Britannia Rules on SEPs – But is it FRAND?

As the debate continues as to whether the UK courts have taken command of global FRAND determinations or whether it is all storm in a teacup, Michael Burdon (Simmons & Simmons) has some critical analysis to share as to the role of the English courts in FRAND determinations in the absence of a dispute resolution mechanisms in SSOs and what that means moving forward.  Over to Michael:  

The English High Court has established itself as one of, if not, the leading forum for resolving international FRAND licensing disputes. All a standard essential patent (SEP) owner needs is a UK SEP and an implementer which operates in the UK and they can force the implementer into taking a global portfolio licence with FRAND terms set by the UK court. The Court probably doesn’t see it this way, jurisprudentially, but that it is how it is working out in practice. In two recent decisions (“Unwired Planet” and “Conversant”) (Unwired Planet v Huawei [2018] EWCA Civ 2344, IPKat post here; Huawei v Conversant [2019] EWCA Civ 38, IPKat post here), the English Court of Appeal has endorsed this practice.

Fair, Reasonable and Non-Discriminatory?

From the English court’s perspective, it is simply allowing a patent owner to enforce its UK patents against an implementer’s UK sales. In the usual way, an injunction will be granted stopping UK sales unless the implementer has a licence. But here’s the catch – the implementer has to accept the SEP owner’s FRAND offer; the SEP owner doesn’t have to accept the implementer’s FRAND offer. And moreover, in all likelihood, under the SEP owner’s licence, the implementer will have to pay royalties for historical sales on a worldwide basis. So, in practical terms, the SEP owner has forced a global portfolio licence and recovered damages on its global SEP portfolio, in the English court. 

Now the English court would point out that it is not forcing the implementer into taking the licence. It is merely deciding whether UK patents are valid and infringed, and if proven, granting the usual remedy of an injunction with effect only within UK borders. But practically that leaves the implementer with no choice but to take the global licence. ZTE’s position offers a stark example of the operation of this practice. ZTE’s UK mobile sales amounted to only 0.07% of its global sales. ZTE’s choice is to take Conversant’s global FRAND licence or shut down its UK operations.

At the heart of the problem is the reluctance of standard-setting organizations (SSOs) such as ETSI and its members to agree to a dispute resolution mechanism. The English courts have stepped up and filled the gap.

In a world with national patents and global standards, a massive and growing market, and no accepted international dispute resolution process for resolving diametrically opposed licensing philosophies, it is hardly surprising that highly complex and strategic litigation (some might call it “game-playing”) has ensued. And that opposing camps take increasingly entrenched and opposing positions, each with plausible, and sometimes even convincing, justification.

The SEP owners over declare, are sitting on invalid and increasingly obsolescent patents and manipulate the standards in their favour. Increasingly they do not manufacture and are immune from counter-suit and cross-licence.

The implementers are free riders and game players, avoiding and delaying paying a fair royalty for using innovation developed by others.

It's a problem that doesn’t lend itself to finding middle ground, easily or even tenaciously. It seems that the balance in the UK has settled very much in the SEP owner’s favour. But is this outcome Fair Reasonable and Non-Discriminatory?

A patent owner which is in the privileged position of influencing technical standards and obtaining patents on their contributions knowing that those in the industry will have no choice but to adopt those standards and use their patents must (1) declare relevant patents to the SSO; and (2) undertake irrevocably that it is prepared to grant irrevocable licences on FRAND terms and conditions.

In the Unwired case, both English Courts found that the global portfolio licence was FRAND and that a UK licence was not FRAND. In the Conversant case, both Courts found they had jurisdiction, and were an appropriate forum to consider whether the terms of a global portfolio licence were FRAND as part of their consideration of whether the asserted UK SEPs were valid and essential and whether an injunction should be granted to restrain infringement of those UK SEPs. Huawei has sought permission to appeal the Unwired case to the Supreme Court. If the further appeal proceeds, a decision is unlikely before late 2020. In the meantime, the Court of Appeal’s approach will be applied.

All courts in both cases have therefore found that the English High Court has jurisdiction to consider and determine the terms of a global FRAND licence recognising that they do not have power to compel either party to agree such a licence – they cannot force either the SEP owner or the implementor to enter into such a licence. The Court’s effective power is found in its remedies. The Court will not grant an injunction to a SEP owner which has not offered a licence with FRAND terms and it will not injunct an implementor where the implementor agrees to enter into a licence on FRAND terms.

