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UK Supreme Court delivers landmark ruling on SEPs and FRAND licensing

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The U.K. Supreme Court’s 26 August ruling on standard-essential patents (SEPs) is the latest in a series of recent decisions that are likely to have a profound effect on FRAND license negotiations across the globe, in particular for the next generation 4G and 5G mobile telecommunication licenses.1  In a well-written judgment, the U.K. Supreme Court confirmed that English Courts have jurisdiction to set global FRAND rates and set disputed license terms and, along the way, provided important guidance on a number of FRAND-related issues, in particular the question of how to ascertain whether licensing terms are non-discriminatory.

The Unwired Planet v. Huawei judgment comes just one month after the German Federal Court of Justice rendered its decision in Sisvel / Haier, which clarified the relationship between the SEP holder’s and implementer’s obligations under Huawei/ ZTE, thereby increasing the burden on implementers during licensing negotiations.2 The judgment also appears only three weeks after the U.S. Court of Appeals confirmed the legality of OEM-level SEP licensing under U.S. law and less than two months after the Avanci Business Review Letter issued by the U.S. Department of Justice which discusses in detail the efficiency benefits of FRAND licensing at the OEM level.

Overall, the UK Supreme Court’s judgment will be welcomed by many SEP holders. However, close reading reveals that implementers may derive some comfort from the judgment as well. In any event, the findings of the U.K. Supreme Court will guide both SEP owners and implementers in their worldwide license negotiations and litigation strategies in the years to come.

The judgment can best be viewed against the background of SEP and industry-specific circumstances.

First, it is well established that, pursuant to the 2015 judgment of the Court of Justice of the European Union in Huawei / ZTE, a SEP owner, bound by its promise to license its SEPs on FRAND conditions, would, by seeking an injunction, infringe EU competition law if it has not complied with the guidance given in that judgment on FRAND negotiations. The essence of the Huawei / ZTE judgment is that seeking an injunction against a “willing” licensee would constitute a competition law violation.

Second (and recognized in the Supreme Court judgment), it is industry practice that implementers often start implementing standard-essential technologies well before licenses are concluded.  While the FRAND assurances of SEP owners provide some certainty for implementers that the required license agreements will be available and be entered into, uncertainty may remain with regard to the territorial scope of the license and other key licensing terms.  In some cases, implementers prefer country-by-country licenses, while SEP holders take the view that (only) global licenses are appropriate.  The Supreme Court’s judgment confirms that, in many cases, a SEP owner may legitimately take the view that a global license meets the requirements of FRAND.3  But this then raises the question whether a national court, confronted with the request for an injunction based on the infringement of national patents, may determine the terms of that global license agreement.

The practical relevance of this question becomes obvious if, as Huawei and ZTE argued, only a very small proportion of their worldwide sales are made in the national jurisdiction at hand.  Does a UK court in those circumstances have the right to set the terms of a global license agreement, including for the use of SEPs in China, where Huawei and ZTE sell the majority of their products? And would such a right not unduly limit the rights of courts in other jurisdictions?

We look at the issues decided by the UK Supreme Court in turn.

Issue 1: Jurisdiction

The jurisdictional question addressed two specific circumstances.  First, does a UK court have jurisdiction to grant an injunction to prevent infringement of a UK SEP unless the implementer of the patented invention enters into a global license of a multi-national patent portfolio? Second, does a UK court have jurisdiction to determine royalty rates and other terms of a global license?   The UK Supreme Court decided that the UK courts have jurisdiction in both situations, even where there was no agreement between the parties.

