Harrison (Buzz) Frahn, Alexander S. Moser
Simpson Thacher & Bartlett LLP
On April 13, 2018, Judge William H. Orrick of the Northern District of California issued a foreign anti-suit injunction in Huawei Techs., Co. v. Samsung Elecs. Co. blocking Chinese technology company Huawei Technologies, Co. (“Huawei”) from enforcing an injunction issued by the Intermediate People’s Court of Shenzhen (“Shenzhen Court”) that would have forced Samsung Electronics Co., Ltd. (“Samsung”) to shut down many of its operations in China. The suit before the Shenzhen Court is part of a multi-front war between Huawei and Samsung over licensing terms for patents essential to the 3G UMTS and 4G LTE wireless standards. The Shenzhen Court found Samsung infringed two of Huawei’s patents and enjoined Samsung’s Chinese affiliates from manufacturing or selling 4G LTE smartphones in China (“Shenzhen Injunction”). Samsung requested the Northern District block enforcement of the Shenzhen Injunction, arguing injunctive relief is inappropriate for alleged infringement of standard essential patents, and that such relief would frustrate U.S. public policies against anticompetitive conduct and breach of contract. Huawei responded by asserting an anti-suit injunction would offend comity, and arguing Samsung was estopped from seeking the anti-suit injunction, as doing so was directly contrary to a position it took earlier in the case.Judge Orrick ultimately sided with Samsung, issuing the anti-suit injunction to ensure settlement pressure did not prevent him from evaluating the propriety of injunctive relief for the parties’ standard essential patents.
Samsung and Huawei both own patents that are declared standard essential patents (“SEPs”) for the 3G UMTS and 4G LTE standards.Both parties agreed to license their SEPs on fair, reasonable, and non-discriminatory (“FRAND”) terms and conditions, under the Intellectual Property Rights Policy promulgated by the European Telecommunications Standards Institute (the “ETSI”). Organizations that establish standards for technologies to be used across an industry, like 4G LTE, often request that the owners of patented technologies adopted in a given standard agree to license those patents on FRAND terms. If a patent owner will not agree, the patented technology may not be included in the standard. The purpose of FRAND terms is to balance patent holders’ private interests against the public interest in technological standards—they curb the potential for anticompetitive conduct that standards would otherwise create.
Samsung and Huawei both committed to licensing their SEPs on FRAND terms, but despite a course of negotiations going back to 2011, they have been unable to reach a cross-license agreement for their respective patent profiles. The instant suit is one result of that failed course of negotiations.
On May 24, 2016, Huawei filed this lawsuit alleging that Samsung infringed eleven of Huawei’s SEPs, and breached “its commitment to enter into a SEP cross-license with [Huawei] on FRAND terms and conditions.” Huawei also filed eleven separate actions in China for patent infringement, largely for the Chinese counterparts of the SEPs asserted in this case. While the court repeatedly refers to these actions as filed a day after the domestic action, Huawei asserts that, because of the time difference, the domestic and Chinese actions were filed simultaneously.
On January 11, 2018, the Shenzhen Court held Samsung is infringing two of Huawei’s Chinese SEPs and issued the Shenzhen Injunction, which bars Samsung’s Chinese affiliates from manufacturing or selling 4G LTE phones in China. Samsung filed a notice of appeal, and on February 1, 2018 moved in the N.D. Cal. case for an anti-suit injunction, arguing the Shenzhen Injunction will force it to close factories in China and negotiate with Huawei at a disadvantage.
The court’s April 13 order is of interest to antitrust practitioners because it helps clarify the standard applied in the Ninth Circuit to motions for anti-suit injunctions and addresses several issues surrounding the anticompetitive implications of SEPs.
The Standard for Foreign Anti-Suit Injunctions
The Ninth Circuit established a three-part test for determining the propriety of a foreign anti-suit injunction in E. & J. Gallo Winery v. Andina Licores S.A., 446 F.3d 984, 989 (9th Cir. 2006). That test directs courts to (1) determine whether the parties and issues are the same in the domestic and foreign actions, and whether the former is dispositive of the latter, (2) determine whether any of certain equitable factors apply, and (3) assess the injunction’s impact on comity.
The parties disputed whether Gallo replaces or supplements the traditional requirements for a preliminary injunction, most recently modified in Winter v. NRDC, Inc., 555 U.S. 7 (2008). Judge Orrick reviewed two Ninth Circuit opinions in foreign anti-suit injunction cases where only the Gallo test was discussed and a Third Circuit case where the Gallo test was adopted as an explicit replacement for the Winter factors. Based on these, Judge Orrick concluded that only the Gallo test need be applied.
Identity of the Parties and Issues
The first part of the Gallo test is a functional determination of whether the parties and issues in the two suits are the same, and whether the first action is dispositive of the action to be enjoined. Additionally, when the parties in the actions are the same, “the two questions of whether ‘the issues are the same’ and whether ‘the domestic action is dispositive of the foreign action’ collapse into one.” Microsoft Corp. v. Motorola, Inc., 871 F. Supp. 2d 1089, 1098 (W.D. Wash. 2012) (“Microsoft I”).