But what happens where the different licensing terms proposed by the SEP owner and the implementor are both FRAND?

The English Court of Appeal has decided, overturning Birss J in Unwired on this one point, that there can be more than one set of FRAND terms for any given set of circumstances having regard to the complexity of patent licences, the commercial priorities of the parties and the experience and preferences of the parties involved. The Court of Appeal recognised that FRAND licences may be structured in different ways in terms of the particular contracting parties, the rights to be included, the geographical scope, the products to be licenced, royalty rates and how they are to be assessed and payment terms (Unwired Planet at paragraph 121).

What of “the Vringo problem”? In Vringo v ZTE ([2013] EWHC 1591 (Pat) and [2015] EWHC 214 (Pat)), Birss J considered the situation where there were multiple licences all of which were FRAND. He anticipated difficulty where the Court was asked to award an injunction in circumstances where the implementor had refused the SEP owner’s (global) FRAND offer and the SEP owner had refused the implementor’s own (country or regional) FRAND proposal. Birss J considered that the grant of an injunction in these circumstances could amount to “international coercion”. Birss J was clearly struggling to reconcile why one FRAND proposal should dominate over the other.

In the Unwired case, Birss J solved, or perhaps avoided, the Vringo problem by deciding that there could only be one set of FRAND terms as between any two parties in any given set of circumstances. But the Court of Appeal disagreed. So how do they solve the Vringo problem?

The Court of Appeal considers the answer to the Vringo problem to be simple – the SEP owner’s terms prevail. If the terms offered by the SEP owner (a global portfolio licence) are FRAND and the implementor refuses to accept those terms, the implementor will be injuncted (Unwired Planet at paragraphs 124-127).

So the statement made earlier in this note that the court “will not injunct an implementor where the implementor agrees to enter into a licence on FRAND terms” is not quite right. The implementor will only escape an injunction by entering into a licence on the SEP owner’s FRAND terms. The implementor will not escape a licence by agreeing to enter into a licence on the implementor’s own

proposed FRAND terms.

The Court of Appeal appears to proceed on the basis that the obligation on the SEP owner is simply to offer FRAND licences. Paragraph 6.1 of the ETSI IPR Policy requires the SEP owner to give an irrevocable undertaking to grant irrevocable licences on FRAND terms. It seems arguable that the SEP owner has not complied with its obligation to grant licences on FRAND terms if an implementor offers a FRAND licence which is refused.

The Court of Appeal remarks on the concern raised by Birss J about the potential imbalance and international coercion, stating “the term coercion is used in this context to imply improper duress or compulsion. But if both the global and the national licence were FRAND, the SEP owner would be guilty of no such behaviour by offering the global licence. That global licence would, on this hypothesis, be fair, reasonable and non-discriminatory. It would then be a matter for the prospective licensee whether to accept it” (Unwired Planet at paragraph 127).

The Court of Appeal also rejected these concerns as resulting from “an elision of two separate but related matters: first the relief to which a SEP owner is entitled if it establishes infringement of its monopoly right, and secondly, what the SEP owner must do to satisfy the undertaking it has given to ETSI” (Unwired Planet at paragraph 127).

It is not entirely clear to me that the SEP owner is satisfying the undertaking it has given to ETSI if it refuses to grant a FRAND licence proposed by the implementor. There is nothing in the wording of that undertaking that exempts a SEP owner from granting licences on FRAND terms which have been offered by the implementor. Nor is there any guidance in the CJEU decision in Huawei v ZTE (ECU:EU:C.2015 - 477) nor in the Guidance issued by the European Commission (CoM [2017] 712 final 29.11.2017). I am not aware of any court in any other country addressing this issue.

The conclusion that a SEP owner can insist on its own proposed international patent portfolio licence and refuse to grant a FRAND licence proposed by the licensee also, with respect, ignores the practical outcome and the extraordinary imbalance between the fair and proper reward for national IP rights on the one hand and the benefit of the global licence on the other. The Court is effectively saying the implementor can only have access to the UK SEP they have been held to infringe if they agree to take a worldwide licence over the SEP owner’s entire patent portfolio, potentially across all telecoms standards, and in every country in the world and provided they pay historical royalties over all those patents for all technologies throughout the world. In ZTE’s case, UK sales were less than 0.07% of their global sales. It is difficult to think of any other field of intellectual property where the indirect consequence of infringement of a UK right has an effect, exponentially greater than the local direct effect of that right.

