31/05/2017
The long-awaited ‘non-technical’ decision of Justice Birss was published in early April 2017 in respect of the competition law and FRAND related aspects in the dispute between Unwired Planet and Huawei in the UK Courts (the decision [2017 EWHC 711] is available on BAILII’s website here). As discussed below, the decision is significant in many respects, primarily as it provides important guidance for parties involved in disputes over potential licenses of patents considered essential to telecommunications standards, and adds to the canon of FRAND related case law set out in decisions such as Huawei v ZTE (CJEU C170/13).
The background
Unwired Planet is the owner of a worldwide portfolio of patents declared as essential to various telecommunications standards (known as Standard Essential Patents, or SEPs), and has been seeking to license their portfolio to handset manufacturers (implementers) such as Huawei, and Samsung, and to technology companies such as Apple, Google and Lenovo.
In the ‘technical trials’, held in the UK courts in 2016 covering the first three of UP’s five SEPs in dispute, two patents (EP2229744B (UK) and EP1230818B (UK)) were found valid and essential to the relevant telecommunication standards (2G, 3G, 4G LTE). The UK Court of Appeal has subsequently upheld the decision of the lower court concerning EP2229744B on appeal from Huawei. The Court of Appeal decision is available here on BAILII’s website).
Unwired Planet and Huawei have been haggling over the terms of a suitable patent licence agreement since early 2014. Unwired Planet sought to have Huawei take licences under the patents on FRAND (fair, reasonable and non-discriminatory) terms. Huawei countered with terms of its own, also asserted to be FRAND.
Various objections have been raised by the parties, who generally sought to present each other’s conduct as an abuse of position. Huawei essentially argued that Unwired Planet is an unreasonable licensor engaged in a patent hold-up designed to extract the maximum benefit (in other word non-FRAND licensing rates) from them as licensee. In turn, Unwired Planet has argued that Huawei is an unwilling licensee, essentially forcing Unwired Planet to litigate in order to obtain fair remuneration (patent hold-out).
Both sides have made a number of without prejudice offers of a licence agreement, but differed widely on the licence rate and the licence terms. Huawei have argued that Unwired Planet’s proposed rate was too high and offered a considerably reduced rate. They also argued that the worldwide licence favoured by Unwired Planet was unreasonable, and sought a licence for only the UK portfolio or per-patent licence on terms to be set by the court. Huawei had previously held a licence from Ericsson for a number of SEPs since transferred to Unwired Planet, but these licences had expired.
The ‘non-technical’ proceedings before the court were scheduled to settle the competition law aspects of Huawei’s defence, determine what licence rates and terms the court considered to be FRAND, and decide the question of whether an injunction would be available to Unwired Planet to restrain Huawei’s activities in the UK.
The decision
The decision is somewhat Homerian in length, containing 166 pages of text, and over 800 paragraphs of detail. Many paragraphs have been redacted to satisfy the confidentiality interests of the parties. Happily, Justice Birss provided a summary in paragraph 806 of the main findings, some of which are repeated here, in connection with the question of FRAND terms, and the relation of FRAND undertakings and competition law.
FRAND
The court found that “there is only one set of licence terms which are FRAND in a given set of circumstances”, and not therefore a range of FRAND rates or terms which could be made by both parties simultaneously. This finding neatly side steps the question of granting or refusing an injunction in circumstances when both parties make a potentially FRAND offer, but has been criticised by some in industry as unrealistic.
In terms of how to determine what is FRAND, Birss J advocated referring to comparable licenses freely negotiated between the parties. A top-down approach could also be used as a cross-check. On these points the judge commented specifically that:
“An appropriate way to determine a FRAND royalty is to determine a benchmark rate which is governed by the value of the patentee’s portfolio. That will be fair, reasonable and generally non-discriminatory. The rate does not vary depending on the size of the licensee. It will eliminate hold-up and hold-out. Small new entrants are entitled to pay a royalty based on the same benchmark as established large entities.
