China's SEP case update - ACT v OPPO, Vivo

Case Background

On 16 November 2018, the Advanced Codec Technologies, LLC (“ACT”) asserted six SEPs against OPPO and Vivo respectively before the Nanjing Court.  ACT sought injunction and damages in the sum of US$ 50 million in total against each company.  ACT’s damages claim is calculated based on a per unit rate of US$0.26 and triple punitive damages claim.

The asserted patents were initially owned by VoiceAge Corporation and sub-licensed to Saint Lawrence and then to ACT in respect of AMR-WB.

Result

The determined China rate is $0.008/ unit of handset for the six patents. In the OPPO case, the lump sum is about US$ 2.18m for China sales of the 44 infringing models assessed from Q3 2015 to Q4 2020.  In the Vivo case, the lump sum is about US$1.89m for China sales of 59 infringing models sold from Q2 2016 to Q1 2021.  In both cases, interests were awarded at 2.125%, calculated from 20 September 2019 onwards for OPPO and from 23 September 2019 onwards for Vivo.

In the OPPO case, the use of 20% uplift by the Nanjing Court as attributable to the implementer’s fault was rejected by the SPC.

The SPC also rejected unpacking using various discounts in both the OPPO and Vivo cases.  The range of discounts that ACT asserted as applicable to the other licenses include early signing discount, trade war discounts, patent invalidation risk discounts, settlement discounts.

Methodology

OPPO asserted both comparable licence and top down.  Vivo claimed that the royalty base should be the SSPPU and relied on top-down approach.

ACT produced the same comparable licences as evidence in both the OPPO and Vivo cases.  The SPC relies on the comparable licence approach but is narrow in the selection.

The numbers disclosed in the SPC judgments are:

For Company C, further licences are produced including ROW – L2 (excluding China and Germany) is US$ 8,920,171. Germany - L3 is US$198,532.

For Company B, Licence 2 signed on 9 March 2015 in respect of ROW (excluding China, Germany) for US$ 1M on prepayment lump sum terms, or quarterly payment of US$0.23/ unit with a cap at US$ 20.70 M.  Licence 3 is a German only licence for a lump sum of US$ 200,000 payable by June 2015, or a quarterly payment of US$ 0.23/ unit with a cap at US$ 2.3M. These ROW licences are not considered.

Damages is assessed from the date of first use to the date of IDC data provided at first instance in respect of the infringing models:

OPPO: US$0.008/unit x 272,109,806 units (44 infringing models, sales from Q3 2015 to Q4 2020) = US$2,176,878

Vivo: US$0.008/unit x 236,759,365 units (59 infringing models, sales from Q2 2016 to Q2 2021) = US$1,894,075

Comparability

The SPC listed clear criteria on the selection of comparable licences:

1. The circumstances under which the licence is negotiated (e.g., whether there were relevant litigations, threat of injunctions between the parties during the licence negotiations).
2. Similarity of the licensing parties, including the licensor and licencee (e.g., industry position of the licensor and the licensee, the sales volumes of the licensee, business model, and relationships between the licensor/ licensee etc.)
3. The similarity of the licensed patents (e.g., whether it is the same or a subset of the patents in dispute, or whether the licensed assets are of the same of similar quantities or qualities as the litigated patents).
4. The similarity of the licence terms, such as the licence scope, the licence period, the payment method, etc.  

In particular, the nationality of the licensee is considered as a factor (whether the licensee is a well-known Chinese telecom company with similar sales as OPPO/Vivo).  This limits the comparable licences to just one or two.

The highlighted licence ended up determining the per unit rate in the ruling because it is a China only license and the licensee is also a comparable Chinese company.  The same six patents are licensed.  Moreover, the license was concluded when there was no litigation pending.

Other aspects worth noting include:

• The use of present value discounting is rejected for this multi-year licence. Simple division is used to derive the per unit rate.
• The comparison of RoW licence from the best comparable B is rejected.  Only the China licence is relied on.

