The UK Supreme Court has issued a landmark decision on standard essential patent (SEP) licensing, holding that it has the jurisdiction to impose global licenses for multinational patent portfolios and determine what terms would be fair, reasonable, and non-discriminatory (FRAND). In that August 26 opinion, the court ruled that it has the authority to resolve licensing disputes over portfolios including non-UK assets because those disputes turn not on patent law but on contract law, since a patent owner’s FRAND commitments stem from contractual agreements made to standard-setting organizations (SSOs). The court’s decision resolved key issues remaining from two high-profile FRAND cases: beyond its key jurisdictional holding, which stemmed from an appeal in Conversant v. Huawei, the court affirmed the holding from Unwired Planet v. Huawei that under UK law and industry practice, FRAND licenses should be global.
What follows is a review of the relevant history from the Unwired Planet and Conversant litigation below as well as an analysis of the Supreme Court’s ruling addressing both cases.
Litigation History
Unwired Planet Decisions: FRAND Licenses Should Be Global
The Unwired Planet litigation here at issue began with a UK infringement suit filed by Unwired Planet International Ltd. against Alphabet (Google), Huawei, and Samsung in March 2014, alleging in part the infringement of five former Ericsson patents generally related to various cellular data technologies and alleged to be standard essential. Unwired Planet filed parallel actions in Germany. The court subsequently dismissed the claims against Samsung and Google in light of settlements but ruled in November 2015 and March 2016 that Huawei had infringed two patents. Meanwhile, at several points throughout the litigation, Huawei and Unwired Planet made a series of licensing offers and counteroffers, with the parties continuing to disagree over whether and to what extent the general terms offered were FRAND. A key underlying issue was the value of Unwired Planet’s patents, as well as the scope of a potential license, with Huawei seeking to establish a UK SEP portfolio license and Unwired Planet arguing for a global license.
In April 2017, Justice Colin Birss of the Patents Court of the High Court of Justice issued a 166-page opinion addressing various issues. As to which terms were FRAND, the court held that “for a given set of circumstances there will only be one set of FRAND terms and only one FRAND rate”. Where neither set of competing terms is found to be FRAND, as Justice Birss held in this case, it is the role of the court to set FRAND terms. Perhaps most significantly, Justice Birss also ruled that FRAND licenses should be worldwide, given that the “vast majority” of industry SEP licenses are already worldwide, and noting in this instance that both parties are multinational players (as judged by the fact that Unwired Planet holds patents in 42 countries while Huawei essentially enjoys global operations). Under such circumstances, Justice Birss held, a “licensor and licensee acting reasonably and on a willing basis would agree on a worldwide licence”, emphasizing that they “would regard country by country licensing as madness” and that a “worldwide licence would be far more efficient”. The court then proceeded to establish its own set of FRAND rates for Unwired Planet’s portfolio, also holding that FRAND rates should be the same regardless of the size of the licensee.
That same June, after Huawei declined to accept the terms of the court’s license, Justice Birss issued another opinion in which he created a new form of injunctive relief that he called a “FRAND injunction”. A FRAND injunction is similar to a normal injunction in that it would “restrain infringement of the relevant patent(s)”, but it also has a proviso that the injunction would “cease to have effect if the defendant enters into that FRAND licence”.
In October 2018, the UK Court of Appeal partially affirmed the judgment below on appeal. While the court upheld Justice Birss’s holding that a global license was FRAND for global market players, it rejected his ruling that only one set of terms was FRAND for a particular set of parties and circumstances, holding instead that any number of sets of terms can be FRAND for a given dispute in light of the inherent complexity of SEP licensing.
