Emerging Global Trends in Standard-Essential Patent Litigation, Part I

The litigation landscape for standard-essential patents (SEPs) — patents that cover proprietary technology mandated by technical standards — has seen dramatic changes in the past few years. While recent decisions have harmonized aspects of the treatment of these patents across certain jurisdictions, differences remain regarding several important issues. In particular, questions remain regarding situations in which injunctive relief may be sought or awarded, the proper method for calculating royalties for SEPs, and the role of competition law in these disputes — all crucial issues that can change the balance of power during licensing negotiations. As a result, parties in negotiations may find themselves navigating a challenging landscape full of contradictions and legal complications. Indeed, with the emergence of internet of things (IoT) technologies expected to introduce even more litigation as players across different industries attempt to cooperate to achieve interoperability among diverse products, the need to streamline SEP litigation and licensing has taken on new urgency. Here are some open issues and emerging trends and policies that are likely to affect the enforcement and licensing of standard-essential patents in the near future.

Background

Technical standards permeate everyday life, and will continue to do so as global economies become more digitized, and connected devices enable telemedicine, virtual reality, autonomous vehicles, and a wide variety of other technologies. As the race to achieve greater interoperability and standardization picks up pace, disputes over SEPs that cover proprietary technology mandated by such technical standards will continue to heat up.

Generally, once a proprietary technology is mandated by the standard, an implementer of the standard cannot produce a standard-compliant device without use of that proprietary technology. Thus, if a standard becomes widely adopted, the SEP owner may achieve a dominant market power that, in many cases, would not exist but for the adoption of the patented technology by the standard. This may create an opportunity for the SEP owner to demand disproportionate licensing terms for, or refuse to license, the technology — a problem generally known as “hold up” — to the detriment of the public interest. To address this problem, standard-setting organizations (SSOs), which determine which patented technologies are adopted by these standards, generally require that SEP owners whose patents are mandatory to such standards agree to license the patents to implementers of the standards on Fair, Reasonable, and Non-Discriminatory (FRAND) terms.

SEPs that are subject to a FRAND commitment are deemed to be FRAND-encumbered. The legal ramifications of a FRAND commitment differ by SSO (each of which may set the terms of its FRAND commitment) and jurisdiction (each of which interprets each FRAND commitment according to national laws). Confusion around FRAND is amplified by the fact that parties seeking to enforce FRAND commitments are typically third parties (e.g., implementers of devices that use the standard) who were not themselves involved in negotiating the FRAND or intellectual property rights agreements at issue (which are between the SSO and the SEP owner). Therefore, the enforcement and licensing of SEPs often implicate global interests and are fraught with disagreements about the scope of the FRAND commitments.

No Per Se Rule Barring Injunctions, But Attitudes Differ

The availability of injunctive relief for SEP owners is one of the most hotly debated issues regarding the scope of a FRAND commitment. On paper, the U.S., China, and Europe all permit an SEP owner to seek an injunction against an infringer of FRAND-encumbered patents. However, the attitudes of the various courts toward injunctions differ, as do the conditions that must be met to obtain one. Generally, in the U.S., following the Supreme Court’s eBay decision, monetary damages are often adequate to address patent infringement, with injunctions being granted (rarely) if the patent owner can meet the four-factor eBay test. In contrast, European countries, including the U.K. and Germany, are often more receptive to patent injunctions, which may be granted as a matter of right upon a finding of infringement. Indeed, during negotiations for the proposed Unified Patent Court, which is intended to preside over EU-wide patent infringement cases, adoption of the eBay factors were considered and decidedly rejected. And although China is more permissive of injunctions than the U.S., injunctive relief is not granted as a matter of right and the court may weigh public and national interests in determining whether to grant them. In the SEP litigation context, these general attitudes toward injunctions in patent cases are tempered by concerns about anticompetitive behavior owing to the dominance that may be conferred by the inclusion of a patented technology into a widely adopted technical standard.

