Much Ado About FRAND: What you need to know about today's Court of Appeal Unwired Planet decision

The Court of Appeal
bats around global FRAND rates

Following this morning's Court of Appeal hand down, patent litigators across the UK and further afield have been analyzing the judgment in Unwired Planet v Huawei [2018] EWCA Civ 2344.   The AmeriKat was only able to briefly summarize the findings, so had to rely on her friends at Bird & Bird (sounds like dinner to the AmeriKat...) in the form of Jane Mutimear and Richard Vary who expand on the Court of Appeal's findings as follows:

"The Court of Appeal handed down judgment in the Unwired Planet v Huawei appeal this morning (23 October 2018). 

The bench consisted of Lord Justice Kitchin (now Lord Kitchin since his elevation last month to the Supreme Court), Lord Justice Floyd and Lady Justice Asplin. They handed down a 291 paragraph, 66 page judgment dealing with Huawei's appeal and Unwired Planet's cross-appeal against Birss J's findings Huawei would be subject to an injunction in the UK unless they entered into a global licence on the terms the Court had determined to be FRAND.  This has been coined a "FRAND injunction".

Lord Kitchin gave the judgment. He explained that this was contributed to by the other two judges.  The appeals were dismissed, upholding the first instance Judge on all substantive points on appeal.

Global Licence v National Licence, and one FRAND rate

Birss J had found that there was only one set of FRAND terms and that a global licence was FRAND. The rates that the Judge had determined were not challenged on appeal, but the global nature of the FRAND licence was challenged.

Huawei claimed that the imposition of a global licence on terms set by a national court based on a national finding of infringement is wrong in principle. For example, in this case it led to a licence where 64% of the money to be paid relates to Chinese patents owned by the second Defendant, UP LLC. UP LLC is a company which owns no UK patents. The English court had, in effect, set rates for a portfolio for which a large part had no enforceable English patent.

Huawei also argued that the judge had settled this licence notwithstanding the facts that (a) there was ongoing patent litigation in relation to corresponding patents in Germany and in China, and (b) there were some countries where UP had no relevant patents at all. 

The Court of Appeal recognised that it may be wholly impractical for a SEP owner to seek to negotiate a licence of its patent rights country by country, just as it may be prohibitively expensive for it to seek to enforce those rights by litigating in each country in which they subsist.  This suggests that a global licence between a SEP owner and an implementer may be FRAND.  The Court of Appeal considered the various cases internationally which have touched on this issue. Huawei relied upon the European Commission's decision in Motorola[1], in which the Commission decided that Apple's offer of a German-only licence was FRAND. The Court also considered two German cases (Pioneer v Acer[2] and St Lawrence v Vodafone[3]), where the German courts had found that a global licence was FRAND.  The Court also reviewed cases from the US, China and Japan, which it found did not assist it in relation to this issue.

The Court of Appeal agreed with the Judge's finding that a global licence was FRAND. It commented that this did not mean that the Judge had been adjudicating on issues of infringement or validity concerning any foreign SEPs: he was simply determining the terms of the licence that UP was required to offer to Huawei pursuant to its undertaking to ETSI.  It was then up to Huawei whether to take the licence.  It could not be compelled to do so and if it chose not to, the only relief available to UP would be relief for infringement of the two UK SEPs the first instance Judge had found to be valid and essential. 

The Court of Appeal came to a different conclusion to the Judge regarding there being only one set of FRAND terms for any given set of circumstances, but found that this had no material effect on the Judge's conclusion.  They considered it unreal to suggest that two parties, acting fairly and reasonably, will necessarily arrive at precisely the same set of licence terms as two other parties.  This is likely to be welcomed as most people had struggled to interpret the Judge's one set of terms position in a way which fitted in with commercial arms' length negotiations of complex licences.  In its discussion of this topic the Court of Appeal appears to have answered another often ventilated concern – if the SEP owners' offer is FRAND but the potential licensee's lower counteroffer is also FRAND, which prevails?  The Court of Appeal commented that if both a global and national licence were FRAND, it would be open to the SEP owner to offer a global licence and then it would be a matter for the prospective licensee whether to accept it, suggesting that it is for the SEP owner to choose between the range of FRAND terms available to it.

Hard-edged FRAND?

Huawei argued that the Non-Discriminatory part of FRAND meant that the rates for similarly positioned licensees should be the same across the industry.  Co-defendant Samsung had settled shortly before trial, when Unwired Planet was cash-strapped. It had paid a lower rate. Huawei argued that it would be discriminatory if they had to pay more than Samsung. 

At first instance, Birss J dealt found that the non-discrimination limb of FRAND does not consist of what he termed a “hard edged” component. A licensee may not demand a lower rate than the benchmark "fair and reasonable" rate solely because that lower rate had once been given to a different but similarly situated licensee. He also held that if FRAND does include such a component, then that obligation would only apply if the difference would distort competition between the two licensees, and there was no evidence that Huawei was suffering from a distortion in the market in handsets as against Samsung.

The Court of Appeal agreed with Birss J that the "Non-discrimination" aspect of FRAND was not hard-edged. It accepted Unwired Planet's submission that differential pricing is not per se objectionable, and felt that an effects-based approach to non-discrimination was appropriate. But, once the "hold-up" problem inherent in standardisation had been addressed by ensuring that the licence is available at a rate which does not exceed a fair and reasonable rate, it is difficult to see any purpose in preventing the patentee from charging less than the licence is worth if it chooses to do so.

