This judgment – which you can find here – is a recent UK court decision on FRAND terms. The factual background to this decision is convoluted (including five “technical” trials relating to the validity and infringement/essentiality of the relevant patents, which preceded the present trial regarding all competition law and FRAND issues), but the situation can be summarised shortly.
Unwired Planet is a company that owns a number of worldwide patents, including many of the foundational technologies that allow mobile devices to connect to the Internet (4G, 3G and the like) – most of the relevant portfolio in this case was acquired from Ericsson. A number of these patents are essential to the relevant technical standards, and are thus deemed Standards Essential Patents (“SEPs”). The process of standardisation involves holders of patents which are essential to an international telecommunications standard declaring them to be essential to the relevant standards body – in this case, the European Telecommunications Standards Institute (“ETSI”). Standard setting organisations – such as ETSI – often require the holders of patents which are essential to the standards to give an undertaking to license them on Fair Reasonable And Non-Discriminatory” terms (“FRAND”) if they wish to participate in standard setting. Basically, the case was about whether telecommunication providers were using technologies based on SEPs, and, if so, what license fee they need to pay to the patent holder. In other words, the main dispute was about whether and to what extent the various terms on offer are or would be FRAND.
The decision covers a number of issues unrelated to competition law, which I will not review. The discussion below is already long enough as it is. Instead, I’ll focus on the parts of the judgment that address the following topics:
- What is FRAND (paras. 83 and 97). The reasons behind imposing FRAND are said to be that: “While the inventor must be entitled to a fair return for the use of their invention, in order for the standard to permit interoperability the inventor must not be able to prevent others from using the patented invention incorporated in the standard as long as implementers take an appropriate licence and pay a fair royalty. In this way a balance is struck, in the public interest, between the inventor and the implementers. The appropriate licence is one which is fair, reasonable and non-discriminatory.” The discussion includes descriptions of how telecommunication SEPs are set up in Europe, how the current (European) system came into being, and how FRAND has been recognised inn jurisdictions across the world (including references to Chinese, Japanese and US cases).
- Under what conditions is a SEP holder under an obligation to provide FRAND terms (paras. 98 to 146) – This section reviews the terms under which a company is bound to a private standard setting body. Since the standard setting body in this case is a (French) private entity, this involves a discussion of (French) private law.
- Whether the Patent Holder Abused its Dominant Position (paras. 627 – 784) Oddly enough, this is the last topic addressed in the decision. However, I think it would have made more sense to discuss it earlier. In any event, it is appropriate to describe how FRAND usually engages competition law at this stage. The main question in this regard is what competition law infringement one can find which is related to FRAND licensing. In its assessment, the court finds that the holder of SEP patents is presumed to be dominant, and that this presumption can only be rebutted through a detailed economic analysis (I’d point out that this is really not how this is done across the pond…). Second, a number of potential infringements were considered:
- Premature Litigation – In this case, the issue was that the patent holder had supposedly started proceedings without notifying Huawei. This would have been prohibited under the (much criticised) Huawei v ZTE decision by the ECJ (see above). However, the English court said the cases were different because the European courts did not take into account that a FRAND undertaking is justiciable and enforceable in court irrespective of competition law. In particular (and, I think, correctly) the Court concludes that it was “not persuaded that the CJEU in Huawei v ZTE sought to set out a series of rigid predefined rules, compliance with which is never abusive whereas deviation from which is always abusive, all regardless of the circumstances (…)[Instead, the judgment] sets out standards of behaviour against which both parties behaviour can be measured to decide in all the circumstances if an abuse has taken place.”
In the light of this, the court concluded that: (i) there had been contacts between the parties regarding renewal of the SEP licenses; (ii) the SEP holder offered FRAND terms, and did not try to prevent Huawei from using technology relying on its patents. Hence, no abuse took place on this basis.
- Excessive Pricing – The court held that, in the context of SEPs and FRAND, only an offer which is so far above FRAND as to act to disrupt or prejudice the negotiations would amount to excessive pricing. This is not the case.
- Bundling / tying in SEPs and non-SEPS – The court held that while a patentee subject to a FRAND undertaking cannot insist on a licence which bundles SEPs and non-SEPs together, it is not contrary to competition law to make a first offer which puts SEPs and non-SEPs together.
