China’s top 20 patent cases of 2020: ZTE v. Conversant

China IP,[Patent]

 

Docket number of the case in the first instance: No. 335 (Part 1), first instance (初), civil case (民), (2018) Shenzhen Intermediate People’s Court (粤03)
 
[Prefatory Syllabus]
SEP disputes lead to parallel proceedings. As the litigation of SEP rate is first filed in Chinese courts, and later in extraterritorial courts, if one party of the extraterritorial civil action applies for enforcement of the first-instance injunction judgment of the extraterritorial court, as a result, a party in a civil action in China may be forced to withdraw from the extraterritorial market, or accept the apparently unreasonable high rate offered by the other party.
 
The Chinese court shall, on the basis of considering the influence of the application for enforcement of the judgment of the extraterritorial court on the judgment of the court in China, whether the act preservation is really necessary, whether the interests of protection outweigh those of damage, whether the social and public interests are compromised, whether the international comity is observed, etc., take act preservation measures against the other party according to the application for behavior preservation filed by the party concerned.
 
[Basic Facts]
Applicant (Plaintiff): ZTE Corporation (Hereinafter: ZTE)
Respondent (Defendant): Conversant Wireless Licensing (Hereinafter: “Conversant”)
 
Conversant, a Luxembourg-based non-practicing entity (NPE), purchased some SEPs for wireless communications from Nokia. Conversant and ZTE are in dispute due to their inability to reach a SEP licensing agreement. On January 17, 2018, ZTE filed a lawsuit against Conversant as the defendant in the Intermediate People's Court of Shenzhen, Guangdong Province, requesting the court to adjudicate Conversant's permission to grant ZTE the rate of Chinese SEP package.
 
On April 20, 2018, Conversant filed a lawsuit with the Dusseldorf District Court (Hereinafter: Dusseldorf Court) against ZTE and its German affiliate for disputes over the infringement of SEP rights. On August 27, 2020, the Dusseldorf Court made first-instance verdict, ruling that ZTE and its German affiliate infringed on No. EP1797659 European patent of Conversant and issuing an order that prohibits ZTE and its German affiliate from providing, selling, using, importing or holding smartphones with UMTS function or other mobile terminals in Germany. This injunction judgement can be provisionally enforced after Conversant provides EUR 700,000.
 
On August 28, 2020, ZTE filed an application for act preservation with the Intermediate People's Court of Shenzhen, Guangdong Province, requesting to order the respondent Conversant not to file an application for enforcement of the judgment of suspension of infringement made by the Dusseldorf Court in the case of disputes over the infringement of SEP rights by Conversant v. ZTE and its German affiliate before the final judgment of this case is made, and to provide a guarantee of RMB 6 million.
 
The Court took into account the following factors:
(1) Impact of the application for enforcement of the judgement made by the German court on this case. The Dusseldorf Court has made the first-instance judgment to stop infringement acts. Once Conversant applies for enforcement of this judgement, the trial and enforcement of the judgment of this case may be hindered, thus causing the trial and judgment of this case to lose its significance. In terms of the subject of action, the parties concerned in this case are ZTE and Conversant, and the litigants in the German court are Conversant and ZTE and its German affiliate. The litigants in two cases are basically the same. In terms of claims, ZTE in this case requests to determine the licensing rate and conditions for Conversant's Chinese SEPs; in the lawsuit with the German court, Conversant claimed that ZTE and its German affiliate infringed upon its SEP rights, and requested the Dusseldorf court to order ZTE and its German affiliate to stop infringement acts. In terms of trial contents, the judgement made by the Dusseldorf court to stop infringement acts is conditional on judging whether the quotations from Conversant and ZTE during negotiations on SEP licensing are in compliance with FRAND (fair, reasonable, non-discriminatory) principles; while the judgement in this case involves the determination of the FRAND licensing quotation for Chinese SEPs owned by Conversant to ZTE. The trial contents of two cases overlapped in some ways. In light of the close connection between two cases, once Conversant applies for enforcement of the judgement of suspension of infringement made by the Dusseldorf court and is approved, it will have a negative impact on the trial of this case.
 
