The Court of Appeal has upheld the High Court's decision assessing a fair, reasonable and non-discriminatory (FRAND) rate for a global licence of standard essential patents (SEPs) under the European Telecommunications Standards Institute (ETSI) rules.

Background

Article 102 of the Treaty on the Functioning of the European Union (TFEU) (Article 102) prohibits any abuse by one or more undertakings of a dominant position within the internal market or in a substantial part of it, as incompatible with the internal market in so far as it may affect trade between EU member states.

In Huawei v ZTE, the European Court of Justice (ECJ) considered the question of whether enforcement of a SEP could be in breach of EU competition law (see News brief "Standard essential patent injunctions: guidance for all concerned", www.practicallaw.com/3-618-8693).

Facts

U's worldwide patent portfolio includes patents which are declared essential to various telecommunications standards. U licenses those patents to companies who make and sell telecommunications equipment such as mobile phones and infrastructure. U sued several companies, including H, for infringement of six UK patents, including five SEPs.

The High Court decided that none of U's prior offers to license were FRAND (Briefing "Patent licensing and FRAND: a new approach", www.practicallaw.com/w-011-0614). It also held that in the circumstances a FRAND licence should be worldwide for the whole of U's SEP portfolio and set royalty rates based on existing comparable licences. In determining the FRAND royalty, it was appropriate to determine a benchmark rate governed by the value of the patentee's portfolio, which did not vary depending on the size of the licensee.

H appealed on three grounds:

  • The imposition of a global licence on terms set by a national court based on a national finding of infringement was wrong in principle and could not be FRAND.
  • H ought to have been offered the same rates as U offered to a co-defendant because the non-discrimination limb of FRAND prohibited a SEP owner from charging similarly situated licensees substantially different royalty rates for the same SEPs.
  • U had sued H without giving any notice of which SEPs were said to be infringed or why, and without having offered a licence. That conduct was an abuse of a dominant position under Article 102 and should be a defence to an injunction.

Decision

The court dismissed the appeal.

A global licence between a SEP owner and an implementer could be FRAND. Assuming such a licence was not discriminatory, there might be circumstances in which it would not be fair and reasonable to expect a SEP owner to negotiate a licence or bring proceedings territory by territory and in those circumstances only a global licence or at least a multi-territorial licence would be FRAND.

The fact that a global licence could be FRAND did not mean that the High Court had been adjudicating on issues of infringement or validity concerning any foreign SEPs: it was simply determining the terms of the licence that U was required to offer to H in accordance with its undertaking to ETSI. H could decide whether to take the licence. It could not be compelled to do so and if it chose not to, the only relief available to U would be for infringement of the two UK SEPs found to be valid and essential.

The court came to a different conclusion regarding there being only one set of FRAND terms for any given set of circumstances, but found that this had no material effect on the conclusion. It was unreal to suggest that two parties, acting fairly and reasonably, will necessarily arrive at precisely the same set of licence terms as two other parties.

The non-discrimination aspect of FRAND was not hard-edged. Differential pricing is not objectionable as such, and an effects-based approach to non-discrimination was appropriate. A hard-edged non-discrimination rule has the potential to harm the technological development of standards if it has the effect of compelling the SEP owner to accept a level of compensation for the use of its invention which does not reflect the value of the licensed technology. The undertaking should be construed in a way which strikes a proper balance between a fair return to the SEP owner and universal access to the technology without threat of injunction. The hard-edged interpretation would amount to the re-insertion of a "most favoured licensee" clause in the FRAND undertaking, which had been considered and rejected by ETSI.

U was in a dominant position but it had not abused that position. In Huawei v ZTE the ECJ was not laying down specific mandatory conditions which must be satisfied before proceedings seeking injunctive relief are issued. In U's case, although it had not followed those steps, there was contact between the parties before proceedings were issued. H had sufficient notice that U held particular SEPs and it knew or ought to have known that if these SEPs were truly essential and valid then a licence was required. It also knew that U wished to agree a licence with it. This was sufficient to avoid an abuse of dominance: U was not refusing to license its SEPs.

This decision is important for those involved in litigating FRAND issues, or in negotiating licences. The underlying principle is that the purpose of the FRAND undertaking is to benefit both parties. The SEP owner is not allowed to use its control over use of standards by extracting unjust licence terms from implementers of the standard. Equally, the implementers are not allowed to deprive the SEP owner of a proper return on its patents by forcing expensive litigation in each country where it has patent rights, knowing that it can avoid facing an injunction if it loses by accepting a licence. Where the SEPs in question have already been licensed, this decision gives guidance on how closely the terms of any new licence must match those of the existing licences. Licensors must work out in negotiation the proper value of the licensed SEPs to arrive at a benchmark royalty rate. Individual circumstances may allow a higher rate, but this must not distort competition, and the SEP owner is entitled to ask for a royalty lower than the benchmark rate.

The decision fully establishes the English court as a jurisdiction willing to tackle FRAND disputes and to be involved in royalty calculations. The court's approval of the FRAND injunction approach gives SEP owners a chance to resolve global disputes where the defendant has sufficient sales in the UK not to want to pull out of the market rather than enter into a licence on terms set by the court. The confirmation that global licences for SEPs can be FRAND should in time allow the telecommunications and automotive industries to streamline the licensing of SEPs and help benchmark component prices.

Case: Unwired Planet International Ltd & Anor v Huawei Technologies Co Ltd & Anor [2018] EWCA Civ 2344.

First published in the December 2018 issue of PLC Magazine and reproduced with the kind permission of the publishers. Subscription enquiries 020 7202 1200.