Advancements in patent law

China trends for SEP licence fees, comparable court methods

There is no doubt that we are living in an era of electronic audio and video. Cell phones, headphones, stereos, microphones, TVs, and other audio and video devices surround us all the time.

To realise the interoperability of different devices, all devices that are capable of transmitting sound and images need to follow specific coding and decoding standards. The patented technologies adopted for use in those standards constitute standard essential patents (SEPs).

Because SEPs form part of the technological standards, owners of SEPs must make a FRAND commitment – that is, they promise they will license their patents in a fair, reasonable, and non-discriminatory (FRAND) manner when their patented technologies are adopted into the standards.

However, any text is naturally ambiguous and interpretable. Given the naturally antagonistic positions of the owner and the implementer of SEPs, the two sides routinely accuse the other of failing to comply with the FRAND principle during licensing negotiations. Resulting litigations are proliferating around the world. China, as a country with rapid technological development and a huge market, is certainly no exception.

In January 2024, China’s Supreme People’s Court (SPC) issued its final judgment in the case of Advanced Codec Technologies LLC v OPPO Guangdong Mobile Communication Co. This is the second standard-essential royalty rate case decided by the SPC, but it is the first case on royalty rates for standard essential patents in the field of audio and video coding and decoding.

Background

The dispute originated in November 2018. Advanced Codec Technologies (ACT) filed a lawsuit with the Nanjing Intermediate People’s Court, claiming that OPPO had intentionally delayed licensing negotiations for six SEPs. ACT requested compensation of RMB342 million (USD48 million).

In December 2019, OPPO filed a counterclaim with the court. It requested the court to confirm that ACT’s conduct during licence negotiations had breached its FRAND obligations. OPPO also requested the court to rule on royalty rates for the standard essential patents involving OPPO in China, and to order ACT to compensate OPPO for economic losses incurred by ACT’s alleged breaches of FRAND obligations.

The trial court confirmed that the six patents involved in this case were standard-essential, and ruled that OPPO should pay the corresponding licence fees. Both parties chose to appeal to the Supreme People’s Court. (In China, the second instance of technology-based intellectual property cases go to the SPC directly.)

Gist of the decision

Common methods of calculating licence fees for SEPs include the top-down method, the comparable agreement method, and the bottom-up method. Therefore, the first issue to be resolved by the SPC in this case was to establish a rule on how to choose the calculating method. The rule it established is that the court will choose the calculation method, based on evidence adduced by the parties.

In this case, ACT submitted several patent licence agreements with different parties outside the case, and explicitly requested the court to apply the comparable agreement method to this case. The submitted agreements and their data successfully tilted the direction of the case towards the comparable agreement method, which the SPC finally confirmed would be the method to be used in this case.

We believe that, in the future, this will greatly encourage SEP holders and implementers to actively provide evidence on applicable and suitable methods of calculating royalty rates because parties can effectively influence a court’s choice of methodology by evidence and facts.

Best match

Once the calculation method had been determined, the next issue to be solved was to select the most appropriate comparable agreement among those agreements at hand, and to use that as a basis for calculating a specific royalty rate in the case. On this, the SPC established the following four considerations:

• The environment of the licence negotiation;
• The similarity of the licensees;
• The similarity of the licensed patents; and
• The similarity of the terms of the licence agreement.

The environment of licence negotiation specifically refers to the background and the conditions of negotiation between the two parties of a transaction. This may include whether a comparable agreement was concluded via natural and amicable negotiations; for example, whether the comparable agreement was made in the context of an accompanying litigation or threat of litigation, or any injunction or substantial risk of injunction by a court.

In other words, the SPC established it would give more weight to agreements obtained through consensual negotiation when choosing a comparable licence agreement.

On the similarity of the licensees, and among other factors, the SPC took into account the business model, the scope of the business, and the relationship between the licensor and the respective licensees.

The similarity of the licensed patents means, for example, whether licensed patents in a comparable agreement were the same as the patents in the case, or at least cover the latter, and whether patents in a comparable agreement were of the same or similar quantity and quality as the patents in the case at issue.

In its judgment, the SPC indicated that the similarity of the terms of licences could be considered in the calculation method of the royalty rate, the geographical scope of the licence, the term of the licence, the manner of licensing and the manner of payment of royalties.

Notably, the first factor (negotiating environment) was analysed in detail for the first time by the SPC in its judgment. The SPC made clear that it needed to consider whether litigation, or at least a threat of litigation, was connected with the comparable agreement, or whether the comparable agreement was an agreement reached in a fair and reasonable atmosphere.

The author believes that the thinking put forward by the SPC for this factor has certain similarities with the hypothetical negotiation approach in the US. The SPC prefers to award a licence fee that is closer to that which the parties would have reached by consensus in commercial practice. In this case, two comparable agreements drew the SPC’s special attention. These were agreements that ACT had entered with other implementers, and which we will refer to as agreement B and agreement C.