The UK Supreme Court looked to standard-setting organization (SSO) policies to address jurisdictional issues.  In the words of the court, “[i]t is the contractual arrangement which ETSI has created in its IPR Policy which gives the court jurisdiction to determine a FRAND license.”4 Regarding the court’s jurisdiction to enter an injunction, the Supreme Court found that the ETSI IPR Policy provided the only limit on an injunction, and the policy subjected the availability of injunctive relief to the SEP holder’s undertaking to offer a license on FRAND terms.5 The governing SSO policy thus provided the basis for both the court’s jurisdiction to set FRAND terms and the court’s jurisdiction to enforce an injunction if the implementer refused those terms. Parties to FRAND licensing negotiations should pay close attention to the contractual arrangements created by relevant SSOs, as SSO policies may attempt to guide courts not only in assessing recognized commercial practice, but also in deciding jurisdictional questions. Addressing Huawei’s arguments that a judicial determination of terms in a worldwide FRAND license would violate principles of comity and lead to forum shopping, the UK Supreme Court noted that, absent ETSI policies creating an international forum to resolve disputes, it fell to national courts to determine FRAND terms, even on a worldwide basis.After surveying FRAND litigation in U.S., German, Chinese, and Japanese courts, the Supreme Court also concluded that each of these jurisdictions has either expressed a willingness to determine FRAND terms of a worldwide license or at least left the question unanswered.7

The UK Supreme Court also rejected Huawei’s arguments that (1) determining worldwide FRAND license terms improperly asserts jurisdiction over foreign patents and (2) a SEP owner is only entitled to be paid for SEPs found valid and infringed, pointing to the recognized commercial practice of licensing worldwide patent portfolios as well as the uncertainty around validity and SEP-status of many patents in such portfolios.8 The court did, however, leave some room for the parties to resolve these issues during negotiations by noting that a FRAND license might contain mechanisms that adjust royalties based on the portfolio quality.9 Potential licensees should consider whether a FRAND counter-offer might include clauses to adjust royalty rates (or recover royalties) upon a successful challenge to validity or infringement along with a reservation of the right to challenge, reflecting Birss J’s mechanism for the adjustment of royalties payable in major markets if successful challenges to the validity or infringement of SEPs reduced the number of declared SEPs in any of those markets.

Issue 2: Forum non conveniens

The issue of whether the UK was the convenient forum arose in the parallel Conversant appeal, where Huawei and ZTE argued that China was the most appropriate forum for hearing the dispute, along with a request for a stay of the claim to injunctive relief in the UK while the Chinese courts litigated matters to a final conclusion.

The Supreme Court (perhaps unsurprisingly in light of its decision on the first issue that it had jurisdiction to decide the terms of a worldwide FRAND license) rejected the argument that China was a more appropriate forum on the basis that China had not been shown to have jurisdiction to decide the terms of a global FRAND license (the evidence that the Chinese courts had shown a willingness to grant a global FRAND license was found to be no more than speculative) and a stay was an unnecessary case management solution.

The Supreme Court’s conclusion needs though to be looked at in light of its analysis of jurisprudence from other jurisdictions, notably the U.S., Germany and Japan.  The Supreme Court concluded that, even if the courts in those jurisdictions had not yet gone so far as to decide upon global FRAND terms, they have expressed a willingness as to their competence to do so.  While, therefore, it is simple to portray the Supreme Court’s decision as setting up the UK as a de facto forum for FRAND disputes, its analysis of the other jurisdictions indicates a likelihood that, faced with the same or similar questions, courts in other jurisdictions will follow suit.

Issue 3: FRAND and non-discrimination

This issue is of general application to FRAND licenses and centers on the question of what constitutes non-discriminatory terms.

The UKSC held that the non-discrimination element in the FRAND undertaking is “general” (requiring the SEP-holder only to license according to market circumstances existing at the time and allowing lower rates for licensees that entered into a license earlier) and not “hard-edged” (requiring the SEP-holder to extend licenses on “most favorable license terms” to “similarly situated licensees”).10 The UKSC found this interpretation was consistent with the wording of the ETSI standard, from which it drew the basis for its analysis.

The term “fair, reasonable and non-discriminatory” is a single, composite obligation; they are not separate terms with which compliance is required, and, in particular with regard to “non-discriminatory”,  FRAND does not extend to a most-favored licensee obligation.11 The terms and conditions on offer should be such as are generally available as a fair market price for any market participant and without adjustment depending on the individual characteristics of a market participant that entered into an earlier license.   While there should be a single royalty price list based on the market value of the patent portfolio, there was no obligation on a licensor to grant licenses on equivalent terms to all licensees.

