The UK's highest court provided guidance on how English courts will analyze license disputes involving standard essential patents (SEPs). The court relied on the policies of a standard setting organization (SSO) to decide fair, reasonable, and non‑discriminatory (FRAND) terms on a global scale. The court provided flexibility to allow SEP owners to offer different licensing terms to subsequent licensees. And the court confirmed that an injunction may be an appropriate remedy for SEP owners when implementers do not negotiate a FRAND license agreement in good faith.
The United Kingdom's highest court recently issued a decision with significant consequences for both standard essential patent (SEP) holders and implementers of standardized technology. In particular, the UK Supreme Court analyzed several important issues relating to the type of relief available to SEP holders as well as the determination of fair, reasonable, and non‑discriminatory (FRAND) rates for a worldwide SEP portfolio.
What Does SEP and FRAND Mean?
Industry members work together through standard setting organizations (SSOs) to create technology standards such as USB, Bluetooth, and 5G, allowing purchasers to use products from different companies interchangeably. SSOs typically require industry members who participate in standards setting to enter into an agreement concerning the licensing of their patented technology in return for the opportunity to have that technology included in a standard. While each SSO has its own policy and agreement, SEP owners typically must agree with the SSO to license those SEPs to implementers on FRAND terms. This framework ensures the technology will be available to implementers of the standard on reasonable terms that will not inhibit adoption of the standard.
The SEP owners at issue in the current case were bound by policies set by the European Telecommunications Standards Institute (ETSI), a SSO for the EU telecommunications sector that promotes a globalized market and allows parties to declare patents essential to telecommunication standards. Like most SSOs, ETSI requires its members to license their SEPs on FRAND terms.
Background of the Case
Unwired Planet (Unwired) and Conversant (collectively “Respondents”) are both owners of worldwide patent portfolios including SEPs for the 2G (GSM), 3G (UMTS) and 4G (LTE) telecommunications standards. In separate cases filed in the UK, Respondents asserted their SEPs against smartphone manufacturers—Unwired Planet sued Huawei and Conversant sued Huawei and ZTE (collectively Appellants).
In Unwired's case against Huawei, several of Unwired's SEPs were found both valid and essential to the relevant standards, while others were found invalid. Subsequently, the court held a trial to determine the remedies for Huawei's infringement including the appropriate terms of a FRAND license. The trial court concluded that a FRAND license between Huawei and Unwired would not be limited to the UK, but rather would be worldwide and proceeded to set FRAND rates for such a worldwide license. The trial court also found that the FRAND requirement did not obligate Unwired to grant Huawei the lower rates provided to another of Unwired's licensees, Samsung. Finally, the court determined that Unwired's conduct did not violate European competition law. The trial court subsequently granted an injunction against Huawei with the condition that the injunction would cease if Huawei accepted a global FRAND license on the terms set by the court. This decision was largely upheld by the Court of Appeal and Huawei then appealed to the UK Supreme Court. While these proceedings were ongoing, Unwired also filed several infringement suits in Germany and Huawei challenged the validity of several Unwired patents in China.
In Conversant's suit against Huawei and ZTE, Conversant sought a declaration that the terms of a worldwide SEP license it offered to Huawei and ZTE were FRAND or, if not, a court determination of appropriate FRAND terms. Conversant also sought an injunction against Huawei and ZTE on its UK patents. Huawei and ZTE argued that the court lacked jurisdiction to decide the terms of a worldwide FRAND license, but the trial court rejected these arguments. Subsequently, certain Conversant SEPs were found both valid and essential and the court scheduled a trial to determine the terms of a FRAND license. This trial, however, was postponed due to the Covid pandemic. In the interim, Respondents appealed the jurisdictional issues to the Court of Appeal, which affirmed the ruling of the trial court. That decision was appealed to the Supreme Court. As with the Unwired dispute, litigation also proceeded on Conversant's patents in both Germany and China concurrently with the dispute in the UK.
