One FRAND to rule them all

It is commonplace for court decisions to be described as “long-awaited” and “landmark judgments”, but such epithets are undoubtedly appropriate to describe the August 2020 decision of the UK Supreme Court in the cases of Unwired Planet v Huawei and Conversant v Huawei and ZTE.

The judgment is the culmination of proceedings lasting six years in the Unwired Planet case, and confirmation that English courts are entitled to set the terms of a global licence of standard-essential patents (SEPs) on fair, reasonable and non-discriminatory (FRAND) terms. This is set to have significant impact on the resolution of telecommunications patent disputes worldwide.

Background

In 2013, Unwired Planet acquired a patent portfolio from Ericsson which included a number of patents that had been declared as being essential to various standards set by the European Telecommunications Standards Institute (ETSI), a key standard-setting organisation (SSO).

In March 2014, Unwired Planet commenced proceedings against Huawei, Samsung and Google, alleging infringement of six UK patents, and seeking an injunction, among other remedies. In three “technical” trials, two patents were held to be valid and essential, while two others were held to be invalid. Google settled in 2015, and Samsung in 2016.

At the end of 2016, a further trial took place between Unwired Planet and Huawei, the remaining defendant, on the remedies for infringement. In his judgment, Justice Colin Birss held that the undertaking given by SEP owners to SSOs to grant licences of SEPs on FRAND terms was enforceable in the English courts and that, in the circumstances of an international patent portfolio and a licensee with global sales, a FRAND licence would be global.

He went on to set the royalty rates and other terms of the FRAND licence and held that, if Huawei did not agree to accept a global licence on those terms, it would be subject to an injunction in the UK. The Court of Appeal upheld the decision in 2017 (with one qualification) and Huawei appealed to the Supreme Court.

The second appeal relates to separate proceedings brought by Conversant, which acquired an international portfolio of patents from Nokia. In 2017, Conversant brought proceedings against Huawei and ZTE in respect of four UK patents. The company sought a declaration that the global licence that it had offered the defendants was FRAND or, alternatively a determination of FRAND terms. Conversant also sought an injunction in the UK, if the defendants did not agree to a licence on FRAND terms.

Huawei and ZTE challenged the jurisdiction of the English courts, but the challenge was rejected by the High Court and Court of Appeal. In two technical trials, one patent was held infringed but invalid, while another (and a divisional) were held partially valid and infringed (with trials of two other patents being stayed, as the patents had expired).

A further trial on the terms of the FRAND licence had been listed for April 2020, but was adjourned due to the coronavirus pandemic. The appeal to the Supreme Court in the Conversant cases therefore related to the jurisdiction challenge.

Decision of the UK Supreme Court

Across the two cases, the Supreme Court considered five different issues. The first of these was the central question of whether the English courts have jurisdiction to grant an injunction restraining infringement of a UK SEP unless the defendant enters into a global licence on FRAND terms.

Huawei argued that the English courts do not have such jurisdiction, as this would involve the implementer having to compromise foreign rights, including the right to challenge whether foreign patents are valid and essential to the relevant standard.

Further, Huawei argued that ETSI’s IP Rights Policy removes the SEP owner’s right to obtain an injunction and limits its remedy to monetary compensation for infringement of any patents that the owner has established are valid and infringed.

The UK Supreme Court construed the ETSI IP Rights Policy (which is governed by French law) and found that Huawei’s interpretation ran counter to the balance which the policy was seeking to achieve. It also did not take into account the “external context” of the policy, as required under French law contractual interpretation.

It was acknowledged that it is common practice in the telecommunications industry for operators to agree global licences of a portfolio of patents, and, accordingly, the IP Rights Policy was contemplating that FRAND licences could be global. The Supreme Court also noted that an implementer could include in a FRAND licence a right to challenge patents and, if such challenges are successful, a mechanism to alter future royalty rates and recover past royalty payments.

The second issue considered by the Supreme Court was a jurisdiction challenge on forum conveniens grounds, which was raised in the Conversant proceedings. Huawei and ZTE argued that, as the majority of their sales relevant to the Conversant patents occurred in China, with only a small minority occurring in the UK, China was the appropriate forum for resolving the dispute.

The Supreme Court noted that, for a challenge on forum conveniens grounds to be successful, the challenger must identify another forum which has jurisdiction. However, the evidence was that the Chinese courts do not currently have jurisdiction to determine the terms of a global FRAND licence, in the absence of agreement by all the parties. Therefore, the challenge failed.

The third issue considered was the meaning of the “non-discriminatory” element of the FRAND undertaking. When Samsung settled with Unwired Planet in 2016, Unwired Planet was in serious financial difficulty and so settled on terms which were favourable to Samsung. Huawei argued that it should be offered a licence on similarly favourable terms.

