The Supreme Court has issued its much anticipated decision in two appeals: Unwired Planet v Huawei and Huawei / ZTE v Conversant. The Supreme Court's decision, following several years of argument before the Courts, cements the attractiveness of the English courts as a forum for resolving disputes over standard essential patents (SEPs). In dismissing Huawei and ZTE's appeals, the Supreme Court has determined that the English court can, without the parties' agreement, set the terms of a FRAND (fair, reasonable and non-discriminatory) licence on a global basis for a portfolio of SEPs, even where it has only found infringement of UK patent rights.
If an implementer that needs to use the patented technology decides not to accept the terms of such a licence settled by the Court, it will therefore be injuncted in the UK. The Supreme Court did suggest that, in such a scenario, the implementer could seek to reserve the right to challenge important non-UK patents in the relevant foreign court, and to require that the licence include a mechanism to alter the royalty rates payable should that patent be found to be invalid or not essential to the particular standard. Whilst Huawei had not done so in this case, it appears to be an option in future cases either during negotiations with the SEP owner or in argument before the Court.
The Court's decision will no doubt be considered very carefully by courts in other jurisdictions, and will have far-reaching implications as parties consider how best to approach such disputes, and analyse where they should be litigated.
Background
Unwired Planet commenced patent infringement proceedings in March 2014 against Huawei (and Samsung and Google, who both settled) relating to a number of its SEPs, following various discussions between the parties. Following a finding of infringement, the Patents Court (Mr Justice Birss) concluded that it could set the terms of a licence on a global basis as this would be FRAND.
Following this decision, Conversant brought similar proceedings against Huawei and ZTE, who raised arguments again on jurisdiction, and also as to suitability of the English court for the litigation. In particular, as they were challenging a number of patents before the Chinese court, they argued that China was a more suitable forum for the dispute. For example, for Huawei, the Chinese market accounts for 56% of its relevant sales worldwide, whereas the UK comprised only 1% of its sales of those products. However, the Patents Court held that the English court had jurisdiction, and China was not a more suitable forum.
The Court of Appeal rejected appeals in both cases. Huawei and ZTE appealed to the Supreme Court, which heard the appeals together.
The Supreme Court Decision
1) Jurisdiction to determine a global FRAND licence
The Supreme Court decided that the English courts do have jurisdiction and may properly exercise a power, without both parties' agreement:
- To grant an injunction against infringement of a UK SEP unless the implementer of the patented invention enters into a global licence of a multi-national patent portfolio; and
- To determine the royalty rates and other terms of the licence.
Whilst the validity and infringement of a national patent should be determined by the courts of the state which granted the patent, the contractual arrangements created under the IPR Policy of the standard setting organisation – ETSI (European Telecommunications Standards Institute) – gave the English courts this jurisdiction, including in relation to non-UK patents.
The Supreme Court described the ETSI IPR policy as seeking to preserve a balance between SEP owners and implementers: it prevents the owner of an essential IPR from 'holding up' implementation of the standard, but also addresses 'holding out' by implementers. The ETSI policy requires the owner of an essential IPR to give an irrevocable undertaking to grant a licence on FRAND terms. Implementers are thereby given access to the technology, and the SEP owner has a 'fair reward' through the licence for the use of their monopoly rights. The possibility that a national court might grant an injunction is a necessary part of this balance, as it incentivises implementers to negotiate and accept FRAND terms for the use of the SEP owner’s portfolio.
The Supreme Court also considered the wider external context, i.e., telecoms industry practice in negotiating licensing agreements. Given that SEPS are usually part of a large worldwide portfolio, and implementers market their products in many countries, SEP owners as a matter of practice voluntarily negotiate worldwide licences. Indeed, as Birss J had put it, 'no rational business' would license on a country by country basis, if this could be avoided. The parties agreed that SEP owners and implementers could not feasibly test the validity and infringement of all the patents involved in a standard. The Court therefore said it was common practice for operators to agree a global licence, without knowing precisely how many of the licensed patents are valid or infringed, in order to deal with unavoidable uncertainty.
