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Foundational Factors for China’s Determination of FRAND Rates

 |  September 17, 2019

Foundational Factors for China’s Determination of FRAND Rates By He Jing (Anjie Law Firm)1

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    In May 2018, the appellate court in China’s Guangdong Province, where
    some of largest Chinese mobile handset manufacturers are based, issued special
    judiciary guidelines in dealing SEP cases. One of the most interesting
    provisions suggested that at least the Guangdong court was willing to
    adjudicate the global FRAND rates, at the request of the litigants.  While we have not seen any such global rates
    made by any of the Chinese courts, it seems to many of us that Chinese judges,
    whether in Shenzhen or in the Intellectual Property Court in the Supreme Court,
    may sooner or later encounter opportunities to make a ruling over the rate
    determination. 

    This article will briefly discuss some of the foundations China should
    focus in developing if the courts are genuinely interested in coming out such
    global rates with credibility. FRAND rates are global in nature and any of such
    decisions have global significance. 
    Whether or not the courts are the ideal place for handling such
    disputes, judges are better ready soon after the opportunities come.

    Loopholes in Jurisdictional Rules

    Generally speaking, Chinese courts may exercise jurisdiction over FRAND
    cases through a special FRAND fee dispute cause of action or anti-monopoly
    cause of action.  The FRAND fee dispute
    cause of action originated from Huawei v. InterDigital case back in 2013.  The anti-monopoly cause of action comes from
    the “excessive fee” clause under the Anti-Monopoly Law.  Both causes of actions seem to be loosely
    based on Chinese anti-monopoly laws and in particular the nature of the FRAND
    fee dispute cause of action is somewhat perplexing. 

    Why Chinese courts may exercise jurisdiction under the anti-monopoly
    claims? In China, anti-monopoly claims are generally treated as tort claims in
    nature.  The jurisdiction for tort claim
    includes the places where the tort is committed, and the places where
    consequences of tort act occurs, or the domicile of the defendant.  One significant loophole is the so-called
    places where consequences of tort act occurs. 
    A plaintiff can always allege it suffers from the anti-monopoly tort act
    and its home court should have jurisdiction. 
    If Chinese courts give a blind yes to such allegations, it will
    essentially allow plaintiffs to choose where they want to sue. 

    Chinese courts may have to at least set out some clearer rules on
    standard of proof about the “consequences of tort act occurs” in the context of
    anti-monopoly violations.  A plaintiff
    must prove at the outset what are the consequences of licensors and how it
    happens, if any at all. 

    Chinese courts should be fully aware of the likelihood of abusive forum
    shopping by implementers.  This is
    particularly problematic when there are earlier court actions between the same
    parties outside China.  When a SEP licensor
    sues an implementer outside China based on SEP disputes, for infringement and/or
    for FRAND rate determination, a Chinese court action will make the situation
    much more complex. Conflicting court opinions may be exactly what the
    implementers are looking for, as part of its “hold out” strategy.

    Confidentiality  

    Chinese judges now widely recognize the use of top down approach and
    comparable licenses in determining royalty rates.  In future FRAND rate cases in China, we may
    see the courts will first determine which licensees were “similarly-situated”,
    then calculate the royalty rates from a set of comparable licenses.  However, disclosure of comparable licensing
    agreements is very sensitive issue, even when the parties choose to do so with
    waivers from third parties. 

    If the courts in China wish to conduct the proceeding with full trust
    from litigants around the world, the issue of confidentiality must be handled
    flawlessly.  In China, even back in 2012,
    Supreme Court’s judicial interpretation for private antitrust lawsuits already
    stipulated measures such as ordering non-public hearing, compulsory
    undertakings for confidentiality, restriction or bans on reproduction of
    documents or review only by attorneys. 
    Such measures will be critical when courts try to determine FRAND rates
    by looking at “comparable licenses” or other confidential information.  Courts must instruct counsels acting for SEP
    owners and implementers to sign the undertaking for protecting confidentiality
    agreement.  In China, one sensitive issue
    is in-house counsels often appear in the courtroom to particulate in the entire
    proceeding and have access to all documents and evidence.  Chinese courts might consider much more
    restrictions of access by in house counsels to confidential information
    provided by the other side. 