One solution is for the implementor to abandon the UK. The injunction which the English Court grants is an injunction not to infringe the UK SEPs which the Court has found to have been infringed unless it enters into the (SEP owner’s) FRAND licence. If the implementor refuses to accept the SEP owner’s terms (even if the SEP owner has refused the implementor’s FRAND terms) the UK injunction will bite and the implementor will not be able to supply or sell products which infringe the UK SEPs which were enforced in those UK proceedings. The SEP owner would have to enforce its SEPs in other jurisdictions and seek to obtain a licence or licences through other routes.

The Court does not elaborate in detail on its rejection of the suggestions of unfair leverage and international coercion. In the Unwired case both Courts found that a UK-only licence was not FRAND. The point on whether a national or regional licence could be FRAND has not yet been fully considered in the Conversant case. But the Court of Appeal in Conversant appears to acknowledge that a national licence could be FRAND. And courts in other countries might also be of the view that national or regional licences are FRAND. We face the risk of contradictory court decisions on FRAND terms relating to the same parties and the same patents.

But if there is no injunction in relation to the UK SEP, what is the appropriate and proportionate remedy in the UK proceedings? One possibility is that the SEP owner will be entitled to damages for infringement of its UK patent in relation to the implementor’s historical (UK) infringing sales and damages in lieu of an injunction for the implementor’s future infringing UK sales. The damages in

lieu are likely to be based on the reasonable royalty. Birss J already recognised in Unwired that a FRAND royalty limited to the UK would be higher than the FRAND royalty for a global or regional licence. The Court would also be able to consider broader factors in relation to the damages in lieu in line with the Supreme Court decision in Morris-Garner v One Step ([2018] UKSC 20). Damages in lieu of an injunction have already been considered in other areas of technology, notably life sciences, where largely for reasons of public interest, the patent owner has not sought an injunction or where the Court has considered a period of time should elapse to enable a transition before any injunction is effective (See for example Boston Scientific v Edwards per Arnold J [2018] EWHC 1256 (Pat)). 

Enforcement of individual national patents in the world of telecommunications would be horribly inefficient. But that is not the fault of the patent system. The patent system has always acknowledged, and indeed respected, the national nature of patent rights. So, while there is an administratively efficient system for obtaining patents in Europe through the EPO, those patents are ultimately national patents and must be validated, maintained and enforced as national patents in their respective national courts. The inefficiencies of the European system for enforcing patents have been recognised and a possible solution by the creation of the Unified Patent Court in Europe has been devised. The fault really lies with the SSOs. They and their members have failed to provide an adequate dispute resolution system. They have also failed to provide proper guidance as to FRAND licences to try to remove the extent of disagreement. Perhaps they should also be more vigilant in declarations of essentiality. The standards system is largely one of self-certification with no requirement of maintaining the currency of the declarations. SEPs are not removed when they become irrelevant. The combination of ambiguous international technology standards with a patent granting system which, by its very nature, is bound to grant some patents which should not be granted provides fertile ground for disagreement as to the importance in value of the rights under discussion. The rejection of patents as invalid or inessential from what is in effect a “proud list” of patents which are asserted (5 out 6 in the Vringo case), does not help the SEP owners’ cause.

Global licensing between global players makes commercial and economic sense. But is it right that the Court of one country becomes the de facto, international court for a standard system?

The problem is only going to get more complex and more important. Major disputes about SEPs and FRAND terms have been largely restricted to telecoms standards. As well as moving into the next generation of telecom standards, the world is increasingly dealing with the connected world and the Internet of Things. Car manufacturers are already facing patent suits arising from connectivity. It is good to see the European Standards Organisations CEN and CENELEC taking the lead on developing guidance on the interpretation of commitments to FRAND licensing for interconnected devices and involving a wide range of industries including telecoms, tech providers, automotive and broadcasting.11 Their approach in appointing organisations who represent competing philosophies to each chair workshops and develop documentary guidance is an interesting one. It will be interesting to see whether this approach can resolve the thorny issues such as valuation for different uses and upstream licensing and develop a unified approach to SEPs and FRAND licensing. It would be helpful it they included a section on dispute resolution.