The European Court of Justice’s 2015 decision in Huawei v. ZTE outlines a framework for determining when an SEP owner may seek an injunction for FRAND-encumbered patents. Prior to the Huawei decision, some national courts in Europe (e.g., Germany) had ruled that an alleged infringer could avoid an injunction only by making a binding offer on terms that the SEP owner could not refuse. In contrast, the European Commission, the enforcement arm of the European Union, took the view that an SEP owner could not seek or enforce an injunction relating to a FRAND-encumbered patent where the alleged infringer had expressed a willingness to enter into a FRAND license, even absent further steps. The ECJ attempted to establish a balance between these two approaches. Under the ECJ’s framework, a SEP owner must comply with several requirements, including making a written offer for a license on specific FRAND terms that specifies the amount of the royalty and the way in which that royalty is to be calculated. To preserve its defense against the grant of an injunction, the alleged infringer must also show its willingness to license on FRAND terms by avoiding delay tactics when responding to offers and providing appropriate security for the proposed royalty. The ECJ’s framework was largely endorsed in the European Commission’s most recent guidelines on SEPs. With the stated objective of fostering a predictable enforcement environment for SEPs, the commission’s guidelines affirmed that injunctive relief is available to SEP owners, including nonpracticing entities, against a party that refuses to take up a license on FRAND terms. The right to an injunction, however, remains subject to principles of proportionality. In particular, the commission set forth several informational and timing requirements for making licensing offers and counter-offers, including that counter-offers must be equally concrete and specific. The commission also noted that willingness to submit to a third party’s FRAND determination is indicative of FRAND behavior that (presumably) may affect whether an injunction is granted.

While the added clarity provided by Huawei and the commission is welcome, they left some of the most challenging questions surrounding the availability of injunctions unresolved: What is the right remedy when both parties are at fault, or when the initial offer is non-FRAND? In several German cases decided after Huawei, lower courts entered injunctions against alleged infringers who failed to fully comply with the Huawei framework by, for example, failing to post security against the royalty demand. Some of these injunctions were later stayed by appellate courts, which found that the SEP owners themselves may not have complied with the requirements of Huawei. Thus, while lower courts imposed an injunction in instances where the initial offer was not deemed non-FRAND on their face, the appellate courts in Germany required an affirmative finding that the initial offers were FRAND to impose an injunction.

The approach taken by the appellate courts in Germany may be contrasted against Justice Colin Birss’ highly publicized approach in his 2017 decision in Unwired Planet v. Huawei. In that decision, Birss imposed worldwide licensing terms under the threat of an injunction even though Unwired Planet’s initial offers were found to be non-FRAND. While the injunction was only to be imposed if the parties failed to enter a license that complied with the court’s terms, the approach in Unwired Planet may suggest that the U.K., which was previously seen as less receptive to injunctions than Germany, may be changing course.

Like Europe, the framework for determining when an SEP owner may seek an injunction in China has evolved in recent years, and may continue to do so as China refines its FRAND jurisprudence through regulatory reforms and pending court cases. In Huawei v. IDC, decided in 2013, the Chinese court held that IDC abused its dominant position by seeking an injunction against Huawei, despite Huawei’s expressed willingness to take a FRAND license and, in the court’s determination, good-faith negotiation behavior. This case led many to believe that Chinese courts would permit an injunction for infringement of FRAND-encumbered patents only in limited circumstances. This view changed, however, following the Supreme People’s Court’s release of judicial interpretation for SEP injunctions, which clarified that injunctions may be denied only under limited circumstances. Article 24 of the interpretation states that if an SEP owner deliberately fails to comply with its obligation to grant a FRAND license, and the accused infringer is not clearly at fault, then the SEP owner’s request for an injunction should be denied. This interpretation, however, applies only to national or local Chinese standards, not to international standards. As with the European Commission’s guidelines, it also does not address the availability of injunctions under other circumstances, such as when both parties negotiated in good faith, when both were acting in bad faith, or when the SEP owner was acting in good faith and the implementer was acting in bad faith, leaving such to judicial determinations.

