As the dust settles after Unwired Planet, what next?
The UK Supreme Court’s landmark decision was eagerly awaited by SEP owners and implementers around the world, but as they digest the ruling there is still much for licensors and licensees to consider.
On 26 August 2020 the UK Supreme Court handed down its highly anticipated judgment in the combined cases of Unwired Planet v Huawei and Conversant v Huawei ((2020) UKSC 37). Much has already been written about the English court’s unanimous finding that it can and will set the terms of a global FRAND licence, with injunctions available if the implementer refuses to conclude that licence. However, this article considers the decision’s implications for industries, particularly telecommunications, where FRAND/RAND obligations loom particularly large.
Many in the licensing community had been waiting for this decision to provide clarity on the scope of licences that would be set by a court in the United Kingdom in the context of a finding of patent infringement, and whether (and how) the Supreme Court would establish jurisdiction to set the terms of portfolio licences on a global basis. Having confirmed the views of the lower courts, the conclusion of this long-running case may mean that stalled negotiations can now be resumed.
Certainly, owners of SEP portfolios now have confirmation from the highest UK court that it is attractive to commence patent infringement proceedings in the United Kingdom. Further, if they succeed in obtaining a finding that one of the patents in the portfolio is valid, essential and infringed, the court may determine a global, portfolio-wide FRAND licence, if the circumstances warrant it. The Supreme Court has also confirmed that the only mandatory element of the Court of Justice of the European Union’s (CJEU) Huawei v ZTE framework is an obligation to notify and consult with an implementer before commencing an action that includes a claim for an injunction and that, subject to any relevant considerations of equity and discretion, an injunction will be granted in respect of any UK infringement if the implementer refuses to enter into the court-determined FRAND licence.
The Supreme Court’s decision has widely been seen as friendly to SEP holders. However, the United Kingdom is not alone in becoming a more SEP-holder friendly jurisdiction; the German Federal Supreme Court’s decision in Sisvel v Haier and the US Court of Appeals for the Ninth Circuit’s decision in FTC v Qualcomm also indicate that these key jurisdictions have become significantly more receptive to actions that enable patent holders to enforce their SEPs.
A subtle shift
Following a period in the middle of the last decade, during which implementers seemed to be getting the upper hand in the courts, the decision in Unwired Planet – along with several other courts adopting a more pro-SEP holder stance – arguably gives patentees an important card to play when it comes to negotiations. However, implementers have not been left without recourse. The Supreme Court’s lengthy review of the policy background to its judgment emphasised the need for balance between the interests of patentees and implementers, and the need to nurture the global standardisation and licensing industry, despite it existing in the context of national patent rights and patent enforcement.
Although the Supreme Court acknowledged the practical difficulty in an SEP holder having to enforce its portfolio in each and every jurisdiction individually, it also indicated that global FRAND licences should allow implementers to challenge patents within the portfolio and that it would not be unreasonable to provide a mechanism for royalty rates to be altered as a result of patents being found invalid or not essential in individual jurisdictions. If an SEP holder were to refuse to entertain such a mechanism in an appropriate case, a UK court might well find that it had not adopted a FRAND process and might require the insertion of an appropriate mechanism in any licence terms it set.
The Supreme Court was clear that there is still a FRAND process in which SEP owners and potential licensees must engage. It will vary from case to case as to how much negotiation is needed in practice before an SEP holder starts litigation that includes a claim for an injunction. The Supreme Court’s interpretation of the CJEU’s Huawei v ZTE framework prevents patentees from launching injunction proceedings without any prior notification. However, the extent of notification required is unclear, does not seem to be extensive and might vary depending on the nature of the parties and the overall context.
Unwired broken down
Much like decisions from the lower courts, the UK Supreme Court’s judgment in Unwired Planet has provided SEP owners and implementers with a thorough explanation of the court’s reasoning on various aspects of the FRAND equation. Here are some key excerpts:
- On the basis for the court’s jurisdiction: “It is the contractual arrangement which ETSI has created in its IPR Policy which gives the court jurisdiction to determine a FRAND licence.” (Paragraph 58.)
- On the validity challenge mechanism: “It might in our view be fair and reasonable for the implementer to reserve the right to challenge those patents or a sample of those patents in the relevant foreign court and to require that the licence provide a mechanism to alter the royalty rates as a result.” (Paragraph 64.)
- On the Huawei v ZTE framework: “There must be communication to alert the alleged infringer to the claim that there is an infringement, but [it] does not prescribe precisely the form that the communication should take.” (Paragraph 151.)
- On the non-discriminatory prong of FRAND being general: “There may be circumstances in which the owner of a SEP portfolio would choose to license its portfolio at a rate which does not actually reflect its true, FRAND royalty rate value.” (Paragraph 125.)
- On a single rate for a portfolio: “There is to be a single royalty price list available to all.” (Paragraph 114.)
- On the timing of election: “In the United Kingdom, it is not the practice to grant a final injunction unless the court is satisfied that the patent is valid and infringed, and it has determined a FRAND rate.” (Paragraph 151.)
