On August 26, 2020, the United Kingdom Supreme Court handed down its unanimous combined decision in the cases of Unwired Planet v. Huawei and Huawei v. Conversant. Both cases involved questions of:
- Whether the contracts entered into by those who had participated in standards setting by the European Telecommunications Standards Institute (ETSI) and agreed to license any standards essential patents (SEPs) they held on Fair Reasonable and Nondiscriminatory (FRAND) terms contemplated such FRAND terms being set out on a global basis;
- Whether the FRAND requirement consisted of separate fair, reasonable and non-discriminatory components or whether the term was a single unitary obligation;
- The role of competition law relating to abuses of a dominant position in deciding disputes relating to SEPs and in particular the meaning of the European Court of Justice decision in ZTE v, Huawei; and
- Whether it was equitable to grant injunctions against Huawei when it had agreed that it would accept the court’s determination of what were FRAND terms for the UK patents in question but not for the rest of the world.
The first three of these had been fully litigated in the lower courts in the Unwired Planet case, but had been pleaded, but stayed, in the Conversant case pending the decision in the Unwired Planet case. The fourth issue was newly raised in the Supreme Court. Additionally, Huawei had argued in the Conversant case that the English courts were forum non conviens for deciding the dispute.
The Supreme Court decided in favor of Unwired Planet and Conversant on all issues, affirming the judgments of the lower courts on the issues that had been litigated before them.
Unwired Planet is a patent assertion entity (PAE) which had bought many of the patents involved in the proceedings from Ericsson. Between 2009 and 2012, Huawei had a license from Ericsson which included the SEPs which were assigned to Unwired in 2013. In 2013, there was brief discussion between Unwired and Huawei about the possibility of Huawei buying some of the SEPs, but Huawei did not do so. In September 2013, Unwired wrote to Huawei proposing discussion with a view to concluding a license, but received no reply. Unwired then wrote, in November 2013, to Huawei’s IP department which replied very promptly. Unwired Planet started infringement proceedings against Huawei in March 2014. In 2015 and 2016 three trials were held to determine whether the UK patents in suit were valid and infringed. Two patents were found valid and essential. Two were found to be invalid. Unwired Planet had similar mixed results in patent infringement trials with respect to patents claimed to be SEPs in Germany and China. Following the three English trials on validity (the “technical trials”) a further trial was held to determine the appropriate remedy. The judge concluded that the appropriate remedy was to determine a global license on FRAND terms and to issue an injunction against infringement of the UK patents that had been found to be valid and essential until Huawei agreed to such a global license. The Supreme Court decision derived from that trial to determine the appropriate remedy.
The Supreme Court’s reasoning on the issues before it was as follows:
On Whether a License Had to be Global to be FRAND
Huawei had accepted that the English court had the power to set out the terms of a FRAND license under Unwired Planet’s UK SEPs and to issue an injunction against infringement of the UK SEPs that had been found valid if it did not accept a license on those terms. However, Huawei disputed the power of the English courts to fix the terms of a global license and issue an injunction retraining infringement of UK SEPs unless Huawei agreed to that global license.
The UK Supreme Court started its analysis by considering ETSI’s IPR policy to try to determine what was intended by its requirement that those who participated in standards-setting should license their SEPs on FRAND terms. The Court noted that the policy had the objectives of deterring both hold up (refusals to grant licenses under SEPs on FRAND terms) and hold out (refusals to accept licenses on terms that had been determined to be FRAND). ETSI’s contracts were governed by French law. The UK Supreme Court noted that by:
requiring an IPR holder whose invention appears to be an Essential IPR to give an irrevocable undertaking to grant a license of the IPR on FRAND terms, it creates a “stipulation pour autrui”, in other words, an obligation which a third-party implementer can enforce against the IPR holder.
However, the UK Supreme Court also noted:
“IPR holders whether members of ETSI and their AFFILIATES or third parties, should be adequately and fairly rewarded for the use of their IPRs in the implementation of STANDARDS and TECHNICAL SPECIFICATIONS.”