In short, no competition infringement was found. But this does not exhaust the judgment’s interest for those interested on the relationship between SEPs, FRAND terms and competition.
- Is there a single set of FRAND terms, or do they fall on a range (paras. 147-153)– While this may seem an abstruse question, it actually has great practical impact – and is relevant from a competition perspective as well. From an economic standpoint, the FRAND royalty rate is the rate which the parties in a given set of circumstances would converge upon and agree to. However, absent ideal conditions (i.e. all the time), a FRAND rate would always be an imperfect approximation to the “true” FRAND rate for any given circumstance. In other, we would expect for there to be a range of FRAND terms.
The question has practical impact when both parties submit different, FRAND terms. If there is a FRAND range, then, in order to adjudicate that a particular rate is the “right” rate, either: (i) there needs to be some further principle aside from FRAND that would allow the identification of a “right” price; or (ii) the parties would have to agree to accept whatever rate the court chooses in the exercise of its discretion. Instead, the Court (dealing with a number of competition issues detailed in the paragraph below) concluded that there is always just a single set of FRAND terms which courts must set.
Competition is relevant for this because the court observed that, if there is a range of FRAND terms and the parties have a dispute about which term to adopt, this would fall outside the scope of competition law. On the other hand, if only one set of terms in given circumstances can truly be FRAND and if FRAND also represents the line between abusive and non-abusive conduct, then every agreed licence in the entire industry is at a serious risk of being contrary to competition law and open to being unwound. Given the court’s approach above, it had to deal with this risk – and it did so by noting that the boundary between what is and is not a true FRAND rate is not and cannot be necessarily coextensive with competition law. Competition law considerations may well indicate why a rate is not FRAND but, in general and as a matter of principle, for competition law to be engaged, it will be necessary but not sufficient for a rate not to be the true FRAND rate.
- Is FRAND a result or a process? (paras. 162-168 ) – For the court, the main issue in this regard was whether the parties would be merely under an obligation to negotiate within a set of FRAND values or, also, to accept the FRAND terms set by the court. Unsurprisingly, the court opted for this latter option. In short, “For concluded agreements (…)the importance of the FRAND undertaking will be historic. The process aspect of FRAND was important in requiring both sides to approach the negotiations appropriately and the requirement that a royalty rate had to be FRAND would be something to be prayed in aid during the negotiations. However once the agreement has been reached the contract must be the thing which governs the rights and obligations of the two parties with respect to each other while it is in force.” Regarding competition law, since it is not co-extensive with the identification of the true FRAND rate, it “must leave latitude to the parties to agree and cannot draw the line between acceptable and unacceptable contract terms in the same place as the line between whether a term is FRAND or not.”
- How to determine FRAND rates (para. 169 – 523) This is the longest part of the judgment. On the basis of principle, the situation is clear: “The question is what would be fair, reasonable and non-discriminatory. Asking what a willing licensor and a willing licensee in the relevant circumstances acting without holding out or holding up would agree upon is likely to help decide that question.” The devil is, as is usually the case, in the details – and hence a long discussion follows which looks into such disparate topics as relevant comparative benchmarks, patent counting, identifying the ratio of essential patents, etc. Ultimately, this section contains a long discussion on the methods on how to identify the FRAND licensing fee. I will not bother you with this – but it is a good source for anyone interested in how to value IP licenses.
A more interesting part of this discussion is about whether the non-discriminatory part of FRAND – and competition law – requires the patent holder to offer the same rate to different licensees. In short, the court found that FRAND non-discrimination would only be relevant if it distorted competition. Thus, as long as a rate offered is FRAND and does not significantly distort competition between licensees, offering different rates to similarly placed licensees will not infringe competition law (paras. 485- 522). Given that competition law and FRAND commitments are not really co-extensive, it would seem that the FRAND term itself can, and will usually be stricter.