The Supreme Court's Decision
Based on the holdings of the lower courts, the UK Supreme Court was asked to decide five questions:
- Do the English courts have
jurisdiction to determine the terms (including royalty rates) for a
global FRAND license?
- Would a Chinese court be a more
suitable jurisdiction to determine the terms of a global FRAND
license in this case?
- Does the
“Non-Discrimination” arm of the FRAND obligation
require an SEP owner to offer a license on the most favorable terms
granted to any licensee?
- What are SEP owner's initial
obligations in negotiating a FRAND license with an
- Is an injunction an appropriate
remedy for infringement of an SEP?
UK Court's Jurisdiction to Determine Global FRAND Licenses
The UK Supreme Court affirmed that UK courts had jurisdiction to determine the appropriate compensation and other terms for a global FRAND license for a worldwide patent portfolio containing UK and foreign patents. The court based its jurisdiction on the ETSI policies, which it described as a “contractual arrangement” binding SEP owners who declare its patents essential to the organization. These policies encourage parties to agree to a FRAND license and avoid litigations that could exclude implementers from a national market. The court concluded that the policies had an “international effect” attempting to mirror the industry norm that telecommunications operators agree to global patent portfolio licenses without knowing precisely how many of the licensed patents are valid or infringed.
Huawei argued that this court should not have jurisdiction to determine the terms of a license for foreign patents that may be challenged. The court disagreed, noting that a FRAND term in a license may include the right for an implementer to subsequently challenge patents within the portfolio as invalid or non-infringed and, if the challenge is successful, seek appropriate relief such as recovery of sums paid and altering of the royalty rate. The decision, however, did not include further discussion on this argument because such a term was not a part of the offers at issue.
Thus, because the ETSI policies supported the position that a FRAND license would have a global reach, the UK Supreme Court found it had jurisdiction to determine that a FRAND license between Respondents and Appellants would cover the worldwide portfolio including both UK and non‑UK patents.
Courts in China Are Not a More Appropriate Forum for FRAND Determination
The UK Supreme Court next rejected Appellants' argument that Chinese courts were a more appropriate forum than English courts. The court determined that the only way for the Chinese court to have jurisdiction would be through agreement of all parties. Because Appellants did not challenge that Conversant reasonably refused to give its consent to jurisdiction in the Chinese courts, the Chinese courts did not have jurisdiction over the matter. Without the possibility of another court having a claim to jurisdiction, the UK Supreme Court concluded it had proper jurisdiction.
FRAND and Non-Discrimination
This court next analyzed the import of the “Non-Discrimination” prong of the FRAND obligation. The UK Supreme Court rejected the view that FRAND imposes two distinct obligations on SEP holders— that a FRAND license must be “fair and reasonable” and separately must be “non-discriminatory.” Instead, the UK Supreme Court stated that there is a “single, unitary obligation” to license on terms that are “fair, reasonable, and non‑discriminatory.” The “non-discriminatory” portion of the phrase gives guidance that “fair” and “reasonable” requires objectively determining a royalty rate to account for the fair market value of the patent portfolio without adjusting the rate based on characteristics of individual licensees. Thus, licensees who are similarly situated should receive similar license offers. Moreover, ETSI's previous rejection of a “most‑favorable license” clause when drafting its policy evidenced that a “hard‑edged” non-discriminatory obligation was not intended and thus, supported the Court's interpretation.
The court further concluded that a license offer with a higher royalty rate compared to previous licenses does not create a presumption of a non-FRAND offer. Instead, the court stated that licensing and industry norms accept price discrimination, especially when highly sophisticated and well-informed parties are involved, such as those engaged with ETSI. Further, it is also common for SEP owners to offer lower royalty rates in certain circumstances, for example, when it would allow the SEP owner to be a “first mover” for the standard, when the licensee would be the first implementer validating the SEP owner's patent portfolio, or if the SEP owner is forced to sell patents in order to survive financially. Since ETSI policies do not contain clear language or intent to overcome these norms, the court found it inappropriate to hold that FRAND terms requires identical pricing. Thus, Unwired's license offer was not necessarily discriminatory because it included a higher royalty rate than a similar license offered to Samsung.