The Court saw this as having the objective of addressing the mischief of “holding out” by which implementers, in the period during which the IPR Policy requires SEP owners not to enforce their patent rights by seeking injunctive relief, in the expectation that license terms will be negotiated and agreed, might knowingly infringe the owner’s Essential IPRs by using the inventions in products which meet the standard while failing to agree a license for their use on FRAND terms by dragging out the license negotiations to effectively force the owner to accept a lower royalty rate than is fair.
Bearing these two objectives in mind and noting that the IPR Policy fails to be construed, like other contracts in French law, by reference to the language used in the relevant contractual clauses of the contract and also by having regard to the context, the UK Supreme Court turned to a consideration of the context of ETSI’s IPR policy.
In doing this, it was appropriate to look to industry practice in negotiating license agreements. It was undisputed that SEP owners, which have a large portfolio of patents covering many countries, and implementers, which market their products in many countries, would as a matter of practice voluntarily negotiate worldwide licenses, or at least licenses from which a given territory is carved out while the rest of the world is licensed. The Supreme Court noted that licensing on a country-by-country or patent-by-patent basis created too many practical problems. Furthermore, it is common practice in the telecommunications industry for operators to agree global licenses of a portfolio of patents, without knowing precisely how many of the licensed patents are valid or infringed. It is a sensible way of dealing with unavoidable uncertainty. It ought to be possible for operators in an industry to make allowance for the likelihood that any of the licensed patents are either invalid or not infringed. By taking out a license of an international portfolio of generally untested patents, the implementer buys access to the new standard. It does so at a price which ought to reflect the untested nature of many patents in the portfolio, in so doing it purchases certainty. The ETSI IPR Policy was agreed against that background and the undertaking required from the SEP owner likewise needs to be interpreted against that background.
With this context in mind, it was appropriate for a FRAND license to set out global terms. The Court did, however, also note that it agreed with the parties:
that the FRAND obligation in the IPR Policy extends to the fairness of the process by which the parties negotiate a license. If an implementer is concerned about the validity and infringement of particularly significant patents or a group of patents in a particular jurisdiction which might have a significant effect on the royalties which it would have to pay, it might, in our view, be fair and reasonable for the implementer to reserve the right to challenge those patents or a sample of those patents in the relevant foreign court and to require that the license provide a mechanism to alter the royalty rates as a result. It might also be fair and reasonable for the implementer to seek to include in the license an entitlement to recover sums paid as royalties attributable to those patents in the event that the relevant foreign court held them to be invalid or not infringed, although it appears that that has not been usual industry practice. Under a FRAND process, the implementer can identify patents which it wishes to challenge on reasonable grounds. For example, in the Conversant case, it might well be argued by Huawei or ZTE at trial, that the obligation of fairness and reasonableness required any global license granted by Conversant to include provision to allow for Huawei or ZTE to seek to test the validity and infringement of samples of Conversant’s Chinese patents, with the possibility of consequential adjustment of royalty rates, given the importance of China as a market and a place of manufacture.
Huawei contended that that grant of a global license was the correct way to ensure that it was FRAND that was out of line with the approach of courts in most significant jurisdictions. To address this, the Supreme Court looked at case law in the United States, Germany, China, Japan, and proceedings before the European Commission, which it summarized as follows:
In summary, the US case law shows:
(i) a recognition that the court in determining a FRAND license in such cases is being asked to enforce a contractual obligation which limits the exercise of the patent owner’s IP rights including its IP rights under foreign law;
(ii) a willingness in principle to grant an injunction against the infringement of a national patent which is a SEP, if an implementer refuses a license on FRAND terms;
(iii) a willingness in principle to determine the FRAND terms of a worldwide license;
(iv) a practice of looking to examples of real life commercial negotiation of licenses by parties engaged in the relevant industry when fixing the FRAND terms of a license; and
(v) a recognition that the determination of a FRAND license by one national court does not prevent an implementer from challenging foreign patents on the grounds of invalidity or non-infringement in other relevant national courts.
