Dealing with unavoidable uncertainty: UK Supreme Court rules UK courts can set global FRAND rates for SEPs

In a much awaited decision, the UK Supreme Court has ruled that the ETSI IPR Policy is a contractual arrangement and English courts have jurisdiction to adjudicate and determine the terms of a global license to a multi-national patent portfolio. See Unwired Planet Int'l Ltd. v. Huawei Techs. combined with Huawei Techs. and ZTE Corp. v. Conversant Wireless Licensing [2020] UKSC 37. In affirming the lower court's decision that set a royalty rate for Unwired Planet's UK and non-UK declared standard essential patents (SEPs), the Court acknowledges that the lower court had "gone further than other courts have done thus far in his willingness to determine the terms of a FRAND licence which the parties could not agree." Id. at ¶ 67. After undertaking a detailed analysis of US, German, Chinese, Japanese, and European Commission precedent, the Court rejected the argument that the lower court's decision "was out of line with the approach of courts in most significant jurisdictions." The Court's lengthy decision provides important guidance to both SEP holders and implementers of standardized technology and makes the UK an attractive forum for SEP holders to resolve disputed license terms.

Background: The trial and appeal over licensing SEPs for telecommunications

Unwired Planet, a non-practicing entity, acquired a portfolio of patents and patent applications from Ericsson and asserted patents against Huawei and others in the UK, Germany and China. The portfolio covered 42 countries and comprised 276 patents and applications, of which 29 were UK patents or applications. Both Ericsson and Unwired Planet declared these patents to be Essential to 2G, 3G, and/or 4G wireless standards and committed to the European Telecommunications Standards Institute (ETSI) to license the patents on Fair Reasonable and Non-Discriminatory (FRAND) terms.

After a series of trials in the High Court, Birss J found two of Unwired Planet's asserted UK patents valid, essential to certain wireless standards, and infringed by Huawei. The court held a subsequent trial limited to the issue of whether Unwired Planet's global license offers complied with applicable FRAND commitments. Huawei contended the offers were not FRAND, in part, because the offers required Huawei to license Unwired Planet's global portfolio, when Huawei had only been found to infringe Unwired Planet's UK patents. Huawei further contended that a SEP owner must grant the same or similar terms to all similarly situated licensees, a view the court termed "hard-edged non-discrimination."

Justice Birss disagreed with Huawei on both points. After considering how real-world license negotiations between a multinational corporation and a SEP owner with a worldwide portfolio play out, the court concluded "a licensor and licensee acting reasonably and on a willing basis would agree on a worldwide licence." [2017] EWHC 711 (Pat) at ¶ 543. The court also found hard-edged discrimination inapplicable because the FRAND rate should be "determined primarily by reference to the value of the patents being licensed," rather than the circumstances of the licensee. Id. at ¶ 175.

Ultimately, Birss J concluded Unwired Planet's global portfolio license offer to Huawei was FRAND. And, because Huawei—an adjudged infringer of UK patents—declined Unwired Planet's FRAND offer, the court deemed appropriate an injunction barring Huawei's sales of infringing products in the UK. Id. at ¶¶ 806, 807.

Huawei appealed, arguing that (1) the FRAND license should not be global; (2) Unwired Planet should have offered Huawei the same royalty rate as Huawei's similarly situated competitors (i.e. hard-edged non-discrimination); and (3) Unwired Planet is not entitled to an injunction because it failed to make its FRAND offer prior to initiating litigation. The Court of Appeal disagreed, and Huawei again appealed.

The UK Supreme Court's ruling on global SEP licensing rates

The UK Supreme Court combined Huawei's appeal with an appeal in Huawei Techs. and ZTE Corp. v. Conversant Wireless Licensing, [2019] EWCA Civ 38, which raised similar issues regarding the availability of an injunction, UK patent infringement, and whether a UK court can set the terms of a global license. The Court addressed five primary issues raised by the parties.

Issue 1: Do English courts have jurisdiction to (a) grant an injunction restraining the infringement of a UK SEP until the parties enter into a global license and (b) determine royalty rates on a global scale?

On appeal, Huawei argued that it need not take a license to Unwired Planet's worldwide SEP portfolio to avoid an injunction pertaining to infringement of UK SEPs. Huawei's argument had five prongs: (1) English courts cannot grant an injunction based on a worldwide license because the English courts do not have the power to determine the validity and enforceability of non-UK patents; (2) allowing courts to do so would make English courts the "de facto international or worldwide licensing tribunal for the telecommunications industry" (Unwired Planet, UKSC 37 at ¶ 52); (3) a clear distinction should exist between what companies might do and what a national court may impose on the companies; (4) ETSI's IPR Policy removes the SEP owner's right to obtain an injunction; and (5) the injunction disproportionately has global FRAND implications based on infringement of UK-only patents.

