UK Supreme Court judgment of 26 August 2020, neutral citation  UKSC 37, case ID: UKSC 2019/0042
The UK Supreme Court (UKSC) has handed down its unanimous landmark judgment in three combined cases involving the patent assertion entities (PAEs) Unwired Planet and Conversant and technology implementers Huawei and ZTE.
The critical point in the case was whether the UK courts have the jurisdiction to determine fair, reasonable and non-discriminatory (FRAND) licensing terms for standards essential patents (SEPs) on a global basis. This was upheld.
The case also determined four other key issues:
- The English courts are an appropriate forum to determine FRAND disputes. The alternative suggested, Chinese courts, don’t yet have the jurisdiction to make this determination.
- The non-discrimination element of the FRAND licensing obligation means that a single royalty price list should be available to all market participants, based on the market value of the patent portfolio. There is no obligation to give the most favorable license terms to all similarly situated licensees.
- It is not a breach of competition law if PAEs do not make a FRAND license offer before starting litigation. There is no mandatory procedure to follow here. Committing to grant a license on whatever terms the court considers to be FRAND is enough.
- PAEs are entitled to an injunction to prevent infringement of UK SEPs found to be valid and infringed. This will be ordered after the FRAND licensing trial unless implementers take a license on the terms determined by the court. Damages are not an adequate substitute for an injunction.
Setting global licensing terms
In the original Unwired trial, the UK court heard evidence of the telecoms industry licensing practice for 2G, 3G and 4G SEPs from the parties. Judge Birss, at first instance, decided as a matter of fact that licenses in this technology space are typically global. That was the commercial practice in the real world.
Key questions were (i) whether the English courts have the jurisdiction to determine licensing terms, on a global basis, of a multinational patent portfolio without both parties’ agreement and (ii) whether the court can compel a technology implementer to enter into that license, failing which they will be injuncted from infringing UK SEPs that have been found to be valid and essential to the relevant standard.
It was held that the English courts have this jurisdiction and may properly exercise these powers.
The English courts will not attempt to rule on the validity or infringement of foreign patents; this is beyond their jurisdiction. The relevant standards-setting organization in this case, the European Telecommunications Standards Institute (ETSI), through its IPR policy, encourages licensing of a portfolio of patents. Industry practice also supports this approach. Indeed, it is the contractual arrangement that ETSI has created in its IPR policy, balancing the rights of patent owners and technology implementers through FRAND licensing, which gives the English courts jurisdiction to determine FRAND terms.
Implementers can reserve the right to challenge the validity and infringement of particularly significant patents in a portfolio and require that the license royalties should be reduced if the challenge is successful. It may also be FRAND to allow for royalties already paid attributable to those patents to be clawed back by the implementer, although this has not been usual industry practice.
The UKSC reviewed various cases to demonstrate that its approach is consistent with that of foreign jurisdictions (specifically, courts in the US, Germany, China and Japan, as well as the European Commission).
Most appropriate court to determine the disputes
Huawei and ZTE argued that the most suitable forum to determine the disputes was China, given that they are both headquartered in China and that is where they conduct their manufacturing. The validity and infringement of Chinese patents, they said, should thus have been of central importance to the value of a global SEP license. Huawei had challenged various Unwired patents in China; Huawei and ZTE had challenged all of Conversant’s declared Chinese SEPs.
It is striking that the UK market only comprised 1 percent of Huawei’s and 0.07 percent of ZTE’s worldwide sales of relevant products. For Huawei, 64 percent of its sales occurred in China or in countries where Unwired has no patent protection (so infringement claims would be for manufacture in China). For the Conversant claim, 56 percent of Huawei’s worldwide sales are in China with a further 19 percent in countries where Conversant has no patent protection. In the first six months of 2017, 60 percent of ZTE’s revenue was from China.
According to the UKSC, this was a global dispute over the terms of a FRAND license and not a dispute over only English patents. The patent owner is entitled to decide where to enforce its patents and cannot be compelled to sue in a country where issues might be more conveniently determined.
Further, expert evidence showed that the Chinese courts did not at the time of the original hearing in 2018 have the jurisdiction needed to determine the terms of a global FRAND license at least without all parties’ agreement to that exercise. Fresh evidence admitted before the Court of Appeal did not change that view. In sharp contrast, the English courts do have the jurisdiction to force a global FRAND assessment.
It was also not appropriate to stay the English proceedings until the parallel Chinese proceedings in the Conversant case had been concluded.
The meaning of “non-discrimination”
The UKSC held that the FRAND obligation is a single, composite obligation. There is no separate requirement to assess that licensing terms satisfy the “non-discrimination” element. “Non-discrimination,” however, gives color and significant guidance regarding the meaning of FRAND. The terms and conditions on offer should be generally available as a fair market price for any market participant. This means a single royalty price list. This must be based on the market value of the SEP portfolio, without adjustment for the characteristics of individual licensees.
There is no requirement on the licensor to grant licenses with “most favored license” type clauses, whereby the cheapest royalty rates and other license terms are given to all similarly situated licensees. Therefore, the exceptional royalty rates which Unwired agreed with Samsung when Unwired was on the verge of insolvency (“fire sale” royalty rates) need not be offered to Huawei. The UKSC also said it may be rational for patent owners to offer a lower rate to the first implementer to take a license, as it provides initial income on the portfolio and may serve to validate the portfolio to other implementers, encouraging further licensing.
Procedure for making pre-litigation FRAND offers
According to the UKSC, it is not a breach of European competition law if a licensor fails to make a FRAND licensing offer before initiating litigation to enforce its SEPs (specifically, it is not abuse of a dominant position contrary to Article 102 of the Treaty on the Functioning of the European Union). On the facts, Unwired did enough by committing to grant a license on whatever terms the court decided were FRAND.
However, bringing an action seeking a prohibitory injunction without notice or prior consultation will amount to a breach of competition law.
The nature of the notice or consultation required will depend upon the facts of the case. It is not necessary to follow the protocol set out by the Court of Justice of the European Union in the Huawei v ZTE case.
Availability of injunctions impacting the UK market
The UKSC held that an award of damages is not an adequate substitute for an injunction preventing infringement of a UK SEP if the implementer refuses to take the FRAND license determined by the court. An injunction is appropriate and proportionate.
The UKSC added there is no risk that licensors could use the threat of an injunction to charge exorbitant fees because they can only enforce their rights once they have offered to license their SEPs on terms which the court is satisfied are FRAND.
Injunctions are only imposed after a technical trial where the court has held that at least one UK patent is valid, essential to the relevant standard and therefore infringed. Injunctions only impact the UK market, ie, they do not extend overseas. That said, one of the important commercial terms of the global FRAND license in the Unwired case was a requirement to pay back royalties for past infringement worldwide from January 1, 2013, when the previous license with original patent owner Ericsson terminated.
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