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The behaviour expected of an SEP owner: the latest from Unwired Planet v Huawei

David Knight
17/05/2017
Recently Birss J gave his sixth judgment in the epic that is Unwired Planet International Ltd v Huawei Technologies Co. Ltd & Ors. This is the first FRAND decision in this string of cases. The judge held that although Unwired Planet was held to be in a dominant position, all Huawei's abuse allegations failed and since they were not prepared to take a licence on the terms that the judge found to be FRAND, a final injunction to restrain infringement should be granted.

Recently Birss J gave his sixth judgment in the epic that is Unwired Planet International Ltd v Huawei Technologies Co. Ltd & Ors. Due to the size of the case, and the number of patents in issue, the case was divided into a number of trials: five "technical trials" relating to the validity and infringement/essentiality of six patents belonging to Unwired Planet, and a sixth "non-technical trial" to address competition and FRAND issues if necessary. Arising out of the technical trials, two of Unwired Planet's patents had been found to contain claims which were valid and were essential to the relevant standards. This article relates to the judgment from the non-technical trial.

The two patents had been held to be standard essential patents (SEPs). SEPs are patents that protect an invention/technology, the use of which is essential in order to implement a specific industry standard. Therefore, competitors producing a product which complies with the relevant industry standard (in this case in the mobile telecommunications sector) will necessarily infringe the SEP. Holders of SEPs (in this case, Unwired Planet) undertake to the relevant standard-setting bodies to offer licences on a FRAND (fair, reasonable and non-discriminatory) basis. Prior to the non-technical trial both Unwired Planet and Huawei set out what they considered would be FRAND terms. 

Huawei acknowledged that if they did not accept whatever FRAND terms the court decided, they could be at risk of an injunction. However, Huawei argued that because Unwired Planet had fallen foul of competition law in that they had abused a dominant position, Unwired Planet would not be entitled to an injunction. This article focusses on this defence of abuse; it does not address the highly detailed and very fact-specific decision of Birss J on the FRAND terms and royalty rates.

 Abuse of a dominant position

 There are two limbs to the question of an abuse of a dominant position:

  • Is the party in a dominant position in the relevant market?

  • If so, has that position been abused?

As to the first limb, Birss J concluded that the relevant market is a market for licences under the SEPs, and it is a market in which an SEP owner has 100% market share. Although FRAND obligations do weaken the SEP owner's position, and licensees can, and do, hold out from taking licences, these (and other factors) were not "sufficient to justify not drawing the inference that the holder of a 100% market share is likely to be dominant". Birss LJ therefore concluded that Unwired Planet is in a dominant position in the market for licences under its SEP patents.

As to the question of abuse of dominant position, Huawei argued that there had been four abuses by Unwired Planet:-

  1. commencing litigation prematurely
  2. unfair excessive pricing
  3. bundling (i.e. tying together SEPs and non-SEPs)
  4. bundling of patents across jurisdictions

Taking these in turn:

Commencing litigation prematurely

The CJEU decision in Huawei Technologies Co. Ltd v ZTE Corp  (Case C-170/13) formed the basis of Huawei's claim that Unwired Planet had abusively commenced proceedings prematurely, in particular,

“…the proprietor of an SEP … cannot, without infringing article 102 TFEU, bring an action for a prohibitory injunction … without notice or prior consultation with the alleged infringer” (para 60)

Birss J derived a number of principles from the CJEU's decision, including:-

  1. The CJEU has set out a scheme which both the patentee and implementer can be expected to follow in the context of a dispute about a patent declared essential to a standard and subject to a FRAND undertaking.

  2. If the patentee complies with the scheme prior to starting a claim for infringement of that patent which includes a claim for an injunction, then bringing such a claim will not be abusive under Article 102.

  3. In the circumstances contemplated by the CJEU, bringing a claim for infringement of a SEP which includes a claim for an injunction without prior notice of any kind will necessarily be an abuse of dominant position.

  4. Bringing a claim for infringement which includes a claim for an injunction even with sufficient notice is capable of being an abuse of dominant position. ... The scheme sets out a standard of behaviour against which both parties' behaviour can be measured to decide in all the circumstances if an abuse has taken place.  

  5. Nor does it follow that if the patentee complies with the scheme such that bringing the action is not per se abusive, or that the patentee can behave with impunity after issue. Again, the scheme sets out standards of behaviour against which both parties’ behaviour can be measured to decide if an abuse has taken place.

  6. If the patentee does abuse its dominant position in bringing the claim or in its conduct after issue, that affords a defence to the claim for an injunction. In other words the proper remedy is likely to be refusal of an injunction even though a patent has been found to be valid and infringed and the implementer has no licence.

Birss J went on to conclude that Unwired Planet had not provided its FRAND terms to Huawei before issuing its claim which included a claim for an injunction. Nevertheless, as there had been some contact, the act of issuing the proceedings was not automatically abusive; neither was it automatically immune. Under the circumstances, Birss J concluded that Unwired Planet's conduct had not been unreasonable. He relied, among other things, on: the timing of issuance that was in large part dictated by an action under the same patents against Samsung; that Huawei had good knowledge of the patents; that Huawei are a sophisticated organisation and would have understood that issuing proceedings did not represent a refusal to negotiate; and that, in any event, FRAND terms were provided by Unwired Planet within a few weeks of issuing proceedings.

Unfair excessive pricing

Birss J stated that there was no mathematical benchmark to define unfair or excessive pricing. It is a value judgment based on all the facts.