Agreement B was ultimately identified by the SPC as the most appropriate comparable licence agreement for this case. The reason was that, while there was some ongoing litigation during the negotiation process of agreement B, the patents relied on in those actions did not overlap with the patents involved in this case. In addition, those litigations took place sufficiently long before the negotiation of agreement B. Therefore, the SPC believed that the impact of the litigations on agreement B was minimal.

In other words, agreement B was a result of natural and amicable negotiations between the parties without the influence of external litigation. The SPC considered agreement B to be closest to that which would have been reached by the parties on the basis of commercial considerations alone.

In contrast, agreement C was highly overlapping with the licence agreement in the present case in terms of some important factors, such as the number of patents, the profile of the licensee and the scope of the agreement. However, the negotiation of agreement C was accompanied by patent infringement lawsuits between the parties of agreement C in Germany and in the US.

Thus, in the SPC’s view, agreement C was an agreement reached in the presence of parallel external litigation and could not be seen as simply reflecting the commercial considerations of the licensor and the licensee. As a result, agreement C was ultimately excluded by the SPC.

This case is labelled with all the hot buttons: SEP, licence fee calculation method, FRAND, breach of FRAND promise, and so on. It will be a focus of attention for a long time. The authors believe that the rules and methodology established by the SPC in this case for adjudicating SEP royalties will be carefully studied and cited by SEP owners and implementers as a guide for such cases for an extended period of time.

CCPIT PATENT AND TRADEMARK LAW OFFICE
10/F Ocean Plaza, 158 Fuxingmennei Street,
Beijing 100031, China Tel: +86 10 6604 6247
Email: mail@ccpit-patent.com.cn
www.ccpit-patent.com.cn

Back to top

---

Positioning India in the global patent ecosystem

India’s intellectual property (IP) landscape is undergoing a remarkable transformation, reflecting the nation’s growing stature on the global innovation stage. With a robust legal framework and recent amendments, India is positioning itself as a key player in the worldwide patent ecosystem. This article provides an in-depth overview of the critical aspects of patent law in India, highlighting recent developments, procedural nuances, and strategic considerations for patent holders and applicants.

Foreign filing licence

A foreign filing licence (FFL) is mandatory for resident inventors in India who wish to file patent applications abroad. This requirement underscores the importance of safeguarding national interests while balancing global innovation objectives.

Obtaining an FFL involves submitting a brief disclosure of the invention to the Indian Patent Office (IPO) for review. If the IPO finds no objection, the licence is typically granted within three weeks, allowing the inventor to proceed with foreign filings. Alternatively, inventors may file the initial application in India and wait for six weeks before filing abroad, provided no secrecy directions are issued by the IPO. It is crucial to note that the FFL cannot be obtained retrospectively, making timely submission a critical step in patenting.

Despite the recent decriminalisation of certain patent law provisions, the FFL requirement remains intact, carrying significant penalties for non-compliance.

If the IPO or a third party discovers the violation, the inventor could face imprisonment for up to two years, a fine, or both. Additionally, the Indian patent application could be abandoned, and any granted patent could be revoked.

This highlights the importance for patent applicants and owners to understand and comply with Indian regulations.

Patent filing and amendments

India offers a cost-effective environment for patent filing, particularly compared to other jurisdictions where native-language requirements can escalate costs. Accepting English as the filing language significantly reduces the complexity and expense of patent applications. Official filing fees in India are lower than global averages, making the country an attractive destination for patent seekers.

One of the unique features of Indian patent law is the flexibility it offers during the filing process. Applicants can choose to drop certain claims during the national phase, particularly those that may not meet patentability criteria. This strategic option can save costs and streamline the examination process. However, post-filing amendments are tightly regulated and limited to disclaimers, explanations, or corrections supported by the original specification. Significantly, any amendments cannot broaden the scope of the claims, ensuring that the integrity of the original application is maintained.

Prosecution proceedings

The patent prosecution process in India is designed to be efficient and applicant-friendly. The process begins with filing a request for examination, which must be submitted within 31 months from the priority date. Recent amendments have introduced provisions for substantial fee refunds if the request for examination is withdrawn before the examination begins, offering applicants greater flexibility and cost-saving opportunities.

The IPO has made significant strides in reducing the backlog of patent applications, leading to a record number of grants in recent years. Once the first examination report is issued, applicants have six months to respond to any objections raised. If the objections are not resolved, an oral hearing may be scheduled, allowing applicants to present their case directly to the patent office. Following the hearing, a decision is issued. If the application is unsuccessful, the applicant has the option to file a review petition with the IPO, or appeal to a high court.

