Canada: Fair, Reasonable And Non-Discriminatory: UK Patent Court Enjoins Huawei From Using Standard Essential Patents Owned By A Non-Practicing Entity

On April 4, 2017, the Honorable Justice Birss of the High Court of Justice (Chancery Division) issued his decision in Unwired Planet International v Huawei Technologies, [2017] EWHC 711 (Pat). The decision provides a comprehensive review of the application of Fair, Reasonable and Non-Discriminatory (FRAND) principles to the licensing of Standard Essential Patents (SEPs).

Background

Unwired Planet is a non-practicing entity (NPE) whose business is to licence its patents to companies who make or use telecommunications equipment. Unwired Planet holds a worldwide portfolio of patents, including many that are declared essential to certain wireless telecommunications standards such as 2G, 3G and 4G LTE.

The process of standardizing a technology involves declaring a patent or group of patents as SEPs. A SEP is a patent that discloses an invention that must be used to work the standard. Standards Setting Organizations require the owners of SEPs to provide an undertaking to license the patents on FRAND terms if they wish to participate in standard setting.

The FRAND undertaking attempts to strike a balance between patentees (i.e., the inventors or owners of patents) and implementers (i.e., those who use the technology) of standardized technologies. As explained by Justice Birss:

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 [...]

The appropriate licence is one which is fair, reasonable and non-discriminatory. That way a standard can safely incorporate the invention claimed in a patent without giving the inventor or his successors in title unwarranted power over those who implement the standard. Thus the public interest is served because telecommunication standards can be set using the best and most up-to-date technical expedients available and the inventor's private interest is served because the FRAND undertaking ensures they or their successors will obtain a fair reward for their invention.

For the FRAND framework to be successful, certain obligations must also be imposed on the implementer. The implementer must negotiate fairly and accept a licence on FRAND terms. Making extreme offers or taking an intransigent approach which prejudices negotiation is not FRAND.

The decision in Unwired Planet resulted from a patent infringement action commenced by Unwired Planet against Huawei, Samsung and Google. Five of Unwired Planet's patents were claimed to be SEPs. Unwired Planet previously made an offer to the defendants to license the entire global portfolio. The defendants denied infringement and argued that the patents were invalid. They also alleged that the offer was not FRAND and was in breach of competition law. By the time of the trial, Samsung and Google had exited the litigation because of a settlement, and the only outstanding issue was whether certain terms in the proposed licences between Unwired Planet and Huawei were FRAND.

How to Assess FRAND

The Court concluded that a key consideration is what a willing licensor and a willing licensee would agree upon in a hypothetical negotiation. To determine this, Justice Birss conducted an extensive analysis of the value of Unwired Planet's patent portfolio, and considered evidence regarding other licenses for similar technologies, evidence regarding how similar negotiations work in practice in the industry, and decisions of other courts in several jurisdictions.

Justice Birss noted that the predominant approach in the industry to determine the value of a portfolio is one based on patent counting rather than an analysis of the quality of each individual patent. Trying to evaluate the quality of individual inventions becomes unduly burdensome and disproportionate to its importance, particularly in a portfolio of any appreciable size. While there may be an exception to this general approach for "keystone" patents, the undisputed evidence before the Court was that Unwired Planet's portfolio was comprised of patents of only "average" contribution to any given standard.

A large aspect of determining a FRAND royalty was determining the proportion of total SEPs for a given standard that are owned by Unwired Planet. The Court determined how many patent families were relevant SEPs to a particular wireless standard, accounted for abandoned or expired patents, applied metrics that account for the expected over-declaration of SEPs (as well as undeclared patents), and accounted for which technologies were truly foundational to any given wireless standard.

After determining how Unwired Planet's patents stand in comparison to the industry, Justice Birss turned to an examination of comparable licences. In assessing the value of each precedent agreement, the Court considered the context of the negotiations, the overlap of the subject matter of the agreement with the present families of patents, how the key terms arose, and the relative economic strength of the parties.

Ultimately, the Court held that the benchmark FRAND rates for Unwired Planet's portfolio are:

  • 4G/LTE: 0.062% for handsets, and 0.072% for infrastructure.
  • 3G/UMTS: 0.032% for handsets, and 0.016% for infrastructure.
  • 2G/GSM: 0.064% for handsets, and 0.064% for infrastructure.

Notably, Justice Birss held that there can only be one set of FRAND terms for a given situation. The Court determined that this was necessary to promote certainty, enhance the normative aspect of FRAND, and make enforcement of the FRAND undertaking possible:

Both patentees and implementers should take a FRAND approach to the negotiation of a licence under a SEP or SEP portfolio governed by a FRAND undertaking. The patentee is obliged by contract to take a FRAND approach to the negotiation and to grant a licence on FRAND terms. The implementer must take a FRAND approach to the negotiation and accept a licence on FRAND terms if it wishes to take advantage of the constraint on the patentee's rights imposed by the FRAND undertaking. A FRAND approach to negotiation does not mean that parties cannot negotiate in good faith and a FRAND approach will allow for starting offers which leave room for negotiation. The fact an opening offered rate is higher than the true FRAND rate does not mean of itself that a patentee has failed to take a FRAND approach any more than the converse could be said about an implementer. On the other hand, making extreme offers and taking an intransigent approach which prejudice fair, reasonable and non-discriminatory negotiation is not a FRAND approach.

