China is becoming a new battlefield in global disputes over SEP licensing. On September 13, 2022, China Academy of Information and Communications Technology (CAICT) and China Automotive Technology and Research Center (CATARC) - two agencies subordinate to the Ministry of Industry and Information Technology (MIIT) and the State-owned Assets Supervision and Administration Commission of the State Council respectively-jointly published a set of guidelines called the Guidelines for Standard Essential Patent Licensing in the Automotive Industry (the "Guidelines"). The Guidelines, for the first time ever, endorses the "license to all" policy and the smallest saleable patent practicing unit (SSPPU) approach in China's automotive field.
"License to all" v. "access to all"
There is a worldwide ongoing debate on whether the FRAND commitment requires SEP holders to grant licenses to any implementer who asks ("license to all") or whether they can select the level of the value chain (end product makers v. component suppliers) where they will grant a FRAND license ("access to all"). In China's information and communication technology (ICT) sector, courts have long adopted the "access to all" approach and it is industry practice for SEP holders to provide licenses at the end-product level. In China's automotive sector, however, there were no statutes or reported court decisions addressing which of the two approaches is preferred.
The Guidelines, for the first time in China, endorses the "license to all" policy. It advocates that according to the FRAND commitment of Standard Setting Organizations (SSOs) or the SSO's intellectual property policy, each good faith implementer of SEPs is entitled to obtain a FRAND license, and a SEP holder is obliged to license to anyone who wants to implement the patent, regardless of the level in the automotive industry chain. The Guidelines emphasize that a SEP holder should not charge duplicate royalties to manufacturers at different levels of the value chain, meaning the downstream purchaser of a component is immune to royalties if the supplier has already taken a license.
SSPPU
Another worldwide debate is whether SSPPU is the appropriate royalty base for cellular SEPs. No Chinese statute expressly upholds the use of SSPPU to set royalty rates, nor have Chinese courts had a chance to rule on this issue.
The Guidelines take the first step to support the use of the SSPPU for FRAND royalties for SEPs in the automotive industry. Specifically, it advocates setting royalties based on the components attributable to the patented technology while excluding the components unrelated to the patented technology. Notably, it clarifies that regardless of whether the royalty base is the component or the car, the actual value contributed by the SEP to the car should be taken into account; moreover, regardless of the licensing level, the royalty for the same car should be approximately the same and the royalty should not differ significantly among different licensing levels. This is interesting because in industry practice, SEP holders such as Nokia, Ericsson and Qualcomm liked the approach of licensing the end product to make more money than licensing the chip. It is unclear how to keep the royalty the same for licensing at different levels.
Top-down and cap on aggregate royalty rate
The Guidelines further propose cross-checking FRAND rates with a top-down approach and a cap on the aggregate SEP royalties for automotive products. This cap could be a certain proportion of the reasonable profits in the industry of the licensed products.
Takeaway
The Guidelines, issued by two government-backed research institutes, reflects the Chinese government's position on protecting the auto industry, particularly vehicle manufacturers and their component suppliers, from unfairly high licensing fees. This is a very sensible approach given China's status as the world's factory. For those automotive component suppliers who seek to initiate legal proceedings against SEP holders (e.g., Avanci, Nokia, etc.) for a license at a reasonable price, China might be an ideal forum, as the Supreme People's Court repeatedly ruled that Chinese courts have authority to determine global licensing rates of SEPs (see OPPO v. Nokia (2022) and OPPO v. Sharp (2021)).
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