: I am speechless, but I am interested to hear what SEPs owners would say about this argument.]

Why were punitive damages awarded, and why was an injunction granted

These were determined based on whether Iwncomm, on the one hand, or Sony, on the other, was in the wrong in relation to the licence negotiations. The Court specifically stated that in an infringement case involving a SEP, an injunction should be granted if the defendant was in the wrong in the negotiations, and vice versa7. [Comment: SEP owners should be aware of this - if a Chinese court ruled that they were in the wrong, i.e. showing bad faith during negotiations, they may not be able to obtain injunction relief in a subsequent infringement case.] The Court ruled on this based on the following two issues.

Was Sony asking Iwncomm to provide claim charts reasonable?

The Court ruled that this was not reasonable. The Court stated that the provision of claim charts is not a must, particularly when Sony has sufficient information to evaluate infringement. In this case, WAPI is a Chinese national standard that Sony must comply with in order to sell mobile phones in China. During negotiations, Iwncomm explained the WAPI-related technologies and provided patent lists and licensing contracts. Based on these, Sony should be able to judge whether the WAPI functional software operated in its relevant mobile phones fell within the scope of protection of the claim of the involved patent, rather than having to rely on claim charts provided by Iwncomm. On the other hand, Sony repeatedly referred to its "not agreeing that its present or planned products used the WAPI patent", that it "found no reason why Sony needed to obtain a patent licence from Iwncomm", that "we had not identified that these patents related to our products" and other assertions without substantive reasoning, which was obviously delaying the negotiations. Therefore, the Court ruled that Sony asking Iwncomm to provide claim charts is not reasonable. [Comment: This could be controversial, as a defendant should not be the one to prove infringement - this is the plaintiff's task. However, in this case, the Court's ruling may not be without merit. After all, Sony has bought access points and authentication servers from Iwncomm to test whether Sony's mobile phone would work with WAPI "during the research- and-development stage, only". Further, what Sony practised was a standard wireless network protocol. In return, Sony repeatedly denied infringement using mere statements.]

Was Iwncomm asking Sony to sign an NDA in order to provide claim charts reasonable?

The Court ruled that this requirement was reasonable, as the claim charts could contain Iwncomm's views and opinions on infringement. [Comment: I always advise my client that claim charts should be kept confidential as much as they can. I am not sure whether Sony's refusal to sign the NDA is a company policy, or the terms in Iwncomm's NDA were not acceptable. For the former, this policy apparently backfires. For the latter, the decision does not indicate whether Sony requested Iwncomm to revise the NDA to become acceptable to both Sony and Iwncomm, which I believe should be achievable. The decision did not mention whether Sony's attempt to invalidate ZL '508 demonstrated bad faith, which in my view should not, as every entity is allowed to challenge the validity of a patent according to the Chinese Patent Law.]

How was the compensation of 9.1 million RMB against Sony determined

Sony argued that the licence contracts submitted by Iwncomm showing a licence fee of 1 RMB per mobile phone are standard pool contracts, in which ZL '508 is only one of the patents involved, and therefore Iwncomm's request for compensation of 1 RMB per mobile phone was not reasonable. Sony submitted English copies of three US court decisions, and asserted that according to the determination rate of the Wi-Fi standard essential patent in these three decisions, whether calculated according to terminals, or each patent, the licensing fee standard of 1 RMB per mobile phone claimed by Iwncomm does not conform with the FRAND principle.

The Court ruled that although Iwncomm's submitted contracts are standard pool contracts, ZL '508 is the core patent in the standard pool, and therefore the licence fee of 1 RMB per mobile as requested by Iwncomm could be used as the basis of compensation calculation for this case, which was in fact used directly by the Court in the calculation of compensation.

[Comment: Sony may argue for this in an appeal, as 1 RMB per mobile phone is the value of ZL '508 plus other patents and technologies in the standard pool contract. Even though the Court may be correct that ZL '508 is the core patent in the standard pool, the Court's ruling could mean that other patents and technologies in the Iwncomm's standard pool contract are worthless.8]

Regarding the US court decisions, these were dismissed by the Court as Sony did not submit Chinese translations of these decisions to conform with the formality requirements on evidence in China. Further, the Court stated that these decisions are not related to the WAPI technology and therefore this case. [Comment: I have no idea why Sony did not submit Chinese translations of the US decisions to the Court, as any non-Chinese documents submitted to a Chinese court must be translated into Chinese. I am not sure whether Sony considered these US decisions to be not very useful, and therefore did not want to spend money on the translations.