Divisional applications

Divisional applications are essential in Indian patent law, allowing applicants to protect multiple inventions disclosed in a single patent application. However, these applications must demonstrate distinct inventions to avoid objections related to double patenting. The burden of proof lies with the applicant, who must clearly differentiate the claims of the divisional application from those of the parent application.

While amendments to claims are permitted during prosecution, they are subject to certain limitations. Therefore, it is advisable to draft divisional claims with a clear and distinct scope from the outset. Divisional applications can only be filed while the application being divided is pending, making it crucial to file them early to avoid losing the opportunity due to the sudden grant of the parent application.

Disclosure of foreign filings

Under Indian patent law, applicants are required to disclose details of any foreign patent applications related to the same or a similar invention. This disclosure must be made using form 3, either at the time of filing the Indian application or within six months after. The applicant is also obligated to update this information within three months of receiving the first examination report.

The IPO may request an updated form 3 if the initial disclosure is deemed inadequate. A grace period of three months is provided for filing this form, emphasising the importance of transparency in the patenting process. This recently simplified disclosure requirement is a crucial aspect of maintaining the integrity of the patent system in India, ensuring that the IPO is fully informed of all related international filings and, at the same time, not being too burdensome on applicants.

Working statement

The requirement to file a working statement in India is a unique feature of the country’s patent law, reflecting the emphasis on the practical utility of granted patents. Recent amendments have extended the periodicity of filing these statements from annually to every three financial years, reducing the administrative burden on patentees.

The new form 27, introduced under amended rule 131, has simplified the working statement process by removing the requirement to disclose sales or revenue data. Patentees are now only required to declare whether the patent has been worked or not during the relevant period. If the patent has not been worked, the patentee may optionally provide reasons for non-working and offer licensing contact details, if applicable.

Despite these simplifications, there has been some confusion regarding the interpretation of due dates under the new rules. The IPO has addressed these concerns by issuing FAQs to provide clarity on the matter. For patents granted before 31 March 2023, the due date for filing the working statement is 30 September 2026. This statement must cover the period from 1 April 2023 to 31 March 2026. Extensions are available up to 31 December 2026, or 30 June 2027, with corresponding fees. For patents granted between 1 April 2023 and 31 March 2024, the deadline is 30 September 2027, with the possibility of further extensions.

Enforcement

The enforcement of patent rights in India has seen significant developments, particularly in the context of litigation. Indian courts are increasingly adopting international best practices while tailoring them to local legal and cultural contexts. Recent landmark decisions have played a pivotal role in dispelling the perception that India is unfriendly to patent holders or incapable of handling complex patent disputes. A notable area of progress is handling cases involving standard essential patents (SEPs), where Indian courts have demonstrated a balanced approach, ensuring that both patent holders and implementers are treated fairly. The establishment of specialised commercial courts and IP divisions has further accelerated the resolution of patent disputes, leading to quicker judgments and enhanced legal certainty.

Way forward

India’s patent landscape is on a clear trajectory of growth and modernisation. While challenges remain, particularly in the areas of enforcement and procedural efficiency, the country has made significant strides in recent years. The reduction in patent application backlogs, the simplification of procedural requirements, and the increased emphasis on transparency have all contributed to a more robust and predictable patent system.

As India continues to refine its patent laws and practices, stakeholders can expect further improvements in the legal and regulatory framework. These developments, coupled with India’s growing emphasis on innovation and technology, position the country as an increasingly attractive destination for patent holders seeking to protect their intellectual property in one of the world’s largest and most dynamic markets.

In conclusion, by understanding the nuances of Indian patent law and staying abreast of recent developments, patent holders and applicants can secure valuable IP rights in a jurisdiction poised to play a central role in the global innovation economy.

LEXORBIS
709/710, Tolstoy House,
15-17, Tolstoy Marg,
New Delhi – 110 001, India
Tel: +91 11 2371 6565
Email: mail@lexorbis.com
www.lexorbis.com

Back to top

---

Expanded territorial reach of Japanese patents

Under recent case law developments in Japan, Japanese patents may cover internet-related activities outside Japan depending on circumstances.

On 26 May 2023, the Intellectual Property High Court granted a notable en banc decision (Dwango Co Ltd v FC2 Inc (Ne No. 10046) regarding the territoriality of Japanese patent rights for the invention of a network system in which servers and terminals are connected via a network such as the internet and operate organically as a whole.

This decision concluded that the act of creating a new network system constitutes “producing” under article 2(3)(i) of the Japan Patent Act, even if the server (which is one of the elements of the network system), is located outside Japan, if the act can be considered to have been performed in Japan, taking into account the four factors discussed below and other related circumstances.

According to this decision, even if a component of the claim, such as a server, is located outside Japan, Japanese patent rights might still reach it if the remaining components are located in Japan.

Outline of the case

The appellant, Dwango (also plaintiff of the first instance) is the owner of patent No. JP6526304, which relates to a comment distribution system. The appellee, FC2 (also defendant of the first instance) operates a video and comments distribution service on the internet.

