Last week, the UK Court of Appeal upheld the findings of the High Court in an important case regarding standard essential patents (SEPs). Of particular significance, the Court of Appeal upheld the finding that the defendant, an implementer of SEPs, could have the sale of its products enjoined in the UK unless it enters into a global licensing deal on terms deemed by the court to be fair, reasonable and non-discriminatory (FRAND). The case is noteworthy not least because the threat of an injunction of this sort has become increasingly rare in other jurisdictions, arguably resulting in an imbalance in bargaining power between patent holders and implementers.
The case concerned patents held by Unwired Planet (most of which had been purchased from Ericsson) that it had declared to be essential to the operation of various telecommunications standards. Chinese telecom giant Huawei had incorporated these patented technologies in its products but disputed the legitimacy of Unwired Planet’s (UP) patents and refused to license them on the terms that were offered.
By way of a background to the case, in March 2014, UP resorted to suing Huawei, Samsung and Google and claiming an injunction when it found it hard to secure licenses. After the commencement of proceedings, UP made licence offers to the defendants. It made offers in April and July 2014 respectively and during the proceedings, including a worldwide SEP portfolio licence, a UK SEP portfolio licence and per-patent licences for any of the SEPs in suit. The defendants argued that the offers were not FRAND. Huawei and Samsung also contended that the offers were in breach of European competition law. UP settled with Google. Three technical trials of the patents began and UP was able to show that at least two of the patents sued upon were valid and essential and had been infringed. Subsequently, Samsung secured a settlement (at a rate below the market rate) and the FRAND trial went ahead with just Huawei.
Judge Birss delivered the High Court order on April 5, 2017. He held that UP’s patents were valid and infringed and it did not abuse its dominant position by requesting an injunction. He ordered a FRAND injunction that was stayed pending appeal against the two patents that had been infringed. The injunction was subject to a number of conditions which are applied because the case was dealing with patents subject to a FRAND undertaking. It will cease to have effect if Huawei enters into the FRAND license determined by the Court. He also observed that the parties can return for further determination when such license expires. Furthermore, it was held that there was one set of FRAND terms and that the scope of this FRAND was world wide.
The UK Court of Appeal (the bench consisting of Lord Justice Kitchin, Lord Justice Floyd, Lady Justice Asplin) in handing down a 291 paragraph, 66 page judgment dealing with Huawei’s appeal, upheld Birss’ findings. The centrality of Huawei’s appeal focused on the global nature of the FRAND license and the non-discrimination undertaking of UP’s FRAND commitments. Some significant findings of the Court of Appeal are briefly provided below.
The Court of Appeal in upholding Birss’ decision noted that it was unfair to say that UP is using the threat of an injunction to leverage Huawei into taking a global license, and that Huawei had the option to take the global license or submit to an injunction in the UK. Drawing attention to the potential complexities in a FRAND negotiation, the Court observed:
..The owner of a SEP may still use the threat of an injunction to try to secure the payment of excessive licence fees and so engage in hold-up activities. Conversely, the infringer may refuse to engage constructively or behave unreasonably in the negotiation process and so avoid paying the licence fees to which the SEP owner is properly entitled, a process known as “hold-out”.
Furthermore, Huawei argues that imposition of a global license on terms set by a national court based on a national finding of infringement is wrong in principle. It also states that there is currently an ongoing patent litigation in both Germany and China and that there are some countries where UP holds “no relevant” patents at all.
In response to these contentions, the Court of Appeal has held that it may be highly impractical for a SEP owner to seek to negotiate a license of its patent rights in each country and rejected the submission made by Huawei that the approach adopted by Birss in these proceedings is out of line with the territorial nature of patent litigations. It clarified that Birss did not adjudicate on issues of infringement or validity concerning foreign SEPs and did not usurp the rights of foreign courts. It further observed that such an approach of Birss is consistent with the Council and the European Economic and Social Committee dated 29 November 2017 (COM (2017) 712 final) (“the November 2017 EU Communication”) which notes in section 2.4:
For products with a global circulation, SEP licences granted on a worldwide basis may contribute to a more efficient approach and therefore can be compatible with FRAND.