Willingness

The SPC also provided guidelines that both SEP owners and implementers should follow when conducting licensing negotiations in China.  In addition to the usual Huawei v ZTE steps, the SPC emphasized on the licensor’s obligation to explain why the offer is reasonable and why the counter-offer is not reasonable, to provide the calculation methods, and to refrain from asking for a price which is obviously higher than the licensee’s competitors.  For the licensee, the SPC said an indication of unwillingness is if the licensee asks for unreasonable licensing terms.  The SPC also said the licensee can deposit what it considered as reasonable in escrow.   Reserving the right to challenge on essentiality and validity is not considered as unwilling. 

The SPC found that ACT and OPPO were equally liable for the failure in negotiations.  This does not affect the FRAND rate but means that OPPO should bear 50% of the late payment interests. 

The SPC found that ACT has fault in negotiation including:

1. No explanation of its calculation methods for the offers of $ 189,055,000, $283,583,000, $17m, $8m or the rate.  Disclosing the rate set out in licences with Company E, G and the lump sum for Company A and B is not enough, because the evidence on file does not show the basis or calculation method on which ACT reached those numbers with the licensees.
2. Threatening litigations within one year of negotiation.
3. Seeking an injunction in the Chinese litigation to put pressure on OPPO.

The SPC found that OPPO has fault in negotiation including:

1. Not disclosing the actual sales to ACT during negotiations
2. A counteroffer of US$ 1m after the RMB 3.7 m counteroffer is still low when compared with competitor Company A.
3. Not providing a detailed explanation of the calculation method to ACT in respect of its US$ 1m counteroffer. Just saying that it is on the back of the economist’s analysis is not enough.
4. Not providing US$ 1m counteroffer as payment in escrow.

The SPC also said the average negotiation time to conclude a licence is about 12 to 18 months with a payment date of 5 days after execution. The first letter from OPPO to express a willingness to take a FRAND licence is dated 14 March 2018.   Therefore, a reasonable time to conclude a licence would be 20 September 2019 (18 months + 5 days).  Since both parties are at fault, the late payment interests would be assessed on a 50/50 basis calculated from 20 September 2019 based on 2.125%.  I calculated this to be around $200K in this case.

Similarly, SPC also found ACT and Vivo were equally liable for failure to conclude a licence:

ACT was at fault because:

1. No explanation of its calculation methods: disclosing the rate set out in licences with Company E, G and the lump sum for Company A and H is not enough, because the evidence on file does not show the basis or calculation method on which ACT reached those numbers with the licensees.
2. Threatening litigations within one year of negotiation
3. Seeking an injunction in the Chinese litigation to put pressure on Vivo.

Vivo was at fault because:

1. It took Vivo 4 months to sign the NDA.
2. ACT made two offers on 31 May 2018 and 18 Sept 2018 respectively, but Vivo only provided its counter offer on 7 Aug 2019.
3. Vivo only made one counter offer of US$ 2m in the entire negotiation process, which is much lower than the royalties paid by company A, a similarly situated licensee.  Vivo also failed to provide explanation of the calculation method of its counteroffer.
4. Failed to provide US$ 2m counteroffer as payment in escrow.

The same late payment interests at 2.125% was also awarded in the Vivo case.

Applicable law

The SPC applied the Chinese law as the applicable laws in FRAND rate determination based on the principle of closest connection.  Applying Article 41, 49 of the Law of the People's Republic of China on Application of Law in Foreign-related Civil Relations, the SPC found that where the two sides have not selected the applicable law for the licensing of IP rights, the law of the habitual residence of the party whose performance of contractual obligations can most reflect the characteristics of the contract or another law most closely associated with the contract shall apply.  The SPC held that OPPO/Vivo is domiciled in China, whose activities in China can most reflect the characteristics of the notional licence contract, and therefore Chinese law should apply.  The SPC also stated that the Chinese law is the law most closely associated with the notional licence contract. 

The SPC also considered that implementers and potential licensees have reliance interests on the FRAND commitments made by a SEP holder to the SSOs, accordingly, under the Chinese legal framework a SEP holder should be bound by the good faith principle as provided under Art 7, no abuse of civil rights provided under Art 132 and no breach of precontractual obligation under Art 500 of the Civil Code.  Of course, both the SEP holder and implementer shall act in good faith in negotiation and conclusion of a licence.

Authors: Christine Yiu (Partner), Emma Ren (Associate), Yang Li (Senior Associate, associated firm Lawjay Partners)