Could Chinese Global FRAND Rate Determinations Become Commonplace?
Taking FRAND Rates Global: China Will Play a Role
On an average day, an individual likely encounters multiple products (often consumer electronics) that contain components protected by standard-essential patents (SEPs). SEPs are patents determined to be necessary by standard-setting organizations (SSOs) in the implementation of a technology.¹ SEPs are most common in the area of wireless technology, with many components and precise standards. In general, SSOs are private business-affiliated groups tasked with promulgating industry-wide technical standards.
To freely license commercially, patent holders must consider FRAND royalty requirements. FRAND is a commonly used acronym for “fair, reasonable, and non-discriminatory” terms. A FRAND requirement is a voluntary contractual commitment between an SSO and SEP holder. Patent holders can then agree to license SEPs to third parties on FRAND terms. FRAND contractual terms originated from consent decrees in antitrust litigation, where the licensor was compelled to license on “reasonable and non-discriminatory” terms.²
In theory, FRAND licensing of SEPs benefits all parties. A patent’s categorization as a SEP causes more widespread industry adoption, increasing the SEP holder’s market power. Licensees benefit from lower royalty costs, and consumers benefit from deterred patent holdup and increased standardization.
SSOs rarely provide guidance on calculating FRAND patent royalty rates. Consequently, a FRAND requirement in an SSO charter essentially serves as a placeholder in patent license negotiations between SEP holders and inquiring potential licensees.³ This indeterminacy has led to increasingly frequent litigation between SEP holders and inquiring implementers. Prospective licensees often allege that SEP holders have breached contractual obligations to SSOs, leaving courts to determine FRAND royalty rates.
In mediating these disputes, courts have certain policy goals in mind. These include keeping the patent reward structure in place but also maintaining the patent portfolio’s accessibility to prospective licensees. As stated above, SEP holders benefit from a patent’s classification as a SEP (generating wider adoption), and licensees benefit from a more affordable FRAND royalty rate.
Recently, some courts have made clear their dissatisfaction with country-by-country FRAND licensing determinations. In Unwired Planet v. Huawei, a United Kingdom court stated that country-specific FRAND licensing is “madness” and “highly inefficient.”⁴ The court gave Chinese telecom giant Huawei two options: either be enjoined from selling infringing products in the U.K., or agree to a global license of Unwired Planet’s (a non-practicing entity’s) portfolio. The U.K.’s highest court rejected an appeal of this decision, affirming that the scope of the FRAND license decision in Unwired Planet is global.⁵
Not to be outdone, a Chinese court has recently pronounced its ability to set global FRAND rates. This decision also comes at a time when China has significantly increased its efforts at intellectual property reform, which was reaffirmed by President Xi at the beginning of December.⁶ China’s intellectual property landscape continues to evolve rapidly. In 2014, China established three specialized patent courts in Beijing, Shanghai, and Guangzhou for patent litigation.⁷ The Beijing court has additional appellate jurisdiction over decisions by the State Intellectual Property Office.⁸
In Oppo v. Sharp, the Shenzhen Intermediate People’s Court ruled that Chinese courts can set global FRAND rates. The seven-judge panel (in what can most analogously be described as a multi-judge district court panel) determined that the court may set the FRAND rate for Sharp’s patent portfolio related to wireless technology.⁹ The court cited increased efficiency and solving multi-jurisdictional lawsuits as a justification for the ruling.¹⁰ Sharp can still appeal the decision to the Supreme People’s Court, but there has been no signal that the decision would be overturned.
This case signals Chinese courts’ increasing willingness to become involved in global FRAND rate determinations. The impact of this decision could be multiplied by the already existing Chinese practice of substantial governmental control over initial SEP categorization. The Chinese government takes an active role in setting national standards for technology, unlike the U.S. practice of private organizations (SSOs) determining SEP portfolios’ composition.¹¹ Combining these two factors may lead to Chinese courts having an outsized impact on the future global FRAND landscape. This decision also sets the stage for China to be yet another favored-venue option (for certain parties) in global FRAND disputes.
1. Gene Quinn, Standard Essential Patents: The Myths and Realities of Standard Implementation, IP Watchdog (Feb. 4, 2019), https://www.ipwatchdog.com/2019/02/04/standard-essential-patents-myth-realities-standard-implementation/id=105940. Return
2. See Herbert J. Hovenkamp, FRAND and Antitrust, 105 Cornell L. Rev. 1683 (2020) (discussing the origins of FRAND from antitrust). Return
3. King Fung Tsang & Jyh-An Lee, Unfriendly Choice of Law in FRAND, 59 Va. J. Int’l L. 223, 227 (2019). Return
4. Unwired Planet v. Huawei, EWHC 2988, 114 (Pat) [2017]. Return
5. Unwired Planet v. Huawei, EWCA Civ 2344, RPC 20 [2018]. Return
6. Xi Calls for IP Rights Reform: enforcement official says system ‘still grim’, World Trade Online (Dec. 4, 2020), https://insidetrade.com/daily-news/xi-calls-ip-rights-reform-enforcement-official-says-system-still-grim. Return
7. Jie Gao, Development of the FRAND Jurisprudence in China, 21 Colum. Sci. & Tech. L. Rev. 446, 451 (2020). Return
8. Id. Return
9. See Michael Renaud, James Wodarski & Matthew Galica, Is this Seat Taken? A Chinese IP Court Proclaims Its Authority to Declare Global FRAND Terms, Mintz Insights Center (Dec. 7, 2020), https://www.mintz.com/insights-center/viewpoints/2231/2020-12-07-seat-taken-chinese-ip-court-proclaims-its-authority. Return
10. Bing Zhao, Chinese Court to Set Global FRAND Rate in Oppo-Sharp Dispute, Iam Patent (Dec. 4, 2020), https://www.iam-media.com/frandseps/chinese-court-set-global-sep-portfolio-rate-in-oppo-sharp-dispute. Return
11. Jyh-An Lee, Implementing the FRAND Standard in China, 19 Vand. J. Ent. & Tech. L. 37, 47 (2016). Return