"It is possible to distinguish between three kinds of price: there is a price which has been agreed upon or paid, a price demanded by a vendor backed by a refusal to supply and a price advanced in a negotiation. In the real world, the distinctions may not always be clear cut but they exist all the same. I agree with Huawei that in principle all three are capable of being abusive but that does not mean they are the same kind of thing or must be judged in the same way. Both the maker and the receiver of an offer made at the start of a negotiation are well aware that the final deal is likely to converge on a lower price."

Birss J went on to characterise Unwired Planet's offers as "a price advanced in a negotiation", and concluded that:

"In the context of SEPs and FRAND, as long as the recipient of the offer can see it is made in that context, then it seems to me that only an offer which is so far above FRAND as to act to disrupt or prejudice the negotiations themselves … will fall foul of Art 102(a). That is a high standard to reach but otherwise it would be too easy for the recipient of an offer to throw up their hands and refuse to negotiate at all."

Birss J recognised that the proposed FRAND rates put forward by Unwired Planet exceeded by some margin the FRAND rates that Birss J decided were appropriate. Nevertheless, he noted that Huawei had similarly put forward rates that were significantly lower than those rates, which was "evidence of how parties negotiate in this industry", and that Huawei was a large and sophisticated organisation, used to negotiating telecommunications licences and was not unfamiliar with patent litigation. Accordingly, Birss J concluded that in putting forward those rates, Unwired Planet had not prejudiced the negotiations, and the conduct was not abusive.

Bundling of SEPs and non-SEPs

Huawei relied on the fact that Unwired Planet had made an offer for a licence under its whole portfolio including both SEP and non-SEP patents. Birss J was "in no doubt that a patentee subject to a FRAND undertaking cannot insist on a licence which bundles SEPs and non-SEPs together." However, he went on to conclude that Unwired Planet had not insisted on this; it was an offer made in negotiation, and when Huawei had asked for the two to be separated they had done so. This argument therefore also was rejected.

Bundling of patents across jurisdictions

Finally, although Unwired Planet's SEPs were not in force in every jurisdiction, Unwired Planet had proposed a worldwide FRAND licence. Much like the bundling of SEPs and non-SEPs, Huawei asserted that by requiring a licence to be taken in jurisdictions in which Unwired Planet had no patent rights, Unwired Planet were acting in an abusive manner. On the facts of this case Birss J disagreed. As Birss J records, it is necessary to,

"… ask what sort of licence for Unwired Planet’s portfolio would be FRAND in terms of its geographical scope when applied to a multinational licensee like Huawei? I will start by asking what a willing licensor and a willing licensee with more or less global sales would do. There is only one answer. Unwired Planet’s portfolio today is (and in 2014 it was) sufficiently large and has sufficiently wide geographical scope that a licensor and licensee acting reasonably and on a willing basis would agree on a worldwide licence. They would regard country by country licensing as madness. A worldwide licence would be far more efficient".

In summary, a worldwide licence would be a sensible and practical arrangement, and to propose it was not abusive. Therefore, although Unwired Planet was held to be in a dominant position, all Huawei's abuse allegations failed and since they were not prepared to take a licence on the terms that the judge found to be FRAND, Birss J held that a final injunction to restrain infringement should be granted.

Nevertheless, Birss J went on to consider whether, if an abuse had been found, this would have relieved Huawei of the usual injunction that follows from a finding that a valid patent has been infringed. He concluded that,

"I am far from being convinced that a refusal of an injunction in 2017 would have been a proportionate remedy for Unwired Planet’s abuse on that assumption. A single patent normally takes about one year to come to trial on validity and infringement in the Patents Court. The abusive commencement of this action in April 2014 would have justified refusal of an injunction in April 2015 and no doubt for a good time after that but we are now two years on from that time, a year on from the finding of infringement and three years overall from the start of the proceedings. Any prejudice to Huawei from the commencement of the proceedings has been outweighed by time and by Huawei’s stance in relation to a FRAND licence. An appropriate alternative remedy might have been to refuse to award any damages to Unwired Planet for the proven infringements in the intervening period (and remove a corresponding term from the licence)."

Lessons to be learned

For the reasons given in this judgment, many SEP patentees are likely to be regarded as being in a dominant position. Care therefore must be exercised in order to avoid a finding that the dominant position has been abused.

On the facts of this case, abuse was not found, but it is clear that with a different set of facts, the outcome could have been different. To avoid abuse, a SEP patentee should bear in mind the following points:

  • They should not commence litigation without notice, and without first offering FRAND terms;

  • They should not propose FRAND terms that are so excessive that it might prejudice any negotiations;

  • They can propose bundling of SEPs and non-SEPs, but should not insist on it; and

  • Proposing a worldwide licence may not amount to an abuse if the patent portfolio and/or the scope of the accused infringer's activities are such that it is a sensible and pragmatic arrangement, but might otherwise amount to abuse.

For a prospective SEP licensee, there also are some important lessons. Even if it is considered that the patentee has acted in an abusive way, the prospective patentee cannot just regard that as a get-out-of-jail-free card. Over time, the abuse may be remedied, and in any event might not lead to a release from the threat of an injunction.

Both patentee and prospective licensee are encouraged to negotiate FRAND terms in good faith. The patentee should act reasonably and in a non-abusive manner. Further, the prospective licensee is expected to engage in the process and not just filibuster. In assessing whether the behaviour of the patentee is abusive, the behaviour of the prospective licensee may also be a factor.

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