11/09/2020
The Supreme Court decision in Unwired Planet and others ([2020] UKSC 37) represents the culmination of a series of trials, begun in 2014, and involving several key players in the telecommunications industry. It combines separate appeals by Huawei and ZTE against Standards Essential Patent (SEP) holders and intellectual property licensing entities (often called Patent Assertion Entities or PAEs) Unwired Planet International Ltd and Conversant Wireless Licensing. The historic decision focusses on the remedies available to a Standards Essential Patent (SEP) holder enforcing their patents in the UK against an implementer, in circumstances where both parties to some extent have agreed to negotiate a license on Fair Reasonable and Non Discriminatory (FRAND) terms.
The historic decision is notable for a number of reasons. The Unwired Planet decision takes into consideration decisions in key jurisdictions overseas, and in turn is likely to be influential for such courts grappling with similar issues. The findings of Justice Colin Birss (Birss J) in his seminal 2017 High Court decision ([2017] EWHC 711) were largely upheld without amendment both by the Court of Appeal in 2018 ([2018] EWCA Civ 2344) and by the Supreme Court in 2020.
Both higher courts have provided a ringing endorsement of an already bold first instance decision. In that decision, Birss J established that the UK court had authority both to set the terms of a global license, those terms being FRAND, and grant an injunction against an implementer who refused to enter into the license proposed by the court. In so doing, the Unwired Planet decisions establish the United Kingdom as a key forum for settling future disputes concerning SEPs and FRAND licenses.
The decision is timely. Enforcement and licensing of SEPs is no longer constrained to the mobile phone industry alone, with Autonomous vehicles and Internet of Things companies increasingly needing access to technology protected by telecommunication standards. The following article gives a brief overview of the background to the case, consideration of the main findings, and the significance of the decision for future IP developments.
The background – Unwired Planet and Huawei
Unwired Planet acquired a SEP patent portfolio from Ericsson in 2013, and in 2014 began proceedings in the UK courts to assert six patents against three parties, Google, Samsung and Huawei. Five of these were declared as SEPs. In addition to a number of case management and procedural matters, proceedings were divided into five technical trials (trials A to E) to establish the validity and standard essentially of the six patents, and a final “non-technical” trial to determine what relief would be available to Unwired Planet if they were successful at the technical trials.
The five technical trials were scheduled to take place between autumn 2015 and summer 2016. Google settled with Unwired Planet in the summer of 2015 before the trials kicked off, leaving Samsung and Huawei to continue with the challenge. Unwired Planet prevailed in two of the trials (A and C) with patents EP2229744B (UK) and EP1230818B (UK) being found valid and essential to the standard, and therefore infringed by Samsung and Huawei if they implemented the technology in the standard. The two patents in trial B were found invalid for obviousness, while consideration of the patents in technical trials D and E were ultimately postponed indefinitely on the agreement of the parties.
Samsung settled with Unwired Planet in summer 2016 leaving Huawei to fight on. At the time of the Samsung settlement, Unwired Planet were in some financial difficulty, and Samsung were able to negotiate considerably more favourable license rates. This fact later formed the basis of Huawei’s challenge to the terms of the global FRAND license determined by the court, namely that under the non-discrimination (ND) part of the FRAND obligation, Huawei should have been entitled to similar rates as Samsung.
In the autumn of 2016, Birss J considered the competition and FRAND issues relating to the valid and infringed patents and the suitable form of relief. Our earlier report of that decision is here, noting that Birss J ruled that an injunction against Huawei should be available in the UK unless Huawei accepted a global license on FRAND terms set by the court. Our further report here discusses the specific nature of the FRAND injunction given.
The nature of the ruling in the initial decisions has been largely upheld by the Court of Appeal and Supreme Court. Lastly, the validity finding in technical trial A was upheld by the Court of Appeal in 2017. Although, appeals were allowed against the finding of technical trials B and C these were stayed in 2017.