Conversant Decisions: UK Courts May Determine Whether Global Licenses Are FRAND
Meanwhile, the relevant Conversant litigation was filed in July 2017 by Conversant Intellectual Property Management Inc. subsidiary Conversant Wireless Licensing S.à r.l. against Huawei and ZTE in the Patents Court of the High Court of Justice in London. The complaint asserted that the companies’ smartphones infringe the UK designations of four European patents alleged to be standard essential, and sought a judgment that Conversant had made both defendants a FRAND offer to license its portfolio—described by the plaintiff as “worldwide” and as containing many “declared SEPs”. The defendants subsequently asserted that the court lacked jurisdiction to hear the case, arguing that since the relevant sales occurred mainly in China, the case primarily concerns foreign patents. Because the invalidity of the Chinese patents would provide a defense to the case’s main issue, Conversant’s global FRAND claim, the defendants asserted that it would be “fair and proportionate” to first determine their validity—an issue that was not justiciable in the UK court. In the alternative, they argued that China, not the UK, would be the natural forum for the dispute, and that Huawei China and ZTE China had not been properly served in the UK.
As covered here in more detail, the High Court of Justice rejected those arguments in April 2018. With respect to justiciability, Justice Henry Carr, writing for the court, held that while it was undisputed that the court could not adjudicate the validity of foreign patents, that determination did not bar further litigation of the FRAND claims in the UK. Moreover, the court held that under Unwired Planet, a global FRAND license would not prevent a licensee from challenging the validity of foreign patents in the appropriate jurisdiction and would provide that royalties would fall away for any patents invalidated as a result. A holding to the contrary—preventing the UK court from determining global license terms, and thus requiring separate litigation for each country in which a patent owner holds SEPs—would undermine the ruling in Unwired Planet. Justice Carr then rejected the defendants’ forum non conveniens argument, finding—based on competing expert testimony—that Chinese courts lack “jurisdiction to determine essentiality or infringement of non-Chinese patents, nor do they have jurisdiction to determine FRAND rates in respect of non-Chinese patents without agreement from both parties”. The defendants appealed the decision as to forum non conveniens.
In January 2019, the UK Court of Appeal affirmed as to that issue, finding that when properly characterized, the dispute was primarily focused on UK SEPs, including claims related to infringement as well as Conversant’s FRAND compliance with respect to those patents. The court held that because the NPE’s FRAND commitments as to the asserted SEPs were “inseparable” from the issue of whether the patents were infringed, and since the “[r]esolution of the dispute will involve determining infringement, essentiality and validity of UK patents”, it concluded that a “UK forum is clearly the most appropriate forum, indeed the only possible forum, for this dispute to be tried”.
The UK Supreme Court’s Ruling on Appeal
Ruling on appeal on August 26, the UK Supreme Court began its analysis by highlighting the inherent tension between national patent laws and international standard-setting efforts. To that end, the court observed that two aspects of patent law have worked against the development of global telecommunications standards and interoperable devices worldwide: injunctions within national jurisdictions, which may give SEP owners “excessive power to disrupt a global market” at the expense of implementers and to “exact excessive royalties”; and “the national nature of patent monopolies” overall, which “makes it very difficult, if not wholly impracticable, for a patent owner to protect an invention which is used in equipment manufactured in another country, sold in many countries and used by consumers globally”.
The court then gave some background on the contractual FRAND obligations that it treated as dispositive in this case: those imposed by the relevant standard-setting organization, the European Telecommunications Standards Institute (ETSI), a French organization that is “recognised as the SSO in the European Union telecommunications sector”. In particular, the court characterized the key terms of ETSI’s Intellectual Property Rights (IPR) Policy, the agreement establishing the FRAND commitments required of all ETSI members. The court found that “[a]chieving a fair balance between the interests of implementers and owners of SEPs is a central aim of the ETSI contractual arrangements”.
