Implications of FRAND royalty rate on standard-essential patent litigation

In Unwired Planet v Huawei (2017 EWHC 711 (Pat)) the High Court gave long-awaited guidance on the determination of fair, reasonable and non-discriminatory (FRAND) royalty rates for standard-essential patents on a worldwide basis.

The case concerned the level of FRAND royalty payable to Unwired Planet, an entity established to license patents acquired from Ericsson. Mr Justice Birss had previously determined that Huawei had infringed two of Unwired Planet’s patents which had been declared essential to the 2G, 3G and 4G wireless telecommunications standards. Some of the judge's key findings were as follows:

• The FRAND undertaking to the European Telecommunications Standards Institute (ETSI) is directly enforceable in the United Kingdom by those who implement the standards.
• There is a single, potentially worldwide FRAND royalty rate applicable to any given set of standard-essential patents and circumstances, and the UK court is prepared to determine that rate.
• A FRAND rate can be determined using a variety of methodologies.
• Offers by standard-essential patent holders greater than the FRAND rate may be made during negotiations without breaching competition law.
• There is no ‘hard-edged’ non-discrimination requirement of FRAND.
• Seeking injunctive relief before an offer has been made will not necessarily be a breach of competition law.
• Once the FRAND rate is set, an injunction will ordinarily be granted against an implementer who refuses to enter a FRAND licence, and an injunction will be refused if the standard-essential patent holder refuses to offer a FRAND licence.

The judge's detailed findings have many implications for UK standard-essential patent litigation, and there are significant ways in which the guidance will affect future UK FRAND disputes.

FRAND disputes are mostly a question of contract law, but competition law still has a role

ETSI’s IP rights policy requires standard-essential patent holders to license those standard-essential patents on FRAND terms. Previous cases, such as the European Court of Justice’s (ECJ) decision in Huawei v ZTE (2014), considered the competition law aspects arising from FRAND obligations. In Unwired Planet the judge held that declarations made to ETSI are “public, irrevocable and enforceable” contracts under French law enforceable by third parties in UK courts. Going forwards, UK FRAND disputes may well focus on these contractual obligations that accompany a FRAND obligation, such as the limits of the non-discrimination element discussed further below; however, competition law questions may still arise.

FRAND is a single, worldwide rate but patentees may make initial offers higher than FRAND in negotiations

There is a single FRAND rate for any given set of standard-essential patents and products. Therefore, the patentee at the outset of negotiations may make an offer above the FRAND rate to allow the implementer an opportunity to negotiate down to the FRAND rate. Further, a patentee making an offer greater than the FRAND rate will not be abusing a dominant position under EU competition law unless the offer “is so far above FRAND as to act to disrupt or prejudice the negotiations themselves”. This holding clearly reduces the scope of competition law arguments available to implementers, but does not eliminate them.

Implementers will rarely, if ever, be able to argue that a FRAND licence should be country specific

The judge rejected Huawei’s arguments that it was interested only in licensing Unwired Planet’s UK patents and held that the FRAND licence here was necessarily worldwide because:

• “the vast majority” of standard-essential patent licences in the industry, including all of the comparable licences introduced at trial, were worldwide;
• Unwired Planet’s patents were issued in 42 countries, while Huawei’s operations extended to 51 countries; and
• the possibility of country-by-country licensing is highly inefficient.

New entrants to the market cannot be discriminated on size, but there is no ‘hard-edged’ non-discrimination

The judgment makes it clear that “all licensees who need the same kind of licence will be charged the same kind of rate” and “[s]mall new entrants are entitled to pay a royalty based on the same benchmark as established large entities”.

However, new market entrants do not face a completely even playing field, as the judge held that there is no hard-edged non-discrimination in FRAND. This means that a licensee cannot challenge a licence allegedly granted on FRAND terms if it later discovers that a similarly situated implementer received a lower royalty rate – unless it can prove that the difference would “distort competition” between the two licensees. This leaves the door open for possible competition law arguments, but is likely to be a significant hurdle for licensees.

Smaller entrants often argue that they need licences at lower royalty rates as compared to their established competitors in order to build their presence in the market. In theory, the judge's finding of no hard-edged discrimination leaves room for standard-essential patent holders to agree rates lower than FRAND rates for new entrants. However, if the standard-essential patent holder is too generous, other licensees may be able to challenge their rates on the basis of distorted competition.

Determining the FRAND rate will be a matter of argument and (possibly extensive) evidence

To calculate the payable FRAND rates, the judge first applied a ‘comparables’ method to calculate benchmark FRAND rates based on Unwired Planet’s UK patents, and used a ‘top-down’ method as a cross-check. The judge then applied various scalers to arrive at the payable FRAND rates in major markets and other markets.

Applying the comparables method, the judge considered a set of comparable licences from Ericsson’s 2G/3G/4G standard-essential patent portfolio; although none of the available licences were considered particularly good, the best starting point were the Ericsson and Samsung 2014 licence rates. The judge discounted these rates by a factor ‒ representing the relative strength of Unwired Planet’s portfolio as compared to Ericsson’s ‒ on per standard, per handset and per infrastructure bases.

The top-down method set the FRAND rate as T x S, where ‘T’ is the total aggregate standard-essential patent royalty burden of a particular standard on a product, and ‘S’ is the share of that aggregate royalty attributable to the patentee’s portfolio. The judge determined ‘T’ by considering various public statements and press releases made by Ericsson and other standard-essential patent holders as to what aggregate royalty implementers should bear (the so-called ‘patent pledges’) and determined Unwired Planet’s share of the relevant standard-essential patents (‘S’) using various weighting methodologies proposed by the parties’ experts. The judge arrived at the following benchmark rates (using values for ‘S’ derived from considering the number of relevant standard-essential patents in Unwired Planet’s UK portfolio).

