The Court of Appeal begins by explaining the link between the potential for anticompetitive abuse of SEPs and the imposition of FRAND licensing terms. After all: ‘the potential for anti-competitive behaviour is obvious. The owner of a SEP has the potential ability to “hold-up” users after the adoption and publication of the standard either by refusing to license the SEP or by extracting excessive royalty fees for its use, and in that way to prevent competitors from gaining effective access to the standard and the part of the telecommunications market to which it relates.’
It then moves on to review the factual background of the case and the High Court’s decision. In short, Unwired Planet acquired patents from Ericson that cover many of the foundational technologies that allow mobile devices to connect to the Internet (4G, 3G and the like). Unsurprisingly, a number of these patents are essential to technical standards.
In this case, the SEPs at stake concern the standards of the European Telecommunications Standards Institute (“ETSI”). The question is whether and to what extent these SEPs need to be licensed on Fair, Reasonable and Non-Discriminatory” terms (“FRAND”). The Court of Appeal summarised the High Court’s findings of relevance to this appeal as follows:
- Willing and reasonable parties would agree on a global licence in a case such as this. It follows that an offer of a UK-only licence was not FRAND.
- The rates sought by Unwired were too high, and it was appropriate for the court to set the appropriate global FRAND rates between the parties.
- Unwired Planet was in a dominant position in the relevant market but had not abused that dominant position by starting and pursuing legal proceedings in the way that it did.
The judge therefore proceeded to determine the appropriate FRAND rates for a global licence and, in case a higher court might come to a different conclusion on the nature and extent of the FRAND obligation, the appropriate FRAND rates for a UK licence. Huawei (the licensee) appealed against these three findings, which I shall now deal with in turn:
First ground of appeal: The imposition of a global licence is wrong.
The original judgment held that, in order to be FRAND, the licence had to be global and had to include all SEPs owned by Unwired Planet. However, one of the Unwired Planet legal entities did not own any UK patents but only patents in other jurisdictions. Despite this, the judge set the global rate and terms of a licence in circumstances where 64% of the money to be paid relates to Chinese patents. What is more, the judge settled this licence notwithstanding the facts that (a) there was ongoing patent litigation in relation to corresponding patents in Germany and in China, and (b) there were some countries where Unwired Planet had no relevant patents at all.
In short, the Court of Appeal concluded that: ‘The judge was entitled to find that in all the circumstances only a global licence would be FRAND. He fell into error in one aspect of his reasoning but this had no material effect on the conclusion to which he came. Ground one must therefore be dismissed.’ It is worth breaking this down into smaller bits.
- Finding: The territorial scope of a FRAND licence depends on the circumstances of the particular sector in issue, and a global licence may be FRAND.
The Court of Appeal begins by noting that the relevant standard (by ETSI, the EU telecommunications sector’s standard setting organisation) sets forth that the undertaking to license SEPs under FRAND terms has international effect. This is because the ETSI standards are themselves of international effect, so that businesses can make and supply, and members of the public can use, products which comply with the standard all over the world. The FRAND undertaking under ETSI applies to all relevant patents irrespective of the territory in which they subsist. This is necessary to protect implementers whose equipment may be sold in a number of different jurisdictions, and then used by members of the public who may travel with that equipment from one jurisdiction to another. Furthermore, it may also be wholly impractical for a SEP owner to seek to negotiate a licence of its patent rights country by country, just as it may be prohibitively expensive for it to seek to enforce those rights by litigating in each country in which they subsist.
In practice, SEP owners and implementers will often negotiate a licence which best suits their respective needs in accordance with FRAND principles. Such a licence will often be global, or at least cover a number of different territories. These considerations point strongly to the conclusion that, depending on all the relevant circumstances, a global licence between a SEP owner and an implementer may be FRAND.
The Court of Appeal then discusses a number of decision that were said by Unwired Planet to indicate that only jurisdiction-specific FRAND can be awarded by a court – including the decision of the European Commission in Motorola (Case AT.39985), the German courts’ judgments in Pioneer v Acer 7 O 96/14 and St Lawrence v Vodafone 4a 073/14, the US court decisions in Microsoft Corporation v Motorola Inc and Ericsson v D-Link, the Japanese judgment Samsung v Apple, and the Chinese decision in Huawei v InterDigital. The learned judges conclude that these cases do not support this proposition.
