Iwncomm v Apple - points to note in licensing negotiation

The Supreme People's Court IP tribunal ("SPC") published a list of 100 cases in celebration of its 5th year anniversary. A number of FRAND judgments are included, one of which under the illustrative category of "Strengthening IP Protection" is the SPC judgment issued in favor of Iwncomm against Apple on 30 December 2022. Iwncomm is the owner of a number of patents declared essential to WAPI, which is a compulsory Chinese national standard for wireless LAN. The SPC judgment was only published recently.

Case Background

The implementer has reached a license agreement with the patentee in 2010 for a portfolio of 51 patents and patent applications, including the asserted Chinese patent ZL 02139508.X in the lawsuit. The license 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 license 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 is 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 equals to an implied per unit rate of RMB 3 (US$0.42). During appeal, the patent has expired, and the injunction becomes 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 behavior impact on the FRAND rate in a SEP case?

Iwncomm v Apple is a patent infringement case. It is worth noting that the Shaanxi Court used a 3x multiplier to the FRAND rate from comparable licenses 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.

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 were equally liable for the failure in negotiation.? 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 means it should bear 50% of the late payment interests added to the FRAND rate.

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 plaintiff'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. The obvious fault of the implementer during negotiation and its refusal to disclose actual sales records is considered as the first factor. 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 the damages assessment, model A is estimated to have sold 40 million units from 2015 to 2017, and model B is 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 computers is more likely to be 618,033 units. In view of the under-estimation, the multiplier is closer to 1.5. The SPC said that, therefore, 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.

From the case trend, the impact of negotiation fault on the calculation of royalty payment has reduced but not extinguished. The SPC judgments still left 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 behaviors is considered as wrong?

The SPC found that the implementer has seriously delayed the negotiation for a post-2014 license. The court found that the implementer had raised unjustified challenges on the need to obtain a license 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 implementer asking for royalty payment assessed at RMB x/ unit.
• From 26 November 2014 to 24 December 2015, several chaser emails were sent.
• On 1 January 2015, the implementer requested to schedule a meeting and said because its person-in-charge has changed.
• On 9 January 2015, the patentee made a lump sum offer.
• From February to May 2015, the parties tried to schedule a meeting.
• On 7 May 2015, the implementer acknowledged the receipt of technical information.
• In May and June 2015, the patentee chased for a reply and continued to ask for RMB x/ unit. The patentee said the US$5 million counteroffer for five years is too low. If the implementer does not want to license anymore, it should notify the patentee.
• On 12 June 2015, the implementer asked for inspection of a third-party license which might give rise to exhaustion issues. The parties then argued on this point for the next four months.
• On 27 October 2015, the implementer further enquired the details of the chip license, and enquired whether there are other comparable licenses which could be relevant. The implementer also asked for the detailed calculation basis for the offer and said in their view they have not infringed the patents.
• On 30 March 2016, the implementer disputed on the sales estimates and the level of use of WAPI technology by the consumers.
• On 11 April 2016, the patentee sued.

The Shaanxi Court found that the implementer did not invite negotiation knowing that the sum payable from 2015 onwards has not been agreed. From November 2014 to May 2015, the implementer did not respond substantively to the patentee's offer. Rather, the implementer raised challenges on whether a license is necessary. The Shaanxi Court said that the objection that a third party license may raise exhaustion issues has no basis, and it was raised only after months of delay. Therefore, it was just an excuse for delay.

On appeal, the SPC upheld the ruling and found that the implementer has "delayed the negotiation for a post 2014 license without justifiable reasons and challenged the necessity to obtain a patent license." The patentee is found to have no fault both in the arbitration and in the court proceedings. Although this would have entitled the patentee to an injunction, it is superseded by the arbitral award and the expiry of the patent asserted.

The SPC judgment refined the threshold of whether challenging essentiality and validity of the patent would consider fault in negotiation. In ACT v OPPO, the SPC said that generally speaking these objections are not viewed as a fault. The Iwncomm v. Apple case reached a contrary finding when the challenge was made during renewal negotiations.

Price negotiations might impact on the final rates unpacked

The judgment also recites a finding by the Shaanxi Court that the per unit rate is ascertained by looking at "the true intention expressed by the parties during negotiations". In assessing whether the per unit rate is FRAND, the Shaanxi Court said that both parties used past sales in predicting future forecast, and the lump sum largely corresponds to multiplying the per unit rate with the past sales from 11 months prior to the signing of the license. Also, the parties only negotiated on the sales estimate. Although the running royalty proposal was rejected and a lump sum payment was adopted in the end, the implementer did not expressly object to the per unit rate proposed by the patentee. Although the implementer has raised doubts when comparing the licensing rates of WiFi with WAPI, this is not a basis of calculation used in the offers and counter-offers.

There are opposing views amongst the economists on whether the unpacking of a comparable license should be based on objective sales forecast or take into account subjective views expressed by the parties. In China, at least, the prevailing views by the Courts are to take into account information exchanged by the parties during negotiations. The reason could be that the rules for contractual interpretation under Chinese laws is to look at the true intention expressed by the parties.

Therefore, when conducting negotiations with a view that the license may become a comparable to be unpacked by a Chinese court, every price exchange and explanation of the calculation basis need to be done with this consequence in mind. This could bring the advantage of having some certainties on the price that the parties ultimately agreed on. An undesirable consequence is that it may steer the negotiation more like lawyers racing to raise objections, rather than a good faith dialogue where the mindset should be looking for common grounds and willing to compromise. But such is the status quo. Que sera, sera, until the next case comes.

Other Issues

The SPC judgment also covers a number of other interesting issues, including contributory infringement liability for a multi-actor patent claim, the number and type of comparable licenses, and whether there is infringement when there is a license with a missing price term. If you are interested in further discussions, please do drop me a note.