The appellant claimed that the system related to the video distribution service operated by the appellee (the defendant’s system) falls within the technical scope of the patented invention, and that the appellee’s act of delivering files from a server located in the US to a user’s terminals located in Japan constitutes “producing” (article 2(3)(i) of the Japanese Patent Act) of the system, and infringes the patented inventions.

Issues in this lawsuit

In this case, because the server, which is part of the defendant’s system, was located in the US, user terminals located in Japan alone do not satisfy all of the claimed elements of the present patent. Whether the appellee “produced” (article 2(3)(i) of the Japanese Patent Act) the defendant’s system, and whether the Japanese patent right would reach to the defendant’s system in such a case was an issue.

Principle of territoriality

The principle of territoriality applies to Japanese patents as well. This principle means that the establishment, transfer, validity, etc., of patent rights in each country are determined by the laws of that country and that the effect of patent rights is recognised only within the territory of that country.

Whether the act of creating the defendant’s system, which existed in both the US and Japan, because the server is located in the US and the user terminals are located in Japan, constitutes “producing” under article 2(3)(i) of the Japanese Patent Act was an issue related to the territoriality.

Court rulings

With respect to the above-mentioned issue, the Tokyo District Court as an original court held that, in order to be covered by “producing” under article 2(3)(i) of the Japanese Patent Act, it is necessary that an object that satisfies all the elements of the patented invention is newly produced in Japan under the principle of territoriality (Dwango Co Ltd v FC2 Inc in Tokyo District Court 2019 [Wa No. 25152, decision rendered on 24 March 2022]), and concluded that the appellee (defendant of the first instance) did not “produce” the defendant’s system in Japan.

In contrast, this appellate court decision concluded that the appellee’s act of delivering files from a server located in the US to a user’s terminals located in Japan constituted “producing” under article 2(3)(i) of the Japanese Patent Act.

Taking into account the following two reasons, this decision established how to determine whether the act of creating a new network-type system constitutes “producing” under article 2(3)(i) of the act, from the point of view of properly protecting patent rights related to the invention of a network-type system.

First, the decision held that in a network system it is now common for the server to be located outside Japan, and even if the server is located outside Japan, if the terminals are located in Japan it is possible to use the system in Japan, and such use may affect the economic benefit that the patentee should obtain by using the invention in Japan.

Therefore, it is not appropriate to strictly interpret the principle of territoriality to conclude that the act of creating a new network-type system does not fall within the scope of “producing” under article 2(3) of the act merely because the server is located outside Japan, as this would result in insufficient protection of patent rights.

Second, this decision states that it is also not appropriate to interpret the act of creating a new network system as “work” under article 2(3) of the act merely because the user’s terminals are located in Japan, as this would result in excessive protection of the patent rights and would cause hindrance to economic activities.

Based on these two reasons, the decision held that, with respect to the act of creating a new network system, even if a server that is a part of the elements constituting the network system is located outside of Japan, the court should take into consideration: (1) the specific manner of the act; (2) the function or role played by the domestic component of the system in the invention; (3) the place where the effect of the invention is obtained by using the system; and (4) the effect of the use of the system on the economic interests of the patentee of the invention and other relevant circumstances; and the court should hold that it constitutes “producing” under article 2(3) of the act if the action can be evaluated to be performed in the territory of Japan.

The decision then stated that, with regard to (1), the reception of files by users in Japan is performed as an integral part of the transmission of files from the server located in the US, which completes the defendant’s system, and thus the transmission and reception can be considered to be performed in Japan.

With respect to (2), the decision also stated that the user terminals existing in Japan perform the functions of the constituent elements necessary to realise the main functions of the invention.

With respect to (3), the decision stated that the defendant’s system can be used from Japan via user terminals and that the effects of the invention are manifested in Japan.

With respect to (4), the decision indicated that the use of the defendant’s system from Japan could affect the economic benefits that the appellant should obtain by using the system of the present invention in Japan.

Taking into account (1) to (4), the decision concluded that the act of producing the defendant’s system constituted “producing” under article 2(3)(i) of the Japanese Patent Act with respect to the present inventions.

Impact of the decision

This decision listed the factors to be considered (1) to (4) and held that the act of creating a new network system may constitute “producing” under article 2(3)(i) of the Japanese Patent Act, even if some of the elements constituting the network system exist outside Japan.

This means that it is necessary to be careful about infringing a Japanese patent when creating a network system in Japan via a network, even if some of the elements exist outside Japan.

Conclusion

Under this decision, there is a possibility of infringement of a Japanese patent when some of the components are present in Japan when conducting business related to network systems. Therefore, such businesses are now recommended to make an appropriate assessment of the infringement risk of Japanese patents based on the factors to be considered in (1) through (4) of this decision.