Give us a FRAND: Unwired Planet v Huawei & Samsung

The IPKat has been aware for some time that the Patents Court, in the person of Mr Justice Birss, has been devoting considerable time to a series of cases concerning mobile phone technology (Unwired Planet v Huawei and Samsung).

The dispute concerns five patents which Unwired Planet acquired from Ericsson and one which it had filed itself. These patents were asserted against Huawei, Samsung and Google (the last of which has settled and is no longer a party to the litigation).

Due to the scope of the litigation, it was streamlined at an early stage with Mr Justice Birss deciding to hold a series of five technical trials on the issues of infringement and validity of the patents in question, followed by a non-technical trial to decide between competing views as to what constitutes a fair, reasonable and non-discriminatory (FRAND) licence as well as other competition and licensing issues.

The technical trials are rumbling along, with a first decision ([2015] EWHC 3366 (Pat)) having issued on November 23, 2015, and a second decision ([2016] EWHC 94 (Pat)) issuing on January 29, 2016. Unwired Planet won the first trial, with EP (UK) 2 229 744 being upheld as valid and infringed. Huawei and Samsung won the second trial with EP (UK) 2 119 287 and EP (UK) 2 485 514 being held invalid for obviousness.

Igor Nikolic, your guest post writer

The IPKat does hope to cover these decisions on infringement and validity in due course, but before doing so he has an opportunity to put the litigation in context for readers, thanks to a guest post from Igor Nikolic, a PhD student at University College London who is writing a thesis on FRAND licensing under the supervision of Sir Robin Jacob and Dr. Christopher Stothers.

Igor writes as follows:

On 29 January, Mr Justice Birss gave judgment in the second UK patent trial between Unwired Planet, Samsung and Huawei, holding that two of Unwired Planet's patents are invalid for obviousness.

The case concerns patents that were declared essential to telecommunication standards developed by the European Telecommunications Standards Institute (ETSI). Standard essential patents (SEPs) are patents which would inevitably be infringed by operating in accordance with a standard. Since, for example, all modern smartphones must implement 4G, 3G and 2G telecommunications standards, SEPs are of great value to their holders. Any smartphone manufacturer will inevitably infringe on such SEPs and should take a licence for the use of SEPs in question.

ETSI, however, requires SEP holders to give an irrevocable commitment to grant licences on fair, reasonable and non-discriminatory (FRAND terms).

What exactly is a FRAND licence is far from clear. As well as being at issue in the Unwired Planet litigation, it was also the subject of another dispute due to come before the UK courts (Vringo v ZTE). Recently, however, it was announced that Vringo and ZTE have reached a settlement, so it appears that Unwired Planet is the only case that may provide any answers in the near future.

The Background

In 2013, Unwired Planet acquired from Ericsson more than 2,000 patents and in March 2014 initiated infringement proceedings against Huawei, Samsung and Google asserting 5 SEPs bought from Ericsson and one non-SEP developed by Unwired Planet. The defendants responded that Unwired Planet's patents are invalid and not infringed. They also argued that while Unwired Planet had offered a licence, the offer was not on FRAND terms. They further argued that the transfer of the SEPs from Ericsson infringed competition law.

What is a FRAND licence?

During the trial, both Huawei and Samsung conceded that they are willing to take a licence if patents are proven to be valid and infringed. However, they disagreed with Unwired Planet on what constitutes a FRAND licence.

Unwired Planet offered a worldwide portfolio licence on all of its patents essential to 2G, 3G and 4G standards, while Huawei submitted that that it is willing to take a licence only for particular SEPs found to be valid and infringed, and only with respect to certain territories.

The following are some of the questions the court is expected to resolve on trial:

1. is the licensor obliged to offer a single patent licence if requested by the prospective licensee (i.e. can a FRAND licensor insist on a portfolio licence or can the prospective licensee demand individual licenses only for some SEPs?);

2. is the licensor obliged to offer a licence on SEPs essential to a particular standard (i.e. Huawei alleges that Unwired Planet does not hold any 2G SEPs and argues that it should therefore not be required to take a licence for this standard);

3. is the licensor obliged to offer a licence for SEPs relating to a particular territory if requested by the prospective licensee? (i.e. must the prospective licensee accept a worldwide licence, or can it choose the territories for which its wants to take a licence?);

In a preliminary judgment on 24 April 2015 ([2015] EWHC 1029 (Pat)), Birss J held that these issues cannot be decided by summary judgment, but must be resolved after a full trial.

With respect to the first issue, the judge noted that it is perfectly possible that both portfolio and individual licensing offers might be FRAND. He was concerned with what happens if each side refuses the other’s FRAND offer. There was nothing in the ETSI rules or FRAND declarations that regulate such a situation.

In his words:

“The obligation owed by a patentee to ETSI may only be to make a FRAND offer and once a single FRAND offer has been made, the obligation to ETSI is fulfilled. It is an open question whether such a single FRAND offer is determinative of the question of whether the court must grant an injunction. Perhaps a patentee also owes a duty to ETSI to accept a FRAND proposal from a Defendant.”