Similarly, in Germany, the developing case law shows:
(i) a recognition that a worldwide license might be FRAND and an implementer’s counter-offer of a national license confined to Germany might not be FRAND;
(ii) a practice of having regard to the usual practices of parties in the relevant industry when the court determines the FRAND terms of a license; and
(iii) a willingness to grant an injunction against infringement of a national patent if the court holds that a SEP owner’s offer of a license is FRAND and the implementer refuses to enter into it. The courts in China have not rejected the proposition that a worldwide license might be FRAND, nor have the courts ruled that they do not have jurisdiction to determine the FRAND terms of a worldwide license with the consent of the parties, although it remains a matter of speculation whether they would or would not accept jurisdiction.
Therefore, the Court rejected Huawei’s contention.
Huawei was also unsuccessful in arguing that even if a global license could be appropriate in some circumstances, it should not be required when the SEPs were owned by a patent assertion entity. The Supreme Court noted:
In our view, however, the rights which PAEs acquire through the transfer by assignment of patents are the same as those which the assignor patent owners had held: assignatus utitur jure auctoris – that which is assigned possesses for its use the rights of the assignor or cedent. In some cases, the assignment of rights to a PAE and the reservation of a share of the royalties which it negotiates or obtains through litigation may be the most straightforward means by which a SEP owner can obtain value from its intellectual property which is the fruit of its research and innovation, and if the rights are treated as qualified in the hands of the PAE the consequence will be that the SEP owner will not receive the reward which its investment merits. In the exercise of those rights in pursuit of a FRAND license the assignee PAE, like the assignor patent owner, must act fairly and reasonably as FRAND is an obligation which governs the process of negotiation as well as the outcome of the determination of a FRAND . There is no legal basis under the general law for treating PAE owners of SEPs differently from other SEP owners unless they have different interests which merit different remedies.
The lower courts had therefore been correct in holding that under ETSI’s IPR policy a global FRAND license was appropriate.
On Whether FRAND Was a Unitary Term or Whether the Requirement to be “Non-discriminatory” Added Separate Obligations
Prior to the trial on remedies in the present case, Unwired had granted Samsung a license with a modest royalty rate. Huawei argued that the “non-discriminatory” aspect of the FRAND obligation meant that it should be granted a license on the same terms. All of the English courts hearing the case disagreed. The Supreme Court approached the issue by considering how ETSI had come to include an obligation on FRAND terms in its requirements to participate in standards setting as a tool to determining whether “FRAND” was a single obligation or three separate obligations. The Court noted that the original proposal for ETSI’s conditions had contemplated a “most favored nation” provision that would have required licensing all users of a patent owner’s SEPs on the lowest royalty agreed with any of them, but this proposal had been dropped. ETSI had recognized that different rates might apply to different users and still be non-discriminatory. The Court noted that in the present case the license to Samsung had been granted when Unwired was in financial distress. Although this was not a determining factor in the present case, it was illustrative of why it could be “fair, reasonable and non-discriminatory” for different rates to apply to different licensees. The FRAND obligation had to be looked at as a unitary requirement and not broken down into separate parts. Noting an academic study that price discrimination was the norm in IP licensing and that there were good reasons why the first licensee might get a better royalty rate than those who came later, the Court agreed with Unwired Planet that:
Non-discrimination between licensees is achieved, because the FRAND rate is objectively determined based on the value of the portfolio and it does not take into account the characteristics of individual licensees. It satisfies the obligation to treat like cases alike, because the same rate is made available to all licensees who are similarly situated in the sense that they seek the same kind of license.
On the Impact of Law Restraining Abuse of a Dominant Position
Article 102 of the Treaty on Functioning of the European Union, prohibits abuses of a dominant position within the EU’s internal market or a substantial part of it. It was accepted that this article was applicable to the present case.