The court explained that under French contract law, the ETSI IPR Policy must be interpreted by the terms of the contract itself and through consideration of context: “both the external context and the internal context of the IPR Policy document itself, such as the policy objectives declared in the document”. The court found that the external context here included ETSI guidance on its IPR Policy, which states that questions of essentiality and validity are matters for the applicable national courts; ETSI’s operating statutes, which set a goal of achieving a “large unified European market for telecommunications” and “to contribute to world-wide standardization” for such technology; and “the globalised market which ETSI and other SSOs were and are seeking to promote”. That external context, the court further found, also includes the presumption that the IPR Policy was crafted based on a certain expertise in patent law and relevant industry practices, since ETSI is a body comprised of telecom industry experts and practitioners “who would be expected to have a good knowledge of the territorial nature of national patents, the remedies available to patent owners against infringement of their patents, the need to modify by contract the application of patent law to promote the development of a globalised market in telecommunications products, and the practice of the industry in negotiating patent licensing agreements voluntarily”.
The court found that the applicable internal context was comprised of contractual language that outlines the IPR Policy’s objectives, including statements that, as read by the court, “clearly reveal . . . a policy of preventing the owner of an Essential IPR from ‘holding up’ the implementation of the standard” (with SEP owners’ interests balanced against the public’s interest in standardization); as well as language stating that SEP owners “should be adequately and fairly rewarded for the use of” their patents and thus “seeks to address the mischief of ‘holding out’” by implementers.
The court reached several “conclusions” from its analysis of the ETSI IPR Policy. These “conclusions” included the finding that the policy amounts to “contractual modifications to the general law of patents” that “achieve[s] a fair balance between the interests of SEP owners and implementers” and that the policy represents a “contractual derogation from a SEP owner’s right” to seek injunctive relief. Additionally, the court found that while the “IPR Policy envisages that the SEP owner and the implementer will negotiate a licence on FRAND terms”, it is up to the parties to resolve disputes on patent validity either by agreement or through “national courts”.
Additionally, the court framed the policy as devised in light of one of the core premises of the UK High Court of Justice’s first-instance ruling in Unwired Planet v. Huawei: that SEP licenses should be worldwide, because “no rational business would seek to license products country by country if it could be avoided” due to the complexities of negotiating, entering, and administering “so many different licenses”. Moreover, the Supreme Court noted the Court of Appeal’s discussion of the prohibitive costs that would result if SEP owners had to litigate the validity and essentiality of their patents in each country. “These obvious considerations must have been part of the factual background of which the expert framers of the IPR Policy were aware when they devised that Policy”.
UK Courts Have Jurisdiction over Global FRAND Disputes
Having so framed its analysis around the IPR policy, the court turned to the issues on appeal, starting with the jurisdictional questions common to both appeals. The court began with the question of whether UK courts may set the terms of a global license and declare those terms to be FRAND. Here, the court acknowledged that claims related to validity and infringement are the domain of national courts but held that it is the set of contractual obligations established in ETSI’s IPR Policy that “gives the court jurisdiction to determine a FRAND licence and which lies at the heart of these appeals”.
By so ruling, the court rejected several Huawei arguments to the contrary. For instance, the court declined to accept Huawei’s assertion that SEP owners are only entitled to monetary and not injunctive relief under the IPR Policy, a position that the court found placed too much weight on protecting implementers against holdup and thus runs “counter to the balance which the IPR Policy seeks to achieve”. Furthermore, the court held that the possibility of an injunction “is a necessary component of the balance which the IPR Policy seeks to strike” and serves as “a strong incentive to negotiate and accept FRAND terms for use of the owner’s SEP portfolio”. The court also declined to accept Huawei’s argument that the IPR Policy only allows a patent owner to receive license payments for patents already held to be valid and infringed. This position, held the court, fails to take into account the aforementioned external context reflected in the IPR Policy—specifically, industry practice that makes it impractical for SEP owners and implementers to license on a per-patent basis. Rather, the court held that the relatively “untested” nature of a portfolio should be reflected in an overall portfolio-level licensing rate.