But the Supreme Court agreed with Unwired Planet’s submission that the FRAND undertaking is a single, unitary obligation. According to the Supreme Court, the non-discriminatory element of the FRAND undertaking indicates that the licence terms should be as are generally available at a fair market price for any market participant to reflect the true value of the SEP.

“Put another way, there is to be a single royalty price list available to all,” it went on. This interpretation of the FRAND obligation was supported by the fact that ETSI had previously considered including a “most-favourable” licence provision in its IP Rights Policy, but had rejected this approach.

This interpretation of the non-discrimination element also reflected commercial reality, in that there may be circumstances in which a SEP owner would choose to license its portfolio at a rate which is less than its true FRAND royalty rate value (as Unwired Planet did when agreeing its licence with Samsung). However, this should not dictate the rate for the portfolio for all other implementers.

The fourth issue in the appeal relates to the interpretation of the decision of the Court of Justice of the European Union (CJEU) in Huawei v ZTE (case C-170/13). In that case, the CJEU set out a series of conditions which a SEP owner is to comply with, so that its claim for an injunction will not be regarded as an abuse of a dominant position. Huawei argued that Unwired Planet had not complied with these requirements and was therefore not entitled to an injunction, but Unwired Planet argued that the CJEU requirements were not mandatory.

The Supreme Court agreed with Unwired Planet, again affirming the decisions of the courts below. It held that the CJEU requirements provide a safe harbour for a SEP owner, but this does not mean that if a SEP owner does not follow the prescribed steps, it will be abusing a dominant position.

The only mandatory requirement is that the SEP owner must not seek an injunction without notice to, or prior consultation with, the implementer. The nature of the notice or consultation depends on the circumstances, and Unwired Planet had satisfied the requirement.

While Unwired Planet had not made a licence offer which was the same as the FRAND offer determined by the Court, it had shown itself willing to license Huawei on whatever terms the court determined were FRAND. That was sufficient to avoid a finding of abuse of dominance.

The fifth and the final issue was a new point raised by Huawei before the Supreme Court. Huawei contended that the grant of an injunction was not appropriate or proportionate in the circumstances, and that Unwired Planet and Conversant’s only remedy was in damages.

The Supreme Court held that, if the patentee were confined to a monetary remedy, implementers would have an incentive to “hold out”, until patent by patent and country by country, they were compelled to pay licences. Accordingly, the ability to obtain an injunction is necessary in order to do justice, and damages are not an adequate substitute.

Impact of the decision

While the decision of the Supreme Court was unanimous and affirmed the decisions of the courts below, the outcome was by no means a foregone conclusion. It conclusively removes any doubt as to whether the English courts are entitled to set the terms of a global FRAND licence and confirms the UK as an international hub for the resolution of SEP patent disputes.

The court’s rejection of the forum non conveniens challenge was on the basis that the courts of China do not currently appear to have jurisdiction to set the terms of global licences, in the absence of agreement by the parties to such jurisdiction. But if other courts were to adopt the UK’s approach, there is likely to be “forum-shopping” by SEP owners and implementers alike. The issue of the most appropriate forum will at that point need to be revisited by the English courts.

The statement in the Supreme Court’s judgment that “there is to be a single royalty price list available to all” has attracted particular comment. It has been suggested that it indicates that SEP owners must publish their royalty rates, which is not in line with current practice.

But it seems more likely that the Supreme Court intended only that the same royalty rate must be available to all implementers, irrespective of their identity and situation, rather than that the rate must be published.

It has also been suggested that the reference to a “single royalty price list” indicates that the same royalty must apply for different types of end device. This is a contentious issue, particular in the context of SEP disputes in the automotive industry. But such an interpretation of the judgment does not appear to be consistent with the Supreme Court’s rationale, which is focused on the same royalty rate applying to different participants in a standard, but not necessarily for different devices. This is another issue which no doubt will be contested in future cases.

Overall, the Supreme Court’s judgment will not be welcomed by telecoms implementers and could potentially even lead some, particularly those with relatively low sales in the UK, to take products off the market in the UK in order to avoid being subject to global licence fees. However, many implementers would not wish to take such a drastic approach and may therefore need to submit to global licences as determined by the English courts.

Following the first instance decision in Unwired Planet, several similar claims were started by SEP owners in the UK. Now that the Supreme Court has confirmed the jurisdiction of the English courts, it is expected that many more such disputes will be started.

In recent years, SEP disputes have extended from the telecommunications sector to the automotive industry and, with the advent of the “internet of things” and 5G, to a range of connected devices, including household appliances.

The impact of the Supreme Court’s decision will therefore extend far beyond the telecoms sector to a wide range of different industries and products.

Yohan Liyanage is a partner at Linklaters. He can be contacted at:  yohan.liyanage@linklaters.com