To calculate royalty rates payable in major markets, the judge scaled the benchmark rate according to the number of relevant standard-essential patents in those market; for the rates payable in China and other markets, he applied a further scaling factor of 50%, acknowledging that licence rates in the real world were typically much lower in China than in other countries. The judge arrived at the following rates payable.

The parties agreed that the royalty base for handsets (ie, the sum to which the rates were applied) was the price at which substantial quantities of equivalent or substantially equivalent products have been sold. The royalty base for infrastructure was held to be the price paid for goods, excluding income from managed services, operation and maintenance.

This approach will not be suitable for every dispute. The judge may have favoured the comparables approach here because Unwired Planet had originally obtained each of the asserted patents from Ericsson, so some of Ericsson’s licences were comparable to the hypothetical licences Unwired Planet would have negotiated with Huawei. Other standard-essential patent holders may not have such convenient predecessors in title. Future cases will present challenges of disclosure of comparable licence terms. Where there are no good comparables, expert evidence as to royalty aggregates and multipliers will be crucial.

Seeking injunctive relief before an offer has been made will not necessarily be a breach of competition law

At trial, Huawei relied on the ECJ guidance for FRAND licensing negotiations in Huawei v ZTE to argue that Unwired Planet had acted contrary to Article 102 of the Treaty on the Functioning of the European Union for seeking an injunction before making an initial offer. The judge held that no breach of Article 102 had occurred: the ECJ guidance was said to define a clear safe harbour, but falling outside that harbour did not automatically entail a breach of EU competition law. What matters are the circumstances of each case: here, because Huawei clearly had ‘notice’ of Unwired Planet’s intention to enforce its patents, seeking an injunction before an offer was made did not amount to a breach of Article 102.

This finding clearly takes some force out of the threat of a successful Huawei v ZTE action against standard-essential patent holders for their conduct in FRAND negotiations. However, behaviour which departs in an extreme way from the ‘best practice’ of Huawei v ZTE, such as seeking an injunction before any talks have started, may still breach competition law.

Injunctions are now firmly on the table in FRAND disputes

Once a court has determined the FRAND rate, the question of an injunction depends on the compliance of the parties: if a standard-essential patent holder refuses to enter a FRAND licence, an injunction will be withheld; if an implementer refuses to enter a FRAND licence, an injunction will ordinarily be granted.

This guidance puts to rest doubts sowed by the judge in his Vringo v ZTE (2015 EWHC 214 (Pat)) decision, where he identified what became known as the ‘Vringo problem’: namely, if FRAND encompassed a range of rates (as it was then suggested), then what was a court to do if both the standard-essential patent holder and the implementer undertook to take FRAND licences, but the standard-essential patent holder made a FRAND offer at the higher end of the range, and the implementer made a FRAND counteroffer at the bottom end? Could an injunction be an appropriate remedy where both the standard-essential patent holder and implementer were willing parties to a licence but disagreed as to the particular FRAND rate? The judge's subsequent finding that there is only one FRAND rate in any given set of circumstances has now dissolved this problem.

Return hearing

After the handing down of the judge's main judgment, the parties returned to court to settle the question of final relief (2017 EWHC 1304 (Pat)). Since Huawei had refused to agree to the final form of licence settled at the main hearing, Unwired Planet pressed for a final injunction. Huawei offered undertakings to enter into the final form of FRAND licence settled by the courts after any appeals, and to treat the terms of the judge's FRAND licence as binding pending the resolution of any appeals, and argued that this rendered an injunction disproportionate. Huawei noted that the FRAND licence would expire in 2020, whereas Unwired Planet’s latest-expiring standard-essential patents (and therefore any final injunction) would expire in 2028. This disparity in time arose because the parties were agreed at trial that the corresponding UK licence would run until 2020 to take account of the fact that circumstances post-2020 would be different: some standard-essential patents would have expired, new standard-essential patents may have been granted and the standards themselves may even have changed.

Therefore, Huawei argued that granting an injunction would distort the negotiating positions of the parties after the expiration of the FRAND licence.

The judge held that, as Huawei stood before the court without a licence but with the means by which to become a FRAND licensee, a new form of licence ‒ a ‘FRAND injunction’ ‒ should be granted (although suspended until the outcome of any appeal). Such an injunction would include a proviso that it would cease to have effect if Huawei enters into that FRAND licence. If, as in this case, the duration of the FRAND licence was shorter than the lifetime of the relevant patents, then the injunction should also be subject to an express liberty to either party to return to court in future to address the position at the end of the term of the FRAND licence. Further, the FRAND injunction would also be subject to an express liberty to return to court to apply in the event the FRAND licence ceases to have effect for any other reason.

The judge rejected Huawei’s submissions that its undertakings were sufficient to avoid an injunction, holding that these had been made at too late a stage in the proceedings, and that it was arguable that the undertakings were not watertight since it was open to Huawei to pursue certain points on appeal whose outcome may render the terms of the undertakings such that Huawei would not become a party to the FRAND licence.

Comment

Overall, the High Court has adopted a pragmatic and commercial approach which is underpinned by the threat of injunctive relief. While non-discrimination prevents entities from being discriminated against based on size, licensees will find it difficult to unpick licences on learning that a competitor has secured a better one. Competition law will only act to punish negotiating parties which take extreme or intransigent positions. Where the parties are global actors, then a FRAND rate will be global, dividing up the world into limited categories of markets. This is the first judicial decision of its kind in Europe, and it remains to be seen how other judges and courts will grapple with these issues.