In addition, the court rejected Huawei’s argument that the UK courts may only set FRAND license terms for UK patents. Here, the court repeated its holding that the issue depends not on the adjudication of the validity or infringement of foreign patents, but on the interpretation of the governing FRAND contractual obligations found in the IPR Policy—which, the court held, Justice Birss and the Court of Appeal had correctly read as reflecting the industry practice of worldwide licenses. To the extent that “an implementer is concerned about the validity and infringement of particularly significant patents or a group of patents in a particular jurisdiction which might have a significant effect on the royalties which it would have to pay”, the court held that a FRAND license can provide a mechanism for allowing those patents to be challenged in foreign courts (as also held by Justice Birss and the Court of Appeal).
Moreover, the Supreme Court rejected Huawei’s argument that by holding that it has jurisdiction to set global FRAND licenses, the court was “out of step” with foreign jurisdictions. Rather, the court cited several foreign “judgments contemplat[ing] that, in an appropriate case, the courts in the relevant jurisdictions would determine the terms of a global FRAND licence”.
These judgments included several US rulings that the UK Supreme Court found to be consistent with its position. For instance, the court found that the Federal Circuit’s 2014 decision in Apple v. Motorola, while not involving a global FRAND license, recognized that injunctions are an appropriate form of relief for the infringement of a national SEP.
Additionally, the court found that three 2012-2013 decisions in the Microsoft v. Motorola litigation “show the willingness of US courts to enforce the contractual obligation on a SEP owner in a SSO policy to offer an implementer a global FRAND licence” (noting that the litigation involved a RAND license, but finding the distinction immaterial). The first of those decisions was a 2012 Western District of Washington ruling granting an anti-suit injunction that barred certain German litigation, in which the court noted a pending trial that would address RAND compliance and set a RAND license. The UK Supreme Court also cited a Ninth Circuit ruling from later that year upholding that district court decision, a ruling on appeal that the UK court interpreted as holding that the US court had jurisdiction under contract law to “enforce the obligation on the SEP owner to grant a RAND licence and therefore not enforce its patents”. Thirdly, the court cited another district court ruling from 2013 in which the court set a worldwide RAND license (though with the implementer’s consent), following a trial in which the court considered “evidence of real-world negotiations” in contemplating the terms of that license.
The court also cited caselaw from several other countries, including German caselaw described as standing for similar conclusions as the above US decisions. Additionally, the court noted that while “courts in China have not rejected the proposition that a worldwide licence might be FRAND, nor have the courts ruled that they do not have jurisdiction to determine the FRAND terms of a worldwide licence with the consent of the parties”, a reading that Chinese courts would be willing to exercise such jurisdiction is too speculative.
The UK Was the Most Appropriate Forum
The court then addressed the issue of whether UK or Chinese courts would be the most appropriate forum, a question raised only in the Conversant appeal. Here, the court returned to an issue discussed extensively by the Court of Appeal: how to define the nature of such a dispute in a manner that did not “prejudge the outcome of the forum conveniens” analysis. For this particular litigation, the UK Supreme Court agreed with Conversant that the focus of the case was on rights stemming from UK patents (validity and infringement), with global “FRAND issues arising only as an aspect of an alleged contractual defence”; whereas the appellants had argued that the case was in substance about the global FRAND license itself.
However, the Supreme Court also held that it did not actually need to revisit that issue, because the forum conveniens determination depended on a jurisdictional challenger having presented a viable alternate forum. In this instance, the Supreme Court held that the forum non conveniens argument failed at this initial threshold, agreeing with the findings of the lower court and the Court of Appeal that “the Chinese courts do not, at present, have jurisdiction to determine the terms of a global FRAND licence, at least in the absence of agreement by all parties that they should do so”—further accepting the finding that Conversant had “acted reasonably in refusing to give its consent” on that issue. Additionally, the Supreme Court ruled that the Court of Appeal was correct in declining to stay the UK case pending the resolution of Chinese validity challenges against Conversant’s patents.
