UK Supreme Court stays the course in Unwired Planet and Conversant – confirming the approach to FRAND adopted by the lower courts

On 26 August 2020 the UK Supreme Court handed down judgment in Unwired Planet v Huawei [2018] EWCA Civ 2344 (the “Unwired Planet Appeal”) and Conversant v Huawei and ZTE [2019] EWCA Civ 38 (the “Conversant Appeal”). The Unwired Planet Appeal concerned the courts’ jurisdiction to determine global FRAND (Fair, Reasonable And Non-Discriminatory) licence terms, the meaning of the ‘non-discrimination’ element of FRAND and an SEP (Standard Essential Patent) owner’s right to an injunction. The issue in the Conversant Appeal was whether England was the appropriate forum to hear such a FRAND case in the circumstances of that case (further explained below).

In short, the Supreme Court has dismissed the appeals confirming that:

• A global licence can be FRAND, and that the courts of England and Wales have jurisdiction to determine the terms of such a global licence.
• The 'non-discrimination' element of the FRAND obligation is not hard-edged. In other words, a SEP owner is not required to grant licence terms equivalent to the most favourable licence terms to all similarly situated licensees.
• There is no mandatory requirement to follow the protocol set out in the CJEU case of Huawei v ZTE when conducting FRAND negotiations, other than the requirement to provide notice to the implementer before bringing proceedings.
• England is a suitable forum for the Conversant v Huawei and ZTE case in the particular circumstances of that case.

The Supreme Court also considered an argument made by Huawei (but not considered by the lower courts) that an injunction was not an appropriate remedy and that damages alone would be sufficient. The Supreme Court rejected this argument.

Finally, we consider the practical implications of this judgment and ask what's next for FRAND?

A copy of the judgment is available here.

Background

Unwired Planet

The High Court decision in the Unwired Planet case was the first major decision on FRAND in the UK and, as a result, it dealt with a wide range of points. By the time the case reached the Court of Appeal the issues in dispute were more limited but perhaps the most contentious of these was whether a global licence could be FRAND and, if so, whether a UK court has jurisdiction to determine the terms of such a licence and, in particular, declare the royalty rates in such a licence to be FRAND.

The Court of Appeal confirmed that a global licence can be FRAND and that the UK courts do indeed have jurisdiction to determine the terms of such a licence. In its judgment, the Court of Appeal was careful to emphasise that the consequence of Huawei refusing to accept the licence would be an injunction in the UK only, not globally, which would be the normal remedy granted for patent infringement if Huawei had not raised a FRAND defence.

The Court of Appeal also had to decide whether the ‘non-discrimination’ element of FRAND was ‘hard-edged’ – meaning that licences must not be offered on less favourable terms than existing equivalent licences – or whether it is a more general requirement. It held that the ‘non-discrimination’ requirement was general rather than ‘hard-edged’.

Finally, the Court of Appeal considered whether the CJEU decision in Huawei v ZTE (C-170/13) (“Huawei v ZTE”) set out a mandatory framework for negotiations that must be followed in order for the patentee to be entitled to an injunction, or whether it merely provided a safe harbour in which it could be sure its actions did not constitute an abuse of a dominant position. The Court of Appeal opted for the latter interpretation, finding that the only mandatory requirement in Huawei v ZTE was that the patentee must give notice to the alleged infringer prior to commencing proceedings. Whether the patentee’s actions constitute an abuse therefore depend on the circumstances of the particular case.

You can read our full article on the Court of Appeal decision here.

Conversant

The issues in the Conversant Appeal were closely related to the Unwired Planet Appeal but arose in a slightly different context. Conversant issued proceedings in the UK in 2017 against UK subsidiaries of Huawei and ZTE for patent infringement seeking various forms of relief, including a declaration that the licensing terms it offered were FRAND. It subsequently sought permission from the court to serve out of the jurisdiction on the parent companies of Huawei and ZTE. Huawei and ZTE challenged the application on the basis that the UK was not the appropriate forum to hear the case – i.e. it was forum non conveniens.