In short, when assessing whether a licensing offer is FRAND, a court should take into account the circumstances of the particular sector in issue. It should have regard to, among other things, the practice in that sector, the importance of non-discriminatory licensing and efficiency considerations, in order to determine the appropriate territorial scope of the licence.
- Finding: A global licence does not infringe on comity.
Another argument advanced by the appellant was that imposing a worldwide injunction infringed on comity. Imposing a global licence would bring to an end the purpose of ongoing litigation in China and Germany, and this would amount to indirect interference with foreign litigation relating to foreign property.
The Court of Appeal thought this argument misguided. The validity of foreign patents was not under dispute, not about relief concerning their infringement. The High Court simply determined the terms of the licence that Unwired Planet was required to offer to Huawei pursuant to its undertaking to ETSI. It was then a matter for Huawei whether it was prepared to take that licence. Huawei could not be compelled to do so, and if it chose not to, the only relief to which Unwired Planted would be entitled would be relief for infringement of the UK SEPs which had been found to be valid and essential. Furthermore, ‘a FRAND licence should not prevent a licensee from challenging the validity or essentiality of any foreign SEPs and should make provision for sales in non-patent countries which do not require a licence, and so proceedings such as those between these undertakings in Germany and China are not rendered purposeless.’
It is of course true that the licence provides for payment of royalties in respect of the use by Huawei of Unwired Planet’s whole SEP portfolio, but the alternative would be to require Unwired Planet to bring proceedings in each territory in which its SEPs subsist. That is not how a reasonable and willing licensor and licensee in the position of, respectively, Unwired Planet and Huawei would behave; instead, it would be a blue print for hold-out.
- Finding: Imposing a global licence does not pose insurmountable practical difficulties.
Huawei contended that imposing a global licence approach will lead to significant practical problems and inconsistencies. If any court can set a global rate, then there will be a race between the SEP owner and the implementer to choose what each perceives to be the most favourable jurisdiction. There is also potential for conflicting decisions, alongside additional difficulties.
The Court of Appeal did not accept that this approach was likely to cause any problems of a kind with which commercial courts around the world are not familiar or which might impact upon the meaning and effect of the undertaking Unwired Planet gave to ETSI. It is true that a court in one country will decide, as between the parties, whether a global or multi-territorial licence is FRAND; but that is inevitable and the court saw nothing unfair about it. Furthermore: (i) such a licence does not deprive a licensee from the ability to challenge the validity and essentiality of the SEPs in any jurisdiction where it may choose to do so; and (ii) Huawei is also wrong to suggest that it is compelled to take the licence. It is not, and if chooses not to do so, then the only relief to which Unwired Planet will be entitled will be the normal relief available to a successful patentee in the UK.
- Finding: the High Court made an error when it found that there could only be one FRAND terms for any given set of circumstances. However, this had no practical impact on the final decision.
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. Further, concepts such as fairness and reasonableness do not sit easily with an approach as rigid as to suggest that two parties, acting fairly and reasonably, will necessarily arrive at precisely the same set of licence terms as two other parties, also acting fairly and reasonably and faced with the same set of circumstances. To the contrary, the reality is that a number of sets of terms may all be fair and reasonable in a given set of circumstances. The economic evidence did not support such an inflexible approach.
Furthermore, if the SEP owner and prospective licensee cannot agree upon the terms and royalty rates of a FRAND licence and the question of what is FRAND falls to be decided by a tribunal, then the tribunal will normally declare one set of terms as FRAND and that will be the set of terms the SEP owner must offer to the prospective licensee. If, however, the outcome of the proceedings is that two different sets of terms are each found to be FRAND then, in the court’s judgment, the SEP owner will satisfy its obligation to ETSI if it offers either one of them. It will in that way be offering an irrevocable licence of its SEPs on FRAND terms.
Second ground of appeal: The licensing rates imposed by the court were not FRAND, because they discriminated between licensees
Huawei claimed that it ought to have been offered the same rates as those reflected in Unwired Planet’s licence to Samsung, because the non-discrimination limb of FRAND prohibits a SEP owner from charging similarly situated licensees substantially different royalty rates for the same SEP. Again, the Court of Appeal dismissed the appeal.