In 2015, in Huawei v. ZTE, the Court of Justice of the European Union considered the relevance of this article to the question of whether a patent owner who had agreed to grant licenses on FRAND terms retained the right to obtain an injunction against a prospective licensee who is holding out for better terms than those offered by the patent owner. The European Court had held that this was possible as long as certain conditions were met. The issue before the U.K. Supreme Court was which of the conditions discussed by the European Court were mandatory and which simply set out a safe harbor that ensured that the mandatory conditions were met, but allowed for meeting the mandatory conditions in other ways.
The UK Supreme Court found that compliance with the Huawei v. ZTE decision required that the owner of an SEP would abuse its dominant position if it were to institute infringement proceedings seeking an injunction “without notice or prior consultation with the alleged infringer”. However, it was not mandatory to follow the specific scheme for consultation set out in the Huawei v. ZTE decision.
The European Court had summarized its decision as follows:
article 102 TFEU must be interpreted as meaning that the proprietor of an SEP, which has given an irrevocable undertaking to a standardization body to grant a license to third parties on FRAND terms, does not abuse its dominant position, within the meaning of article 102 TFEU, by bringing an action for infringement seeking an injunction prohibiting the infringement of its patent or seeking the recall of products for the manufacture of which that patent has been used, as long as:
1. Prior to bringing that action, the proprietor has, first, alerted the alleged infringer of the infringement complained about by designating that patent and specifying the way in which it has been infringed, and, secondly, after the alleged infringer has expressed its willingness to conclude a licensing agreement on FRAND terms, presented to that infringer a specific, written offer for a license on such terms, specifying, in particular, the royalty and the way in which it is to be calculated, and
2. Where the alleged infringer continues to use the patent in question, the alleged infringer has not diligently responded to that offer, in accordance with recognized commercial practices in the field and in good faith, this being a matter which must be established on the basis of objective factors and which implies, in particular, that there are no delaying tactics.”
The UK Supreme Court noted that this passage did not “tell us that if an SEP owner does not follow the steps it will be abusing its dominant position” (emphasis in the original). The quoted passage simply set out certain steps which if they were followed avoided the possibility of being found to have abused a dominant position.
In the present case Unwired Planet had made it clear to Huawei that it was willing to grant a license before proceedings commenced and further during the proceedings that even though Unwired Planet believed that the license should be global it had accepted that if a court found that it was not necessary for the license to be global for it to be global, it was willing to grant a license for its UK portfolio alone. After noting that the European Commission’s view of the Huawei v. ZTE decision recognized that each situation was dependent on its own facts but the objective was to protect both the intellectual property rights of SEP owners and interests of what it called “good faith technology users”, the UK Supreme Court concluded:
What mattered on the facts of this case was that Unwired had shown itself willing to license Huawei on whatever terms the court determined were FRAND, whereas Huawei, in contrast, had only been prepared to take a license with a scope determined by it.
Unwired Planet had not therefore abused a dominant position by seeking an injunction.
On Whether Grant of an Injunction was Equitable
Although the issue had not been argued in the lower courts, the Supreme Court considered Huawei’s submission that the appropriate remedy for its not having agreed to a FRAND license as set out by the lower courts was an award of damages rather than grant of an injunction against infringement of the UK patents in question. Huawei argued that since it agreed that it should pay a royalty, the only dispute being about the basis for that royalty, an award of damages was the appropriate and proportionate remedy. The Supreme Court disagreed. It considered the U.S. Supreme Court’s decision in eBay Inc. v. Mercexchange LLC and in particular Justice Kennedy’s explanation of why injunctions were not necessarily the appropriate remedy in cases of patent infringement because they could be used by PAEs to bargain for exorbitant fees, particularly where the patented component formed only a small component of the product. This was not a consideration here because the nature of the case was such that the only royalties that would have to be paid were those the court considered reasonable. In any case because of the costs of litigating on a country-by-country basis, denying the patent holder the right to an injunction would provide the user of an SEP with an incentive to hold out on a country-by-country basis until it was compelled to pay. An injunction was therefore “necessary to do justice” and damages would not be an adequate substitute.