The Supreme Court view reflects the general commercial position and takes into account different factors (e.g. portfolio strength, time at which the license is concluded, financial standing of the parties) that come into play when license terms are concluded.  While in any FRAND negotiation the parties should not lose sight of the overall requirement that terms be fair, reasonable and non-discriminatory, the impact of the commercial position on those terms is recognized as a relevant consideration.  The impact is that commercial negotiations around FRAND issues will continue to be hard-fought, and there are likely to be further disputes that the courts will be called on to resolve as acceptance by the Supreme Court of commercial reality leaves the question of what is fair, reasonable and non-discriminatory open to interpretation on a case by case basis.

Issue 4:  Competition Law

The UKSC addressed the impact of the Court of Justice of the European Union’s decision in the Huawei / ZTE case and, specifically, the question of whether the offer of a FRAND license as a requirement for obtaining injunctive relief was mandatory and provided a safe harbor from a finding of an abuse of a dominant position under Article 102 TFEU.  The UKSC confirmed the notice requirement, but made no judgment on what the notice had to contain, confirming that it was a matter for each individual case.12 The UKSC further found that, in light of Huawei’s refusal to commit to enter a FRAND license, it was enough that Unwired Planet had expressed a willingness to conclude a license on FRAND terms.13

Again, the Supreme Court left the issue open to interpretation, understandably given its conclusion that the CJEU’s decision in Huawei/ZTE constituted a code of conduct, not an absolute requirement.  The takeaway though is that, in the circumstances of this case (and again each situation needs to be examined on a case by case basis), the key was the expression of willingness to enter into a license on FRAND terms, not that the license terms proposed were, in fact, FRAND. 

Issue 5:  Remedies

The Supreme Court held that damages would not be an adequate remedy and that an injunction should have been awarded.14 Huawei had argued that, since a licensor’s only interest is royalties, damages alone would be adequate relief.  The UKSC rejected this argument, finding that an injunction was proportionate and that there was no risk that a SEP holder would use the threat of an injunction to charge exorbitant royalty rates because any royalties had to be on FRAND terms. 

Conclusion

Overall, the Supreme Court’s judgment provides important guidance on a number of FRAND related issues and has already led to skirmishes in US patent litigation between SEP holders and implementers  In particular, it sets the standard for national courts (in the UK and elsewhere) to claim jurisdiction to set worldwide FRAND terms, on the meaning of what constituted “fair, reasonable and non-discriminatory” and on the issues of jurisdiction and remedies.  The totality of the judgment, the key points of which are set out in the commentary above, provides guidance that will impact both negotiation and enforcement strategies.  The Supreme Court sets guidelines, but each case, it emphasizes, will have a different commercial context and all of its conclusions need to be seen in this light.



1 Unwired Planet International Ltd and another (Respondents) v Huawei Technologies (UK) Co Ltd and another (Appellants); Huawei Technologies Co Ltd and another (Appellants) v Conversant Wireless Licensing SARL (Respondent); ZTE Corporation and another (Appellants) v Conversant Wireless Licensing SARL (Respondent) [2020] UKSC 37
Case C-170/13
3 [2020] UKSC 37, ⁋⁋ 48, 60.
4 [2020] UKSC 37, ⁋ 58.
5 Id. ⁋ 61.
6 Id. ⁋ 90.
7 Id. ⁋ 84.
8 [2020] UKSC 37, ⁋⁋ 61–63.
9 [2020] UKSC 37, ⁋ 64.
10 [2020] UKSC 37, ⁋⁋ 106, 110, 112.
11 Id. ⁋ 113–14.
12 [2020] UKSC 37, ⁋ 151.
13 [2020] UKSC 37, ⁋⁋ 145–47, 158.
14 [2020] UKSC 37, ⁋ 169.

 

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