On the other hand, I agree with the Court that the US decisions are not relevant, as WAPI is a Chinese-only standard, and what happened in the US bears little relevance to this case.]

With the above points determined, the remaining elements were just simple calculations. The total number of Sony's mobile phones registered with the Telecommunication Equipment Certification Center of the Ministry of Industry and Information Technology of the Chinese government is 2,876,391. Three times punitive damage was imposed by the Court due to bad faith demonstrated by Sony during licence negotiations, resulting in 8,629,173 RMB (2,876,391x3) compensation for infringement. The Court also awarded Iwncomm 474,194 RMB for expenses of suing Sony, in which 400,000 RMB are the legal costs.

[Comment: It is encouraging to see that the Beijing IP Court awarded reasonable legal costs for infringement cases. In comparison, legal costs in the region of only 10,000 RMB were awarded by a Chinese court. Whether this will make China become more litigious at least in patents, we will have to wait and see.]

Summary

As a huge multinational corporation, it is disappointing to see the level of due diligence (Qualcomm' did not obtain a WAPI licence from Iwncomm, while Sony tried to rely on Qualcomm's chip for exhaustion of rights), care (no submission of Chinese translations of foreign language documents to a Chinese court), and sophistication (arguments of non-infringement including Sony's mobile phone is not specifically made for performing WAPI, and WAPI is a Chinese national standard and therefore could not be infringed) demonstrated by Sony in this case. Better performance is expected.

Below is what could be learnt from this case:

•       Try not to be in a Catch 22 situation, in which either of the conclusions are bad.

•       If a product is said to comply with a standard, it will be difficult for me to say otherwise in a court without hardcore technical proof (for example, for arguing non- infringement). However, if compliance to this standard is a legal requirement, this would get into other kind of trouble if it could be successfully demonstrated that the product indeed does not comply to the standard.

•       It is always useful to draft claims directed to individual functional components in a system, for example a mobile terminal, an access point, and a server, to secure direct infringement against individual suppliers of these components in the system.

•       Reliance on exhaustion of rights should be done with due care. Always do homework, more carefully.

•       Method of use (but not method of manufacturing) claims are not subject to exhaustion of rights in China, and therefore could be valuable.

•       During negotiations for a licence under an SEP, if you deny anything, avoid using mere statements. The denial is better accompanied with substantive reasons and/or proof to avoid bad faith.

•       If a Chinese court found bad faith on a SEP owner, that SEP owner may not be able to obtain injunction relief in a subsequent infringement case. For standard implementer, punitive damages may be imposed. Therefore, please play nice.

•       Chinese courts are rewarding substantial legal costs to a patentee (but not defendant) in successful infringement claims to encourage patentees to defend their patent rights more actively.

 

Notes and references

1.      E.g. Huawei v Unwired Planet: [2017] EWHC 711 (Pat) and all its predecessors

2.      Sony Mobile Communications (China) Co. Ltd.

3.      Xi'an China Iwncomm Co.,Ltd

4.      A quick review of the WAPI standard in Wikipedia, shows that it has had a fairly colourful history, which may explain some of the approaches taken in this case. For example, apparently when ISO/ IEC did not accept the first attempt at recognition, the Standards Administration of the People's Republic of China delegation walked out, and there were allegations of a conspiracy, intimidation and threats.

5.      Editor: I anticipate that this arises (amongst other reasons), because the ZL '058 patent relates to the operation of the protocol, which only arises at the point ofuse, and that patent holders prefer to license as close to the final point of use as possible, at which point the value of the licensed product is highest.

6. Editor: This is perhaps a little unfair as there are myriads of functions in any mobile phone, and, as with many digital devices, not all functions will be tested but perhaps more to the point, according to Wikipedia: "In addition, despite mandates for WAPI to be implemented in China in Wi-Fi enabled mobile phones and by the three Chinese service providers, it is very rarely used in practice." (https://en.wikipedia. org/wiki/WLAN_Authentication_and_Privacy_ Infrastructure)

7. Editor: Essentially consistently with EU law: Huawei v ZTE (CJEU Case C-170/13 (http://curia.europa.eu/juris/document/document. jsf?docid= 165911 &doclang=en))

8. Editor: See, by way of contrast, Birss J's decision in Huawei v Unwired planet, with a detailed analysis and discussion of methodologies for assessing FRAND rates (at least for ETSI FRAND undertakings) which rejects the notion of different values for different patents in that case ([2017] EWHC 711 (Pat)).

Author: Toby Mak                            Journal: CIPA JOURNAL, JULY-AUGUST 2017

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