ZTE and Huawei raised a number of points that they said pointed to China being the appropriate forum instead of the UK, including the fact that all manufacture of the allegedly infringing products took place in China and that the UK made up a relatively small proportion of global sales (in ZTE's case only 0.07% of its global turnover was generated in the UK).

The High Court and Court of Appeal largely set these points aside, holding that because Conversant had brought proceedings for infringement of UK patent rights the UK must be the appropriate forum. The fact that Huawei and ZTE had raised FRAND defences to infringement meant that the UK court would potentially be required to determine the terms of a global FRAND licence. However, this did not displace the key issue in dispute, i.e. the UK patent rights.

You can read our full article on the Court of Appeal decision here.

Analysis of the Supreme Court Judgment

Does the UK court have jurisdiction to determine global FRAND licence terms?

Huawei argued on the following grounds that it was unjust for the English court to award an injunction if Huawei refused to accept a global FRAND licence:

• Accepting such a licence would require the implementer to compromise its position on non-UK patent rights and, in particular, its ability to challenge the validity and essentiality of those rights in the relevant jurisdictions.
• By fixing the terms and royalty rates of such a licence the English Court would be acting as “a de facto international or worldwide licensing tribunal for the telecommunications industry”.
• There was a distinction between the licensing practices commonly adopted by global telecoms companies (i.e., to agree a global licence) and the terms that a national court may impose on those companies.
• The ETSI (European Telecommunications Standards Institute) IPR policy points towards approaching each SEP individually, rather than taking a global approach.
• It would be disproportionate to exclude an implementer’s products from the UK market purely on the basis of infringement of an SEP.

The Supreme Court recognised that the validity of foreign patents was a matter for national courts and that an English court would have no jurisdiction to determine global licence terms in the absence of the ETSI IPR policy, and the FRAND declaration within it in respect of patents that have been declared essential, i.e. SEPs. In construing the policy, the Supreme Court emphasised that it was intended to address not just the issue of ‘hold-up’ (where a patentee seeks to enforce unfavourable terms on an implementer) but also to balance this against the issue of ‘hold-out’ (where an implementer seeks to avoid taking a licence from the SEP holder for as long as possible, or at all).

The Supreme Court also considered the realities of the telecoms industry, where portfolios may consist of hundreds of thousands of patents and it is simply not practical to consider the validity of each and every patent individually.

Taking a policy-based approach the Supreme Court concluded that the ETSI IPR policy was intended to have an international effect. Following the reasoning adopted in the High Court and Court of Appeal, it therefore concluded that the English court was entitled to find that a global licence could be FRAND, to determine the terms of such a licence, and to award an injunction against the implementer if it refused to accept those terms.

The meaning of non-discrimination

The issue of what the non-discrimination element of FRAND meant arose out of Huawei’s argument that it should be entitled to a licence on no less favourable terms than the licence Unwired Planet had agreed with Samsung. The royalty rate in the Samsung licence was considerably lower than that determined by Birss J to be FRAND in his first instance judgment, and would therefore be far more favourable to Huawei.

Huawei argued that, based on the ordinary meaning of ‘non-discrimination’, the SEP holder must grant licences on the same or similar terms to similar licensees, the so-called ‘hard-edged’ interpretation. The Supreme Court rejected this interpretation, preferring instead the approach adopted by the High Court and Court of Appeal that it was a ‘general’ non-discrimination requirement, i.e., “that the non-discrimination element is to be read as part of a single, unitary obligation to license on terms which are “fair, reasonable and non-discriminatory”. To comply with that obligation, a licensor has to offer a royalty rate set by reference to the true value of the SEPs being licensed; that is, a standard fair market royalty rate available to market participants for use of the SEPs.  A rate set in this way, which is available to all licensees without discriminating between them by reference to their individual characteristics, does not cease to be FRAND because the SEP owner has previously granted a licence on more favourable terms”.

Conduct of FRAND negotiations

Huawei argued that the CJEU’s decision in Huawei v ZTE set out a series of mandatory requirements that the SEP holder must follow in order to be entitled to an injunction. At one level, Huawei argued that those steps must have been completed before proceedings were commenced, but more generally its position was that Unwired Planet had not made a FRAND offer at any stage.