- On damages: “It may be that the measure of damages which a court would award for past infringement of patents would equate to the royalties that would have been due under a FRAND licence.” (Paragraph 87.)
The remaining steps laid out by the CJEU are said to be a route map to reach a clearly defined ‘safe harbour’ from a breach of Article 102 of the Treaty on the Functioning of the European Union. Indications from the German Federal Supreme Court in Sisvel v Haier suggest that the German courts will also not require a patentee to endure protracted pre-action negotiations. With this being a flexible assessment based on the circumstances of the case, whether courts will require more substantive negotiations in future cases will be watched with interest.
Should negotiations prove fruitful, the Supreme Court’s confirmation that a patentee’s ‘non-discriminatory’ obligations are general, rather than hard edged, may allow licences to be concluded at a favourable rate. This mirrors the approach taken in Sisvel v Haier. This flexibility allows licence rates to be agreed for a portfolio without necessarily dictating the rate that has to be offered to all other future licensees. The Supreme Court recognised the commercial importance of an SEP owner being able to incentivise implementers to take advantage of the opportunity to agree a licence (eg, to get the first-mover advantage by taking the first licence to a portfolio or to benefit from a patentee needing to raise funds in a fire sale). This decision is likely to lead to an increase in SEP/FRAND litigation in the United Kingdom as SEP holders seek to have the court set the rate for a global and portfolio-wide FRAND licence – as such determinations now have a much more significant commercial value. The Supreme Court has confirmed that while the non-discrimination obligation allows discounted licences to be agreed, there is a benchmark price that reflects the value of the portfolio and this does not change depending on the individual characteristics of the licensee in question (although it may change if other factors change).
Although any decision would not be legally binding on subsequent implementers, in practice, the courts are likely to be influenced by earlier findings as to the applicable FRAND rate for the portfolio in question. In seeking to undermine the patentee’s reliance on previous findings, whether in court or during negotiations, any future implementer could explain why the situation differed from that previously considered by the court. It might do this, for example, by arguing and providing evidence that the licensing practice and comparable licences or other factors considered previously were not relevant to its licence with the SEP holder, that the facts had changed or that relevant facts had not been before the court.
FRAND to the fore
Leaving aside the debate as to the terms of FRAND licences, an increase in litigation in the United Kingdom may not be limited to traditional patent infringement actions, in which the court considers validity, essentiality and infringement issues before turning to a FRAND determination. The Supreme Court’s finding that the contractual arrangement created by the European Telecommunications Standards Institute (ETSI) IP Rights Policy gives it jurisdiction to determine the terms of a global FRAND licence could give rise to attempts to put the FRAND determination at the forefront of any litigation. The Supreme Court noted that, in determining whether the terms of an offered licence are FRAND, a court is being asked to rule on whether the SEP owner has fulfilled the contractual obligation that arose as a result of giving the irrevocable undertaking required under the ETSI IP Rights Policy. The Supreme Court’s approach, founding the scope of its jurisdiction in contractual aspects of the ETSI regime may lead to arguments that those that are intended to benefit from the contract have a right to rely on it, at least to the extent of seeking a useful declaration as to FRAND terms in a particular commercial context.
Courts in England have broad inherent jurisdiction to make binding declarations, providing a significant amount of flexibility in hearing actions that have no conventional cause of action. However, any exercise of such discretionary declaratory powers must serve a commercially useful purpose. Will we, therefore, see declaratory actions commenced by implementers akin to the Microsoft v Motorola action in the United States?
The Court of Appeal had previously commented in TQ Delta that there was no independent right to ask for a declaration concerning the licence that must be offered, unless there was an implementer willing to enter into such a licence. The Supreme Court has now held that courts in England can determine the terms for a global portfolio licence even if both parties do not consent. While the court will not entertain hypothetical questions, following this judgment some may be encouraged to explore whether the court could be persuaded to hear a declaratory action started unilaterally by an SEP holder or an implementer to adjudicate on the royalty rate that is FRAND for any given portfolio.
This could allow parties to conclude a global licence on FRAND terms without having to resort to expensive and time-consuming patent litigation in numerous jurisdictions. Alternatively, an SEP owner could take this FRAND focus into a more traditional patent infringement action and ask the court to stay technical patent trials and assess applicable FRAND licence terms first. This would arguably determine the most commercially important point first, encouraging settlement while allowing the parties to assess whether it was economically sensible to proceed with the remaining patent liability trials.
If litigation is commenced, an open question remains about the point at which an implementer will be asked to choose between accepting an injunction in the United Kingdom and undertaking to enter into a FRAND licence. Differing views have been expressed in the past by judges in the lower courts. The Supreme Court’s judgment does not deal with this question explicitly but notes that it is not accepted practice in England for a court to grant an injunction in respect of infringement of an SEP until it has determined the FRAND rate. This suggests that perhaps no choice need be made until the court has determined those terms or, alternatively, that no election need be made until it becomes apparent that a licence will be necessary to avoid an injunction (ie, once a patent has been upheld as valid and infringed).
