The future of global licensing for digital standards?

 UK Supreme Court: 

Unwired Planet v Huawei and Huawei / ZTE v Conversant 

The Supreme Court gave its unanimous decision on 26 August 2020 in these long-awaited cases which upholds both the first instance High Court judgments of Mr Justice Birss in Unwired Planet v Huawei and of (the late) Mr Justice Henry Carr in Huawei / ZTE v Conversant; and the Court of Appeal decisions in both cases. The decision has confirmed that the UK courts do have jurisdiction and to determine the terms of a FRAND licence on a global basis. It is the first clear statement by any senior court that its national courts can and will determine FRAND terms on a global basis. We unpick the five key issues below.

The case is significant: its conclusions are relevant not only to the many thousands of SEPs which are used in mobile devices, but also to growing numbers of connected and/or interoperable devices in the fast evolving “Internet of Things” (IoT) economy. The decision will also provide a frame of reference to other industry-wide standard setting initiatives in which FRAND obligations are (or may become) relevant, for example the development of blockchain solutions, the connected car industry and the burgeoning world of digital health.

Issue one: can the UK courts decide a global FRAND licence?

In short, yes. The Court upheld the jurisdiction of the English courts to make a global FRAND determination and to grant an injunction against a defendant that is not willing to enter into such a licence. Having reviewed case law from the United States, Germany, China, Japan, and the decision of the European Commission in Motorola, the panel did not find any suggestion that in asserting jurisdiction to set FRAND licence terms on a global basis the UK is “out of step” with other countries even though few other courts have yet embarked on a multi-national FRAND determination.

Issue two: should they?

Again, yes. This issue arose in the Conversant cases only. The Court first considered whether its jurisdiction or China’s (since Huawei and ZTE’s biggest market is China) was the more suitable forum for determining the dispute. That involved defining the main issue between the parties: was that a dispute about the terms of a global FRAND licence, or a dispute about infringement of UK patent with a FRAND defence? The Court again upheld the courts below and found the patent issues were key, but also held that the case definition was not dispositive since the Chinese courts did not have jurisdiction to set global terms.

Issue three: can a licensee demand the terms granted to another licensee?

This one is not quite so simple. The Court upheld the view of the lower courts that the non-discrimination element in the ETSI FRAND undertaking is not ‘hard-edged’ so as to oblige SEP owners to offer royalty rates lower than the benchmark rate (i.e. equivalent to their most favourable licence terms) to all-comers. The Court makes clear that “[l]icence terms should be made available which are ‘fair, reasonable and non-discriminatory’, reading that phrase as a composite whole” (see [113]). The Court has also said that it would expect “any anti-competitive effects from differential pricing” to most appropriately be addressed by separate global competition laws rather than the FRAND undertaking itself. Therefore, the lower rate offered by UP to Samsung at a time of financial distress did not reduce the FRAND rate to others, but nonetheless the Court suggested that “there is to be a single royalty price list available to all”.

Issue four: does a SEP holder have to comply with the CJEU’s Huawei v ZTE framework?

Again, a nuanced answer. The Court confirmed that Unwired Planet did not abuse its dominant position by failing to follow the precise sequencing of the FRAND licensing framework set out by the CJEU in Huawei v ZTE, prior to seeking injunctive relief. The Court notes that Unwired Planet had satisfied the mandatory requirement in the CJEU’s judgment that “the proprietor of an SEP… cannot, without infringing article 102 TFEU, bring an action for a prohibitory injunction… without notice or prior consultation with the alleged infringer” (para 60 of the CJEU’s judgment). The UK courts will continue to take a more flexible approach to the framework than other European jurisdictions, although the requirement that both licensor and licensee must be “willing” remains an essential starting point.

Issue five: is an injunction disproportionate when a FRAND licence is not accepted?

This was a new issue not raised before. Huawei argued that the grant of a final injunction would be neither appropriate nor proportionate, and damages would be an adequate remedy for UP/Conversant, since their interest is only in receiving FRAND royalties. The Court ultimately declined to interfere with the “FRAND injunction” granted by Mr Justice Birss. For the unwilling licensee, a FRAND injunction was not disproportionate.

Looking ahead: 

1. The judgment includes points of interest not only for SEP owners and licensees in the mobile communications sector, but also a broad range of other digitalising industries, including industrial clients such as car and home goods manufacturers, and financial services and healthcare businesses engaged in industry-wide standard setting initiatives. The ongoing dispute between Nokia/Sharp/Conversant v Daimler in Germany concerning connected cars, for example, raises the interesting question as to who in the product value chain (if willing) must be able to obtain a licence from a SEP holder?
   
   
2. The UK can be expected to further increase in popularity as a forum for FRAND-encumbered patent actions and will continue to shape international jurisprudence on these matters. No other senior court has expressed such willingness to determine what constitutes FRAND licensing terms on a global basis. Unless and until that changes, then the UK will continue to be a favoured venue for SEP holders.
   
   
3. We can however expect to see greater focus on “forum shopping” and jurisdictional battles as parties seek to have FRAND issues determined in their home courts: 2019/20 has already seen the emergence of anti-anti-suit injunctions from the German courts hearing the connected car patent cases, who have maintained their right to continue hearing infringement cases while US courts determine FRAND rates. Similar decisions came out in France and the UK in late 2019. The frequency of such tactics is only likely to increase.
   
   
4. The importance of being able to show that negotiations have taken place in a “FRAND manner” or by way of adopting a “FRAND approach” will not diminish, even if it is not necessarily an abuse of a dominant position to deviate from the precise sequencing of the CJEU’s Huawei v ZTE framework. The Supreme Court has endorsed the permissive approach to the Huawei framework taken by Birss J, but the importance of ensuring that you are “willing”, whether as a licensor or licensee, is strongly emphasised in the decision (as it also recently has been in Germany in Sisvel v Haier). Parties must consider how they can give the broadest possible declaration of willingness while at the same time protecting their preferred FRAND and jurisdictional positions.
   
   
5. Industry reality and comparable licences will remain important benchmarks for establishing the value of the relevant SEP portfolio – including in respect of matters relating to “non-discrimination”. This should be kept in mind throughout individual licensing negotiations – but not go so far as adopting a “hard edged” approach to non-discrimination. These findings will be important to other essential licensing frameworks, for example in the financial services, healthcare and IoT context.
   
   
6. The Court expressly acknowledged the reality that many SEP portfolios contain numerous “declared SEPs within a portfolio [which] are often invalid or not essential” (see [40]). The suggested remedy for this weakness is to include in the licence a “ratchet” mechanism to reduce royalty rates where individual patents are held invalid or non-essential. However, it is not clear whether this will be adopted in the context of the relatively short-term licences (5-10 years) that are typical in this field. Parties may instead want to consider whether to take a more robust alternative to the value of portfolios at the negotiation stage to avoid such subsidiary litigation.  As avid FRAND-watchers will recall, the court-determined royalty rate set by Birss J was significantly lower than UP originally claimed, and below the minimum price agreed on the acquisition of those patents by UP.