Ever wonder why Chinese phones and electronics are so cheap?
Part of the reason why is because it apparently uses its judicial system to make it easier for its manufacturers to negotiate lower prices for patents from European patent holders, or even use patented technology illegally, without consequence.
The European Commission filed a case on behalf of the EU's 27 members on Friday against China at the World Trade Organisation (WTO) for restricting its companies from protecting and using their patents.
It said that EU companies were being deterred from going to foreign courts to safeguard their standard-essential patents (SEPs).
China uses anti-suit injunctions to prevent companies from settling disputes outside the country. These are orders issued by a court that prevents a party from filing a case in another jurisdiction or forum.
What Are SEPs?
A ‘standard’ is a set of technical specifications that seeks to provide a common design or guidelines for a product or process. The A4 size of paper and the USB C port are both examples of standards, since they require certain design specifications to be met.
These standards can be voluntary, set by standard setting bodies, or enforced by law.
A Standard Essential Patent (SEP) is a patent that claims an invention or technology that must be used to comply with a standard. To manufacture a standard-compliant product, companies have to obtain licenses from the SEP owners.
However, this type of patent right is not absolute. To promote the application of the standard and avoid any competition concerns, such licenses must be made available under Fair, Reasonable and Non-Discriminatory (FRAND) terms.
What Is Troubling EU?
According to a press statement, the European Commission alleged that China severely restricts EU companies with rights to key technologies (such as 3G, 4G and 5G) from protecting these rights when their patents are used illegally or without appropriate compensation by Chinese mobile phone manufacturers.
Chinese manufacturers request these anti-suit injunctions to benefit from cheaper or even free access to European technology, the commission said.
The companies that do go to court outside China often face significant fines in China, putting them under pressure to settle for licensing fees below market rates, it added.
"EU companies have a right to seek justice on fair terms when their technology is used illegally. That is why we are launching WTO consultations today," said Valdis Dombrovskis, Executive Vice-President and Commissioner for Trade.
According to the EU, China's actions are inconsistent with the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). It has raised this issue with China on a number of occasions in an attempt to find a solution, to no avail.
It's not just the EU. The Commission has also consulted the United States and Japan, whose standard-essential patent holders face similar challenges and want to set global tech standards, Reuters reported.
In August 2020, the Supreme People’s Court of China issued anti-suit injunctions involving three Chinese standard essential patents owned by Conversant, a US based web advertising company.
The court ruled that Chinese courts can grant an “anti-suit injunction” to prevent patent holders from going to foreign courts to enforce their patents.
It also decided that that violation of such an order can be sanctioned with a €130,000 daily fine – that's upwards of Rs 1 crore a day.
According to the EU, Chinese courts have issued four such anti-suit injunctions against foreign patent holders since then.
China’s policy means that local manufacturers can get licensing fees for low prices and even use patented technology illegally. The EU companies have no choice but to approach Chinese courts to resolve these issues.
No companies have been named in the complaint. According to Reuters, China's largest smartphone makers are Oppo, Vivo, Xiaomi and Honor, formerly owned by Huawei, while European SEP holders include Nokia and Ericsson.
The dispute settlement consultations that the European Commission has requested is the first step in WTO dispute settlement proceedings. If this does not lead to a satisfactory solution within 60 days, the EU can request the WTO to set up a panel to rule on the matter.
(With inputs from Mondaq and Reuters)