SEP Owner Obligations
The UK Supreme Court next provided guidance on how UK courts should interpret the seminal Huawei v. ZTE decision of the Court of Justice of the European Union (CJEU) that addressed how the parties should proceed in FRAND negotiations. The CJEU outlined that initially, an SEP owner should give notice to the alleged infringer and present a license offer on FRAND terms. The CJEU found that an SEP owner that satisfies these obligations as an initial step would not abuse its dominant position and can seek injunctive relief by seeking a license from an implementor.
The UK Supreme Court interpreted the CJEU decision to only require the SEP owner to perform the first step—provide sufficient notice before seeking an injunction in court. The court considered the remaining obligations described in the CJEU decision (such as presenting a license offer on FRAND terms) as not mandatory, but merely a “safe harbor”—meaning that SEP owners would not necessarily abuse their dominant positions if they did not present a FRAND offer to an implementor. Thus, the actions of an SEP owner after providing sufficient notice are analyzed on a case-by-case basis to determine whether the SEP owner abused its dominant position.
In the current case, the UK Supreme Court affirmed that Unwired did not behave abusively because it gave sufficient notice to Huawei before filing for an injunction. Further, the court held that Unwired's willingness to license on whatever terms the court determines as FRAND further supported their conclusion. Sufficient notice did not require Unwired to submit claim charts to Huawei, but rather that Huawei knew that Unwired held particular SEPs and knew (or ought to have known) that a license was required—which Huawei did through communication with Unwired. The court also rejected Huawei's argument that Unwired must present a FRAND offer prior to initiating a proceeding—instead, the court accepted Unwired's willingness to accept a FRAND offer as satisfactory.
Injunctions Are the Appropriate Remedy
Finally, Huawei asserted that an injunction is neither an appropriate nor a proportionate remedy because Respondents are only seeking to obtain reasonable royalties and, thus, damages derived from infringement of the UK patents would sufficiently make them whole. The UK Supreme Court again interpreted the ETSI policy to reject Huawei's arguments. The court held that damages would not be an adequate substitute because it would undermine the global nature of the dispute and motivate implementers to continue infringing SEPs in other countries until the owner brought proceedings in every country. Instead, the court noted the SSO policy requires the ability for an SEP owner to seek injunctive relief to prevent implementors from taking advantage.
Strategy and Conclusion
SEP owners and implementors must consider the following when handling FRAND disputes in the UK:
- The details and interpretation of
agreements between patent owners and SSOs can largely determine how
a patent owner and an implementer must proceed in negotiations and
the rights of an SEP owner and implementer if the negotiations
- UK courts may determine the terms of
a worldwide FRAND agreement involving licensing a portfolio that
includes UK and foreign patents.
- SEP implementors still may be able to
challenge patents within the portfolio as invalid or non-infringed
and attempt to adjust the royalty rate accordingly even though the
implementer must indicate its willingness to enter into a FRAND
license, whatever FRAND turns out to be.
- The fair, reasonable and
non-discriminatory aspects of FRAND may be determined as a whole
and not separately by UK courts.
- Specific circumstances of the
implementors and previous licensees as to whether they are
similarly situated may affect whether a license offer is FRAND.
Non-discriminatory does not mean most favored license.
- UK courts will determine if an SEP
owner met its obligations while negotiating with an implementor on
a case-by-case basis. An SEP owner must give adequate notice and
show that it did not abuse its dominant position.
- If the negotiations fail due to the fault of the implementer, the patent owner may be able to obtain an injunction.
Also, the UK may see an uptick in FRAND related litigations due to the jurisdictional determination along with the UK's interpretation of Huawei v. ZTE.
The Unwired Planet decision can be found here.
Originally Published by Finnegan, December 2020
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.