China: SEPs and FRAND – litigation, policy and latest developments

Disclaimer

This is an insight article whose content has not been written by the GCR editorial team, but which has been proofed and edited to run in accordance with the GCR style guide.

SEP/FRAND is a growing area in China, particularly as more Chinese courts hear SEP/FRAND cases and set global rates. Given that the automotive industry is a key area in China and that the use of new energy is highly encouraged by the Chinese government and its industrial policy, the guidelines pertaining to this sector are particularly pertinent. This overview, therefore, introduces and analyses the main features, drawbacks and background of the Guidelines of Standard Essential Patent License for Automotive Industry (the Guidelines),[1] and comments on the impact of the Guidelines on the automotive and communications industries.

On 13 September 2022, China Automotive Technology and Research Center and China Academy of Information and Communications Technology (CAICT), with support from IP Committee of China-SAE, the IMT-2020 (5G) Promotion Group and the Working Group on Automotive Standard Essential Patents, appointed industrial experts to conduct drafting, research and demonstration. They later exchanged opinions within their respective working groups, leading to the formulation and launch of the Guidelines. From recent IP litigation development in China, I can foresee that the Guidelines are most likely to increase the likelihood of litigations in the near future.

An overview of the Guidelines[2]

The Guidelines were released as a countermeasure to patent conflicts – especially in the context of Standard Essential Patents (SEPs) – brought about by the integration of the automotive industry with other industries, specifically the communications sector. With the further development of new scientific and technological revolutions and industrial transformations, the integration of automotive and related technologies in energy, transportation, information, communications and other fields has accelerated. From on-board software to automatic driving and a large number of data calculation and real-time transmission, the automotive industry is constantly evolving. In the development process of automotive intelligence, communication technology plays an increasingly important role.

The purpose of the Guidelines is to further standardise the practice of SEP licensing, accelerate the cross-border integration and development of automotive and communication industries and protect fair competition in the market. Consequently, the publication of the Guidelines has garnered extensive attention from all social and industrial sectors in China, and even abroad.

The contents of the Guidelines[3]

Explanation of terms

The Guidelines begin with defining certain terms. For example, in the Guidelines, SEP refers to a patent that must be used in the implementation of a technical standard; ‘automotive products’ refer to parts of or complete automotive vehicles; ‘SEP for automotive industry’ refers to the technical standards adhered to in the manufacturing of automotive products; and the ‘fair, reasonable and non-discriminative (FRAND)’ rule is a licensing principle recognised by international standardisation organisations.

Although these terms are widely recognised in the field of communications, they are still explained in the Guidelines, which shows that in the field of Chinese automotives, SEP and other related licensing terms are not yet common knowledge and need to be introduced.

The main features of the Guidelines

The Guidelines include four core principles concerning the licensing of essential patents for automotive standards.

First, according to the Guidelines, SEP licensing should follow the principle of the balancing of interests to: ensure the awarding of reasonable returns to the patent holder for its investment in innovation; maintain royalties within a reasonable range so that technical standards can be widely popularised and applied; and promote healthy and sustainable development in the automotive industry. In addition, the interests of the public should be considered.

Second, in the Guidelines, ‘fair and reasonable’ implies the entitlement of an SEP owner to obtain a return on its investment in R&D and technological innovation. In compliance with the FRAND principle, returns generated from the licences should be limited to a reasonable range. ‘Non-discriminatory’ means that an SEP owner should license to implementers by using substantially identical or similar terms under substantially identical or similar conditions, and unjustified refusal to license or the attachment of unreasonable licensing conditions is prohibited. According to the Guidelines, if there are significant differences in licensing conditions or terms, a reasonable explanation should be provided to avoid a situation where the implementers under substantially identical or similar conditions are at a competitive disadvantage. The Guidelines also recognise SEP transfers: in the event of subsequent succession, assignment or other change of ownership of the SEP, the original patent holder should make efforts, with the help of the successors or assignees, to ensure that they are compliant with the FRAND principle.

Third, the most important point in the Guidelines is the ‘principle of entitlement to obtain licences at any level in the industry chain’ or the ‘license to all’ feature. According to the FRAND commitment of the SSO or its intellectual property policy, any good faith patent implementer is entitled to obtain an SEP licence, and the SEP owner is obliged to license to an implementer who intends to obtain a licence, regardless of their position in the industry chain. In the Guidelines, it is stipulated that an SEP owner should not repeatedly charge royalties to manufacturers at different levels of the same industry chain.