A FRAND rate can be determined by using comparable licences if they are available. Freely negotiated licences are relevant evidence of what may be FRAND. A top down approach can also be used in which the rate is set by determining the patentee’s share of Relevant SEPs and applying that to the total aggregate royalty for a standard but this may be more useful as a cross-check.”
The judge concluded that none of Unwired Planet’s offers of April 2014, June 2014, June 2015 or August 2016 were considered to be FRAND, but also that none of Huawei’s offers of June 2015, August or October 2016 were considered to be FRAND. The FRAND licence between Unwired Planet and Huawei was considered to be a worldwide licence, with licence rates as follows:
| Major Markets | China and Other Markets | |||
| Handsets | Infrastructure | Handsets | Infrastructure | |
| 2G/GSM | 0.064% | 0.064% | 0.016% | 0.032% |
| 3G/UMTS | 0.032% | 0.016% | 0.016% | 0.004% |
| 4G/LTE | 0.052% | 0.051% | 0.026% | 0.026% |
Since Huawei had not (in negotiations with Unwired Planet) been prepared to take a licence on terms found by the court to be FRAND), and was found to have infringed valid patents EP2229744B (UK) and EP1230818B (UK), and since Unwired Planet were not found to be in breach of competition law, “a final injunction to restrain infringement of these two patents by Huawei should be granted. To the extent damages should be awarded, they would be at the same rate as the appropriate FRAND rate”. However, Huawei will be able to avoid any such court sanction by now entering into a licence agreement with Unwired Planet on the terms set by the court.
FRAND’s interaction with competition law
The court decided that it did not need to rely on competition law with regards to the FRAND commitment, because Unwired Planet’s declaration to The European Telecommunications Standards Institute (ETSI) “is a legally enforceable obligation” which the implementer (in this case Huawei) can rely on against the patentee. As a result the FRAND undertaking is “enforceable” in an English court. The court also decided that “The boundaries of FRAND and competition law are not the same” and that “a rate may be above the FRAND rate but not contrary to competition law”.
The court also found that some departure from the approach and principles set out in Huawei v ZTE is possible, but that the extent of the departure would need to be assessed in each case to ensure that the dominant party did not act in abuse of its position. Specifically, at paragraph 741, the judge notes that:
“I am not persuaded that the CJEU in Huawei v ZTE sought to set out a series of rigid predefined rules, compliance with which is never abusive whereas deviation from which is always abusive, all regardless of the circumstances. Abuse of dominance is a serious matter and the court will have had well in mind that circumstances can vary.”
Summary
This judgment is notable for tackling the complexities of FRAND negotiations between parties head on, and provides much guidance for parties to follow. However, as the circumstances in which parties negotiate vary so considerably from case to case it is perhaps still too early to take a view on what universally applicable conclusions can be drawn. In closing, it is nevertheless worth repeating Justice Birss’ summary of what this case was really about, namely the effectiveness of patents standards bodies and the requirement for SEP holders to give FRAND undertakings.
- “The point of FRAND in standard setting is fairly easy to understand. Standards exist so that different manufacturers can produce equipment which is interoperable with the result that the manufacturers compete with one another. So the phone makers compete in the market for phones and the public can select a phone from any supplier and be sure (for example) that if it is a 4G phone, it will work with any 4G network. As a society we want the best, most up to date technology to be incorporated into the latest standards and that will involve incorporating patented inventions. While the inventor must be entitled to a fair return for the use of their invention, in order for the standard to permit interoperability the inventor must not be able to prevent others from using the patented invention incorporated in the standard as long as implementers take an appropriate licence and pay a fair royalty. In this way a balance is struck, in the public interest, between the inventor and the implementers. The appropriate licence is one which is fair, reasonable and non-discriminatory.”
Despite its complexities, this case is likely to be a touchstone for parties in future for determining what an “appropriate licence” for SEPs might be.
This article is for general information only. Its content is not a statement of the law on any subject and does not constitute advice. Please contact Reddie & Grose LLP for advice before taking any action in reliance on it.
