China’s top court affirms jurisdiction over global FRAND rates in OPPO v. Sharp, finding overwhelmingly strong Chinese connection

Last month, the Supreme People’s Court (SPC) of the People’s Republic of China affirmed on a definitive basis a decision by the Shenzhen Intermediate People’s Court that OPPO is in its right to seek a global FRAND determination against Sharp from a Chinese court. Sharp had brought a jurisdictional appeal of the decision below. Last week, Chinese media reported on the ruling.

According to Counterpoint Research, OPPO shipped well 33.6 million smartphones during the last quarter, making it number four in the global market in its own right–though if you throw in the 32.5 million units sold by vivo and the volumes of other subsidiaries of the BBK Electronics group (such as OnePlus), we’re actually talking about the world’s largest smartphone maker (well ahead of Samsung and Apple). OPPO already has significant traction in various markets outside China, and increasingly has to fend off patent royalty demands and infringement assertions. Landmark rulings are an effective way to earn the respect of actual or potential adversaries.

At a time when the European Commission is challenging the Chinese stance on global standard-essential patent (SEP) dispute resolution by means of a set of questions raised at the WTO level, this ruling by China’s top court is particularly important. It took me a few days to obtain an unofficial English translation. While I don’t claim to know Chinese law, the ruling is, thankfully, self-explanatory.

The highest Chinese court determined that the lower court had jurisdiction over this case, that it was appropriate for the lower court to exercise such jursidiction and, on that basis, to adjudicate the global licensing terms for the SEPs in question, and also dismissed the argument that a Sharp subsidiary named ScienBizip Japan (which participated in licensing negotiations) was a proper defendant to OPPO’s FRAND action.

Neither is the SPC’s decision an invitation for all sorts of SEP implementers to flock to China nor is it an outlier. In my interpretation, OPPO made an extremely compelling argument against Sharp’s appeal, but even someone whose case is not quite that strong might still prevail. The court considers FRAND disputes to involve questions of contract as well as patent law, and with respect to jurisdiction balances multiple factors such as whether many of the patents at issue are Chinese patents, where the parties negotiated or under which jurisdiction they concluded a license agreement, where the patents are implemented in terms of product development and manufacturing, and where most of the sales are generated. As for the latter criterion, in late 2019 OPPO generated approximately 70% of its global unit sales in China, and developed and manufactured 100% of its products there. Negotiations took place in China, too. And any future enforcement (of contractual obligations to pay royalties) would have a Chinese connection, as most of OPPO’s assets are in China.

OPPO argued that the alternative would be for a foreign court to set a global rate, such as a UK Court further to the Unwired Planet judgment by the UK Supreme Court. The Chinese SPC merely took note of that argument without commenting on it, but presumably the global SEP litigation landscape played a key role nonetheless.

There are three schools of thought in the world when it comes to global FRAND rates:

  • U.S. courts are reluctant to set licensing terms for foreign patents. If one party opposes, it’s game over (so far). If both parties agree, it’s up to the court.

  • European courts (UK & EU) don’t want to directly impose license terms on parties, but they practically achieve that effect by allowing injunctions to be enforced unless implementers take licenses on terms that are either set by those courts (UK) or are merely not considered facially absurd (Germany).

  • Chinese courts make FRAND determinations at one party’s request, but subject to a multifactorial analysis of the economic parameters (forum conveniens).

This is speculative, but I guess an implementer won’t have to prevail on all factors (though OPPO did)–and there’s no indication whatsoever that an implementer must generate 70% of its worldwide unit sales in China (as OPPO does). It is likely sufficient to have higher unit sales in China than any other country (simple majority) in order to prevail on that factor. The SPC says that all factors must be “comprehensively” considered.

Sooner or later, we’ll see a Chinese court ruling that arrives at a forum non conveniens conclusion. But if OPPO had lost to Sharp, there wouldn’t have been a way for anyone to obtain a global FRAND determination from a Chinese court.

From a geopolitical perspective it will be interesting to see the EU and China discuss these jurisdictional questions, but even more interesting is the question of what U.S. courts and the Biden Administration will do. Will they stay on the sidelines?

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