Second-instance judgment in ACT v Oppo sheds light on comparable agreements and how to find fault in SEP licensing negotiations

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Case name

Advanced Codec Technologies v Oppo

Court

Supreme People's Court

Parties

Advanced Codec Technologies

Oppo

Cause of actionAdaptive multi-rate wideband standard licensing dispute

On 15 January 2024 the Supreme People's Court released its second-instance judgment on the SEP dispute between Advanced Codec Technologies (ACT) and Oppo (2022 Zuigaofa ZhiMinZhong no 907, 910, 911, 916, 917 and 918, 12 December 2023).

According to this, for six patents related to the adaptive multi-rate wideband standard, Oppo must pay ACT a patent licensing fee of 15.4 million yuan (approximately US$2.14 million), any interest accrued and reasonable expenses for investigating and stopping the infringement. The court determined the licence rate for the six patents to be US$0.008 per unit device, and the sales volume of the alleged 44 models of Oppo’s infringing mobile phones in the 22 quarters since the third quarter of 2015 (when the earliest sales data of these phones came to light) to the last quarter of 2020 (when the latest data emerged) to be about 272 million units.

Details about the licensing negotiations revealed

The judgment disclosed several key events in the negotiation process.

On 22 February 2018, ACT sent an email to Oppo, requiring it to pay licensing fees for the six patents. In the email, ACT listed the patents’ contents and global licensing situations and suggested a fee of US$0.2 to US$0.4 per unit. ACT also expressed its willingness to negotiate in accordance with FRAND principles and that it had prepared for litigation in the meantime.

On 14 March 2018, Oppo confirmed receipt and also expressed its willingness to engage in FRAND negotiations and handle the situation as soon as possible.

On 31 May 2018, ACT made an offer of US$0.26 per unit (with a total price of US$189 million) and US$0.39 per unit (with a total price of US$284 million) according to its licensing rates with two other companies, but did not elaborate on its calculation method. Since then, the parties failed to reach an agreement.

On 16 November 2018, ACT filed six infringement suits with the Nanjing Intermediate People’s Court. It proposed a licensing rate of US$0.26 per unit, indicated 292 million infringing mobile phones and opined that due to Oppo’s obvious fault, the amount of damages should be calculated at three times the licensing fee. However, ACT did not claim the full amount of damages but instead a total damage of US$50 million with an average of 57 million yuan per case. In two of the six suits, ACT requested the court to order Oppo to immediately stop making, selling and offering to sell the infringing products.

On 19 October 2019, Oppo provided its first counteroffer of 3.7 million yuan, and stated that ACT never provided a calculation basis for its offer. Then, on 1 November 2019, ACT sent a redacted licence agreement and stated that the counteroffer was far from ACT’s previous licence agreement. Six days later, ACT proposed a global licensing fee of US$17 million to Oppo, but still failed to elaborate on the calculation method. Oppo informed ACT on 15 November 2019 that its offer was too high and did not conform to FRAND principles.

On 30 December 2019, ACT expressed its willingness to make concessions and made an offer of US$8 million, but still did not elaborate on its calculation basis or method.

On 22 January 2020, Oppo provided a second counteroffer of US$1 million. ACT responded on 3 February 2020, stating that this proposal was unreasonable.

On 22 November 2021, the court issued its first-instance judgment, which held that Oppo should pay ACT a licence fee of 13.06 million yuan for the six patents.

Assessing comparability of licence agreements

The comparable agreement method was used to determine the licence fee that Oppo should pay to ACT. One key point about this case is that it has clarified the factors that should be considered when determining the comparability of a licence agreement (if the comparable agreement method is applied) to decide the licence rate in SEP disputes. The court held that when selecting a comparable licence agreement, the following factors should be considered.

The situation of the licence negotiation

The circumstances of the negotiation must be examined – specifically the background of the transaction and the parties’ transaction conditions, which are used to evaluate whether the agreement has been reached based on voluntary negotiation with no psychological compulsion on the licensor or licensee. Further, it should be considered whether:

  • the licence agreement negotiation was accompanied by litigation or the threat of it;
  • a court had ruled to stop the infringement during the negotiation; or
  • the rights holder (including the patentee and sub-licensor) threatens to request the court to stop the infringement through a ruling.

Similarity of the licensing entities

It is crucial to consider the similarity of the licensing entities, including the similarity of the licensors and of the licensees, which can be evaluated based on many aspects, including business models and scopes, and the relationship between the licensor and the licensee.

Similarity of the licensed patent

The court should take into account factors such as whether the patent in the comparable agreement is consistent with or covers the patent involved in the current dispute, and whether they are of the same or similar quantity or quality.