In Iwncomm v. Sony (2017), the Beijing IP Court granted the first known SEP-based injunction in China against Sony (subsequently affirmed by the Beijing High People’s Court), and took the opportunity to set forth its views on the availability of injunctions in relation to SEPs. There, the court faulted Sony for allegedly delaying licensing negotiations over six years, its attempts to rely on comparable licenses for an international standard, and its unwillingness to sign a nondisclosure agreement before receiving Iwncomm’s claim charts. The court stated that in the event that the parties fail to reach an agreement, an injunction should be granted only if the implementer is at fault, or if both parties are at fault, if the implementer bears more fault. The Beijing High People’s Court also issued guidelines for SEPs directed to recommended national, industrial, or local standards. These guidelines specify how injunctive relief should be awarded when neither party is at fault, or both parties are at fault, during FRAND licensing negotiations. The guidelines also provide that if neither party is at fault, the alleged infringer must deposit the amount of its proposed royalty with the court to avoid an injunction. More recently, in Huawei v. Samsung, the court in Shenzhen issued an injunction for Huawei against Samsung in a case involving the 4G standard, the first of its kind regarding an international standard. As in Iwncomm, the court’s decision was based, at least in part, on the alleged bad faith of the accused infringer. However, the court noted that if a cross-license is reached in the future, or if Huawei requests for non-execution of the permanent injunction, the injunction will not be enforced. The injunction was subsequently blocked by a U.S. court pending resolution of the counterpart U.S. case.

These cases and the recent guidance issued by the Supreme People’s Court and Beijing High People’s Court indicate a more receptive attitude toward injunctions in China. Meanwhile, the Anti-Monopoly Commission of China’s State Council, with support from China’s various antitrust and IP agencies, is preparing new guidelines regarding the various IP-related issues, including when an SEP owner may seek an injunction. Section 26 of the draft guidelines outline factors that should be considered when determining whether to grant an injunction for infringement of a FRAND-encumbered patent. Taken together, these factors, which include considerations of the potential effects of the injunction on the negotiations between the parties and the effect on competition and customer interests in the relevant market, suggest that China may shift toward a more nuanced approach that looks beyond the relative fault of the parties when deciding whether to grant injunctions in SEP cases.

In contrast to Europe and China, U.S. courts, following eBay, are less receptive to injunctions in patent cases, and are especially so in the context of FRAND-encumbered patents. In Apple v. Motorola, the Federal Circuit expressly rejected a per se rule that would foreclose an injunction for SEP owners, while maintaining that the eBay framework applies equally to SEPs, even if SEP owners may have difficulties showing irreparable harm. In doing so, it noted that “an injunction may be justified where an infringer unilaterally refuses a FRAND royalty or unreasonably delays negotiations to the same effect.” The net effect of this is that while a SEP owner may seek an injunction in U.S. courts, such relief is likely available in limited circumstances, especially where the SEP owner has met its FRAND obligations and an alleged infringer is acting in bad faith. Although U.S. courts remain unreceptive to FRAND injunctions, recent cases at the International Trade Commission (ITC) suggest that exclusion orders (which may have similar effects as injunctions) may be available in certain FRAND cases. Notably, the ITC is a federal administrative agency that is not bound by the Supreme Court’s eBay framework. Instead, the ITC applies its own test that requires weighing the public interest, among other factors, in making decisions to issue exclusion orders, which prohibit a party from importing an infringing product into the U.S. Applying this framework, the ITC issued an exclusion order prohibiting Apple from importing devices that it found infringed certain Samsung SEPs. This exclusion order was subsequently blocked by the U.S. Trade Representative, citing insufficient facts in the record to support the ITC’s ruling. In fact, consistent with this outcome, other federal agencies, including the Federal Trade Commission and Justice Department, have expressed views that exclusion orders for FRAND-encumbered patents may be incompatible with the public interest. But while these agencies have each brought actions against certain SEP owners for seeking injunctions, none has issued a per se prohibition. Indeed, the DOJ’s antitrust chief, in comments made in November 2017, criticized the inability of SEP owners to get injunctions. It remains to be seen whether the tide in the U.S. will turn more permissive toward SEP injunctions.

Author Information

Regina Sam Penti is counsel in Ropes & Gray’s intellectual property transactions practice. She advises technology and life sciences companies on a wide range of global intellectual property matters, including technology-driven transactions, due diligence, and strategic portfolio development. She is based in Boston and London.

Kevin Post is a New York-based partner in Ropes & Gray’s intellectual property litigation practice, where he works extensively with high-technology and life science companies handling complex patent disputes.

Beibei Sun is a Boston-based associate in Ropes & Gray’s intellectual property transactions practice, advising public and private companies on a wide range of transactional matters.