The background – Conversant, Huawei and ZTE
The Supreme Court decision also includes an Appeal by Huawei and ZTE against the first instance decision of J Carr in ([2018] EWHC 808). In July 2017, Conversant asserted a number of its standard essential patents against Huawei and ZTE, seeking a declaration from the English Court that the global license it had offered Huawei and ZTE was FRAND, determination of FRAND terms in the event that they were not, and an injunction against Huawei and ZTE that would last until they entered into a FRAND license.
Four patents were asserted in the English Conversant trials. In a first trial, EP1797659B (UK) was found by Arnold J to be standards essential, but invalid in view of added subject matter. Conversant appealed the decision and although the appeal has taken place, the decision is awaited at the time of writing. In a second technical trial of EP1878177B (UK) and its two divisional applications (EP3197206B (UK) and EP1878177B (UK)), Birss J found patents EP1878177B (UK) and EP3267722B (UK) partially valid and infringed, and EP3197206B (UK) invalid for obviousness. The appeal on the decision of the second technical trial is scheduled to take place in November 2020. A related non-technical FRAND trial was due to take place in April 2020 but has since been delayed in view of the COVID-19 pandemic and to await the outcome of the appeals.
By way of defence, Huawei and ZTE had challenged the jurisdiction of the English courts to hear the dispute. This is the subject matter of the appealed [2018] EWHC 80 decision noted above. The arguments took a number of forms, including: a) that the English court had no jurisdiction to decide Conversant’s claim, which by reference to a global license “in substance and effect” concerned the infringement of foreign patents the validity of which is in dispute, b) that England was not the proper or appropriate forum to hear the dispute (a forum non conveniens argument), which should instead be regarded as China, c) that Huawei China and ZTE China had not been validly served in England, and d) applications by Conversant to serve Huawei China and ZTE China for substituted service should have been refused.
Significantly, with regard to point b), Huawei argued that China accounts for 56% of Huawei’s worldwide sales on which royalties are claimed by Conversant, and that Conversant relies on its Chinese patents to claim royalties both in China and on other global sales (amounting to a further 19%), such that if the Chinese patents were found invalid then 75% of the royalty claim would fall away. By contrast, the UK accounted for only 1% of Huawei’s business.
Huawei and ZTE had begun parallel proceedings in China to challenge the validity of Conversant’s Chinese patents, and so similar (but not necessarily identical) issues could be expected to be heard in those proceedings.
Issues considered by the Supreme Court
Against the background discussed above, five issues remained to be ruled on by the Supreme Court. These are paraphrased here as follows:
(1) Can an English court grant an injunction restraining the infringement of a UK SEP unless the defendant enters into a global licence on FRAND terms of a multinational patent portfolio? And can the English Court determine the royalty rates and other disputed terms for a settled global licence and to declare that such terms are FRAND?
(2) Is England the appropriate forum to hear the litigation? (the forum non conveniens issue)
(3) What is the meaning of the Non-Discriminatory requirement in the FRAND undertaking, and is it hard-edged?
(4) Should the English Court refuse an injunction because Unwired Planet did not follow the CJEU’s judgement in Huawei v ZTE?
(5) What circumstances make it appropriate for an English Court to grant a prohibitory injunction or to award damages?
Each issue will now briefly be discussed below.
(1) The English court’s right to compel an implementer to take a global FRAND license and to determine the terms of that license.
The dispute around the first issue is essentially the heart of the respective appeals by Huawei (and ZTE). Huawei had argued that the English court’s award of a UK injunction that would be applied unless Huawei took a global FRAND license amounted to Huawei having to compromise their right to challenge the validity and standards essentiality of the other patents in the global portfolio. In other words, as English courts cannot determine the validity or infringement of foreign patents, it would not be right that an English court compel an implementer to take a license in respect of a foreign right which ultimately may be found by a foreign court not to exist (due to invalidity), or to set royalty rates in a potentially different way to the foreign court. By doing so, the English court was setting itself up as a de facto international or worldwide licensing tribunal for the telecommunications industry.
The Supreme Court, agreeing with the lower courts, recognized that it is the contractual nature of European Telecommunication Standard Institute’s (ETSI) IPR policy that gives it jurisdiction to determine a FRAND license and ultimately for that license to be a global one.