(2) Whether the adoption of act preservation measures is really necessary. Once Conversant applies for enforcement of the judgement of suspension of infringement made by the Dusseldorf court and is approved, there are only two option for ZTE and its German affiliate, either being forced to withdraw from the German market or accept Conversant's quotation and reach a settlement with Conversant. In the former case, the market losses and lost business opportunities incurred to ZTE and its German affiliate due to withdrawal from the German market can hardly be covered by money afterwards; in the latter case, ZTE and its German affiliate that undertake pressure from the judgment of suspension of infringement will have to accept the quotation from Conversant for SEP licensing. Since Conversant's quotation is more than ten times higher than that determined in the "Huawei case”, and ZTE and Huawei are comparable, this means that ZTE may be forced to waive any opportunity for legal remedy in this case. For this reason, the judgment in this case will be virtually impossible to enforce, no matter how the Chinese rate is determined.  Both of the two cases will incur irreparable damage to ZTE. Therefore, it’s necessary and urgent to take act preservation measures in this case.
 
(3) Consideration of the impact of act preservation on the interests of the applicant and respondent. Once Conversant applies for enforcement of the judgement of suspension of infringement made by the Dusseldorf court and is approved, if the court doesn’t adopt corresponding act preservation measures, ZTE and its German affiliate will be forced to withdraw from the German market, or to accept the quotation of Conversant and give up the opportunity to seek legal remedies in the Chinese court. For Conversant, if the court takes act preservation measures, the damage to Conversant will only be the suspension of enforcement of the first-instance judgment made by the Dusseldorf court. The judgment of the Dusseldorf court is not final, so the suspension of this judgment will not affect Conversant's other litigation interests in Germany. Moreover, the core interest of the SEP patentee Conversant’s lawsuit in Germany is to obtain financial compensation, so the suspension of enforcement of the judgment made by the Dusseldorf court to stop infringement acts will incur limited damage to Conversant. By contrast, the damage caused to ZTE by failure to adopt act preservation measures significantly overweighs that to Conversant by adoption of act preservation measures. Therefore, the adoption of act preservation measures is on good grounds. Moreover, ZTE provided a corresponding guarantee for act preservation in this case, which can legally protect the interests of Conversant.
 
(4) Whether public interests are compromised due to the adoption of act preservation measures. This case and the German lawsuit primarily concern the interests of ZTE and Conversant. The act preservation in this case is targeted at prohibiting Conversant from applying for enforcement of the judgment of suspension of infringement made by the Dusseldorf court before the final judgment of this case is rendered, without affecting public interests.
 
(5) International comity factor.  This case was accepted in January 2018, earlier than the German lawsuit, which was accepted in April 2018. If the Intermediate People's Court of Shenzhen, Guangdong Province prohibits Conversant from applying for enforcement of the judgment of suspension of infringement made by the Dusseldorf court before the final judgment of this case is rendered, neither will it affect subsequent trial procedures of the German lawsuit nor derogate from the legal effect of the German judgment. It will only suspend the enforcement of his judgement, with modest influence on the trial and adjudication of the case in the Dusseldorf court.
 
Based on the above considerations, the Intermediate People's Court of Shenzhen, Guangdong Province made a ruling on this case. This ruling has gone into effect.
 
[Typical Significance]
This is the first typical case of SEP anti-suit injunction (injunction) in Guangdong Province. ZTE sued Conversant in the Intermediate People's Court of Shenzhen before Conversant sued ZTE in a German court. In first instance, the German court granted an injunction to ZTE, resulting in adverse results of either withdrawing from the German market or accepting the high SEP licensing rate of Conversant.
 
According to the application for act preservation filed by ZTE, the Intermediate People's Court of Shenzhen, Guangdong Province took action preservation injunction measures against Conversant. Conversant didn’t apply to the Dusseldorf court for enforcement of the injunction judgment against ZTE, and actively negotiated with ZTE on SEP licensing, finally facilitating the signing and implementation of a fair, reasonable and non-discriminatory FRAND licensing agreement between two parties. On November 2, 2020, ZTE applied to the Intermediate People's Court of Shenzhen for withdrawal of the lawsuit, successfully resolving the dispute between two parties. The issuance of the injunction in this case not only effectively protects the legitimate rights and interests of ZTE as a high-tech enterprise according to law, but also provides useful experience for further exploring and improving the injunction system in China in the future.
 
This case was selected as "Shenzhen Intellectual Property Judicial Protection Innovation Case" and one of “Top10 Intellectual Property Trial Cases of Guangdong Province in 2020”.

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