For over four years, patent licensing company Unwired Planet (UP) has been locked in a battle in the English court with handset maker Huawei over the grant of a licence to use UP’s mobile phone technology, which is essential to a number of telecommunications standards. In April 2017 the High Court set a ‘FRAND’ benchmark royalty for the licence. Huawei appealed on a number of issues. On 23 October this year the Court of Appeal dismissed the appeal; its judgment addresses some key principles affecting licensing negotiations in FRAND situations.
Background to the case
Compliance with the relevant industry standard is crucial for a mobile handset maker. This means that companies which own patents reading onto aspects of these standards (standard essential patents – SEPs) are in a very strong market position, because anyone who wants to produce standard-compliant products must take a licence. Standard setting organisations therefore require SEP owners to undertake to grant licences on fair, reasonable and non-discriminatory (FRAND) terms. There is, however, continued uncertainty about the conditions for FRAND and – given the high stakes in this industry – negotiations can be fraught, with parties often using litigation, or the threat of litigation, as a negotiating tactic.
Portfolio licences can be FRAND
The matter came before the English High Court in the course of patent infringement proceedings in relation to a number of UK patents. Huawei argued that the licence should therefore only relate to the UK. The Court of Appeal, however, agreed with the High Court’s finding that in this case the FRAND licence would be a global one: the FRAND undertaking itself was international and, looking at comparable licences, this was industry practice. The size and geographical scope of UP’s patent portfolio was such that a willing licensor and licensee acting reasonably would regard country by country licensing as madness. This did not mean that a FRAND licence would always be global – all depended on the circumstances and what a willing licensor and licensee could be expected to agree.
A licence can be non-discriminatory even if another licensee has got a better deal
In July 2016, at a time when UP had been in some financial difficulty, it had entered into a licence with Samsung at a lower rate. Huawei argued that the ‘non-discriminatory’ requirement in FRAND meant that it should be offered similar terms. Birss J in the High Court had found that the Samsung licence was an equivalent transaction but that the non-discrimination requirement did not outlaw differential pricing below the benchmark FRAND rate. The Court of Appeal upheld Birss’s approach. The purpose of the FRAND obligation was to ensure that the SEP owner was not able to ‘hold up’ implementation by demanding more than the technology was worth. The SEP owner must offer a licence on terms which reflected the proper valuation of the portfolio to all ‘implementers’ (producers of standard compliant products/services) in a non-discriminatory manner. However, it was not the intention that it should “level down the royalty to a point where it no longer represented a fair return for the SEP owner’s portfolio, or to remove its discretion to agree lower royalty rates”. Price differences must not, however, be such as to distort competition.
The constraints on SEP owners seeking an injunction
As will often (but not always) be the case where SEPs are involved, the High Court found that UP was in a dominant position on the market for licensing its SEPs. Where the SEP owner is dominant, seeking an injunction may be an abuse of that dominant position and a breach of competition law (‘hold-up’). However, the knowledge that it cannot be injuncted may lead the infringer to employ delaying tactics in the licensing negotiations (‘hold-out’). In order to deal with this impasse the Court of Justice (CJEU) - in Huawei v ZTE (C-170/13 2015) - set out a procedure for the SEP owner to follow at the commencement of negotiations which would avoid abuse. This involved (among other things) giving notice or prior consultation and offering the infringer a licence on FRAND terms. UP had not followed this procedure (partly because the dispute started before the CJEU’s judgment). Huawei argued that this in itself constituted an abuse. However, the High Court held – and the Court of Appeal agreed – that the procedure in Huawei v ZTE constituted a safe haven but was not mandatory. The only mandatory aspect was to give notice: provided that this was done the SEP owner was free to argue that it had acted reasonably and its behaviour was not an abuse. Although UP had commenced proceedings without giving details of the patents which were infringed or why and without offering a licence as such, the court found that overall the information Huawei had by March 2014 was sufficient for it to understand that the issuing of proceedings for an injunction did not represent a refusal to license its portfolio. The High Court held that there was no abuse and the Court of Appeal upheld that decision.
How does the case help patentees and licensees?
Although UP itself is primarily a patent licensing company, many players in the mobile communications area are both SEP owners and licensees in respect of other companys’ SEPs. Lack of clarity in the law relating to FRAND is arguably their worst enemy because it leads to extensive and complex negotiations. The Court of Appeal’s decision is therefore helpful for providing greater clarity on some points.
The decision that a global licence can be FRAND has generally been welcomed because it reflects the realities of negotiations in an area where large patent portfolios are often involved and encourages the doing of a global deal without litigation in multiple countries. The Court’s decision on non-discrimination encourages SEP owners to publish a benchmark royalty rate which complies with FRAND requirements, but provides flexibility for negotiating below that rate subject to competition law restraints. (Some help in setting a FRAND rate may be derived from Birss’s High Court judgment in this case, although uncertainty remains.) Finally, the Court’s decision that the procedure in Huawei v ZTE is only a safe harbour and not mandatory is likely to be welcomed by both sides as preventing this procedure from becoming a straight jacket, although in practice parties will, of course, be well-advised to take advantage of the safe harbour where possible.
Case: Unwired Planet International Ltd & Anor v Huawei Technologies Co Ltd U Anor [2018] EWCA 23 October 2018
Tom Lingard