- Is the scope of FRAND telecommunication licenses national or worldwide? (paras. 524 – 627). This was deemed the most significant point at issue other than the amount of the licensing fee / royalty rate. To my surprise, the issue was framed by counsel in terms of whether it would be anticompetitive to impose a worldwide license – as this would amount to unlawful tying / bundling. Unsurprisingly, the court gave this argument short thrift (even if it acknowledged that the grant of worldwide licenses may give rise to issues arising from the adoption of inconsistent decisions by courts of different jurisdictions, a point which was also argued and which is, to my mind, more to the point. The court’s solution to this issue, however, was not to limit the scope of the license. Instead, a worldwide FRAND license should include appropriate mechanisms to deal effectively with non-patent countries, and to apply different rates for specific countries (i.e. China) when appropriate).
The judgment merits a few comments. Its conclusions on the relationship between FRAND terms and competition law is likely correct (assuming competition should play any role in this area at all). Nonetheless, it is hard to disagree with the court’s assertion that the setting of FRAND rates is ultimately a matter of contractual / IP law, even if it can be informed by competition law. In this context, competition law would merely provide a benchmark for determining a lawful range of FRAND terms. Thus, the court’s statement that for a competition law infringement to be found “the absence of a FRAND offer is a necessary but not sufficient condition” is correct in most cases.
However, I doubt that – as the law stands – a FRAND offer will always prevent an infringement from being found. The English court itself recognised that Huawei v ZET was in reality akin to a refusal to license – and it may be possible for SEP holders to engage in constructive refusals to license even as they offer apparently FRAND terms in order to comply, on the face of it, with the law. In other words, even if an offer is made on FRAND terms, if the parties act in such a way as to prevent the implementation of the license, a competition law infringement would follow. Instead, I think that the Court’s conclusion that “The boundaries of FRAND and competition law are not the same. A rate may be above the FRAND rate but not contrary to competition law.” is a better description of the law.
A second topic which I would like to discuss is the setting of FRAND rates. Throughout the decision, there is a tension between holding that competition law sets a range of values that parties (and impartial observers) can use for setting FRAND rates, and simultaneously holding that, as a matter of IP / contractual law, there a unique FRAND value. However. 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 what the US courts have done, without reference to competition law). This would have the added advantage of creating a benchmark for assessing the offers of the parties beyond competition law – even if I also think it is correct to say, as the court does, that “Offers in negotiation which involves rates higher or lower than the FRAND rate but do not disrupt or prejudice the negotiation are legitimate.” This would also allow for the creation of a systematically coherent benchmark that would align all the areas of law applicable in this matter.
A last matter of interest is the court’s distinction between FRAND as a process and FRAND as a set of final terms. The Court held that “FRAND characterises the terms of a licence but also refers to the process by which a licence is negotiated”. Personally, I think this again adds confusion where there needs to be none. The conceptual framework will be simpler – and more in line with existing case law, including this case – if one characterises FRAND as imposing a broad process-oriented obligation which is framed by a range of objectively reasonable outcomes (i.e. FRAND rates). The focus of the analysis should be on process: first, do the parties approach the negotiations in a FRAND way; and, secondly, if third-party adjudication is necessary, do they engage in this process, and implement its outcomes, in a FRAND way? Naturally, the final rates and conditions must be FRAND-compliant, but the assessment of final terms is better understood as an element in the assessment of whether the parties’ behaviour is, on the whole, FRAND.
A last question in this regard is whether bringing judicial proceedings to enforce existing rights should amount to an abuse at all. This is a question which often comes up when discussing the interaction between IP and antitrust (think of pharma), and it provokes spirited reactions across the world. I also mention it here because I think it influenced the decision – particularly its tone, which implies that competition law should not be engaged when other FRAND-related mechanisms can be relied on by the licensee against the SEP holder.
Ultimately, the issue underlying all this discussion is what standard should be used to identify FRAND-related competition infringements. One of the criticisms of the Huawei v ZET case was that it introduced a significant element of uncertainty regarding how to identify conduct that infringes competition law. As a result, the case was criticised for introducing serious turbulence and legal risk into FRAND negotiations. The validity of these criticisms is made apparent by the various grounds which were advanced before the English High Court to argue that an abuse of a dominant position occurred. This is an issue that is not addressed by my analysis above; while the identification of applicable theories of harm is undoubtedly the most important matter here from a competition law perspective, my analysis just tries to provide a coherent reading of EU law as it stands. I have no solution as to what the appropriate theory of harm should be in this area. But I do know that I’m generally opposed to the instrumentalisation of competition law to solve regulatory issues in other sectors.