This morning in London, the High Court released its highly anticipated judgment in Unwired Planet v Huawei. If your business is concerned with the licensing of patent portfolios that surround standardised technologies, this decision will act as a roadmap for how future licences are negotiated and determined. As the Judgment is over 160 pages long, the Bristows TMT Team explains below the key immediate points that you need to start advising your team and business.

The History

Three years ago, Unwired Planet (UP) launched patent infringement proceedings against Huawei, Samsung and Google in respect of five standard essential (ETSI) telecoms patents acquired from Ericsson.

After a number of patent infringement / validity trials, and with Samsung and Google (both represented by Bristows) having reached settlements, the High Court in London heard a further trial at the end of last year to consider the proper obligations of UP and the remaining defendant Huawei to give and take a licence, and what Fair, Reasonable and Non-Discriminatory (FRAND) terms for such a licence would be.

This is the first time these problematic issues have been ruled upon by the courts in the UK and, subject to any appeal, the effects of this decision are far reaching.

The Headline Points

The substantial and (in all likelihood) controversial judgment, sets out a number of principles:

FRAND is directly enforceable without recourse to competition law: Filing a declaration of essentiality with ETSI creates a legally enforceable contract upon which any implementer may rely. As a result of that contract, a patentee who will not give a FRAND licence will not get injunctive relief and an infringer who does not take a FRAND licence has no defence to injunction. It is not necessary to rely on competition law to enforce FRAND.

There is only one true FRAND: There is and will only be one set of licence terms which is FRAND between given parties in a given situation. The problems for a court adjudicating between an offer and a counter-offer which are both apparently FRAND are, therefore, avoided. This does not raise the spectre of all existing licences being re-opened as, having agreed the terms, it is not open to parties to revisit them on the ETSI contractual basis (unless the terms are so wide of the mark so as to engage competition law).

FRAND is a two-way street: The judge gave a clear message that FRAND has implications for both patentees and implementers. Arriving at a FRAND deal means that the patentee must not engage in hold up (effectively refusing to license) nor must the licensee engage in hold out (effectively refusing to take a licence). However, in the Judge’s view, it is not hold up for an essential patent holder to seek some of the value that results from the inclusion of its technology into a standard. A fair balance must be struck between SEP owners and implementers.

A FRAND licence will likely be a worldwide portfolio licence: A hypothetical arms-length negotiation between a willing patentee with a global portfolio and a willing implementer with a global business would result in a global licence. That is, therefore, what a FRAND licence would look like in such a situation. A multinational implementer cannot insist on a patent-by-patent and/or country-by-country approach to licensing with the holder of a global SEP portfolio.

Competition law does not define FRAND: There is no correlation between a contractual FRAND offer and whether such an offer is anti-competitive. For example, a royalty rate may be above the FRAND rate as required by the FRAND undertaking but not be abusive. This logic is applicable to other FRAND licence terms.

Offers made during negotiations do not all have to be FRAND: Both parties need to follow a FRAND approach, but that still allows for opening offers that leave room for negotiation. Offers made in negotiation which involve rates higher or lower than the FRAND rate but which do not disrupt or prejudice the negotiation are legitimate. Making extreme offers and taking an intransigent approach, however, is not a FRAND approach.

How do you calculate a FRAND rate? A FRAND rate can be determined by ‘unpacking’ (freely negotiated) relevant licences so as to make them comparable. Calculating the total number of relevant essential patents, and working out the patentee’s ‘share’ of those patents, can also be used as a ‘top down’ approach to calculating a rate (although this is perhaps better as a cross-check that the right result has been achieved through analysing comparable licences). The judgment makes findings of fact on the number of relevant essential patents for GSM, UMTS and LTE (for handsets, 154, 479 and 800 respectively), allowing any telecommunications SEP holder to make calculations of the “top down” royalty rate for its portfolio.

All patents should be treated as valid and valuable: Counting patents is the only practical approach to determine FRAND, especially for sizeable patent portfolios where evaluating the importance of each individual invention is disproportionate. Generally, all patents should be treated as equal, although exceptionally a patent might cover some ‘keystone’ invention which should be accorded particular value. Mechanisms can be included in a FRAND licence to allow for the adjustment of rates to reflect material changes to the portfolio as a result of successful invalidity attacks or the grant of new patents.

The English Court can and will set the rate and the terms: The court can decide what terms would be FRAND in given circumstances and can grant a declaration to that effect. Its jurisdiction is not restricted to an assessment of whether a given set of terms is FRAND. It extends to deciding between rival proposals and, if appropriate, coming to a conclusion different to the position of either party.

Failure to accept the Court’s FRAND terms may result in an injunction (implementer) or refusal to grant an injunction (SEP owner): An SEP holder who refuses to accept terms determined by the court to be FRAND is in breach of its FRAND undertaking. Even if a court might not be able to order a patentee to enter into a licence on those terms, the court would be likely refuse to enforce the patents by way of injunction in such circumstances. An implementer who refuses to take a licence on terms found by the court to be FRAND has chosen to have no licence and is likely to be injuncted if a patent is found to be valid and infringed.

Non-Discrimination: The non-discrimination limb of FRAND does not justify a licensee demanding a lower rate than the calculated FRAND benchmark rate simply because another similarly situated licensee had received a better deal. Any such obligation would only apply if the difference would distort competition between the two licensees.

So, what was FRAND? For the particular facts before him, Mr Justice Birss concluded that FRAND rates for a worldwide licence of UP’s relevant essential patents (of which there were 10 or fewer) would be:

Major Markets

China and Other Markets

Handsets

Infrastructure

Handsets

Infrastructure

2G/GSM

0.064%

0.064%

0.016%

0.032%

3G/UMTS

0.032%

0.016%

0.016%

0.004%

4G/LTE

0.052%

0.051%

0.026%

0.026%

Initial Practical Takeaways for Patentees and Implementers

For Implementers:

  • The ‘top down’ approach to calculating a FRAND rate limits exposure to some degree as it uses a total aggregate royalty to determine the FRAND rate or as a cross check on it.

  • An injunction will be granted in the UK on an essential patent only once FRAND terms have been set by the Court and turned down.

  • FRAND terms determined by the UK Court are likely to be on a worldwide portfolio basis.

  • It will always be possible to challenge patents, even after agreeing FRAND licence terms, but ensure that there is a mechanism in the licence to at least allow for the possibility of some adjustment of the rates.

  • To preserve competition arguments as well as a contractual FRAND defence:

  • make offers subject to negotiation and consider presenting fall back positions

  • make at least some offers open (not “without prejudice”) so that they can be relied on in court

For SEP holders:

  • You can now calculate a putative FRAND royalty rate and justify it using the methodology and findings of fact in this judgment.

  • The Judgment offers a practical way to press for a resolution if negotiations fail or are too slow

  • The Judgment endorses a worldwide, portfolio approach as FRAND and the English Court is willing to establish what FRAND would be on that basis.

  • Once you have at least one finding of validity and infringement, an injunction will typically be available if the FRAND licence terms set by the Court are not accepted.

  • Avoid intransigent behaviour:

  • make offers subject to negotiation and consider presenting fall back positions;

  • make at least some offers open so that they can be relied on in court; and

  • provide notice before commencing any litigation.