UK: UK Court A "FRAND-LY" Face For Deciding SEP Licence Terms

The UK Patents Court has confirmed that it is willing to decide the appropriate terms for a global FRAND licence even where the dispute has a relatively small connection to the UK and where related foreign court proceedings are ongoing (and where that foreign court is the major market for the relevant technology) – see Conversant Wireless Licensing S.A.R.L v Huawei & ZTE [2018] EWHC 808 (Pat).

The determination of licence terms applicable to Standard Essential Patents (SEPs) is the focal point of any SEP litigation.  When a patent holder owns a patent that is essential to a standard, they are entitled to royalties for the use of their invention by anyone using that standard.  In return, most standard-setting organisations require that the SEP holder undertakes to provide an SEP licence on FRAND (fair, reasonable and non-discriminatory) terms.  Anyone who wishes to implement the standard in their products should enter into a FRAND licence with the SEP holder (with payment of a fair royalty) or they face an injunction effectively preventing future use of the standard in their products.  Where parties cannot agree the terms of a FRAND licence, the patentee is likely to start infringement proceedings.

SEP holders will often own large portfolios containing many different patents from different jurisdictions.  Where disputes arise relating to infringement or validity of an SEP, the local court of the SEP's jurisdiction will usually be the correct forum to decide the issue.  (In particular, where validity is likely to be an issue, there are rules which discourage or even prohibit the courts of other jurisdictions from becoming involved.)  However, when a court is asked to decide the terms of a FRAND licence, this relief is often sought on a global basis meaning that the resulting FRAND licence will also cover international SEPs from outside that court's own jurisdiction.  As a result, FRAND litigation often includes some jurisdictional challenge as to whether one court or another should decide the issue.

In this case, the Defendants challenged the UK's jurisdiction on the basis that the determination of a global licence constituted, in substance and effect, claims relating to infringement and validity of foreign patents (noting that a defence to the global FRAND claim was invalidity of the SEPs). The Court disagreed, finding that the two issues were separate.  Any challenge of a particular SEP, including the question of its validity, could still be raised with the court in the appropriate jurisdiction.  A FRAND licence should not prevent these challenges and should also contain provisions for circumstances where SEPs are invalidated or found not essential. These provisions will enable a reduction of royalty rates (where appropriate) following the determination of SEP proceedings in other jurisdictions.

Accordingly, the Court viewed the Defendants' objection as an objection to specific terms of the proposed FRAND licence – relating to the mechanism for dealing with the outcome of foreign proceedings – and not a jurisdictional one. The Defendants could make a counter-offer setting out appropriate licence terms to address this issue.  It was therefore not unjust to allow the FRAND licence determination proceedings to continue where the validity of foreign SEPs was not justiciable in the same court. In making this finding, the Court noted that the Defendants' justiciability argument could be applied in every jurisdiction where an SEP holder sought a determination of FRAND terms for its global portfolio.  This would enable continued infringement without payment of royalties while the SEP holder would be required to seek separate licences in each individual country.

The Defendants also argued that the UK was not the proper or appropriate forum to decide the claims, pointing to the "China-centric" nature of their businesses and the relative insignificance of the UK to their worldwide sales.  China was the place of manufacture for both Defendants and Chinese SEPs were relevant to 75% (Huawei) and 60% (ZTE) of the worldwide royalty claim; in contrast, UK SEPs only accounted for 1% (Huawei) and 0.07% (ZTE) of the claim.  The Defendants had commenced proceedings in China which were due to reach decisions – covering infringement and validity of Chinese SEPs, and the associated FRAND royalty terms – before any UK decision was expected. Even so, the UK Court was willing to continue the UK proceedings, noting that the Defendants intended to challenge validity of the UK patents as part of their defences (an issue which would only be justiciable in the UK).  The fact that the bulk of sales occurred in China was not relevant to the correct licence terms for the SEP portfolio.  The Court also suggested that, if it ultimately determined a global FRAND licence, it would potentially include the Chinese court's decision on a FRAND royalty rate as the Chinese SEP rate in that licence.  When suggesting this, the Court observed that comparable licences showed that Chinese royalty rates could be 50% that of the rates for the rest of the world.

The decision will be welcomed by holders of SEPs who are concerned about "hold out" litigation tactics by users of telecoms standards.  It also demonstrates the willingness of the UK courts to provide a forum in which FRAND disputes can be settled on a global basis.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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