In contrast, the Court of Appeal held that a hard-edged non-discrimination rule has the potential to harm the technological development of standards if it has the effect of compelling the SEP owner to accept a level of compensation for the use of its invention which does not reflect the value of the licensed technology.  The Court accepted that whilst a patent owner may prefer to license its technology for a return which is commensurate with the value of the portfolio, such an approach is not always commercially possible.  It felt that the undertaking should be construed in a way which strikes a proper balance between a fair return to the SEP owner and universal access to the technology without threat of injunction.  It found that a hard-edged approach is excessively strict, and fails to achieve that balance.

It also noted that the "hard-edged" interpretation would be akin to the re-insertion of a “most favoured licensee” clause in the FRAND undertaking. This had been considered and rejected by ETSI. 

Huawei had argued that this would limit the impact of the non-discrimination limb of the undertaking: if it is enough that the rate is fair and reasonable, why would the policy need to specify "non-discriminatory"? But the court found that a hard-edged approach would give unwarranted primacy to that limb, in that a licence granted at a lower rate, no matter how low, would always trump the benchmark fair and reasonable rate.

The Court did not go on to consider whether the "non-discrimination obligation" would only apply if the difference would distort competition between the two licensees. This would only have been necessary if it had found that the non-discrimination requirement was hard-edged.

The court did not consider the cases of other courts in great detail because none were found to exactly address the issue it had to decide. It noted that Judge Selna in TCL v Ericsson[4] rejected the notion that a requirement for competitive harm should be grafted on to the non-discrimination obligation, but the Californian court was not asked to address the "hard-edged" argument presented to the English appeal court. 

Did Unwired Planet need to first comply with the Huawei v ZTE[5] steps?

Unwired Planet challenged Birss J's assumption that it held a dominant position (which would be necessary for Huawei v ZTE to apply).  The Court of Appeal dismissed that challenge.

However, the Court found that in Huawei v ZTE the CJEU was not laying down specific mandatory conditions which must be satisfied before proceedings seeking injunctive relief are issued. The CJEU's decision expresses the steps outlined as providing a safe harbour for the SEP owner. But it does not follow that being outside the safe harbour is automatically an abuse. In Unwired Planet's case, although it had not followed those steps, there was contact between the parties before the proceedings were issued. At the moment before proceedings were issued, Huawei had sufficient notice that UP held particular SEPs and it knew or ought to have known that if these SEPs were truly essential and valid then a licence was required. It also knew that UP wished to agree a licence with it. This was sufficient to avoid an abuse of dominance: Unwired Planet was not refusing to license its SEPs.

The Court of Appeal noted that the German courts had also not regarded the Huawei v ZTE steps as being mandatory before commencing litigation, noting in particular Pioneer v Acer[6], Sisvel v Haier[7]  and St Lawrence v Vodafone[8].  (The IP Bridge v HTC[9] decision had not been handed down before the hearing in this appeal and is not addressed).

The case is also a “transitional case": the litigation started before the CJEU gave its decision in Huawei v ZTE.  It would be unfair if UP were to be found to have conducted itself abusively in failing to comply with requirements identified by the CJEU only at a later date.

The Court of Appeal therefore agreed with Birss J that this did not give Huawei an automatic defence and was not an abuse of Unwired Planet's dominant position. 

In relation to costs, the Court of Appeal awarded Unwired Planet 90% of its costs of the appeal, to be assessed if not agreed.  It ordered that Huawei make an interim payment of £612,612 within 14 days of the sealed Order and refused permission to appeal to the Supreme Court.

Comment

This decision will be warmly welcomed by SEP owners.  The Court of Appeal noted: "Just as implementers need protection, so too do the SEP owners. They are entitled to an appropriate reward for carrying out their research and development activities and for engaging with the standardisation process, and they must be able to prevent technology users from free-riding on their innovations. It is therefore important that implementers engage constructively in any FRAND negotiation and, where necessary, agree to submit to the outcome of an appropriate FRAND determination".  This part of the FRAND contract is often considered by SEP owners to have been overlooked in some of the other recent Court and regulatory decisions.  

The Court of Appeal's judgment fully establishes the English Court as a jurisdiction which is willing to tackle FRAND disputes and get involved in the nitty gritty of royalty calculations. Their approval of the "FRAND injunction" approach gives patentees a chance of resolving global disputes where the defendant has sufficient sales in the UK to not want to pull out of the market rather than enter into a licence on terms set by the Court.

This case has taken 4.5 years to reach this conclusion and many millions of pounds worth of legal fees.  The TCL v Ericsson case has taken a similar amount of time, and is still facing appeal. For the courts to be a viable option for most patentees and potential licensees, they need to find a much quicker and cheaper way to resolve disputes of this nature.  A typical licence in the SEP field often has a 5 year term.  A solution which takes nearly 5 years to determine the licence fee is unworkable.  With the precedent set by this case, we believe that the English Courts will now be in a position to push cases forward in a streamlined manner so that trials can take place within a year, with reasonable costs levels. In two recent arbitrations the ICC has determined SEP portfolio rates inside two years.  The English courts have also demonstrated that they can move quickly in the Copyright Tribunal, and when determining rents in business tenancies, both of which can include equally complex issues and large numbers of comparables. It should be possible now to achieve this in relation to patent licensing."

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[1] Case AT.39985

[2] 7 O 96/14

[3] 4a 073/14

[4] 8:14-cv-00341-JVS-DFM

[5] Case C-170/13 Huawei v ZTE [2015] Bus LR 1261

[6] 2016 6 U 55/16

[7] 66/15 OLG Dusseldorf, 15 March 2017

[8] 1-15 U 36/16

[9] https://www.juve.de/nachrichten/verfahren/2018/10/sep-streit-ip-bridge-und-htc-gehen-mit-remis-in-die-naechste-runde