UK: UK High Court Issues Important Ruling On Licensing Of Standard Essential Patents

On April 5, 2017, the High Court of Justice in the UK ruled that if a patent holder claims that a patent is essential under the ETSI IPR Policy, it must license that patent to third parties on fair, reasonable, and non-discriminatory (FRAND) terms, and the licensee must accept the FRAND terms or face the threat of an injunction barring product sales for items taking advantage of such technology. [2017] EWHC 711 (Pat).

In Unwired Planet v. Huawei Technologies, a dispute arose during a nontechnical trial regarding several standards essential patents (SEPs) owned by NPE Unwired, whose robust global patent portfolio includes numerous SEPs declared essential to various telecom standards (including 2G, GSM, 3G, UTMS and 4G LTE). In March 2014, Unwired sued Huawei, Samsung and Google for infringement of six of its UK patents. During the course of the litigation, Unwired offered to license its entire global portfolio (both SEPs and non-SEPs) to the defendants. The defendants refused this offer and argued that they did not infringe and that the SEPss were both invalid and nonessential. Unwired then made another offer to license its SEPss, but the defendants argued that this offer was not FRAND. Google and Samsung eventually settled, leaving Huawei to litigate the dispute to trial.

Huawei was found to be infringing. What remained for the High Court to determine in this decision were the following issues: (i) what FRAND royalty rate should apply to the Unwired SEPs, (ii) whether Unwired abused a dominant position during FRAND negotiations with Huawei by failing to adhere to the relevant procedural requirement set by the European Court of Justice in Case C-170/13, Huawei Technology Co. Ltd v ZTE Corp., ZTE Deutschland GmbH and (iii) whether injunctive relief against Huawei was appropriate should it refuse to accept global FRAND terms. Unwired advanced that if each side makes a FRAND offer, then the patentee should be entitled to seek injunctive relief on the basis that it discharged its FRAND obligations by making the offer. In opposition, Huawei argued that if each side makes a FRAND offer, then the injunction should fail since the patentee was refusing to accept a licensee's FRAND terms, and the very purpose of FRAND is to benefit those that would wish to implement the technology.

The High Court offered an extensive explanation of the purpose of FRAND and its principles under the applicable European law. The governing standards setting organization, European Telecommunications Standards Institute (ETSI), requires that patent holders agree to license on FRAND terms if they wish to participate in the standards setting process. ETSI requires, as part of the ETSI IPR Policy, that its members inform it of any essential intellectual property rights in a timely fashion. Since by definition an SEP is essential, an SEP owner must give an irrevocable written undertaking to ETSI that it will grant irrevocable licenses on FRAND terms. This system rewards innovators for their contributions, but also prevents said innovators from taking advantage of those wishing to make use of the innovation by charging unreasonable or unfair licensing fees. Moreover, FRAND terms prevent a licensee from unnecessarily dragging out the negotiation process with a patentee, creating a situation where a patent owner must accept an unfair royalty rate out of necessity.

The High Court ultimately held that a patentee must agree to license its technology on FRAND terms, and that those licenses must be global for global players, instead of limiting a license to a single jurisdiction on a country-by-country basis. In this case, since Huawei participated in the global market, it was essential that it accept a global license rather than a UK license. The High Court also held that there can be only one FRAND royalty rate applicable to any given set of SEPs, as opposed to a FRAND range in which there can be more than one set of rival license terms, both compliant with FRAND. To hold otherwise would not only run contrary to economics (the FRAND rate should be the rate which parties in a given set of circumstances would agree upon), but would not assist courts in determining what rate actually applies to a particular dispute. This is not to say that parties lack the room to negotiate a royalty rate. Neither a breach of contract nor a competition claim for abuse of dominance will succeed unless an SEP holder's offer is significantly above the true FRAND rate, in which cause the royalty rate would conflict with applicable competition laws.

The High Court was clear that formerly negotiated licenses cannot be disputed since parties have been bound to their own contractual agreement, so long as the agreement does not contravene competition law. In the dispute at hand, the High Court relied upon comparable licenses from the industry to determine that neither Unwired nor Huawei had made an offer compliant with FRAND terms; consequently, the High Court looked to comparable licenses as a basis for determining a FRAND-compliant royalty rate.

The High Court also ruled that the "nondiscrimination" portion of FRAND does not employ a "hard-edge" test. Instead, the High Court applied the "general" nondiscrimination test, whereby the FRAND rate is derived by examining all factors playing into the intrinsic value of the portfolio, independent of any one specific licensee, and is applicable to all licensees seeking the same kind of license. Consequently, Unwired was not required to offer the same rates to Huawei as it did to other licensees. By rejecting the "hard-edge" test favored by Huawei, a licensee is limited in challenging FRAND terms on the basis that another similarly situated party had been granted a lower rate, so long as competition between the two licensees is not distorted.

Finally, the High Court held that if a patentee refuses to offer a license on FRAND terms, it breaches its FRAND undertaking with the ETSI. If a defendant is found to infringe a patent and refuses to accept the valid FRAND terms of a license, then an injunction may be awarded in hopes of encouraging both sides to enter into a license on FRAND terms. In this case, should Huawei not heed the High Court's ruling and agree to a global license with Unwired, then Unwired will be entitled to injunctive relief.

It remains to be seen what impact this milestone decision will have on courts outside of the UK, especially in the United States. However, the decision is still important to patent holders across all jurisdictions, as it will likely incentivize the enforcement of patent portfolios in Europe.

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