Is a Worldwide Licence FRAND?

A key issue in the case, and the apparent deal-breaker for Huawei, was the scope of the licence. Huawei was willing to take a licence under Unwired Planet's UK patent portfolio. Unwired Planet wished to grant a worldwide licence and contended that it was entitled to insist on it.

On this issue, Justice Birss observed that:

[M]ultijurisdictional portfolio licences themselves are unlikely to have inherently anti-competitive effects and that a demand for a worldwide licence is not inherently likely to distort competition. It may be that a worldwide rate is demanded which is excessive but that is a matter related to the rate. It may also be that a given portfolio does not justify a worldwide licence but that is a point on the facts. Assuming the licensor has a worldwide portfolio of SEPs, in my judgment asking a licensee to accept a worldwide licence is unlikely to be abusive.

The Court ultimately concluded that a worldwide licence is FRAND, noting that in the context of a sufficiently large international portfolio, reasonable licensees and licensors would regard country-by-country licensing as "madness".

What is the Interaction of FRAND and Competition Law

Huawei's defence against an injunction was premised on the allegation that Unwired Planet's conduct was anti-competitive. Justice Birss agreed that as the owner of SEPs, Unwired Planet was in a dominant position in the market for licences under those SEPs. However, Justice Birss concluded that it is only where the patentee abuses its dominant position that there can be a defence to the claim for an injunction.

Huawei argued that Unwired Planet abused its dominance by commencing premature litigation, imposing excessive pricing, attempting to tie-in non-SEPs, and imposing multi-jurisdictional bundling. The Court rejected these allegations and held that Unwired Planet had not abused its dominant position by its conduct.

The Court also made clear that it is not necessary to rely on competition law to enforce the FRAND undertaking. This is because the boundaries of FRAND and competition law are different; a rate may be above the FRAND rate, but not inconsistent with reasonable practices under competition law.

What is the Impact on Canadian Law

SEPs and FRAND undertakings were recently addressed by the Canadian Competition Bureau's updated Intellectual Property Enforcement Guidelines. The Guidelines include a section that seeks to clarify the analytical framework that would be applied by the Bureau in conducting a review of conduct involving SEPs.

The Guidelines note that the Bureau is not a price regulator, and will leave determination of royalties for SEPs to negotiations between parties or the courts. While the Bureau will not regulate the terms and conditions that a patentee may impose when seeking to license SEPs, it may review terms and conditions if they have potential to cause competitive harm.

Two examples of competitive harm provided in the Guidelines are bundling SEPs with non-essential patents, and imposing no-challenge clauses (i.e., preventing the implementer from challenging the validity the licensed patents, or allowing the patent owner to terminate the licence in the event of a challenge). Interestingly, in Unwired Planet, Justice Birss observed that while insisting on a licence that bundles SEPs with non-SEPs may not be FRAND, the mere fact a licence includes both does not take it out of FRAND nor does it indicate that a patentee has used its market power to secure a licence under the non-SEPs. Everything ultimately depends on the circumstances.

Like Justice Birss' decision in Unwired Planet, the Canadian Guidelines recognize that potential licensees of SEPs may hold-out for a particular royalty or not negotiate in good faith. Accordingly, the Guidelines provide several examples of where an injunction may be appropriate and would not be contrary to competition law, including:

  1. When a prospective implementer refuses to pay a royalty that is determined to be FRAND by a court or arbitrator;
  2. When a prospective implementer refuses to engage in licensing negotiations;
  3. When a prospective implementer constructively refuses to negotiate (for example, by insisting on terms clearly outside the bounds of what could be considered to be FRAND terms); or
  4. When a prospective implementer has no ability to pay damages (for example, a firm that is in bankruptcy).

Guidance is also provided regarding the factors the Bureau will consider when assessing whether a SEP holder is in a dominant position, and where such dominance has been abused. The Guidelines state that one of the circumstances in which the Bureau may intervene is where the patentee's conduct is something more than the mere exercise of the IP right. Conduct such as patent ambush, reneging on a license commitment or seeking an injunction against willing licensees after making a licensing commitment are provided as examples of "something more" than the mere exercise of patent rights.

While the Guidelines provide some clarity regarding how FRAND undertakings will be approached by the Competition Bureau, it will be interesting to observe how the FRAND jurisprudence evolves further internationally, and how it will be applied in the Canadian context.

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