A telecoms Blockbuster: Beijing High Court upholds patent injunction in IWNCOMM v Sony

A new appeal decision from Beijing upholding the country’s first SEP-based injunction could set the stage for future patent litigation in the telecoms sector and beyond.

The April 2018 decision in IWNCOMM v Sony gives insight on how the Chinese legal system interprets Fair, Reasonable and Non-Discriminatory (“FRAND”) licensing obligations in telecoms cases, and gives guidance on the proper conduct of FRAND negotiations. It also gives clarity on more fundamental issues, including the tests for direct and indirect infringement, and calculation of damages in patent cases generally.

Background

Ten years ago, China published its national strategy to improve its IP system, for the benefit of the Chinese economy as a whole. Since then it has updated its patent law, successfully opened a range of specialist IP courts, and started publishing its decisions. Progress is speedy: the Beijing IP Court has even launched an ADR App operating on top of the Chinese social media network, WeChat.

Perhaps most importantly, the Chinese courts have also established a new system of justice by precedent, aimed at addressing issues caused by “varying discretionary powers, application of law, and unequal standards of evidence” (in the words of Beijing Judge Yang Jing). This has been widely welcomed by the international community as a good move to increase transparency and consistency of justice in China.

So it’s clear that the appeal decision in IWNCOMM v Sony is intended to, and will, act as strong precedent for future patent cases in the region. The case (fully cited as Sony Mobile Communications Products (China) Co., Ltd. v Xi'an Xidian Jietong Wireless Network Communication Co., Ltd. (2017) Jingmin 454) is Sony’s appeal in a case originally brought in 2015 by Xidan Jietong, better known by its brand IWNCOMM.

IWNCOMM holds patents that are essential (standard-essential patents, or “SEPs”) to the Chinese standard known as WAPI. WAPI is a security layer process that is compatible with the more familiar WiFi communications standard that is used solely in China. Despite this, the issues are of wider significance: like other standard-setting organisations, members of the consortium behind the development of WAPI made declarations that essential patents would be licensed on FRAND terms.

Sony makes telecoms devices that are sold in China, and which comply with the WAPI standard. IWNCOMM entered into negotiations with Sony in 2009 to conclude a FRAND licence for use of its patented technology, but negotiations broke down. In 2015 IWNCOMM issued proceedings in the Beijing IP Court for infringement of patent ZL02139508.X: a method patent for establishing and authenticating a connection between a wireless access point and user equipment.

First instance & Appeal

The first instance decision found for IWNCOMM on every count. The patent was essential and infringed by Sony, and IWNCOMM’s claimed royalty rate was FRAND-compliant. More significantly, the court granted the country’s first ever injunction based on a SEP.

Sony appealed to the Beijing Municipal High People’s Court (the ‘Court’), who this month has handed down a decision confirming the first-instance result, the injunction, and the legal tests behind them. At a glance, the issues are:

a) clarity for the tests of direct and indirect infringement;
b) the limits of exhaustion;
c) FRAND used as a pure defence;
d) injunctions for SEPs in China; and
e) the conduct of FRAND negotiations: lessons to be learned.

Tests for infringement

IWNCOMM had alleged direct infringement against Sony on two heads, but only one survived the appeal: that during the design and development process, Sony had conducted equipment tests carrying out the entire method of both the access point and the user equipment (e.g. a handset). This was due to the fact that WAPI compliance testing requires interfacing a product with a test access point to see if the method is appropriately carried out.

The evidence submitted by IWNCOMM referred to the normal standardised testing that would normally be conducted, and was therefore a proxy – since evidence of Sony’s own conduct was not available to them. The Court concluded that the general practice of the industry was to apply such tests and that Sony likely had done so. On the second head, IWNCOMM had also alleged that Sony’s quality assurance tests might infringe when products were tested after manufacture. However, the general practice of the industry did not extend to full compliance testing at a factory, and the proxy evidence was not sufficient for that purpose.
 
The Court clarified the test for indirect (contributory) infringement and concluded that it was also made out on the facts of the case. The issue was this: in principle, contributory infringement must contribute to an actual case of direct infringement by a third party. But IWNCOMM could not prove that a direct infringement occurred on the facts, because end-customer users of mobile handsets were regarded as non-commercial users and therefore could not be liable. However, the court explained that the burden of proof on this point did not extend to proving any one particular act of infringement; simply that use of a product as intended would give rise to use of the patented method. The Court highlighted the following factors for success in such an allegation:

a) a party provides the raw material for (or products designed to facilitate) the implementation of a patented invention;
b) that provision is made to others who will commit the direct infringement;
c) the party knows that the raw material is to be used for this purpose;
d) it is done commercially and without authorization from the patentee;
e) that the product or raw material is substantially relevant to the implementation of the patented technology; and
f) the products are not general-purpose or commonly-used products for any other economic or commercial purpose.

The limits of exhaustion

Sony also…