- Finding: Differences in licensing rates do not automatically breach the non-discrimination limb of FRAND obligations. Such obligations must be assessed by reference to the object and purpose of the FRAND undertaking.
A first question was whether the non-discrimination limb was engaged at all. The question in dispute was when situations, and in particular transactions, are equivalent or comparable. Is it enough if the two counterparties (in this case Samsung and Huawei) are “similarly situated” as licensees? Or does the enquiry go further, making it legitimate to rely on differences in the commercial situation facing the licensor which may mean that the non-discrimination limb was not even engaged in this case?
The Court of Appeal reviewed a number of decisions on the meaning of non-discrimination in the FRAND context, some of which read non-discrimination in light of competition law – e.g. the German decision in Sisvel v Haier –, some that refused to take competition concerns into account – the US decisions in TCL v Ericsson –, and some that do not mention competition law at all – Ericsson, Inc., v D-Link Systems, Inc. in the US and Huawei v Interdigital in China.
The Court of Appeal ultimately found that, in deciding whether two transactions are equivalent, it is important to focus first on the transactions themselves. The equivalence of the transactions themselves needs to be disentangled from differences in the circumstances in which the transactions were entered into. On this basis, the judge was found to be right to regard the licences to Samsung and to Huawei as equivalent transactions. As a result, the non-discrimination limb of the FRAND undertaking was engaged in this case.
A second question is, then, what is the content of the non-discrimination obligation? This needs to be assessed by reference to the object and purpose of the FRAND undertaking, which are to ensure that the SEP owner is not able to “hold-up” implementation by demanding more than its patent or patent portfolio is worth. The undertaking therefore requires it to offer to license the portfolio on terms which reflect the proper valuation of the portfolio, and to offer those terms generally (i.e. in a non-discriminatory manner) to all implementers seeking a licence.
Thus, differential pricing is not per se objectionable, and can in some circumstances be beneficial to consumer welfare. Once the hold-up effect is dealt with by ensuring that the licence is available at a rate which does not exceed that which is fair and reasonable, it is difficult to see any purpose in preventing the patentee from charging less than the licence is worth if it chooses to do so. Huawei is correct that the potential exists for discrimination below the benchmark rate. Such discrimination is not, however, without the potential for redress through the application of competition law.
Third ground of appeal: Unwired Planet abused its dominant position by suing Huawei without giving any notice of which SEPs were said to be infringed or why, and without having made any licensing offer.
The appellant held that, in light of the Huawei v ZTE decision of the Court of Justice of the European Union (the “CJEU”), an owner of SEPs such as Unwired Planet cannot, without infringing Article 102 of the Treaty on the Functioning of the European Union (the “TFEU”), bring an action for a prohibitory injunction against an alleged infringer such as Huawei without (a) notice or prior consultation and, if the alleged infringer has expressed a willingness to conclude a licensing agreement on FRAND terms, (b) offering to that infringer a licence on FRAND terms.
- Finding: Not all deviations from the procedural conditions set out by the CJEU in Huawei v ZTE amount to an abuse.
The Court of Appeal began by noting that ‘it was and remains common ground that in this case the relevant market for the purpose of assessing dominance is, in the case of each SEP, the market for the licensing of that SEP, so the SEP owner has 100% of each such market.’ Despite being constrained by: (i) the FRAND obligation; and (ii) the possibility of implementers holding out on the payment of the licensing fee while using the standard, the Court if Appeal found that Unwired Planet was dominant.
The Court of Appeal then dealt with the question of abuse, which ‘raises an important question concerning the circumstances in which it is appropriate for a UK court to grant injunctive relief in respect of the infringement of a SEP. The answer to this question depends upon the proper interpretation of the decision of the CJEU in Huawei v ZTE.’ According to the High Court, the European case law sets out a number of procedural conditions for avoiding an abuse. These conditions provide a safe harbour for certain types of conduct, while not immediately condemning any deviation from those conditions as an abuse. The exception to his concerns the bringing of infringement proceedings without adequately notifying the implementer before commencing proceedings, which will usually amount to an abuse. Beyond this, the Court of Appeal came to the firm conclusion that the judge was correct in that the CJEU was not laying down mandatory conditions in Huawei v ZTE, judgment such that non-compliance will breach of Article 102 TFEU.