Similarity of licence terms

Finally, the similarities in the licence terms, including the calculation of the licence rate, its scope (whether it is limited to China or is a global licence), the licence period, the type of licence and the payment method of the fees must be considered in order to determine whether a prior agreement is comparable.

The comparable agreement used in this case

An agreement between ACT and another company (called "Company B" in the decision) was considered the most comparable and had the following characteristics:

  • the subject matter was the same six patents involved in this case;
  • the licensee, like Oppo, is also a well-known Chinese enterprise in the telecommunications industry;
  • the licensing scope similarly only involved China;
  • the quantity of Company B’s and Oppo’s mobile phones that use the six patents have both surpassed 100 million; and
  • the agreement was reached under normal licence negotiation circumstances, and can objectively and reasonably reflect the market value of the disputed patents.

Determining fault in SEP licensing negotiations

Another interesting feature of this case is that it has shed light on the factors that should be considered when determining whether the parties in an SEP licensing negotiation are at fault. The court in this case held that it should comprehensively consider whether the SEP holder:

  • directly filed a judicial lawsuit to request a royalty determination without issuing a written infringement notice to the implementer;
  • explicitly rejected the implementer’s request for a licence;
  • repeatedly threatened or directly took action to file an infringement suit or to request the court for a ruling to stop the infringement during the negotiation;
  • interrupted the negotiation without a justifiable reason;
  • refused to disclose necessary patent information to the implementer (eg, the number of SEPs or exemplary claim charts);
  • refused to disclose the fee or rate calculation method to the implementer;
  • made a licence fee offer that was significantly or unreasonably higher than that offered to other competitors in the same industry and refused to explain the reasoning;
  • provided feedback to the implementer within a reasonable period after receiving the implementer’s counteroffer; or
  • rejected the implementer's request for clarification of relevant technical issues without a justifiable reason.

Meanwhile, when determining whether the implementer is at fault, it should be thoroughly evaluated whether it:

  • responded within a reasonable time after receiving the written infringement notice from the SEP holder or informed the SEP holder of its refusal to negotiate;
  • actively responded on whether it would accept the conditions within a reasonable time after receiving them;
  • promptly made a counteroffer or licensing proposal that it considered to be fairer and more reasonable or escrowed the licence royalty corresponding to the counteroffer in a timely manner;
  • delayed or interrupted the negotiation without a justifiable reason; or
  • proposed obviously unreasonable licensing conditions to the SEP holder.

In addition, the court also considered that in the licence negotiation process, even if the implementer expresses a willingness to reach an agreement with the rights holder but it also voices doubts about the patent’s essentiality or validity, it generally would not be considered at fault.

Fault and responsibility in this case

Based on the above principles, the court evaluated both parties’ performance during the negotiation process. It determined that ACT’s main faults were:

  • failing to respond to Oppo’s request to elaborate on the calculation basis or method for the licensing fee;
  • issuing multiple threats to file patent infringement suits against Oppo; and
  • after filing the lawsuits, requesting the first-instance court to issue injunctions against infringement in two of the six cases.

It held that Oppo’s main faults were:

  • failure to truthfully disclose the sales data of the alleged infringing products to ACT, even though the two parties had signed a confidentiality agreement; and
  • after ACT disclosed its licence agreements with other companies to show that Oppo’s first counteroffer was far from the previous agreements, Oppo’s second counteroffer was still too low. It also did not explain the calculation basis or method for this second counteroffer in detail, nor did it escrow the money of the counteroffer in time.

The consequences of both parties being at fault is that they will both bear ACT’s additional losses caused by its failure to obtain the full licensing fee earlier, according to the degree of their respective faults – that is, the loss of interest. It should be noted that when determining licensing fees, the degree of fault of the parties should not be used as a proportional factor to adjust the fee, but instead to determine the apportionment ratio of interest loss. In this regard, the court pointed out that the SEP holder and accused infringer’s negotiation performance and the extent of their fault in failing to reach an agreement are not the statutory factors that should be considered when determining a reasonable multiple of the licensing fee.

Ultimately, the court found that both parties were equally at fault for failing to reach a licence agreement. Therefore, it held that each party should bear 50% of the responsibility for the losses of interest. The commencement date for interest is when ACT could have reasonably obtained the full licensing fee, which was determined as the reasonable negotiation period (18 months according to industry practice) from the date that Oppo first confirmed receipt of ACT’s email and expressed a willingness to negotiate, plus the payment time after the agreement was concluded (five days in this case).

Key takeaways

The Supreme People's Court adopted a cautious attitude when selecting the comparable agreement, corrected the first-instance court's mistake of adjusting the licensing fee according to the fault degree of both parties and provided a relatively novel approach in determining fault and responsibility, which will improve the predictability of FRAND licensing dispute resolution in China.

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