“It is the contractual arrangement which ETSI has created in its IPR Policy which gives the court jurisdiction to determine a FRAND licence and which lies at the heart of these appeals”. [para. 58]
Huawei had tried to argue that the correct interpretation of ETSI’s IPR policy limited the court to a national license. Reasons advanced included the fact that ETSI had not established an international forum where the terms of a global license would be determined, and that determining a global license by a court would unduly favour SEP holders, giving them extra leverage (in the form of the threat of an injunction) to engage in patent “hold-up” – that is taking advantage in negotiations of the less flexible position of the implementer and imposing less favourable terms than initially promised under the SEP holder’s FRAND declaration. Specifically, such an outcome would be contrary to Section 3.1 of ETSI’s IPR policy which speaks of seeking a balance between the needs for standardization and the rights of the IPR owners.
The Supreme Court was not persuaded and noted that Huawei’s argument gave insufficient weight both to commercial reality, and in a more specific sense, to section 3.2 of the ETSI’s IPR policy which also sought to expressly secure fair and adequate rewards for SEP holders. With regard to commercial reality, the Supreme Court noted that:
“operators in the telecommunications industry or their assignees may hold portfolios of hundreds or thousands of patents which may be relevant to a standard. [And that] The parties accept that SEP owners and implementers cannot feasibly test the validity and infringement of all of the patents involved in a standard which are in a sizeable portfolio” [para. 60]
“The practical solution therefore is for the SEP owner to offer to license its portfolio of declared SEPs. That is why it is common practice in the telecommunications industry for operators to agree global licences 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”. [para. 60]
Licences for a portfolio of standard essential patents were understood to unavoidably include a number of patents that ultimately might not be found valid or infringed, due to issues such as over-declaration (the problem that more patents are declared as essential than actually are), as well as the fact that the difficulty and time involved in determining the validity and infringement of a patent ruled out individual challenge of all but the key patents in the portfolio. However, this deficiency could be dealt with practically, by operators in the industry negotiating suitable license rates reflecting the likelihood of patents in a portfolio being invalid or not infringed. Thus,
“by taking out a licence 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”. [para. 60]
In this regard, the court also saw no reason to distinguish between intellectual property licensing entities such as Unwired and Conversant as SEP owners, and other SEP owners such as manufacturers and sellers of telecommunications equipment.
The Supreme Court therefore upheld the English courts authority to compel an implementer involved in SEP licensing discussions to take a global license on FRAND terms and for the English court to determine the terms of that license.
(2) Whether England is the appropriate forum to hear the litigation (forum non conveniens)
In the Conversant appeal, Huawei and ZTE had argued that the international nature of the dispute meant that the English High Court was not the appropriate jurisdiction, with the suggested court instead being the Chinese court.
The Supreme Court noted that in order to decide on the appropriate forum, the common law forum conveniens doctrine required the English court to “identify the dispute between the parties as the matter to be tried”, and that this had been a sticking point between the parties in resolving the issue.
On the one hand, Huawei and ZTE regarded the dispute as one concerning a Global FRAND License, while Conversant submitted that the dispute was “about the rights in an English patent, and therefore about their validity and infringement, with FRAND issues arising only as an aspect of an alleged contractual defence”.
The Supreme Court took the view that the latter definition of the dispute was the more accurate, as the owner of a patent portfolio granted by different countries is entitled to choose the country in which they litigate, and should not be compelled to enforce patents in another country just because a common FRAND defence raises issues which might be more conveniently determined there.
The Supreme Court also ruled that Huawei and ZTE had not in fact shown that there was a more appropriate forum. China was the only alternative jurisdiction put forward, and despite the commercial importance of the Chinese market to the parties, it was found (based on extensive expert evidence) that Chinese courts did not have jurisdiction to determine the terms of a global FRAND license at least in the absence of any agreement by all parties that they should do so. English courts on the other hand have determined that they do have jurisdiction, even in the absence of agreement by the parties, and had appropriately exercised that jurisdiction.
A related but smaller issue argued by Huawei and ZTE was that the claim for injunctive relief in the English proceedings should be temporarily stayed or otherwise case managed so as to enable a final decision to be handed down in the parallel litigation in the Chinese courts. Some accommodation had been provided by J Carr in the scheduling of the UK trials, but no further accommodation was considered necessary, especially due to the fact it was only speculative that the Chinese court would rule on a global license.
