In this long awaited decision (Unwired Planet v Huawei 2017 EWHC 711 (Pat)), the question of what is a “Fair, Reasonable and Non-Discriminatory” (FRAND) licence to work a Standards Essential Patent (SEP) has been addressed for the first time by a judge in Europe. The English High Court held that it had jurisdiction to determine and enforce the FRAND undertaking in question and, significantly, the Court held that there is only one set of licence terms which are FRAND in a given set of circumstances. In its decision, the Court determined the FRAND royalty rates for a worldwide licence to Unwired’s portfolio of SEPs, which in earlier decisions the Court had held were valid, infringed and essential to the GSM (2G), UMTS (3G) and LTE (4G) standards. In doing so, the Court considered the legal effect of the FRAND undertaking and the nature of FRAND as not only characterising the terms of a licence but also the process by which a licence is negotiated. The decision provides useful guidance to both patentees and implementers as to how to deal with the process of FRAND, including using a benchmark rate and comparable licences to determine a FRAND royalty, and competition law concerns.
By way of background, patentees notify the relevant standards body (in this case, the European Telecommunications Standards Institute (ETSI)) of patents they believe are essential to an international telecommunications standard (in this case GSM, UMTS and LTE). In return for registration of a patent on ETSI’s SEP database the patentee agrees, in accordance with the ETSI IPR policy, to issue irrevocable licences to the patent on FRAND terms. This obligation is binding on all successors-in-title of the patentee. In this way, ETSI intends to balance the public interest in establishing telecommunications standardisation and the patentee’s interest in obtaining a fair reward for their invention. However, ETSI does not examine the essentiality of the patents or define what is FRAND. Therefore, Courts have been called on to rule on essentiality. However, until now, only informal opinions have been available for guidance on what is FRAND in the UK and in Europe more generally. (For example, see Sir Robin Jacob’s article FRAND: A legal Analysis, October 2014). Hence the importance of the present decision.
Unwired’s business is licensing. Prior to the court proceedings, Huawei, Samsung and Google had each unsuccessfully attempted to negotiate with Unwired to licence the relevant UK patents on FRAND terms. In March 2014, Unwired sued the defendants for infringement. According to Unwired, the defendants’ products were compliant with the relevant ETSI standards and therefore infringed Unwired’s patents. Unwired sought by way of remedies injunctions, removal from channels of commerce, and delivery up of the allegedly infringing products. In response, the defendants denied infringement and essentiality of the patents and argued that the patents were invalid.
After the commencement of proceedings, Unwired made licence offers to the defendants. The first offer (April 2014) was to license Unwired’s full global portfolio comprising both SEPs and non-SEPS, with regard to: cloud and server methods and equipment; mobile devices; and infrastructure. The second offer (July 2014) related only to Unwired’s SEPs, and was applicable only to mobile devices and infrastructure. Further offers were made by Unwired during the proceedings, including a worldwide SEP portfolio licence, a UK SEP portfolio licence (pertaining to more patents than only those in suit), and per-patent licences for any of the SEPs in suit. The defendants argued that the offers were not FRAND. Huawei and Samsung also contended that the offers were an abuse of a dominant position in breach of European competition law. There were also points of competition law regarding the terms under which the patents were transferred to Unwired (from Ericsson), bringing into contention Unwired’s right to sue.
Due to the number and complexity of the issues, separate “technical trials” were held to consider validity, infringement and essentiality of the respective patents (as referred to above). During the three technical trials (now under appeal; the remaining two postponed indefinitely), two of the patents were found to have valid and essential claims, whereas the other two patents were held invalid.
The “non-technical trial” followed, resulting in this decision on FRAND and related issues. (Both Google and Samsung settled with Unwired in relation to the SEPs before the non-technical trial). The non-technical trial confirmed that the patentee’s FRAND undertaking can be determined and enforced in an English court, and held that there is “only one set of licence terms which are FRAND in a given set of circumstances”, ie, there will “only be one set of FRAND terms and only one FRAND rate” that will be compliant with the FRAND undertaking (paras 164 and 165).
The legal effect of the FRAND undertaking was emphasised by Birss J’s conclusion that:
an implementer who makes an unqualified commitment to take a licence on FRAND terms... cannot be the subject of a final injunction to restrain patent infringement. Whereas an implementer who refuses to take a licence on terms found by the court to be FRAND has chosen to have no licence, and so if they have been found to infringe a valid patent an injunction can be granted against them (para 806(5))
Equally, the Court could use its equitable jurisdiction to refuse to grant an injunction to a patentee that refuses to accept FRAND terms. In this case, Birss J held that neither Unwired (too high) or Huawei (too low) had offered FRAND royalty rates.
