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The best of FRANDs? - the Court of Appeal rules in Unwired Planet v Huawei

David Knight
20/11/2018
In the latest round of Unwired Planet International Ltd v Huawei Technologies Co. Ltd & Ors, previously discussed in our blogs, the Court of Appeal has rejected Huawei's appeal against the High Court's decision of April 2017.

In the latest round of Unwired Planet International Ltd v Huawei Technologies Co. Ltd & Ors ([2018] EWCA Civ 2344), previously discussed in our blogs here, here and here, the Court of Appeal has rejected Huawei's appeal against the High Court's decision of April 2017 (see the full judgment here).

Background

The European Telecommunications Standards Institute (ETSI) is the EU's standards setting organisation (SSO) for mobile telephone technology. Its standards are set by participating members, such as mobile phone manufacturers. Certain intellectual property rights, which protect the technology which is required to meet and implement industry standards, are known as standard essential patents (SEPs). Members who hold such SEPs are required to inform ETSI of those patents and must license them to users of the standard on 'fair, reasonable and non-discriminatory' (FRAND) terms.

This is designed to mitigate the potential for anti-competitive behaviour, by which SEP owners could refuse to license their patents or receive excessive royalty fees. Nonetheless, negotiations are still often lengthy and drawn out. Owners of SEPs may threaten injunctions in an attempt to secure payment. Likewise, infringers may refuse to engage constructively to avoid paying the fees.

Due to these issues, in November 2017 the European Commission outlined some key principles designed to ensure a more predictable and fair framework for licensing SEPs, as discussed by us here.

High Court decision

Unwired Planet ("UP") has numerous patents, which it licenses to companies who make and sell mobile phones. It sued several companies, including Huawei, for infringement of six UK patents, of which five were claimed as SEPs. This led to five "technical trials" in relation to the patents' validity and infringement, and a sixth "non-technical trial" in relation to FRAND and competition law issues.

UP settled with all the other defendants. It and Huawei then each made offers of licence terms which were unacceptable to the other and which Birss J - in his High Court decision - decided were not FRAND. He found that Huawei's insistence on a national rather than global licence was unreasonable, as were the rates sought by UP. He held that in the circumstances a FRAND licence should be worldwide for all of UP's SEP portfolio, and set royalty rates based on a number of existing comparable licences. He also held that UP did not abuse their dominant position in the market by, among other things, issuing injunction proceedings prematurely and bundling SEPs and non-SEPs in a global licence.

Birss J therefore granted a UK injunction against Huawei until it entered into a global agreement with UP. Huawei subsequently undertook to enter into whatever licence was finally determined to be FRAND.

Court of Appeal ruling

Huawei appealed on three grounds, as set out below.

1. Global licensing

Huawei stated that imposing a global licence on terms set by a national court based on a national finding of infringement is wrong and does not qualify as being FRAND. In its view, its offer to enter a FRAND licence which covered all of UP's UK rights sufficiently met UP's FRAND undertaking, and it was inappropriate to set royalty rates and impose an SEP licence extending beyond the UK.

The Court of Appeal found, however, that it is often impractical for owners of SEPs to negotiate licences of their patent rights on a country by country basis. Indeed, a licensee acting willingly and reasonably would regard country by country licensing as 'madness', and no rational business would do this if it could avoid it. It is therefore possible for a global licence to be FRAND, particularly given that both patent portfolios and the FRAND obligations of patentees are often international.

The only substantive point of disagreement with the High Court was with Birss J's assertion that there is only 'one true FRAND' set of rates and terms. This, the Court of Appeal held, is not correct, as there is always a range of terms upon which willing licensors and licensees could potentially reach agreement.

2. Non-discrimination

Huawei stated that it should have been offered the same rates as those contained in UP's licence to Samsung. It contended that the non-discrimination limb of FRAND is intended to prevent SEP owners from charging similarly situated licensees substantially different royalty rates for the same SEPs.

The Court of Appeal found, however, that the non-discrimination limb is not 'hard edged'. In other words, licensees cannot demand a rate given to another licensee simply because that rate was lower than what is considered 'fair and reasonable' under FRAND. The starting point is always what is considered 'fair and reasonable', which is essentially the rate which reflects the proper valuation of the portfolio to licensees. That is regardless of what has previously been offered to other similar parties, although other licences can, in the right circumstances, provide a guide to what is 'fair and reasonable'.

3. Abuse of a dominant position

UP had sued Huawei without giving any notice of which SEPs were said to be infringed or why, and without having made any licensing offer. Huawei contended that, following the decision in Huawei v ZTE, this conduct is an abuse of a dominant position under Article 102 TFEU and ought to be a defence to an injunction.

The Court of Appeal found, however, that Huawei v ZTE only provides a 'safe harbour' for licensors and that UP being outside of the safe harbour did not automatically mean that it had abused its dominant position. Nor are the steps outlined in Huawei v ZTE necessarily mandatory in all situations.

Result: In a unanimous decision given by Kitchin LJ, the Court of Appeal therefore dismissed the appeal.

Comment

Although not a ground-breaking decision in that it very largely affirms the judgment of Birss J, this is an important decision as regards FRAND and SEPs. It likely will have application to 5G, the next generation of telecoms technology. It also confirms the UK as a highly attractive forum for cases of these types, by showing the flexibility of UK courts to such disputes.

The decision does attempt to strike the balance aimed at by the European Commission, by ensuring that the terms insisted upon by SEP owners are fair, but that licensees cannot force those owners to litigate in every single country. It also provides useful clarification on both the calculation of royalty rates when other licences already exist, and how compulsory the Huawei v ZTE  'safe harbour' provisions are.

It remains to be seen if Huawei seeks leave to appeal to the Supreme Court, a distinct possibility given the case's history. 

With special thanks to trainee, Chris Eykel, for his contribution to this article.

 

POSTSCRIPT:

Leave to appeal to the Supreme Court was given in April 2019.

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