(3) What is the meaning of the Non-Discriminatory requirement in the FRAND undertaking and is it hard-edged?
At the time that Samsung had negotiated a license, Unwired Planet were in some financial difficulty. PanOptis had recently acquired Unwired Planet, and the new owners had a wider commercial interest in establishing a favourable business relationship with a new business partner (e.g. Samsung) in order to encourage further transactions. As a result, the worldwide royalty rate under the Samsung license was “much lower” than the worldwide rate later determined for Huawei by the first instance court based on an analysis of comparable licenses in the market.
Huawei had objected that this infringed the non-discrimination aspect of the FRAND undertaking, which, required an ordinary and unadorned interpretation, and so ultimately required an SEP owner to grant the same or similar terms to all similarly situated licensees, unless it could be shown that there were objective grounds for treating them differently. This argument was interpreted as a “most favourable licence” argument, essentially requiring Huawei to be offered the same terms as Samsung.
These arguments failed. The courts had found that the “fire sale” terms of the Samsung licence were not a good comparator or basis for assessment of the uniform marketing royalty rate required under the FRAND declaration. Further, the non-discrimination element of the FRAND undertaking was viewed as a general one rather than a “hard-edged” one. The non-discrimination requirement is not to be considered in isolation from the requirements that the FRAND terms be “fair” and “reasonable”, but is to narrow down the scope of what these words might mean in a given context. In particular, the non-discriminatory requirement stipulated that a fair and reasonable royalty does not depend on any idiosyncratic characteristics of the licensee.
“Licence terms should be made available which are “fair, reasonable and non-discriminatory”, reading that phrase as a composite whole. There are not two distinct obligations, that the licence terms should be fair and reasonable and also, separately, that they should be non-discriminatory. Still less are there three distinct obligations, that the licence terms should be fair and, separately, reasonable and, separately, non-discriminatory” [para. 113]
The Supreme Court noted that publically available documents showed that ETSI had considered and ruled out a most favourable licence term in the FRAND undertaking, and that differential pricing is well known within IP licensing. Particularly persuasive was an appeal to commercial reality, which observed that that first mover advantage is a well recognised phenomenon, and that a SEP portfolio holder may have reason to offer a lower rate to a first implementer to provide an initial income and to validate the portfolio in the eyes of the market.
“if the “fire sale” royalty rate were to be taken to dictate the FRAND royalty rate for the portfolio for the rest of the participants in the market, […] portfolio owners would be unable to utilise such means of raising funds without, in effect, permanently devaluing the portfolio. There is nothing in the ETSI scheme or the language of the FRAND undertaking to indicate that it was intended that the undertaking should have these effects” [para. 126]
(4) Should the English Court refuse an injunction because Unwired did not follow the CJEU’s judgement in Huawei v ZTE
Huawei also argued that Unwired planet had not followed the conditions set out in the Huawei v ZTE decision of the CJEU, Huawei v ZTE (CJEU C170/13), and that compliance with these conditions was mandatory for an SEP owner to be awarded an injunction. By not complying exactly with these requirements, Huawei argued that Unwired Planet’s request for an injunction was an abuse of its dominant position in contradiction to competition law, and that they should have been limited to an award of damages. Huawei’s argument was complicated a little in this regard by the CJEU judgement not being available at the time Unwired planet began the English court proceedings against Huawei.
In relation to the specific findings in CJEU Huawei v ZTE, the English courts held that the CJEU decision provided guidance as to an acceptable standard of behaviour between the parties, but had not set out prescriptive rules that were intended to apply in every case. Thus, although the steps set out in Huawei v ZTE did indicate a safe harbour for license negotiations, non-compliance did not mean that an abuse of a dominant position had occurred, or that the award of an injunction was not justified.
At first instance, Huawei’s argument that it had a competition law defence because proceedings had been commenced before FRAND terms were offered to it by Unwired Planet had failed. Birss J took the view that Huawei had sufficient notice prior to commencement of the proceedings, and that it was clear in the context, that by issuing the proceedings Unwired Planet were not refusing to license.