Here, Samsung and Huawei agreed that the parties in the two actions are functionally the same, but disputed whether the issues were. Relying on Microsoft I and Microsoft Corp. v. Motorola, Inc., 696 F.3d 872, 875 (9th Cir. 2012) (“Microsoft II”), Samsung argued that the primary issue in both cases is the propriety of injunctive relief for infringement of Huawei’s SEPs. Microsoft was a breach of contract case where Microsoft alleged it was a third-party beneficiary of Motorola’s contractual commitment to offer its SEPs for the H.264 video standard on FRAND terms. There the district court held, and the Ninth Circuit agreed, that the domestic case would resolve the patent infringement claims Motorola brought in Germany because the European patents at issue there were subject to the same FRAND licensing obligations.
Here, Huawei alleged Samsung breached its contractual obligations to license its SEPs on FRAND terms, and asked that Samsung be barred from obtaining injunctive relief on those SEPs. Samsung argued that this would resolve whether such injunctions are appropriate for alleged infringement of SEPs generally, making the domestic case dispositive of the foreign case, as it was in Microsoft. Huawei responded by attempting to distinguish the Microsoft cases.It argued, inter alia, that the German action in Microsoft was filed months after the domestic action as an attempt to circumvent an unfavorable outcome in the domestic case, and that the German court never reached the FRAND issue. In contrast, Huawei claimed it filed the domestic and Chinese actions simultaneously, and that the Shenzhen Court explicitly decided the FRAND issues.
Judge Orrick brushed Huawei’s distinctions aside as “irrelevant” in the same sentence that he called them “undeniable and important.” He found that neither party disputed the other’s status as a third-party beneficiary of its contract with the ETSI to offer SEPs on FRAND terms, and so the “‘contractual umbrella over the patent claims’ controls” and the “availability of injunctive relief . . . depends on the breach of contract claims.”
Huawei also argued Samsung should be judicially estopped from claiming it is entitled to an anti-suit injunction because Samsung previously argued an appropriate FRAND rate could only be set after the court decided the validity, enforceability, infringement and essentiality of the SEPs. In other words, Samsung previously argued that the breach of contract issues were dependent on the patent issues, and now argues the exact opposite.Judge Orrick was not swayed from his decision that the breach of contract claims in the domestic case are dispositive, but Samsung did not escape unscathed. Following Samsung’s previous arguments to their logical conclusion, Judge Orrick concluded, would prevent him from ever reaching the FRAND issues at all. Consequently, he held that while Samsung was not estopped from seeking an anti-suit injunction, it is estopped from later arguing “that the breach of contract claims depend on evidence not before me, such as the validity, infringement and essentiality of foreign patents.”
The Unterweser Factors
The court then turned to the second part of the Gallo test, the equitable considerations that may justify relief. These are known as the Unterweser factors, and support an anti-suit injunction “when [the foreign suit] would (1) frustrate a policy of the forum issuing the injunction; (2) be vexatious or oppressive; (3) threaten the issuing courts in rem or quasi in rem jurisdiction; or (4) where the proceedings prejudice other equitable considerations.” The court focused on the first and second of these, concluding that the foreign suit wouldfrustrate domestic policy, but could not be called vexatious or oppressive.
The parties argued over whether the Shenzhen Injunction would frustrate “domestic policies against injunctive relief on SEPs and general public policies against anticompetitive conduct and breaches of contract.” Judge Orrick noted that “the bulk of precedent” supported Samsung’s position.But he identified a different policy at issue: “this court’s ability to determine the propriety of injunctive relief in the first instance.” According to Judge Orrick, the Shenzhen Injunction undermined this policy in two ways.First, it created the risk of inconsistent judgments, as the domestic case could find injunctive relief is inappropriate for Huawei’s SEPs.Second, because implementation of the Shenzhen Injunction would force Samsung to close factories in China, it “would likely force [Samsung] to accept Huawei’s licensing terms, before any court has an opportunity to adjudicate the parties’ breach of contract claims” (which were not before the Shenzhen Court).Thus, an anti-suit injunction was necessary to ensure the court can reach the question of whether injunctions are appropriate for SEPs.
In contrast, the court declined to find the Chinese suits were vexatious or oppressive, despite a clear statement from a Vice President at Huawei that the company sought the injunction to use “as a bargaining chip,” rather than to actually “kick Samsung out of China.” Judge Orrick relied primarily on Huawei’s near-simultaneous filing of the actions to distinguish Microsoft I, where Motorola’s cases were filed months apart, and the German action was considered vexatious.
Comity, the final part of the Gallo test, is “the recognition which one nation allows within its territory to the legislative, executive or judicial acts of another nation.” Gallo requires the court “estimate whether any  interference [with comity] is so great as to be intolerable.” Here, Judge Orrick’s unwillingness to acknowledge the “simultaneous” filing of the domestic and Chinese actions bore fruit.He wrote that “[s]ince this action preceded the Chinese actions—if only by one day—enjoining the foreign action would not ‘intolerably impact comity.’” Judge Orrick also noted that the anti-suit injunction’s scope is limited, as the domestic case is scheduled for trial in December of 2018, and the Shenzhen Court’s injunction cannot become final until Samsung’s appeal of that court’s decision is resolved.
With the issuance of the foreign anti-suit injunction, and given the parties’ nearly seven year history of fruitless negotiation, it seems likely this case will continue on to trial in December 2018. In the meantime, the court’s decision shows that even if a party seeks to avoid any appearance of forum shopping when pursuing claims in multiple jurisdictions, it should still carefully consider where it files suit first.It also shows that contractual obligations to license SEPs on FRAND terms are likely to dominate concerns over actual infringement or validity. This is in part because the opposite arrangement would make it more difficult for courts to set FRAND rates, thereby limiting the utility of FRAND agreements as a tool for combating the anticompetitive use of SEPs.