The Court of Appeal has endorsed the approach taken by Birss J at the first instance in relation to determining fair, reasonable, and nondiscriminatory (FRAND) royalties and the rights and obligations of parties negotiating licences for standard essential patents (SEPs), dismissing Huawei's appeal in its entirety.
The dispute was between patent owner, Unwired Planet (UP), and prospective licensee, Huawei, regarding patents declared essential for various telecommunication standards. In the High Court, Birss J emphasised that FRAND characterises both the terms of a licence and a process by which a licence is negotiated. Birss J found that the Court will be prepared to grant an injunction against a party who fails to satisfy the Court of its willingness to take a licence on FRAND terms.
To calculate FRAND royalty rates, the High Court favoured benchmarking using the relative proportions of the patentee’s portfolio relative to licences from a comparable licensor, with a crosscheck based on the total aggregate royalty burden for the standard in question. It also rejected the argument that the nondiscriminatory requirement of the FRAND undertaking forced the licensor to offer the same or a similar royalty rate or terms as that agreed in any earlier licence with a similar licensee (socalled “hardedged nondiscrimination”). Our full summary of the High Court decision can be found here.
The High Court's final order granted a UK injunction against Huawei until such time as it entered into a global agreement on FRAND terms settled by Birss J. Huawei appealed.
In short, the Court of Appeal upheld the decision of Birss J more or less in its entirety (with the exception of minor points which had no impact on the overall outcome of the case).
1. Can a global licence be FRAND?
The Court of Appeal found that whether a particular licence was FRAND would depend on all the relevant circumstances, but there was no reason in principle why a global licence would not be FRAND. The Court rejected Huawei's arguments that the FRAND royalties determined by the court should match the territorial scope of the SEP in question, or that a FRAND approach required countrybycountry licensing. The Court also emphasised that Huawei was not being compelled to take a global licence – it was free to accept the licence, or to decline and face the normal relief UP would be entitled to as a successful patentee in the UK.
2. Should UP have offered Huawei the rates that it previously agreed with Samsung?
One of the few points on which the Court of Appeal disagreed with Birss J was on the question of whether there can only ever be a single set of FRAND terms. The Court found that different sets of terms can both be FRAND, as it is 'unreal' to think that two parties will necessarily arrive at precisely the same set of terms as two other parties. Rather, economic evidence showed that a number of sets of terms may all be fair and reasonable in a given set of circumstances and the SEP owner can satisfy its obligation to ETSI by offering either one of them – which also then solves the socalled Vringo problem to which Birss J had referred. However in this instance, Birss J had found that the only FRAND licence would be a global one, so the Court of Appeal's decision did not change the outcome.
The Court of Appeal did agree with Birss J's decision that the nondiscriminatory aspect of FRAND terms did not force the licensor to offer the same or a similar royalty rate or terms as that agreed in any earlier licence with a similar licensee (hardedged discrimination). Instead, the Court held that the 'nondiscriminatory' aspect of FRAND was a general requirement which was met by approaching the determination of FRAND terms using the benchmarking approach Birss J had followed. SEP owners could grant licences at rates below the benchmark FRAND rate.
3. Had UP infringed competition law?
Argument on this issue centred around whether the CJEU's decision in Huawei v ZTE had set out a concrete behavioural framework which had to be followed in all cases for a SEP owner to avoid infringing competition law. Ultimately, the Court found that Birss J had been correct on this point – the CJEU in ZTE was not setting out mandatory conditions any deviation from which would result in abuse of a dominant position, but rather giving an example of a safe harbour. Whether or not there was infringement of competition law if behaviour fell outside that safe harbour would depend on all the circumstances of a given case.
For a more detailed analysis of the Court of Appeal's reasoning, click here.
It has been reported that Huawei intends to seek permission to take the case to the Supreme Court.
In relation to negotiating a FRAND licence, key takeaways are generally unchanged from those which we discussed after the High Court's decision here.
Key points to note in light of the Court of Appeal's decision include:
- The question of whether a particular licence was FRAND depends on all the relevant circumstances, but there is no reason in principle why a global licence cannot be FRAND
- There will not be a single set of FRAND terms for any given set of circumstances — a number of different sets of terms may all be FRAND in a given set of circumstances. A SEP owner can satisfy its FRAND obligations by offering any one of them.
- The nondiscriminatory requirement of the FRAND undertaking will not force an SEP holder to offer the same or a similar royalty rate as that agreed in any earlier licence with a similar licensee—lower offers are permitted. However, that is not to say that discrimination can never arise below the benchmark rate so licensors will still need to be aware of competition law issues if making such offers.
- The procedure set out in Huawei v ZTE sets out safe harbour, rather than a mandatory code of behaviour (except that the requirement for a licensor to notify or consult with an alleged infringer before commencing proceedings is always required). Failure to comply with the guidelines set out in Huawei v ZTE will mean that a dominant licensor has opened itself up to an allegation of competition law infringement, but whether or not there is infringement will depend on all the circumstances of the case.