The reasons for this are as follows. First, the CJEU expressly recognised in its judgment that, in determining whether a course of conduct is abusive, account must be taken of the actual circumstances in the case – something which is line with the general approach to abuse of dominance set out in Post Danmark. This approach sits oddly with the idea that Huawei v ZTE sets out detailed behavioural prescriptions which breach amount to an abuse. Second, the language used by the CJEU is to the effect that a deviation from the prescribed behaviour may amount to an infringement of competition law. Third, this language may be contrasted with the language used to make clear that a SEP owner cannot, without infringing Article 102 TFEU, bring an action for an injunction without notice or prior consultation with the alleged infringer. Fourthly, this interpretation is consonant with the purpose and objective of the FRAND regime, addresses the particular problem with which the CJEU was concerned, and allows for and accommodates the wide variety of circumstances which may arise in different cases. Fifthly, the procedural rules of member states differ one from another, which means that a flexible approach makes more sense. Sixthly, the Court of Appeal reviewed how Huawei v ZTE has been applied in practice – mainly in Germany – and concluded that national courts have not applied the CJEU judgment in a formulaic way. Instead, national courts have considered any special features of the cases before them, and have been prepared to take into account the behaviour of the parties up to the end of their oral hearings.
As the review above hopefully makes clear, this case addresses a variety of important questions regarding FRAND licences and provides valuable guidance going forward.
I am obviously not an expert in pure IP matters, so I am unable to comment on many of the issues discussed by the judgment, but the court’s reasoning makes sense to me. For example, you may remember that I held here that ‘it would be simpler and more realistic for the court to accept that there is a lawful FRAND range for each SEPs, and that when the parties do not arrive at an agreement the court then has discretion to select specific rate within the allowable range’, which is the position adopted in this judgment. The reasoning is so clear that it actually helped me understand some matters that I had not fully comprehended when reviewing the decision of the court below – e.g. why a global licence was thought to be appropriate. I am still not convinced that this will not give rise to practical difficulties, but this is an issue which can only be elucidated by further developments.
One point where I had difficulty following the reasoning concerned non-discrimination. Inasmuch as the owner of a SEP has market power, I can see how non-discrimination is relevant to determine whether the licensing conduct is anticompetitive. However, that should be secondary to the main issue, which is whether licensing terms are non-discriminatory for the purposes of the relevant standard. It would seem to me that the non-discriminatory limb of a FRAND licence would require, first and foremost, contractual interpretation of the relevant standard, and in particular of the clause requiring SEPs to be licensed on FRAND terms.
As such, I did not expect the discussion on the second ground of appeal to focus so squarely on Art. 102 TFEU. Moreover, in reality, Art. 102 TFEU seems to be forgotten when determining whether the licensing terms are FRAND or not: at this point, the judgment pays attention to the wide variety of circumstances in which a non-discrimination obligation can arise, e.g. public law and EU law, in addition to competition law. It is true that the court then seems to hold that discrimination will be lawful if it increases consumer welfare, which is something I am not sure how courts being asked to deal with these matters are supposed to assess. Furthermore, the Court of Appeal recognises that, when applying the non-discrimination principle, judges are ‘engaged in an exercise of interpretation, seeking to apply normal principles of contractual interpretation against a specific commercial, factual matrix’.
I think this part of the reasoning reflects ongoing confusion about the role of competition law in the assessment of whether terms are FRAND – an area of great academic activity, and a topic that is likely to be with us for a while. In practice, it seems to me that the simplest approach – even in places such as Germany, where competition law seems to be the trigger for FRAND obligations – is to see competition law as being concerned with controlling the legality of negotiating conduct and licensing terms, but not interfere with the process of contractual interpretation beyond this. This would be a role that is in line with the role that competition law usually plays in the contractual sphere: if a contract(ual term) is anticompetitive, it is void because it is unlawful. Nonetheless, this is only relevant for the interpretation of a contract inasmuch as it can be interpreted in ways that are pro- and – anticompetitive – which may lead to a preference for interpretations that do not lead to illegal outcomes.