Monday, March 31, 2014

Some recent papers on the Huawei-InterDigital FRAND dispute in China

Many readers are no doubt aware of the 2013 decision of the Shenzhen Intermediate People's Court in a case in which Huawei accused InterDigital of violating its obligation to license certain patents on FRAND terms.  (There were actually two complaints, the other accusing InterDigital of unlawful tying and excessive pricing in violation of Chinese competition law.)  The court concluded that a FRAND royalty would be no more than 0.019% of the value of each Huawei product.  The opinion was not published, although the judges subsequently published two articles about the case (in Chinese, of course; to my knowledge, no English-language translations of the articles in their entirety have been published yet, though I imagine someone will be motivated to publish translations at some point).  The judgment was affirmed on appeal, and earlier this year the parties settled their global patent disputes.  For previous coverage on this blog, see here and here.  I've also previously mentioned the paper by Professors Sokol and Zheng (see here and here), titled FRAND in China (available on ssrn here).  The authors discuss, among other things, some features of a redacted version of the actual (unpublished) opinion, to which they had access (see pages 27-34). According to Sokol and Zheng:
To determine the reasonableness of the licensing terms offered by InterDigital to Huawei, the court examined publicly available information, including information on InterDigital’s licensing revenues, to estimate the fees that InterDigital charged or proposed to charge Apple and Samsung. The court needed to reverse engineer these numbers because InterDigital refused to disclose them, fearing that they would be provided to non-parties to the case. The court then compared those estimates to the fees that InterDigital had demanded from Huawei and found the latter to be much higher. In this respect, the unpublished decisions mirror the analysis in the judges’ articles.

Some factors mentioned in both the judges’ articles and the unpublished decision look different from factors that would be relevant in a U.S. proceeding. The InterDigital judges in their articles mentioned jobs-related factors. Huawei employs 51,000 R&D staff with over 49,000 patent applications and 17,765 patents granted worldwide. In contrast, InterDigital has 260 R&D personnel with only 19,500 patents and patent applications. The judges also noted that InterDigital does “not engage in any substantive production activities.”  Indeed, in the articles, when discussing the reasonableness of InterDigital’s offers and the abuse of dominance by InterDigital, the judges rely heavily on the fact that InterDigital does not have a production business. The judges stated that the consideration of those factors was intended to measure the “rate of return that would be commensurate with InterDigital’s contributions to telecommunications technologies.” Apparently, the judges were assuming that the number of research personnel and the number of patents and patent applications were a good indicator of the value of the patents—an assumption that is obviously false.
Two more recent papers discussing this case are Fei Deng & Su Sun, Determining the FRAND Rate:  U.S. Perspectives on Huawei v. InterDigital, CPI Antitrust Chronicle, Feb. 2014(1), available here, and David S. Evans, Vanessa Yanhua Zhang, & Xinhua Zhang, Assessing Unfair Pricing under China's Anti-Monopoly Law for Innovation-Intensive Industries, available on ssrn here.  

The Deng/Sun paper focuses on the Chinese court's use of assertedly comparable licenses to determine the FRAND rate, and provides a translation of a portion of one of the Chinese judges' articles on this issue.  The authors argue that the two comparable licenses the court used (between InterDigital and Samsung, and between InterDigital and Apple) may not have been very comparable in actuality to a hypothetical license between InterDigital and Huawei, given that the Samsung license was in settlement of litigation; the Apple license "might not have been entered based on RAND considerations"; the "patents covered by InterDigital's licenses with Apple and Samsung may not be totally identical to what would be included in the license with Huawei" and may cover different specific standards within the 2G, 3G, and 4G standards; the uncertainty over whether the Samsung and Apple licenses had other provisions, such as grantbacks or cross-licenses; the dissimilarity of the products made by the licensees; and the fact that the Apple license was a lump-sum license, which means that "when turning it into a per unit royalty one should use the projected sales units at the time of license negotiation as the denominator, instead of the actual sale units" (pp. 9-12).

The second paper is somewhat broader in scope, but discusses the Huawei v. InterDigital case towards the very end (pp. 50-52).  As the authors note at the beginning of the paper, "Article 17(1) of China’s Anti-Monopoly Law (AML) prohibits dominant firms from 'selling commodities at unfairly high prices or buying commodities at unfairly low prices.'”  In the discussion of Huawei, the authors state:
It is difficult to conclude much about the direction that the Chinese courts will take on the application Article 17(1) to IPR given that the unfair pricing claim was just one of several antitrust claims; much of the analysis of prices themselves occurred in the FRAND contract case; the decisions themselves have not been published; and the decisions have not been heard by the Supreme People’s Court. Moreover, InterDigital does not seem to have submitted sufficient evidence about its licensing agreements to permit the court to make a fully informed analysis.

Subject to these caveats, one interesting aspect of the decision is that it does not appear to have expressly addressed Article 55 of the AML, which exempts the exercise of IPRs from antitrust scrutiny unless those rights are used to eliminate or restrict market competition. It may be that the court concluded that the extreme disparities it found in rates charged to different licensees had such an anticompetitive effect, but that is not clear from the information about the case that is publicly available. If the court did not make such a finding, it would be hard to reconcile the decision with Article 55. In that case, the court’s approach would also be inconsistent with the approach in most other jurisdictions of limiting excessive pricing cases regarding IPRs to situations in which a firm pursued an exclusionary strategy.

Nevertheless, the judges for the Shenzen Intermediate Court made a conscientious effort to address a set of difficult issues concerning negotiating FRAND royalty rates for SEPs. This Chinese court is not the first to find this topic challenging. We are therefore optimistic that the Chinese courts will find the approach towards unfair pricing followed in other jurisdictions, and in particular towards innovative-intensive industries, helpful in shaping the case law on the application of Article 17(1).
This is, indeed, a more optimistic perspective than that expressed by Professors Sokol and Zheng (who conclude their paper by noting that "To the extent that industrial policy does guide FRAND policy in China, it presents negative consequences for innovation in China") and more aligned with that of Drs. Deng and Sun, who note that while "economic experts . . . are still largely absent in [Chinese] intellectual property litigation," a trend towards greater acceptance of "in-depth economic analyses . . . can be expected in the near future" (p.13).  

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