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Chinese court rules that US IT Company abused its dominant position in China despite having no domicile in China

    • Competition, EU and Trade

    16-12-2013

    Summary

    A Chinese court has recently fined a US based IT and Telecoms company for abusing its dominant market position in relation to the licensing of patents for 3G wireless communication devices. The decision underlines the increasingly forceful approach adopted by Chinese courts and enforcement bodies in both anti-monopoly investigations and litigation involving international companies in the technology sector.

    Background

    InterDigital Co. (“IDC”), a US based provider of market intelligence and advisory services for the IT, telecoms and technology sectors, recently commenced patent infringement litigation in the US against HuaWei Technology Co. (“HuaWei”), a Shenzhen-based Chinese telecom company. Almost simultaneously, IDC filed a complaint against HuaWei for patent infringement at the United States International Trade Commission (“USITC”), which led the USITC to launch an investigation against HuaWei. In response, HuaWei brought proceedings against IDC in the courts of Shenzhen, China, claiming that IDC had abused its dominant market position in relation to the licensing of standards–essential patents (“SEPs”) for 3G wireless communications.

    Abuse of Dominance in relation to the use of intellectual property rights in China

    Under the PRC Anti-Monopoly Law (“AML”), companies with a dominant market position are prohibited from engaging in certain types of conduct in relation to their intellectual property rights (“IPRs”). Three key behaviours are considered by the State Administration for Industry and Commerce (“SAIC”) to constitute abuse:

    • Discriminatory refusals to licence, or a refusal to licence an essential IPR;
       
    • Unjustified tie-in/bundling clauses; and
       
    • Attaching unreasonable trading conditions to an IP agreement.

    The decision of the lower court (Shenzhen Intermediate People’s Court)

    On 5 December 2011, HuaWei filed two complaints against IDC at the Shenzhen Intermediate People’s Court (the “Shenzhen Court”):

    1. HuaWei argued that IDC adopted a discriminatory royalty rate and was guilty of tying-in the licensing of SEPs with non-essential patents during licensing negotiations. HuaWei sought damages of RMB20 million (approx. US$3.25 million) from IDC.
       
    2. HuaWei requested that the Shenzhen Court determine an appropriate royalty rate by applying fair, reasonable and non-discriminatory (“FRAND”) terms.

    In relation to the first complaint, the Shenzhen Court found that IDC had abused its dominant market position by: (i) tying SEPs with non-SEPs during licensing negotiations; and; (ii) initiating investigations and proceedings in the US with the aim of stopping HuaWei from using the SEPs.

    Regarding the second complaint, the Shenzhen Court concluded that IDC failed to comply with its FRAND commitments in relation to its SEPs by: (i) requiring HuaWei to pay royalties which were over 100 times higher than those paid by Apple and Samsung (this was inappropriate and unreasonable considering that HuaWei’s global sales of mobile phones were much lower than those of Apple and Samsung); and (ii) insisting that HuaWei license all of its own patents obtained globally on a royalty-free basis to IDC.

    The Shenzhen Court used the FRAND principles to determine that the appropriate royalty rate should not exceed 0.019% of the actual sales price of each HuaWei product based on the following factors:

    • profit margins in the wireless communication industry;
       
    • the quantity and quality of IDC’s patents, the company’s reputation, and its R&D costs;
       
    • the royalty rate offered to other companies, such as Apple and Samsung; and
       
    • the applicable jurisdiction for determining issues relating to the licensing of SEPs.

    The Appeal – the Guangdong High People’s Court

    On 28 October 2013, following an appeal by IDC, the Guangdong High People’s Court (“Guangdong Court”) upheld the Shenzhen Court’s decision and confirmed that HuaWei should be awarded damages of RMB20 million (approx. US$3.25 million).

    However, the Guangdong Court found that the bundled licensing of SEPs could be justified on efficiency grounds and that IDC’s practice of tying SEPs with non-SEPs did not violate the AML.

    IDC has indicated that it plans to appeal against the ruling at the Supreme People’s Court in the PRC.

    Jurisdiction

    Perhaps the most notable aspect of the decision relates to jurisdiction. IDC filed an opposition to the original claim when the Shenzhen Court accepted jurisdiction. Its position was that the alleged abuse of dominance occurred in the US and as IDC had no domicile in China, the Chinese courts had no jurisdiction over the case. The Shenzhen Court rejected IDC’s arguments and held that the AML has extra-territorial effect and applies in cases even where the abuse of dominance had taken place overseas if the abuse has an effect in the domestic PRC market. As the alleged anti-competitive behaviour affected HuaWei’s manufacturing in China as well as its exports out of China, the Shenzhen Court held that it had jurisdiction in this case.

    Comment

    This case is significant both for companies in the TMT sector as well as their lawyers. It highlights the willingness of the Chinese courts to accept jurisdiction and rule on patent cases involving foreign-owned SEPs, as well as a readiness to apply the FRAND principles to establish what it believes to be appropriate royalty rates under the AML. International companies should be aware that the Chinese competition regime is becoming increasingly emboldened after a series of high-profile and high-value decisions under the AML.

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