Regarding Huawei's first contention, the Court agreed that "validity and infringement of a national patent are within the exclusive jurisdiction of the courts of the state which has granted the patent." Id. at ¶ 58. As the Court explained, however, the ETSI IPR Policy—a contractual arrangement—confers jurisdiction on "an English court [to] determine a FRAND licence of a portfolio of patents which included foreign patents." Id.

The Court further held ETSI's IPR Policy "is intended to have international effect," and does not support the piecemeal FRAND licensing advocated by Huawei. Id. at ¶¶ 60, 62. Further, the Court found the practice of entering into "global licences of a portfolio of patents, without knowing precisely how many of the licensed patents are valid or infringed" to be "a sensible way of dealing with unavoidable uncertainty." Id. And, ETSI's IPR Policy does not "provid[e] that the SEP owner is entitled to be paid for the right to use technology only in patents which have been established as valid and infringed." Id. at ¶ 61.

As to the availability of an injunction, the Court concluded Huawei "attaches too much weight to the" IPR Policy's prohibitions against patent hold-up without also acknowledging the IPR Policy's protections against implementer hold-out. Id. at ¶ 59. "In circumstances where it may well be difficult for the SEP owner to enforce its rights after the event, implementers might use their economic strength to avoid paying anything to the owner. . . .[or] effectively force the owner to accept a lower royalty rate than is fair." Id. at ¶ 10. ETSI's IPR Policy thus strikes a balance between (a) "preventing the owner of an Essential IPR from 'holding up' the implementation of the standard" by unduly restricting licenses to their SEPs, and (b) preventing implementers from "knowingly infring[ing] the owner's Essential IPRs . . . while failing to agree [to] a [FRAND] licence." Id. "The possibility of the grant of an injunction by a national court is a necessary component of the balance which the IPR Policy seeks to strike, in that it is this which ensures that an implementer has a strong incentive to negotiate and accept FRAND terms for use of the owner's SEP portfolio." Id. at ¶ 61.

The Court also addressed Huawei's contention that requiring a global FRAND license to overcome an injunction based on infringement of UK-only patents disproportionately elevates the scope of "voluntary agreements . . . in the telecommunications industry" over "the limited powers of a court." Id. at ¶ 62. The Court explained "commercial practice in the relevant market is likely to be highly relevant to an assessment of what terms are fair and reasonable," and thus Huawei's contention that a FRAND license would encompass only UK patents "fail[ed] [to] adequately . . . take into account the external context" of the telecommunications industry where owners "may hold portfolios of hundreds or thousands of patents which may be relevant to a standard." Id. at ¶¶ 60, 62. Huawei's position "fails to acknowledge that what the implementer is purchasing" through a global FRAND license "is not solely access to the UK market but . . . the ability legally to manufacture and sell products which comply with the standard on a worldwide basis." Id. at ¶ 86.

Regarding whether English courts have jurisdiction to determine terms related to licensing foreign patents, the Court, relying on interpretations of American, German, Chinese, Japanese and European Commission precedent, agreed with the Court of Appeal that Birss J's approach did not "los[e] sight of the territorial nature of patents," but rather is in "accord with the approach taken in other jurisdictions." Id. at ¶ 67. In summary, the Court found that precedent from key jurisdictions supports English courts granting an injunction based on a SEP-holder's contractual requirement to enter into a global FRAND license, including because such precedent analyzes and relies on the parties' worldwide actions, intents and negotiations. Id. at ¶ 84. Thus, the Court found Birss J's decision not "out of line with the approach of courts in most significant jurisdictions." Id. at ¶ 84.

Issue 2: Did Unwired Planet discriminate in its SEP licensing?

Next, Huawei submitted that Unwired Planet discriminated in its licensing, and therefore failed to meet its FRAND obligations because Unwired Planet entered into other agreements with royalty rates much lower than those offered to Huawei. As summarized by the Supreme Court, Huawei presents that the "non-discrimination limb of the undertaking means that the SEP owner must grant the same or similar terms to all similarly situated licensees." Id. at ¶ 106.