    A related point is the possibility of limited discovery.  China does not have US style discovery, but
    more courts, the latest example including Beijing, are willing to grant special
    orders to counsels to investigate evidence from third parties, which include government
    authorities.  This kind of investigation
    orders could open up some new opportunities for litigants to find out more
    evidence.

    Expert Witness

    The value of economic analysis has increasingly been given recognition
    by Chinese judges.  In some recent high
    profile court cases or antitrust investigations, economists’ testimony have
    played substantial roles, even those from US-based economists.  This was quite unthinkable even 10 years
    ago. 

    In August 2019, Beijing local government issued a special policy
    guideline encouraging active participation of expert witness in evaluation
    intellectual property. If this guideline is fully implemented, we may see the
    judges are willing to spend more courtroom time for both sides to present
    expert opinion and allow cross-examinations and rebuttals etc.  In the past, one reason for judges to be less
    willing to grant request for appearance of experts was the concerns of extended
    hearings.  Judges probably have to
    realize that a lot more time will be needed for FRAND cases. 

    We expect that judges may soon scrutinize qualification of experts
    although no clear criteria has been established. More rules about the scope of
    expert opinion and the way of presenting or cross-examining experts may come
    out.  After all, Chinese judges and
    counsels receive quite little training in handling experts in the courtroom. 

    Amicus Brief

    The utility of amicus brief has started to be appreciated.  Beijing Intellectual Property Court has even
    experimented publishing such amicus briefs in certain cases. And in certain
    high profile cases Chinese courts are known to receive briefings or opinions
    from prominent professors or even industry associations. 

    The courts in China are short of establishing a formal system close to
    amicus brief.  One reason is that China
    has not made those litigation documents open to the public and it is almost
    impossible for others to timely submit amicus brief. Courts also lack
    experience in dealing with amicus in actual proceedings.  But Chinese judges should soon realize that
    being open to amicus brief type submissions is a very valuable way for them to
    adjudicate FRAND cases that are of global significance.  Even before the official adoption of amicus
    brief, industry associations, professors or companies should actively seek
    opportunities to submit their opinion or reports to Chinese courts where FRAND
    cases are being litigated.

    Due Process in Antitrust Investigation

    Whenever China antitrust enforcement agencies start looking at the issue
    of FRAND rates,  they must bear in mind
    fundamental due process requirements. For example, on April 5, 2019, the ICN
    published the Framework for Competition Agency Procedures, which
    provides that, the antitrust investigation should be focus on the
    competition-related information.  The
    investigator should provide reasonable time for the relevant personnel to
    respond to the inquiry in the investigation in considering the effectiveness of
    the investigation.  Such recommendations
    need to be implemented in China, so that the parties involved in such
    investigation procedures will not be overly burdened.  Noticeably, the recently issued interim SAMR
    rules against dominant market position have not set out any additional
    procedural safeguards beyond what has been in the general administrative
    penalty rules issued by the same agency in December 2018.  The traditional approach in China always
    emphasizes “objectivity, completeness, fairness and timelines” in dealing with
    to what extent evidence should be uncovered by the enforcement
    authorities.  There is a strong and
    urgent need to address the issue of relevancy, reasonableness and
    proportionality, as shown in the ICN framework document. This should be a
    priority when FRAND rates are of the priority concern in any antitrust
    investigations.

    To conclude, we believe China’s courts and antitrust enforcement
    authorities have to closely look at some of the foundational factors as
    discussed here, if they wish to make decisions on global FRAND rates with
    confidence and credibility.  None of
    these factors are far from reach. There is no reason not to do any of them.


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    1 He Jing founded Anjie Law Firm in 2012 and is currently a member of its executive committee.