However, as we have seen in some recent UK cases, an implementer could face an argument that it is an unwilling licensee if it refuses to undertake to enter into a licence upon terms determined by the court because it is, in effect, refusing to accept a FRAND licence. Determining the FRAND licence terms as a first step in the litigation would mean that an implementer has the full details of the court-determined FRAND licence to enable it to make that election immediately upon a subsequent finding that a patent is valid, essential and infringed. However, as no court can force an implementer to enter into a licence, it may be that more implementers follow in the footsteps of ZyXEL, ASUS and HTC and submit to an injunction in the United Kingdom to avoid concluding a global, portfolio-wide court-determined FRAND licence. Such a decision could have significant commercial consequences for implementers, which will need to consider their market position and the remaining lifetime of the patent in question to determine whether maintaining a UK business justifies entering into the licence.
The Supreme Court’s decision may not mark a complete end to the jurisdictional disputes that have been a feature of SEP/FRAND litigation since Mr Justice Birss’ decision in Unwired Planet. Although the Supreme Court definitively confirmed the jurisdictional basis to set global FRAND licence terms, this is likely to raise further jurisdictional questions. The Supreme Court reviewed decisions from the United States, Germany, China and Japan and concluded that none of these courts had taken an approach that was out of sync with the ability of the UK court to set global FRAND terms. However, if – as in many SEP cases – patent infringement actions are commenced in multiple jurisdictions, defendants may continue to challenge the jurisdiction of the court on the basis that only the first seised of those jurisdictions should determine FRAND terms that will apply across the globe, or that other courts are better placed to do the exercise even if not first seised.
The court will continue to face the question of whether it should decline jurisdiction if there is a risk of irreconcilable judgments on the issue of FRAND. In addition, this potential overlap in FRAND considerations may cause a wave of anti-suit and anti-anti-suit injunction applications to try to prevent litigants from pursuing actions in competing courts that could have the effect of obstructing ongoing proceedings. As has been seen in recent cases, the court might be asked to stop a patentee from bringing patent infringement actions in multiple jurisdictions or to prevent a patentee from enforcing any injunction if the question of global FRAND is already in play between the parties.
In turn, these may then trigger anti-anti-suit injunction applications to prevent those patentees from being deprived of the rights to litigate their national patent rights. These applications have been seen already in the United Kingdom and the United States and are starting to appear in other jurisdictions such as France in IPCom v Lenovo and, most recently, China, where the Supreme People’s Court granted its first anti-suit injunction to prevent Conversant from enforcing a German injunction against Huawei and this was swiftly followed by an anti-suit injunction preventing InterDigital from seeking injunctive relief or a FRAND determination against Xiaomi in other jurisdictions (Wuhan Intermediate People’s Court).
One question left open by the UK Supreme Court is what approach should be taken to historic damages for infringement of an SEP, where it has not been accounted for in the terms of a forward-looking FRAND licence. In his first-instance decision, Birss made an obiter finding that a willing licensee and willing licensor would have agreed on the same FRAND licence terms and that those royalties would have been payable on all UK sales. This point was not considered in the subsequent appeals.
Therefore, the proposition that the counterfactual licence that must be assessed for the purposes of damages is a licence to the whole portfolio and on all of the defendant’s global sales is yet to be tested. The Supreme Court’s discussion of it being common practice in the telecomms industry to agree global licences to patent portfolios may be relied upon to argue that damages should be assessed on the same basis. However, the court stressed that assessing the loss suffered by a patentee as a result of the implementer’s infringement is an exercise of a different nature to that of determining the terms of a FRAND licence. While the judgment warns against the misplaced equation of the two assessments, it also comments that the damages payable might equate to the royalties due under a FRAND licence. At least two upcoming cases (Philips v TCL and IPCom v HTC) are due to ask the English High Court to consider this issue. To date, this has been considered only in the context of a summary judgment/strike out application in Philips v ASUS, in which Mr Justice Marcus Smith found that the issue of assessing back damages and the relevance of the possible FRAND licence terms must be considered in full at trial and could not be determined on a summary basis.
The Supreme Court provided very clear answers to the specific questions that it had been asked to address. These answers may unblock a number of negotiations that had been paused, while giving the parties new issues to discuss. However, many interesting points raised by the nature of global FRAND licences and the effect of the court’s willingness to determine the terms of those licences are yet to be resolved.
The UK Supreme Court’s decision in Unwired Planet and Conversant came in the midst of a series of positive court rulings for SEP owners in the United States and Europe, adding to the legal and commercial issues that licensees and licensors must consider in FRAND negotiations.
- The decision is likely to lead to a spike in SEP cases in the United Kingdom, which could put FRAND determinations – rather than, for example, questions around validity and infringement – to the fore.
- If FRAND terms are addressed first in a dispute, it might push parties into an earlier settlement.
- As some implementers have done already, we may see more companies submit to a UK injunction to avoid concluding a global, portfolio-wide court-determined FRAND licence.
- The decision could give rise to further anti-suit and anti-anti-suit injunctions, as litigants seek leverage in various national courts.