The Court of Appeal however disagreed with Birss on the issue that there was only one set of FRAND terms. This view of the bench certainly comes as a relief since it seems to appropriately reflect the practical realities of a FRAND negotiation. The Court held:
Patent licences are complex and, having regard to the commercial priorities of the participating undertakings and the experience and preferences of the individuals involved, may be structured in different ways in terms of, for example, the particular contracting parties, the rights to be included in the licence, the geographical scope of the licence, the products to be licensed, royalty rates and how they are to be assessed, and payment terms. Further, concepts such as fairness and reasonableness do not sit easily with such a rigid approach.
Similarly, on the non- discrimination prong of FRAND, the Court of Appeal agreed with Birss that it was not “hard-edged” and the test is whether such difference in rates distorts competition between the licensees. It also noted that the “hard-edged” interpretation would be “akin to the re-insertion of a “most favoured licensee” clause in the FRAND undertaking” which does not seem to be what the standards body, European Telecommunications Standards Institute (ETSI) had in mind when it formulated its policies. The Court also held :
We consider that a 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.
Finally, the Court of Appeal held that UP did not abuse its dominant position just because it failed to strictly comply with the safe harbor framework laid down by Court of Justice of the European Union in Huawei v. ZTE. The only requirement that must be satisfied before proceedings are commenced by the SEP holder is that the SEP holder give sufficient notice to or consult with the implementer.
The Court of Appeal’s decision offers some significant guidance to the emerging policy debate on FRAND. As mentioned at the beginning of this post, the decision is significant particularly for the reason that UP is one of a total of two cases in the last two years, where an injunctive relief has been granted in instances involving standard essential patents. Such reliefs have been rarely granted in years in the first place. The second such instance of a grant of injunction pertains to Huawei v. Samsung where the Shenzhen Court in China held earlier this year that Huawei met the FRAND obligation while Samsung did not (negotiations were dragged on for 6 years). An injunction was granted against Samsung for infringing two of Huawei’s Chinese patents which are counterparts of two U.S. asserted patents (however Judge Orrick of the U.S. District Court for the Northern District of California enjoined Huawei from enforcing the injunction).
Current jurisprudence on injunctive relief with respect to FRAND encumbered SEPs is that there is no per se ban on these reliefs. However, courts have been very reluctant to actually grant them. While injunctions are statutory remedies, and granted automatically in most cases when a patent is found to be infringed, administrative agencies and courts have held a position that shows that FRAND commitments certainly limit this premise.
Following the eBay decision in the U.S., defendants in infringement claims involving SEPs have argued that permanent injunctions should not be available for FRAND-encumbered SEPs and were upheld in cases such as Apple v. Motorola in 2014 (where Judge Randall Radar also makes a sound case for evidence of a hold out by Apple in his dissenting order). However, in an institutional bargaining framework of FRAND, which is based on a mutuality of considerations, such a recourse is misplaced and likely to inevitably disturb this balance. The current narrative on FRAND that dominates policymaking and jurisprudence is incomplete in its unilateral focus of avoiding the possible problem of a patent hold up in the absence of concrete evidence indicating its probability. In Ericsson v D-Links Judge Davis of the US Court of Appeals for the Federal Circuit underscored this point when he observed that “if an accused infringer wants an instruction on patent hold-up and royalty stacking [to be given to the jury], it must provide evidence on the record of patent hold-up and royalty stacking.”
Remedies emanating from a one sided perspective tilt the bargaining dynamic in favour of implementers and if the worst penalty a SEP infringer has to pay is the FRAND royalty it would have otherwise paid beforehand, then a hold out or a reverse hold up by implementers becomes a very profitable strategy. Remedies for patent infringement cannot be ignored because they are also core to the framework for licensing negotiations and ensuring compliance by licensees. A disproportionate reliance on liability rules over property rights is likely to exacerbate the countervailing problem of hold out and detrimentally impact incentives to innovate, ultimately undermining the welfare goals that such enforcement seeks to achieve.
The Court of Appeal has therefore given valuable guidance in its decision when it noted:
Just as implementers need protection, so too do the SEP owners. They are entitled to an appropriate reward for carrying out their research and development activities and for engaging with the standardization process, and they must be able to prevent technology users from free-riding on their innovations. It is therefore important that implementers engage constructively in any FRAND negotiation and, where necessary, agree to submit to the outcome of an appropriate FRAND determination.
Hopefully this order brings with it some balance in FRAND negotiations as well as a shift in the perspective of courts in how they adjudicate on these litigations. It underscores an oft forgotten principle that is core to the FRAND framework- that FRAND is a two-way street, as was observed in the celebrated case of Huawei v. ZTE in 2015.