The Court held that an appropriate way to determine a FRAND royalty is to determine a benchmark FRAND royalty rate based on the value of the patentee’s portfolio. Such benchmark determination is “fair” and further satisfies the “reasonable” and “non-discriminatory” requirement of FRAND, as it depends on “the intrinsic value of the portfolio being licensed… not on the licensee”. Smaller entrants to a market are entitled to pay a royalty based on the same benchmark as established large entities (paras 176-177). A further distinct non-discrimination point, a so-called “hard-edged” component to justify the reduction of a royalty rate or adjustment to a licence term that would otherwise be considered FRAND to “take into account the nature of the particular licensee seeking to rely on it” (in this case licensees who are “major players”, like Huawei and Samsung) (paras 177 and 481) was considered and rejected.
A further important consideration was the proper geographic scope of any FRAND licence when applied to a multinational like Huawei. The starting point was what a willing licensor, with a patent portfolio of wide geographic scope, and a willing licensee, with more or less global sales, would do. A country-by-country license approach would be “madness”. The answer was clear, both parties would agree on the efficiency and economies of scale of a worldwide licence. This did not preclude different royalty rates being agreed for different countries/regions, within reason. The FRAND royalty rates determined by the Court in this case differentiated between China, major markets and other markets (which were the same rates as for China).
In addition to dealing with the nuts and bolts of what constitutes a FRAND agreement, the Court held that a FRAND undertaking is not just a contractual commitment to grant licences on FRAND terms, but also to adopt a FRAND approach to the negotiation of such licences. Likewise, the implementer must take a FRAND approach to the process of negotiating and agreeing the terms of a licence on FRAND terms if it wants to take advantage of the constraint on the patentee’s rights imposed by the FRAND undertaking. What constitutes a FRAND approach remains a grey area, but it does not mean that there is no scope for good faith opening offers and counter offers that fall short of FRAND and leave room for further negotiation. What is not a FRAND approach is “making extreme offers and taking an intransigent approach” (para 163) or creating a circumstance in which “it would be too easy for the recipient of an offer to throw up their hands and refuse to negotiate at all” (para 765).
The Court did not agree with Huawei that Unwired’s actions, including its approach to the licence negotiations and seeking an injunction from the Court, were an abuse of a dominant position and therefore anti-competitive. For example, although Unwired had not provided its FRAND offer to Huawei before issuing a claim for an injunction, sufficient prior contact had occurred so that the action did not automatically amount to abuse regardless of the circumstances (para 747). However, because Unwired’s approach to dealing with Huawei did not comply with all aspects of the scheme set out in Huawei v ZTE, Huawei’s conduct from a competition law perspective had to be considered in the light of all the circumstances of the case. The Court also held that in assessing the dominant position of a SEP holder, the practical effect of the FRAND undertaking and the potential for hold out by an implementer are relevant factors and may lead to the conclusion that a SEP holder is not in a dominant position.
The Court held that in the light of its findings that two of Unwired’s SEPs were infringed and valid, that Huawei has not accepted a licence on terms found to be FRAND, and there was no breach of competition law by Unwired, a final injunction to restrain infringement of the two SEPs by Huawei should be granted. However, the Court exercised its discretion and a final injunction will be considered at a hearing in a few weeks’ time during which time Unwired has undertaken to prepare a detailed global FRAND licence based on the Court’s findings and serve this on Huawei. To avoid the injunction, Huawei will need to accept those terms. That FRAND licence includes a term for back royalties to 1 January 2013. If Huawei does not agree to enter into the FRAND licence damages, which are compensatory, will be assessed at the same rate as the benchmarked FRAND royalty rates in the licence (as determined by the Court). In this case, the Court held that this will be on the basis of the major markets rate on UK sales. Unwired had argued that damages should be assessed on the per-patent rate because damages for infringement of a particular patent should not be affected by the discounts available in FRAND licences from taking a licence on several patents at once, but this was rejected by the Court. Unwired also raised the prospect of additional damages pursuant to the Enforcement Directive 2004/48/EC but the Court did not address this and the “interesting questions” which may arise in respect of patent damages pursuant to the Directive in the context of this case.
The English High Court considered an array of fact and expert evidence during the course of this trial that demonstrated, yet again, the ability of UK judges to handle complex patent litigation and provide thorough and reasoned judgments. Unsurprisingly, the judgment in this case is long (running to 166 pages) but the subject matter is well signposted and it will serve as a useful point of reference to parties involved in negotiating a licence to SEPs. It should instil a greater mutual understanding of what terms and conditions are FRAND as well as the need to ensure the process of negotiating the licence is conducted in a FRAND-like manner. We believe that this will facilitate and enhance co-operation and deal-making between companies in the information and communications technologies (ICT) sectors and, ultimately, provide a commercial boost to the industry.
The full Unwired Planet v Huawei decision is available at www.judiciary.gov.uk/wp-content/uploads/2017/04/unwired-planet-v-huawei-20170405.pdf.