The Supreme Court concluded that neither Birss J nor the Court of Appeal had purported to determine the validity of any non-UK patent or as to whether such a patent was or not a SEP. If they had, this would have been illegitimate. Instead, they had looked to the commercial practice of agreeing to take a licence of a portfolio, regardless of the validity/infringement status of each patent, and construed ETSI's IPR policy as promoting that behaviour.
However, the Supreme Court did note that it might be 'fair and reasonable' for an implementer to reserve the right to challenge important foreign patents in the relevant court, and to require that the licence include a mechanism to alter the royalty rates accordingly. Or, an implementer could seek to include in the licence an entitlement to recover sums paid as royalties in relation to those patents if the relevant foreign court subsequently finds them invalid/not infringed. Huawei did not seek to do so here, but it appears implementers could seek to obtain such a reservation in future cases during FRAND negotiations or before a court over the terms of a licence. Of course, this would then require the implementer to take action in all those relevant foreign courts.
2) Suitable forum
In the Conversant case, Huawei and ZTE also argued that, even if the English court had jurisdiction, China was the more suitable forum for the dispute. The Patents Court judge (the late Henry Carr J) had held that, at present, the Chinese courts do not have jurisdiction to determine the terms of a global FRAND licence, at least without the parties' agreement. Further, even if the parties did consent to such jurisdiction, it was no more than speculative that the Chinese Court would take this approach. As it had been determined that the English court did have this jurisdiction, the Supreme Court held that the argument on whether China was the more suitable forum failed at the 'first hurdle'.
3) Non-discrimination
In the Unwired Planet case, Huawei argued that the non-discrimination limb of the FRAND undertaking should take into account the fact that Unwired Planet had granted Samsung a licence on a much lower worldwide royalty rate than that determined by Birss J. As Unwired Planet had granted this licence to Samsung after it had been acquired by Pan Optis and was in a distressed financial position, Samsung had been able to drive down the royalty rates. Birss J described Huawei's approach as one of 'hard-edged' non-discrimination, its practical effect being that a SEP owner would be required to grant licence terms equivalent to the most favourable licence terms to all similarly situated licensees.
The Supreme Court agreed with Birss J that the non-discrimination obligation is 'general' in nature, rather than 'hard-edged'. The terms and conditions on offer should be such as are generally available as a fair market price for any market participant, to reflect the true value of the SEPS to which the licence relates, and without any adjustment depending on the individual characteristics of a particular market participant – i.e., there must be a single royalty price list available to all. However, there is no requirement for SEP owners to grant licences on terms equivalent to the most favourable licence terms to all similarly situated licensees. Indeed, ETSI had considered and rejected the imposition of a most-favourable-licence clause.
4) Competition law: abuse of dominance by Unwired Planet?
Huawei also sought to rely on Huawei v ZTE where the CJEU had laid down a protocol of steps for SEP owners and implementers involved in FRAND negotiations. The Supreme Court agreed with the Court of Appeal and Patents Court that the CJEU had not imposed a mandatory framework that a SEP owner must comply with before seeking injunctive relief, other than in relation to giving the implementer prior notice or consulting with the implementer. The nature of that notice/consultation must, said the Supreme Court, depend upon the circumstances of the case – the facts of the case demonstrated that Unwired Planet had shown itself willing to license Huawei on whatever terms the Court determined were FRAND, whereas Huawei had only been prepared to take a UK licence.
5) Damages instead of an injunction?
Lastly, in a new argument before the Supreme Court, Huawei argued that the Court should not grant an injunction as this was not appropriate or proportionate, and instead damages should be awarded. However, the Supreme Court concluded that there was no basis to do this. Unwired Planet and Conversant could not employ the threat of an injunction as a means of charging exorbitant fees as they could not enforce their rights unless they have offered to license their SEPs on terms which the Court is satisfied are FRAND. Further, damages were in any event unlikely to be an adequate substitute. In particular, confining the SEP owner to a monetary remedy would give an implementer who was infringing an incentive to continue doing so until they were compelled to pay royalties in relation to each individual patent on a case by case basis.