The Non-Discrimination Prong of FRAND Is General and Not Hard-Edged
Next, the Supreme Court addressed Huawei’s argument in the Unwired Planet case that under the non-discrimination prong of FRAND, Justice Birss should have ruled that the patent owner had to offer it the same, more favorable license terms that it had previously given to Samsung. Huawei had asserted that under the “ordinary and unadorned” meaning of the non-discrimination prong, a “SEP owner must grant the same or similar terms to all similarly situated licensees, unless it can be shown that there are objective grounds for treating them differently”—a position characterized by Justice Birss as seeking a reading that the non-discrimination prong is “hard-edged”.
Here, the Supreme Court ruled in favor of Unwired Planet, agreeing with Justice Birss and the Court of Appeal that “the non-discrimination element in the FRAND undertaking is ‘general’ and not ‘hard-edged’ and that there had been no breach of it” in this case. Returning once again to the ETSI IPR Policy, the Supreme Court interpreted a clause requiring that licenses be made available “on fair, reasonable and non-discriminatory . . . terms and conditions” as a “single unitary obligation”, and that this phrase should be read as a “composite whole”. The “non-discriminatory” part of that phrase, explained the court, “provides focus and narrows down the scope for argument about what might count as ‘fair’ or ‘reasonable’ for these purposes in a given context. It indicates that 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 adjustment depending on the individual characteristics of a particular market participant”. In other words, “there is to be a single royalty price list available to all”. A “powerful indication” that supported this position, the court found, was the fact “that ETSI had previously considered and rejected the imposition of a ‘most-favourable licence’ clause” in its IPR Policy.
The court also cited several arguments from Unwired Planet as persuasive on this issue. First, the court agreed with Unwired Planet that a “general” approach satisfies the non-discrimination requirement to treat like cases alike: “the same rate is made available to all licensees who are similarly situated in the sense that they seek the same kind of licence”. The court also agreed with the NPE that this approach ensures that the “fair” and “reasonable” prongs do not “depend on any idiosyncratic characteristics of the licensee” and that Huawei’s approach would unduly compel the NPE to accept a lower license rate based on a prior license found not to represent the fair value of a portfolio. Additionally, the court agreed that “price discrimination is the norm as a matter of licensing practice and may promote objectives which the ETSI regime is intended to promote (such as innovation and consumer welfare)”, and that a general approach is the only one that would allow a SEP owner to deviate from the FRAND rate under certain well-recognized practices, such as offering a lower rate to first movers.
Unwired Planet’s Licensing Conduct Did Not Violate EU Competition Law
Lastly, the Supreme Court ruled that Justice Birss had correctly determined that Unwired Planet had not behaved abusively toward Huawei under the Court of Justice of the European Union’s decision in Huawei v. ZTE. Here, the Supreme Court agreed with Justice Birss and the Court of Appeal that the decision’s framework for interpreting whether a SEP owner’s conduct amounted to an abuse of dominance under EU competition law depended on the facts and circumstances of the case. Furthermore, the Supreme Court agreed with Unwired Planet that the requirements of Huawei v. ZTE establish a “safe harbor” within which certain actions will not amount to an abuse of dominance, but that this does not mean that conduct falling outside that safe harbor is per se a violation.
Injunctive Relief is a Proper Remedy in FRAND Disputes
Lastly, the Supreme Court concluded by addressing Huawei’s argument that the issuance of an injunction in this case would be “neither appropriate nor proportionate”. The company had argued that “[s]ince the claimants’ only interest in the observance of the UK SEPs is in obtaining reasonable royalties . . . that interest can be fully recognised by an award of damages in lieu of an injunction”. Rather, the court held that in the global FRAND context damages would be an inadequate substitute for an injunction, since it would likely be impractical for a SEP owner to file suit against an implementer in every jurisdiction it has infringed. This, the court held, would disincentivize implementers from entering into a FRAND license.
Additional Background
See here and here for more details on the preceding decisions in Unwired Planet v. Huawei. More coverage of the prior decisions in Conversant v. Huawei can be found here and here.