The Supreme Court fully endorsed the interpretation taken by the High Court and Court of Appeal. It therefore held that the only mandatory obligation for an SEP holder is to notify the alleged infringer prior to bringing infringement proceedings, otherwise it will have abused its dominant position in breach of Art.102 TFEU. However, the nature of the notice required is dependent on the circumstances of the case.

The Supreme Court confirmed that the other steps set out in the CJEU’s judgment merely offered a safe harbour for the SEP holder, but a failure to follow these steps precisely would not necessarily amount to an abuse of its dominant position.

Is England the proper forum for FRAND claims in the Conversant case?

There were two limbs to the forum non conveniens issue before the Supreme Court. The first was whether permission to serve out of the jurisdiction on Chinese parent companies of Huawei and ZTE should be set aside on the basis that England was not the appropriate forum for the dispute.

The main point of dispute in relation to this limb was whether the dispute was fundamentally in relation to the terms of a global FRAND licence or over UK patent rights. The Supreme Court suggested obiter that it would agree with the lower courts that the dispute was fundamentally one that related to UK patent rights. However, its basis for rejecting the appeal was that Huawei and ZTE had failed to suggest another jurisdiction where the dispute over the terms of global FRAND licence could be settled. Huawei and ZTE had suggested China as an alternative forum but the lower courts had already found that the Chinese courts did not have such a jurisdiction. The Supreme Court’s decision leaves unresolved the question of jurisdiction where an alternative forum is proposed that does have the ability to determine global FRAND licence terms.

The second limb of the forum non conveniens issue was a request by Huawei and ZTE to stay the issue of injunctive relief to enable relevant matters to be litigated to a final conclusion in the Chinese courts. The Supreme Court rejected this request and accepted that the Court of Appeal was justified in refusing a stay. It also expressed doubt as to whether the terms of a global FRAND licence could or would be determined by the Chinese courts in any case, finding that it was “no more than speculative”.

Should an injunction be granted?

The final issue was one not raised before the lower courts. Huawei argued that the court should exercise its discretion not to award an injunction on the basis that it was neither appropriate nor proportionate. The basis for this argument was that the SEP holder’s only interest was in obtaining a reasonable royalty and that this interest could be satisfied by the award of damages in lieu of an injunction.

The Supreme Court was not persuaded that there was any basis in this case for it to exercise its discretion to award damages in lieu of an injunction. It did so on the basis that:

• There were no grounds to fear that an injunction could be used by the SEP holder to charge exorbitant fees or for undue leverage, given that Huawei’s alternative would be to enter into a licence which the court had already determined to be fair, reasonable and non-discriminatory.
• The award of damages would not be an adequate remedy as refusing an injunction would encourage hold-out behaviour on the part of implementers because they would be incentivised to force the patentee to litigate country by country, the cost of which would be “impossibly high”.

What next for FRAND?

The long awaited decision of the Supreme Court finally provides some certainty as to the UK’s approach to FRAND and is likely to put the UK at the centre of global FRAND disputes in the future. The key points to take away from the judgment are that:

• The English courts are willing and able to take jurisdiction of disputes concerning appropriate FRAND licence terms. In the Conversant case they have done so even where there were relatively few sales of the implementers’ products in the UK. The only way to avoid a UK court determined FRAND licence would now seem to be to accept an injunction in the UK (the approach adopted by ZyXEL in proceedings brought by TQ Delta).
• The fact that the non-discrimination element of FRAND is not ‘hard-edged’, coupled with the UK court’s willingness to determine a FRAND royalty rate, means that the UK will continue to be a popular choice of jurisdiction for SEP holders seeking a one-stop-shop for resolution of their FRAND disputes.
• The Supreme Court has also shown that the UK courts are prepared to award injunctions in respect of SEPs, particularly where the court feels there has been ‘hold-out’ behaviour on the part of the implementer.
• Perhaps the most relevant point to note for everyday purposes is that the UK courts will take a flexible approach to the conduct of FRAND negotiations (although for certainty an SEP holder may still wish to follow the protocol set down in Huawei v ZTE to take advantage of the safe harbour). This is in contrast to the strict approach adopted in other European jurisdictions, such as the recent German Supreme Court decision in Sisvel v Haier, reported on here.