“There was no mandatory requirement that Unwired itself make an offer of terms which coincided with those that were ultimately determined by the court to be FRAND […] 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 licence with a scope determined by it”. [para. 158].
The Supreme Court therefore found against Huawei on this issue, agreeing with the lower courts.
(5) What circumstances make it appropriate for an English Court to grant a prohibitory injunction or to award damages?
A final issue raised at the Supreme Court trial had not been argued in the courts below and related to the balance of interests in granting an injunction. Huawei argued that even if they were infringing the SEP, the only legitimate interest of the claimant Unwired Planet (being a Patent Assertion Entity or PAE) was to obtain royalties, and this interest could be entirely satisfied by an award of damages. Thus, it was not proportionate or fair to grant an injunction.
The Supreme Court were not persuaded, and looking to the wider reasons why an injunction might be needed, stated:
“If the patent-holder were confined to a monetary remedy, implementers who were infringing the patents would have an incentive to continue infringing until, patent by patent, and country by country, they were compelled to pay royalties. It would not make economic sense for them to enter voluntarily into FRAND licences”. [para. 167]
“An injunction is likely to be a more effective remedy, since it does not merely add a small increment to the cost of products which infringe the UK patents, but prohibits infringement altogether. In the face of such an order, the infringer may have little option, if it wishes to remain in the market, but to accept the FRAND licence which ex hypothesi is available from the patent-holder” [para. 167]
Huawei’s allegation that the threat of an injunction was being used to charge higher fees or for undue leverage, was not therefore found to be consistent with the facts of the case. Unwired Planet, as SEP holder, had indicated willing to license, and had sought to make a FRAND declaration on fair reasonable and non-discriminatory terms. To the extent that the offered terms were not FRAND, they would accept terms determined by the court assessed against comparables in the market place.
Rather than “enabling the patent-holder to abuse its rights” the English’s court FRAND injunction instead applied economic pressure to the potential licensee encouraging them to settle on appropriate terms, preventing “hold out” by the licensee, and avoiding circumstances in which an SPE holders would need to bring enforcement proceedings territory by territory.
Are the UK courts setting themselves up as a de facto global licensing forum? – well yes, and probably no.
So where does that leave us? The decision of the Supreme Court is notable in a number of respects. Primarily, it is clear that the English Courts are confident in their authority both to award FRAND injunctions unless an infringer takes a global license, and also to determine the terms of such a license. The mechanism for this arising from the English courts undisputed right to determine the infringement and invalidity of UK patent rights, and the associated contractual treatment of the FRAND obligations set out in ETSI’s policy, which go the question of appropriate relief for the parties involved if a patent is found valid and infringed.
The Supreme Court did acknowledge that in the first instance decision “Birss J has gone further than other courts have done thus far in his willingness to determine the terms of a FRAND licence which the parties could not agree, but that does not involve any difference in principle from the approach of courts in other jurisdictions” and that “the principles stated in those judgments [of other jurisdictions] contemplate that, in an appropriate case, the courts in the relevant jurisdictions would determine the terms of a global FRAND licence” [para. 67].
The English court’s willingness to offer such relief also arises from its detailed assessment of commercial reality, and the observation that it would be madness to require an SEP holder to litigate country by country if this could possibly be avoided. A worldwide license, albeit one with different rates for different regions and different standards would be considerably more efficient, and is open to the parties to accept or refuse.
Finally, the decision of the English Courts demonstrates the English court’s view of its role in providing clear legal guidance, based on commercial reality and involving as comprehensive a view of the issues as is reasonable in the circumstances, while seeking to bring the matter to a satisfactory close. In this regard, the decision in Unwired Planet is significant for its breadth of consideration, and resolve to balance the rights of SEP holder and implementer.
The number and importance of SEP portfolio negotiations is likely to increase in the coming years, as SEP technology is embedded and rolled out to automotive and IoT applications. The balanced approach set out in the Unwired Planet decision and associated trails is therefore extremely timely, and its guidance is likely to form the bedrock of legal negotiations going forwards.
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.