The fourth point is the ‘principle of handling differences between industries through negotiation’. The automotive industry chain is a complex system as tens of thousands of parts and components are involved in a vehicle. In the current mature industrial practice, the prevalent business custom is to adopt a vertical licensing model along the industry chain; that is, automotive enterprises usually contract with their upper-level suppliers to resolve intellectual property licence issues related to the supplied parts and components, and automotive manufacturers usually resolve intellectual property issues through their suppliers for all kinds of automotive parts and components. Therefore, when there are discrepancies or differences between the SEP licensing model and the current commercial custom, it is appropriate to fully respect and consider the industry characteristics and business customs, and for the parties to discuss and negotiate with each other while seeking an acceptable licensing model.

Among these principles, the most important are the third and the fourth. As to the third point, the issue of the SEP licensing level, namely, whether to adopt a ‘licence to all’ or ‘access to all’ approach – the latter which means that the patent holder has no obligation to issue a licence to the implementer and has the right to choose the implementer – is the focus of long-standing dispute between SEP owners and implementers. In the traditional mobile phone field, SEP licensing has formed a model in which the patent holder charges the cell phone manufacturer. However, in the automotive industry, from the perspective of the licensing model itself, it is usual for component manufacturers that implement the necessary patents of the standard to obtain licence from the patent holder, and automotive enterprises can avoid or reduce intellectual property issues by doing so. Therefore, the ‘licence to all’ feature seems to be more in line with the interests of automotive enterprises. As mentioned above, there is no doubt that the patent licensing model is closely related to industry characteristics and business practices, and the SEP licensing model applicable to the mobile phone industry cannot be taken for granted in the automotive industry. Therefore, the Guidelines specifically put forward the fourth principle to distinguish the various licensing models suitable for different industries.

The noticeable highlights of the Guidelines

The Guidelines also provide calculation principles for reasonable licence fees, mainly including the following highlights.

First, ‘the product unit that has made actual contributions to the automotive products by the SEP technology shall be taken as the calculation base of the licence fee,’ and at the same time, other product units that have nothing to do with the SEP technology shall not be included in the calculation base of the licence fee.

Second, reasonable licensing fees should take into account the actual value contribution of SEP technology in automotive products, the industry cumulative licensing rate, the number of SEPs held by the patentee, geographical distribution and other factors, and the licensing rate should not benefit from the inclusion of patents in the standard. These two features are very important for vehicle manufacturers since, for instance, a communication unit is not generally the core component in a vehicle, and taking this into consideration can help in avoiding excessive licence rates.

The third principle is of limitation on the cumulative licence rate. The Guidelines stipulate that to ensure a balance of interests between SEP owners and implementers, the sum of the SEP licensing fees for automotive products should have a reasonable upper limit, which can be a certain proportion of the reasonable profits of the industry in which the licensed products are located. This is also a practical measure in balancing the interest of the two parties.

Fourth, the licence fee calculation method should be selected reasonably. This point is rather controversial. According to the Guidelines, the ‘top-down’ and comparable licence agreement methods can both be used to calculate the SEP licensing fee. The ‘top-down’ method can avoid royalty stacking. The aggregate royalty rate cap should be determined for all SEPs under a specific standard, then the actual share of the SEP should be calculated by different patentees and, finally, the respective reasonable royalty shares can be reached. When adopting the comparable licence method, factors to be considered include the relevance of the participator, the licensed product, the licensed territory, the licensed subject matter, the licensing counterparty and the negotiation process. Both of the ‘top-down’ method and the comparable licence agreement method are relatively mature methods for calculating SEP licence fees in the mobile phone industry. However, in the automotive industry, there is no relatively fixed basis for constructing the ‘top-down’ approach. The same is especially true for the comparable licence agreement method, because there is no licence agreement model that can be used for reference in the automotive industry. It is expected that there will be more disputes and discussions on this in the future.

The background of the Guidelines

It is worth noting that the Guidelines are produced by CAICT, while the IMT-2020 (5G) Promotion Group, the Intellectual Property Branch of the Chinese Society of Automotive Engineering and the China Automotive Standards Essential Expertise Working Group are responsible for the interpretation of the Guidelines. The main sponsor of the Guidelines is the IMT-2020 (5G) Promotion Group.

