The Art of An SEP War: A Chinese IP Court’s Recent Use of Anti-Suit Injunction Invites A Battle that It Likely Won’t Win

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Victorious warriors win first and then go to war, while defeated warriors go to war first and then seek to win.”

Who wishes to fight must first count the cost.”

--Sun Tzu, The Art of War

The recent anti-suit injunction issued against InterDigital in its SEP litigation with Xiaomi is a somewhat predictable reaction to the recent UK Supreme Court decision against Huawei and ZTE. One of the central arguments there was that the UK courts were trying to set themselves up as the international arbiter of FRAND disputes. The Supreme Court’s written opinion does an excellent job, as did the lower court opinions, in explaining why that is not the case.

The underlying patent infringement dispute did not give the UK courts the authority to determine the FRAND license. Rather, it was the defendants’ assertion of a contractual FRAND defense that conferred jurisdiction. No one challenged that issues concerning infringement and validity of a patent must be adjudicated by a court in the country where the asserted patent issued. The disputed issue, created by the defendants’ asserted contractual defense, was whether the SEP owner had discharged its contractual obligations under the standard setting organization’s (SSO) intellectual property rights (IPR) provisions. Only if the SEP owner had complied with its obligations was an injunction available as a remedy. No court can answer that question without first determining what a FRAND license would be in the circumstances. And that is precisely and correctly what the UK court did.

A primary motivation behind Huawei’s unsuccessful appeal was an effort to have the FRAND issues it raised decided by courts in China. Huawei’s position was based on the argument that the vast majority of its relevant product sales were in China, and China therefore had a paramount interest in deciding the issue. Having observed the UK Supreme Court’s rejection of that argument, the Wuhan Intermediate People’s Court recently issued the anti-suit injunction against InterDigital in an effort to secure for Xiaomi what Huawei failed to achieve in the UK.

The problem with the Wuhan court’s anti-suit injunction is it’s likely to accomplish the exact opposite of its intended goal. If the expectation is that it will help solidify the role of Chinese courts in adjudicating FRAND disputes for Chinese implementers, it is unlikely to happen.

The reality is that a Chinese court, solely through its own actions, cannot establish the prominent role in FRAND disputes that companies like Huawei, ZTE, and Xiaomi would like it to have. Such a role necessarily comes from the importance of the relevant commercial market. Where a country’s market is significant, any judicial intervention by its courts is meaningful simply because of its potential market impact. Thus, as the UK Supreme Court expressly noted, Huawei was free to not enter the FRAND license that had been determined by the lower court but such a decision would have consequences with respect to Huawei’s ability to access the UK market.

China is a huge market for Chinese manufacturers like Huawei, ZTE, Xiaomi. That is not necessarily true for their foreign competitors and other SEP stakeholders. Moreover, despite a longstanding effort to foster the perception of Chinese courts as favorable to non-Chinese litigants and a forum where patent owners could achieve cost-effective and meaningful remedies, foreign patent holders have generally not embraced enforcement in Chinese IP courts. Its seems apparent that the exact reason why companies like Huawei want to have Chinese courts overseeing these FRAND issues may be the very same reason that foreign patent holders generally avoid Chinese courts.

Following from these realities, SEP owners, like InterDigital, are understandably choosing to enforce patents against Chinese OEMs outside of China in countries where the relevant market is too important for Chinese companies to ignore or walk away from. India is the world’s second-largest market for smartphones and the largest market for Chinese smartphone manufacturers outside of China. An anti-antisuit injunction from the Delhi High Court is meaningful precisely because Xiaomi must honor it or potentially face unacceptable consequences in a critically important market. Conversely, the power of a Chinese court’s anti-suit injunction comes from the significance of the Chinese market to a litigant who must comply with the order or risk the potential loss of access to the Chinese market. For many SEP stakeholders, especially non-practicing entities, that may not be a material concern.

Simply put, while principles of comity will always be relevant, the Delhi High Court’s anti-anti-suit injunction matters because the Indian market matters greatly to Xiaomi. Interdigital is not similarly burdened. It does not have to enforce its IP rights in China against Chinese OEMs because it has other and preferable options, like India. It can avoid Chinese courts and still pursue its licensing objectives. In such circumstances, it’s curious what the Wuhan court hoped to achieve by issuing the anti-suit injunction. Whatever was intended, its likely effect is to erode further the use and relevance of Chinese courts for international IP disputes. That is surely not what is intended. It may also have a broader economic impact.

The ex parte anti-suit injunction issued against InterDigital follows a similar anti-suit injunction issued against Conversant in August. The Chinese courts attempting this recent more assertive jurisdictional competition in SEP disputes seem not to appreciate or understanding this fundamental connection between market realities and the power of an anti-suit injunction. Global SEP owners do understand the relationship; and, after witnessing these recent events, will rationally re-assess where they are doing business and the risks involved. In other words, how important to me is the Chinese market in light of the attendant risks? China’s interests are not advanced by its courts prompting global SEP owners to ask that question.

It is understandable that Chinese stakeholders would press Chinese courts to respond aggressively to the decision of the UK Supreme Court. Yet, Chinese IP courts must be discerning in their response, and reserve consideration of anti-suit injunctions, and jurisdictional competition generally, for circumstances where such actions are likely to be meaningful and accepted.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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