This article was first published in IAM Magazine, April 2017
On Wednesday, the High Court sitting in London handed down the UK’s first-ever decision in a case relating to the licensing of standard essential patents on a FRAND basis. It came down on the side of licensor Unwired Planet in its dispute with Huawei, and provided a long, very detailed explanation, as to why it had decided to. Significantly, given the state of play in the US, Unwired Planet is a non-practising entity (whose patent assets were acquired by PanOptis last year) and the court ruled that should Huawei not now agree a global FRAND-based licensing deal with it, Unwired Planet would be entitled to injunctive relief in the UK.
Needless to say, this case is a very big deal and one that may mean the UK becomes a much more favoured destination for the play-out of FRAND-based disputes. For this reason, anyone involved in SEP/FRAND licensing as a licensor, a licensee or a third-party adviser should be poring over the judgment in order to understand its full implications.
To get things started, IAM commissioned a piece from UK law firm Bristows – written by partners Pat Treacy and Sophie Lawrance, and associate Francion Brooks – setting out some of the key points of the decision. This is required reading ...
Earlier this week, the UK High Court handed down its first judgment dealing in detail with the issues surrounding standard essential patents (SEPs) and the corresponding obligation to license those patents on Fair, Reasonable and Non-Discriminatory (FRAND) terms. This judgment will have far-reaching consequences, not least for those involved in negotiating licences for SEP portfolios. But will it result in more companies turning to the courts to resolve disputes where negotiations are not proving fruitful?
A bit of background
As readers of this blog will know well, Unwired Planet (UP) is an IP licensing company (or non-practising entity) which acquired a large portfolio of patents from Ericsson in early 2013. Many of the patents in UP’s portfolio are declared essential to various ETSI telecommunications standards, including 2G standards (such as GSM/GPRS), 3G standards (such as UMTS) and 4G standards (such as LTE).
In March 2014, UP sued Huawei, Samsung and Google for patent infringement of six UK patents, including five SEPs (as well as issuing parallel proceedings in Germany against a number of companies). Since then, the English High Court has heard technical trials on the validity and infringement of some of those patents with two being held valid and infringed. This latest judgment, however, relates to the competition law and FRAND issues in the case, which were heard at a separate trial at the end of last year. In the end, that trial only involved UP and Huawei as the other defendants (Samsung and Google), as well as Ericsson, who had been joined to the proceedings, reached settlements before the hearing.
What does the judgment say about FRAND?
When a patent holder declares a patent essential to an ETSI telecommunications standard, it must make a commitment to license that patent on FRAND terms. In this judgment, the court has held that a FRAND licence will typically be worldwide and that the terms of that licence should not vary substantially depending on the size of the licensee/implementer.
This will be crucial, and perhaps troubling, guidance to many involved in negotiating SEP licences. The judgment also sets out a method for determining FRAND rates – either by ‘unpacking’ the rates from relevant pre-existing comparable licences or by a ‘top down’ analysis which calculates the SEP holder’s share of the total relevant SEPs.
The judge prefers the use (where available) of comparable licences, with the top-down analysis as a cross-check. He also concluded that counting patents is the only practical approach to identifying the relevant SEPs, and to deal with the issue of over-declaration. He decided that generally, all patents should be treated as valid and as of roughly equal value, although in some circumstances it may be possible to attribute additional value to exceptional patents which cover a ‘keystone invention’ of a particular standard.
Notably, the judge held that there is only one set of FRAND terms between given parties in a given situation. This encompasses not only the rate, but also all of the other terms of a licence. The judge noted that this provides legal certainty, ensuring that FRAND is enforceable, as otherwise a court may be asked to choose between an offer and counter-offer which are both seemingly FRAND.
However, as far as negotiations between parties are concerned, there is no doubt that there will continue to remain competing views as to what are the true FRAND terms. Crucially, the court stated that its findings do not allow existing licences to be reopened as, having agreed the terms, such licences cannot be revisited on an ETSI contractual basis (unless the terms are so wide of the mark as to engage competition law).