The IMT-2020 (5G) Promotion Group was created by the Ministry of Industry and Information Technology, the National Development and Reform Commission and the Ministry of Science and Technology in February 2013.[4] Its organisational structure stems from the original IMT Advanced Promotion Group, and its members include major Chinese operators, manufacturers, universities and research institutions in communication industries. The purpose of establishing the IMT-2020 (5G) Promotion Group was to harness the power of China’s production, education and research, promote the country’s 5G technology research and carry out international exchanges and cooperation.  The IMT-2020 (5G) Promotion Group has recently achieved more cross-border integration in promoting 5G applications, especially in the area of internet of vehicles.

The following chart shows the organisational structure of IMT-2020 (5G) Promotion Group.[5]

image-20221124000824-1

In June 2022, the IMT-2020 (5G) Promotion Group renewed the memorandum of cooperation with the 5G Automotive Alliance (5GAA). Christoph Voigt, chairman of 5GAA, and Zhiqin Wang, leader of the IMT-2020 (5G) Promotion Team, attended the online signing ceremony. The two sides look forward to further deepening cooperation in the new cycle and jointly leading the C-V2X[6] and 5G automatic driving technologies towards large-scale commercial use.[7]

Prior to this, on 24 December 2021, CAICT released a white paper on ‘The Latest Development Trend of Essential Patents for 5G+Industry Standards (2021)’ with strong support from the Intellectual Property Working Group of the IMT-2020 (5G) Promotion Group. Indeed, the IMT-2020 (5G) Promotion Group plays an important role in the application of 5G technology in the automotive industry, and although it is not a Chinese government organisation, it plays a critical role in the implementation of government policies and regulations.

Problems within the Guidelines

Although the purpose of the Guidelines is to integrate the automotive industry with the communication industry and solve the SEP and licensing problems, there are still some areas of the Guidelines that can be improved.

Lack of extensive participation by the members of the automotive industry

According to our preliminary research and communication with automotive manufacturers and auto parts manufacturers, many in the automotive industry said that they had never heard of the Guidelines, let alone having an opinion or suggestions about it. Many practitioners in the automotive industry believe that the Guidelines are tantamount to allowing patent holders in the communications field to openly seize the interests of the automotive industry. In the process of global automotive transformation to new energy vehicles, the ‘invasion’ of the communications field is bound to increase production costs and operating expenses. Therefore, it remains to be seen whether the Guidelines will be generally accepted by the Chinese automotive industry.

The publisher’s lack of authority

According to the above analysis, the Guidelines are not issued by an administrative department, a first rate industrial organisation or a competent legislator, even though the IMT-2020 (5G) Promotion Group has a certain discourse power in the industry regardless of its position as a publisher or an interpreter. Therefore, the Guidelines are not authoritative enough, and it is also said in the preamble to the Guidelines that they ‘serve as a reference for the industry’. It is hence uncertain whether the Guidelines can be implemented and complied with in practice.

The Guidelines’ usage as a reference in dispute resolution

At present, there is no public case report on SEP dispute in the automotive industry in China. However, in the near future, there will be related disputes and lawsuits. Furthermore, the Guidelines clearly mention that if there is any inconsistency between the provisions and the current domestic laws and regulations, the latter prevail. Therefore, in practice, whether the court will refer to the contents of the Guidelines as a basis for dispute resolution still needs to be observed and is subject to judicial review.

Conclusion

In any case, the Guidelines are the first to introduce the concept and principle of SEP licensing in the automotive industry in China. It is expected that they will play a certain reference role, whether for SEP owners in the communications, audio-visual and related fields to gain profits in the automotive industry, or for the integrated development of traditional automotive industry, emerging intelligent automotive enterprises and enterprises in connected fields. It is, therefore, worthwhile for enterprises at home and abroad to review and consider the Guidelines in advance.

Notes

[1] www.caict.ac.cn/xwdt/hyxw/202209/t20220913_408833.htm.

[2] www.caict.ac.cn/xwdt/hyxw/202209/P020220913563753692262.pdf.

[3] www.caict.ac.cn/xwdt/hyxw/202209/P020220913563753692262.pdf.

[4] www.imt2020.org.cn.

[5] https://wenku.so.com/d/56919445955a587a9bb72c5efa3615d2.

[6] C-V2X wireless communication technology or Cellular Vehicle-to-Everything is a kind of vehicle networking based on cellular technology, which mainly endows vehicles with communication capabilities. It includes many technologies and disciplines, and its industrial chain includes communication chips, communication modules, terminals and equipment, vehicle manufacturing, high-precision positioning and map services. See: https://baijiahao.baidu.com/s?id=1687496871370500729&wfr=spider&for=pc.

[7] https://new.qq.com/rain/a/20220608A08O5U00.

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