The Supreme Court, however, upheld the lower courts' decisions in that "[t]hey were right to find that the non-discrimination element in the FRAND undertaking is 'general' and not 'hard-edged'"—i.e., FRAND does not require offering most favored nations terms to all comers. Id. at ¶ 112. The Court based its rationale on the text of the ETSI IPR Policy where "[l]icence terms should be made available which are 'fair, reasonable and non-discriminatory', reading that phrase as a composite whole." Id. at ¶ 113. As such, the "non-discriminatory" part, when read as a whole, "indicates that the terms and conditions on offer should be such as are generally available as a fair market price for any market participant." Id. at ¶ 114. The "role of the non-discrimination limb is to ensure that the fair and reasonable royalty is one which does not depend on any idiosyncratic characteristics of the licensee." Id. at ¶ 122.

Issue 3: Does competition law prevent an injunction against Huawei?

Relying on the Court of Justice of the European Union's ("CJEU") decision in Huawei v. ZTE, Huawei argued a SEP owner such as Unwired Planet must comply with a series of mandatory conditions to obtain an injunction, including an alert of infringement, a written offer, and a request for third-party determination on a proper royalty.¹ The Supreme Court disagreed and endorsed the lower courts' conclusion that "the nature of the notice/consultation that is required must depend upon the circumstances of the case" (Unwired Planet, UKSC 37 at ¶ 151), as "the [CJEU's] reference to 'notice or prior consultation'[] . . . does not prescribe precisely the form that the communication should take." Id. The Court further acknowledged that the opinion "does not tell us that if the SEP owner does not follow the steps, it will be abusing its dominant position." Id. at ¶ 153 (emphasis in original).

Issue 4: Was the injunction appropriate and proportionate under considerations of equitable jurisdiction?

In an argument to the Supreme Court and novel to the proceedings, Huawei submitted that the injunction is not an appropriate remedy here because it is neither appropriate nor proportional given the availability of monetary damages. Notably, Huawei relied in part on the US Supreme Court case eBay Inc. v Mercexchange LLC, 547 US 388 (2006). The UK Supreme Court, however, rejected this argument and the use of eBay because when dealing with FRAND-encumbered SEPs, "[t]he threat of an injunction cannot be employed by the claimants as a means of charging exorbitant fees[]." Id. at ¶ 164.

Issue 5: Is there a more appropriate forum (from Conversant cases)

The UK Supreme Court additionally decided one issue unique to the Conversant appeal concerning forum non conveniens. As with the Unwired Planet litigation, in Conversant, the Court's assessment of a FRAND license arose in the context of an infringement liability determination. That is, after Huawei and ZTE were found to infringe UK patents, Conversant sought an injunction that would be revoked only after the parties entered into a global license. Huawei and ZTE alleged this arrangement lets the tail of UK patent infringement wag the dog of global FRAND licensing, and that the Chinese courts were a more appropriate forum for resolving the FRAND issues.

The Court found this argument unavailing based on the evidence entered in the lower courts that the Courts of China have not, up to this point, been willing to set the terms of a global FRAND license. Thus, the UK is an appropriate forum, and the global FRAND determination was proper.

Takeaway: The impact on global FRAND licensing and dispute resolutions

The UK Supreme Court has reinforced the viability of UK courts for resolving FRAND disputes, and UK courts are likely to remain a favored forum for SEP litigation.  Unwired Planet v. Huawei allows English courts to not only require parties to enter into a global license, but it also provides these same courts the power to determine what constitutes a global FRAND license.  In contrast, courts in other jurisdictions, including the United States, have thus far declined to exercise jurisdiction of foreign portions of a SEP-holder's FRAND claim absent explicit party consent to do so.  Instead, US courts require the SEP-holder to separately sue alleged infringers in each jurisdiction where the owner holds SEPs.  The UK Supreme Court's decision goes the opposite direction, allowing one-stop enforcement for SEP-holders seeking to have their global offers adjudged FRAND-compliant.

The Court's decision focused on the language of ETSI's IPR Policy and typical licensing practices in the telecommunications industry.  Of particular import is the Court's determination that injunctions must be available to strike a balance between the dual risks of patentee hold-up and implementer hold-out.  Additionally, the lynchpin of the Court's willingness to set terms of a global FRAND license is its determination that real-world industry participants enter into agreements of global scope, rather than incur transaction costs of multiple region-specific license negotiations.  And, the Court's rejection of hard-edged non-discrimination means a SEP-holder may appropriately vary the terms offered to potential licensees without violating FRAND.

In the wake of the Unwired Planet decision, it is entirely possible courts in other nations—including China and Germany—may determine that they too have the ability to set the terms of a global FRAND license between SEP-holders and implementers.  Should this happen, parties may race to their preferred jurisdiction to resolve future FRAND disputes.

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