To determine the FRAND rates in this case, the court relied upon freely negotiated comparable licences, and then cross-checked the resulting rates by ensuring that the implied total aggregate royalty burden was in an appropriate range. On this basis, the court found that neither party’s offers had been FRAND – UP’s offers were too high and Huawei’s offers were too low. Instead, the judge determined a different set of FRAND rates for a worldwide licence of UP’s portfolio:
Major Markets (MM)
China and Other Markets (OM)
These rates imply a total aggregate royalty burden of 8.8% for 4G handsets (which the judge thought was appropriate).
What does this mean for SEP holders and implementers?
The court’s guidance on how to determine a FRAND rate will clearly be helpful to parties negotiating licences for SEPs. In addition, it gave some useful guidance on how parties should conduct themselves in FRAND negotiations.
The court confirmed that both parties must take a FRAND approach; the SEP holder must not hold up (effectively refusing to license) and the licensee/implementer must not hold out (effectively refusing to take a licence). However, this does not mean that all offers made during negotiations have to be FRAND. A FRAND approach still allows for ‘non-FRAND’ opening offers that leave room for negotiation upwards or downwards towards an eventual FRAND licence. Offers above or below FRAND will only become problematic if they are extreme or take an intransigent approach which disrupts or prejudices the negotiation. Notably, in the judge’s view, it is not hold up for an SEP holder to seek to obtain through its licensing some of the value that results from the inclusion of its technology into a standard.
As a result of a particular issue raised in this case, the court also dealt specifically with the ‘non-discrimination’ or ND part of FRAND. He held that a licensee/implementer is not necessarily entitled to demand the same licence terms as another similarly positioned licensee (although it may be able to if the differences in licence terms distort competition between the two licensees). Instead the ‘non-discrimination’ part of FRAND means that licensees should be offered FRAND royalties based upon the strength of the patent portfolio and not the size of the licensee.
Finally, although in this case UP was found not to have abused its dominant position, the judgment acknowledges that competition law can apply if negotiations for an SEP portfolio lead to anti-competitive bundling, tying, or excessive pricing. In addition, although the court found that the framework for negotiations set out in Huawei v ZTE must be applied fluidly, a significant departure from those principles can amount to an abuse of dominance. Crucially, the judge held that these competition law issues are distinct from the separate contractual enforcement of the FRAND undertaking. This is a novel and controversial proposition which is likely to be the subject of much commentary.
More FRAND litigation on the horizon?
Where negotiations with a licensee/implementer are proving ineffective, litigation may now be a more attractive option for SEP holders for a number of reasons:
First, this case shows that English courts are willing and able to set FRAND rates and licence terms – and to do so for a global licence.
Second, the perceived exposure to competition law counterclaims (eg, for an abuse of dominance) is likely to be reduced as the judge held that: (i) a royalty rate may be above FRAND, but not contrary to competition law; and (ii) the framework for negotiations set out in Huawei v ZTE need only be applied fluidly.
Finally, and crucially, this case establishes that the English court will grant an injunction if an infringing implementer refuses to take a licence on the FRAND terms it has determined (although, equally, the court will refuse to grant an injunction if the SEP holder fails to grant a licence on those FRAND terms). Previously, there was some doubt as to whether injunctive relief would ever really be available when litigating SEPs. In this case, the judge granted an injunction against Huawei which will be considered at a hearing in a couple of weeks’ time. As the licence terms held by the judge to be FRAND relate to a global licence, and these must be accepted if an injunction is to be avoided, the court’s willingness to grant an injunction enables the SEP holder to obtain agreement to a global licence through one lawsuit.
This judgment may also encourage licensees/implementers to engage more with litigation, rather than reaching an agreement for a licence on unsatisfactory terms. In this case, the court set FRAND terms and awarded damages which equate to a back-dated payment of royalties for that FRAND licence, as if it had been in place from the outset. As a result, depending on how well the negotiations for a licence are progressing, litigation may not be such an unattractive option as – other than costs consequences in the litigation – there is seemingly no serious risk of a financial penalty for not agreeing to a FRAND licence sooner, and very limited risk of injunction at the end of the process as long as there is clear willingness to accept the terms set by the court.
With these factors in mind, we may well see more FRAND litigation in the English courts in the coming years. In the meantime, the 800 or so paragraphs of this judgment gives us plenty food for thought…