The UK High Court’s 150+ page epic on fair, reasonable and non-discriminatory (FRAND) licence terms in Unwired Planet v Huawei has stirred up a lot of commentary in the tech nerd space and the international patent community (across which there is probably a fair bit of overlap). The decision goes some way to standardising the terms under which mobile phone manufacturers are able to use the technology that enables mobile networks to work. It has implications for patent litigation in high-tech industries across the board.
The telecom patent wars
The end goals of the patent system – using short-term monopolies over technology to induce people to make the effort to innovate – doesn’t hold up in the telecom industry. If a mobile telecoms network is going to work, every player must use the same technologies. So when a standard like Wi-Fi or 4G becomes universal, using an alternative technology is not an option. Often this system works – owners of so-called standard-essential patents, or SEPs, trade per-unit price for sales volume and charge no more than a few cents on products making use of their technology. But not always. We want to create a monopoly, but we don’t want the owner of the standard to charge monopolist rates.
The solution that we’ve come to is that the innovator must agree to issue licences for its patented technology on fair, reasonable and non-discriminatory – FRAND – terms. FRAND commitments are a condition of registration on the databases of many standards bodies (including, in this case, the European Telecommunications Standards Institute, or ETSI). It’s an admission that the innovators of industry-standard tech must be subject to some kind of restriction to curb the monopoly power that standardisation creates. But the system is not perfect. The fact that SEPs rely on self-declaration – with patentees notifying the relevant standards body of patents they believe are essential – is problematic. And until the Unwired Planet litigation entered the picture, and despite the huge number of telecom patent disputes in recent years, courts haven’t had the opportunity to provide guidance on what terms are considered FRAND.
Enter Unwired Planet
Unwired Planet is a US company that is in the business of licensing. It is a patent holder with no intention of developing the technology the subject of its patents – known as a “non-practising entity”, “patent licensing company” or “patent troll”, depending on your loyalties. Its headquarters are above an Italian restaurant in Reno, Nevada. And it owns a worldwide portfolio of extremely heavy-duty patents. Numerous of its patents have been declared essential to various telecommunications standards. Most of them were purchased from Ericsson and other tech companies.
In 2014, Unwired Planet brought proceedings against Chinese mobile phone and infrastructure manufacturer Huawei, together with Google and Samsung, alleging the infringement of six of its patents. Five of the asserted patents had been declared by ETSI to be essential to the 2G, 3G and 4G wireless telecommunications standards and were therefore encumbered by Ericsson’s FRAND commitments to ETSI. The defendants denied infringement and essentiality and argued that the patents were invalid.
During 2014, Unwired made a number of licence offers to the defendants relating to its full global portfolio of patents. The defendants argued that the offers were not FRAND. In June 2015, as a result of directions from the court, each side made further open offers of licensing terms. Google settled in relation to the SEPs in 2015 and Samsung followed in 2016, leaving Huawei as the sole defendant.
Following a number of “technical trials”, the UK High Court held that only two of Unwired Planet’s SEPs were essential to the 2G, 3G and 4G standards and had been infringed by Huawei. The 7-week “non-technical trial” on FRAND issues followed. The main issue in dispute was whether, and to what extent, the terms of the offers made by either side were FRAND. At the heart of this dispute was the proper scope of any licence and the value of Unwired Planet’s patents, which would be reflected in the royalty rate.
Mr Justice Birss ruled that questions as to the enforcement of FRAND undertakings and the determination of FRAND rates and licence terms were within the Court’s jurisdiction and considered that neither party had made a FRAND offer. In coming to that conclusion, for the first time a formula was laid down for the setting of FRAND royalties for SEP licences.
Justice Birss considered that there is only one set of truly FRAND licence terms in a given case between two given parties. Finding that sweet spot may be the culmination of long back-and-forth negotiations in which several non-FRAND offers are made without prejudicing the legitimacy of the negotiation. FRAND licences require give-and-take – for a licence to be considered FRAND, the patentee must not refuse to licence and the licensee must not refuse to take the licence.
Justice Birss also held that the non-discrimination limb of FRAND has the implication that the fair rate does not vary according to the size of the licensee – small entities may be required to pay a royalty based on the same benchmark as large ones. On the flipside, non-discrimination doesn’t mean that a licensee is necessarily entitled to the same licence terms as another similarly situated licensee.
Significantly, Birss J enforced FRAND obligations directly – without recourse to competition law.
Calculating the FRAND rate
Justice Birss held that a FRAND rate could be determined by reference to comparable pre-existing licences, including those that have been freely negotiated. Alternatively, benchmark rates may be calculated by reference to the value of the patentee’s portfolio.
A further consideration was the proper geographic scope of the FRAND licence where the licensee has global sales. Justice Birss considered that any reasonable licensee would regard country by country licensing as “madness” and that a worldwide licence, with different rates for different regions and standards, would be far more efficient. The FRAND royalty rates determined in this case differentiated between China, major markets and other markets.
Justice Birss went on to decide the terms of a worldwide licence that would be FRAND in the given circumstances. His Honour did not craft a set of FRAND terms out of thin air, but rather declared that a given set of terms were FRAND and, within that framework, decided that certain terms need to be adjusted in order to make a set of terms FRAND. Huawei, however, refused to enter into a worldwide licence on the terms his Honour had found to be FRAND and, on that basis, his Honour considered that an injunction to restrain infringement by Huawei ought to be granted. However, since Huawei did not engage with the draft terms, in exercise of the Court’s discretion, the imposition of a final injunction will be considered in a post-judgment hearing in a few weeks’ time.
The future of telecom standards
Justice Birss’ decision clarifies the relationship between the companies that make mobile phones and the patent holders for the technology that enables those phones to communicate. The decision confirms that the legal effect of a FRAND commitment is that an implementer who refuses to take a licence on terms found by the court to be FRAND has in effect chosen to have no licence, and so may be subject to an injunction to restrain patent infringement.
FRAND obligations allow for innovation in standards while allowing patent holders to monetise their technologies. But in the end it’s difficult to get around the fact that standardisation creates tensions – creating monopolies to encourage innovation while requiring that everyone must use that technology if the networks are going to work.
In the meantime, Huawei has learned the hard way that SEP owners are better a FRAND than a foe.