Regarding the second issue, the judge noted that with respect to competition law, if the patentee had no 2G patents then a licence proposal which covered 2G as well as 3G seems unlikely to be legitimate. However, Huawei did not base its claim on competition law, but on ETSI’s IPR policy which is silent on this issue and, further, Unwired Planet submitted that it does, in fact, hold patents essential to the 2G standard.

With respect to the third claim, the judge noted that it also might be possible that both options are FRAND. Huawei submitted that a problem with worldwide proposals is that they involve paying for sales in countries in which Unwired Planet has no patent rights, like Iran. The judge disagreed and held that there is a distinction in intellectual property licensing between the scope of rights and the royalty-bearing event. With no patents in Iran, Huawei does not need a licence from Unwired Planet to sell phones lawfully in Iran. However, Huawei’s phones sold in Iran will be made in countries in which Unwired Planet has patents (China for example) and therefore making them will need a licence. If the royalty-bearing event is sale, then whether the products made under licence in China are sold in Iran or in the UK does not matter. The products all need a licence to be manufactured but the royalty is calculated by the selling price.

Transfer of FRAND commitments and competition law

Samsung claimed that Ericsson breached competition law in following ways:

1. by transferring patents to Unwired Planet, there was a failure to ensure transfer of an enforceable FRAND obligation;

2. by dividing its patent portfolio into two parts (Ericsson retained some patents itself and transferred some to Unwired Planet) unfair higher royalties will be earned;

3. that certain terms of the sale agreement represent price-fixing clauses.

In a further preliminary judgment on a strike-out motion, on July 21, 2015 ([2015] EWHC 2097 (Pat)), Birss J. struck out the first competition law claim in the preliminary judgment, but left the remaining claims to be decided on full trial.

With respect to the first alleged breach of competition law, Samsung had argued that Ericsson’s FRAND commitment was not transferred to Unwired Planet because the sale agreement did not compel Unwired Planet to give a FRAND commitment; and even if it did, the obligation under the sale agreement was only enforceable by Ericsson and not by third parties. The judge found that Unwired Planet submitted a FRAND commitment to ETSI, which is enforceable by third parties.

Next, Samsung alleged that the sale agreement should transfer Ericsson’s FRAND obligation. Namely, when the Unwired Planet patents were part of Ericsson's portfolio, the obligation to license them on FRAND terms meant that such licence took into account their inclusion within a much bigger portfolio. Now that the patents have been divided out, Unwired Planet's FRAND obligation does not take into account other patents held by Ericsson. Therefore when Unwired Planet licenses them, more money is likely to be earned from licensees than would have been the case if they had remained within Ericsson's portfolio.

Birss J noted that it would be unreal and commercially unworkable for competition law to require that the transferor's own FRAND obligation should somehow be transferred in the manner alleged by Samsung. Accordingly, that would mean looking back at the position of the transferor in order to decide what FRAND terms were today. It is sufficient for the transferee to give its own FRAND declaration, which Unwired Planet did.

As to the second competition law breach, Samsung alleged that by dividing the patent portfolio Ericsson breached Article 101 TFEU because Ericsson retained the right to a substantial share in the licensing revenue generated by Unwired Planet, it can transfer further (unspecified) patents to Unwired Planet, and because Unwired Planet is a non-practicing entity (or more directly – a patent assertion entity).

Birss J was sceptical about Samsung’s arguments, but decided not to strike them out. He expressed concern that Samsung’s arguments cut across the idea that a subset of patents from a portfolio could ever be transferred out of a larger portfolio. In his words:

“the transfer obviously takes the patents out of Ericsson's portfolio and so out of the ambit of Ericsson's FRAND commitment. I cannot see how that alone could be contrary to Art 101. […] I am also sceptical about the breadth of Samsung's complaint that Ericsson is trying to earn more money from its patents, as if that is a sin. It is not.“

Regarding the third competition law breach, Samsung alleged that certain clauses in the sale agreement are hard core restrictions of competition law and amount to horizontal price fixing.

The relevant clauses are 3.4, which sets out the minimum payment to Ericsson by Unwired Planet, expressed in a percentage of net sales revenue and payable regardless of whatever royalty rate has been agreed between Unwired Planet and the licensee; and clause 6.1(aa), which provides that Unwired Planet cannot license the patents other than on terms in which the royalty due is a percentage of the aggregate net sales revenue of the licensee.

The judge considered that, taken together, these clauses might contribute to the creation of an anti-competitive incentive to charge higher royalties and decided not to strike out this claim.

Conclusion

It is expected that the series of technical trials will continue into the summer and that the non-technical trial related to FRAND and competition law issues will follow in October. [The IPKat notes that the non-technical trial is scheduled to last 13 weeks] Unwired Planet presents a good opportunity to clarify the content of FRAND licences and competition law issues related to the transfer of FRAND-committed SEPs to non-practicing entities.

The IPKat is extremely grateful to Igor for separating out the complex issues so clearly. Unless the parties settle, this series of cases is due to generate at least four further judgments, i.e. in addition to the four (or more?) already written by Mr Justice Birss. In that context, the IPKat expects that he will need to refer back to Igor’s summary several times in the next year and will be ever more grateful for the existence of this guest post on each occasion he has to refresh his memory.