On the Issue of Forum Non Conveniens
The Supreme Court approached this issue from the traditional common law perspective of considering whether a foreign court is a more suitable forum to determine the dispute between the parties in “the interests of all the parties and for the ends of justice”. To decide this, it was necessary to define the dispute between the parties. Huawei argued that it was about the terms of a global FRAND license. Conversant, which as noted above was the only patent-owning party in the case in which the forum issue had been raised, argued that the dispute was about vindication of the rights inherent in English patents and therefore their validity and infringement with the FRAND issues arising only as an aspect of an alleged contractual defense. The Court agreed with Conversant. However, this was not the determining reason why the English courts had jurisdiction. For the forum non conveniens defense to apply it was necessary to show that some other court would be more suitable to decide the dispute. Even on Huawei’s characterization of the dispute, the evidence did not show that any other court was better situated than the English courts. The Court noted that the only candidate to be advanced was a Chinese court. However, the evidence in the case showed that a Chinese court had the power to settle the terms of a global FRAND license, at least unless there was agreement between the parties that it should do so, and even this was not entirely clear. Therefore, the English courts were the better choice to settle global FRAND terms.
Calculation of the Royalty
No appeal was made against the methodology used by the first instance judge (Birss J) as to how to calculate a FRAND royalty, just on the way on which such methodology should be applied and so the Supreme Court had no reason to review the methodology. For completeness, however, it is worth remembering that Birss J’s method was first to consider comparable licenses and then to cross check the results obtained by a “top-down” calculation.
In the first stage, Birss J considered licenses that had been granted by Ericsson, the previous owner of many of the patents, as the starting point for determining a reasonable royalty rate but subjected this to an adjustment to represent the relative strength of Unwired Planet’s portfolio to Ericsson’s to determine benchmark rates for different standards. The benchmark rate was then used as the basis for determining applicable rates for different territories. Three main factors were used for this adjustment:
1. whether comparable licenses had different rates for different countries;
2. the relative number of relevant patent families in the territory as compared to the number of patent families that had been included in the portfolios used to establish the benchmark rate and;
3. whether the territory was a “major market” or an “other market” for the standard, the latter being based on the number of relevant SEPs in the territory included in the licensed portfolio (effectively using this number as a proxy for how important the market was). Applying these criteria, the judge determined appropriate rates for different standards for different countries resulting for example in rates of 0.026% for 4G infrastructure in China and 0.051% for such a license in the United Kingdom and the United States, a large factor in the difference being evidence that comparable licenses had royalty rates in China that were 50% of those in many other countries.
For a cross-check, Birss J looked to the “aggregate royalty burden”, in which the aggregate royalty attributable to a standard under all SEPs is computed and then allocated to the SEP holder in suit. To do this, Birss J looked at public statements made by Ericsson and other SEP holders as to what they thought the aggregate royalty burden should be and then multiplied this by a factor representing Unwired Planet’s share of the relevant SEPs. In doing this he used a variety of counting and filtering methodologies proposed by the parties’ experts, one of which aimed to assess the likely essentiality of the patents in the asserted portfolio.
The judge also noted a number of other provisions that should be included in any FRAND license in this case, including:
1. a release for back damages on the basis that royalties were paid at the contract rate for the past period;
2. basing the royalty on the defined net selling price of defined end user equipment or infrastructure equipment;
3. applying the royalty rate applicable in the country in which the licensed product was sold; royalties being payable on sale. If imposed by the court, the terms of the license would be public. However, such a license should not include a clause providing for exclusive jurisdiction seeking to oust the jurisdiction of other courts that might otherwise have jurisdiction over any dispute relating to the license.
As with the recent U.S. Ninth Circuit Court of Appeals decision in FTC v. Qualcomm, and recent decisions in Germany, this decision again shows the courts concerns that originators of technical advances that come to be used widely by others should be entitled to obtain a proper reward for their contributions.