China: Iwncomm v Apple - points to note in SEP licensing negotiation

In this article we take a look at the SPC’s judgment and how it may impact on future licensing negotiations for SEPs (Standard Essential Patents) in China. 

Case background

In 2010, the implementer reached a licence agreement with the patentee for a portfolio of 51 patents and patent applications, including the asserted Chinese patent ZL 02139508.X in the lawsuit. The licence term is from 2010 to 2028. However, only the lump sums payable in respect of sales from 2010 to 2014 are stipulated in the agreement. The royalty payable in respect of sales from 2015 and beyond are subject to further negotiations under the agreement. The licence has a dispute resolution clause submitting all disputes arising from the contract to HKIAC arbitration. 

The parties started to negotiate the 2015+ royalties from November 2014 onwards. The implementer raised a number of questions regarding the value of the patents and whether the royalty sought was justified. On 11 April 2016, the patentee brought the present lawsuit. 

In March 2018, the implementer brought an arbitration in Hong Kong. The arbitral tribunal reached a decision on 7 April 2021. The Shaanxi High People's Court reached the first instance judgment on 30 December 2021, and the SPC issued the appeal judgment on 30 December 2022. Meanwhile, the patent expired on 6 November 2022. 

What is the rate?

In the first instance ruling, the Shaanxi Court granted an injunction and damages in the sum of RMB 142.8 million (around US$21.4 million) in respect of the infringement of the ZL 508 patent. The lump sum was calculated on the basis of:

• RMB 141 million corresponding to 47 million units of handsets, and 
• RMB 1.84 million in respect of 613,000 units of computers. 

This is equivalent to an implied per unit rate of RMB 3 (US$0.42). During the appeal, the patent expired, and therefore the injunction became moot. The damages sum was upheld, but on an adjusted ground. 

A per unit rate of RMB 3 is also the amount awarded by the Beijing Court against Sony Mobile in 2018 for the same patent, arriving at a lump sum of RMB 8.6 million. 

Does negotiation behaviour impact on the FRAND rate in a SEP case?

First instance ruling 

Iwncomm v Apple is a patent infringement case. It is noteworthy that the Shaanxi Court used a 3x multiplier to the FRAND rate from comparable licences in its assessment of damages. The award of triple royalty is linked to the implementer's fault in negotiation. Another reason is that the actual number of sales units of the infringing products cannot be accurately ascertained but is likely to exceed the number used by the patentee in calculation. The ruling is consistent with the parallel judgment of Iwncomm v Sony Mobile. In that case, damages were similarly awarded in the sum of 3x per unit royalty rate of RMB 1 for infringement of the same patent. 

Contrasting decision

By contrast, the SPC rejected a request for 3x royalties in the more recent case of ACT v Oppo/ Vivo (2023). The SPC found that ACT and OPPO/Vivo were equally liable for the failure in negotiation (see our article, SEP case update ACT v OPPO Vivo).

The SPC explained that "In the case the actual damages suffered by ACT can be ascertained... the actual damages can be calculated [by late payment interests] and it is not necessary to go to the alternative basis of using a reasonable multiplier of patent licensing royalty fees." The SPC said OPPO's fault (also Vivo’s fault) means it should bear 50% of the late payment interests added to the FRAND rate. 

SPC ruling

In the appeal judgment of Iwncomm v Apple, the SPC upheld the finding that the implementer has obvious fault in negotiation. However, the SPC does not characterize the award as punitive damages, but as a reasonable assessment of damages when the claimant’s loss or the defendant's gain cannot be accurately ascertained.

The SPC considered a number of factors in finding that the damages award is reasonable:

1. The obvious fault of the implementer during negotiation and its refusal to disclose actual sales records is considered as the first factor.
2. The second reason is that the sales units used in the damages assessment is likely to be far lower than the actual sales units by the implementers. In Iwncomm’s damages calculation, model A was estimated to have sold 40 million units from 2015 to 2017, and model B was estimated to have sold 7 million units. According to the MIIT records, the corresponding numbers are more likely to be 69 million units and 22 million units. The number of tablets is more likely to be 618,033 units. In view of the under-estimation, the multiplier is closer to 1.5. 
3. The third reason is that the SPC considered the asserted patent is the key patent with significant value in Iwncomm’s WAPI portfolio.  Also, Apple did not pay any royalty for the remaining 51 patents in the portfolio during the process of the infringement litigation. 

Consequently, the SPC concluded that the damages award is not too high. 

In respect of the overlapping arbitral award and damages award, the SPC said the patentee can decide which one to execute and deal with any duplicative payment then. 

The trend from these cases shows that the impact of negotiation fault on the calculation of royalty payment has been reduced but not eliminated. The SPC judgments still leave open the possibility of fault being an aggravating factor in some situations, such as when the patentee's loss in royalty payment cannot be accurately ascertained. 

What kind of negotiation behaviours is considered as wrong?

The SPC found that the implementer had seriously delayed the negotiation for a post-2014 licence. The implementer had raised unjustified challenges on the need to obtain a licence when the negotiation was supposed to be on the rates only. 

A summary of the negotiation history is as follows:

• On 20 November 2014, the patentee sent a notice to the…