U.K. Supreme Court’s Landmark Ruling on SEPs: An Imperfect Solution, But Is There a Perfect One? (Part I)

Posted on By Legal 60

[Disclosure: I represent/have represented clients on related and unrelated issues. Views expressed here are personal.]

In a recent landmark ruling, the U.K. Supreme Court (here) dismissed the appeals filed by implementers of technical standards, i.e. Huawei, ZTE, against standard essential patent (SEP) holders, i.e. Unwired and Conversant.  This is a well-known dispute and has previously been covered by this blog here, here, and briefly touched upon here.

In this Part I, I will focus on summarising the ruling, reserving my critique/comments to Part II.

Issues

 The Supreme Court was asked to answer the following questions:

  1. Jurisdiction of English courts to grant an injunction concerning UK SEPs with the proviso that it would automatically stand vacated upon entering of a FRAND global license, and the jurisdiction to settle terms of such FRAND global license;
  2. Whether the English courts were forum non conveniens;
  3. The meaning of the “non-discrimination” obligation in FRAND;
  4. The nature of the FRAND license that an SEP holder must offer before initiating infringement suits, in accordance with the ECJ’s judgement in Huawei v. ZTE;
  5. The circumstances when a Court can award damages in place of an injunction. 

Policy considerations/factors underpinning the judgement

On reading the judgement as a whole, the U.K. Supreme Court was cognizant of the following policy considerations/factors (paras 4, 10, 15, 36):

  1. potentials of abuse by a SEP holder (the so-called ‘hold-up’ situation);
  2. denial by implementers of the SEP holders’ legitimate rights;
  3. the industry practice is to negotiate worldwide licenses because it is not rational to seek licenses, country by country;
  4. the prohibitive cost of litigating the validity and essentiality of SEPs, territory by territory.

Finding on issue 1

  1. It is relevant, among others, to consider industry practice in deciding what amounts to a FRAND license (para 9).
  2. There is a lack of ex-ante clarity to both SEP holders and implementers since it is not feasible to test the validity and essentiality/infringement of the patents involved in a standard, for each country. Therefore, it is industry practice to take a worldwide license to SEPs because it “purchases certainty” (para 60).
  1. The possibility of an injunction is a necessary component of the balance required because it provides the implementers with a “strong incentive” to accept FRAND licenses. The counterbalance is that the SEP holder is limited from seeking an injunction, being bound by an irrevocable FRAND undertaking (para 61).
  1. The ETSI IP policy, clause 6 of which memorialises the undertaking to offer FRAND licenses on SEPs, is intended to have an international effect (para 62).
  1. A national Court settling/directing FRAND global licenses does create risks of forum shopping, conflicting judgements and applications for anti-suit injunctions. However, that is simply the inevitable consequence of the policies adopted by standard setting organisations (SSOs) in, adopting a FRAND undertaking with international effect, but not prescribing an international tribunal or forum to determine the terms of such FRAND licenses (para 90).
  1. The relevant stakeholders are welcome to devise methods to have this resolved through other means, such as by providing for an international tribunal or forum or by identifying respected national IP courts or tribunals as a chosen forum (para 90).
  1. While English courts certainly do not have the jurisdiction to rule on the validity or infringement of a foreign patent (para 63), English courts certainly do have jurisdiction to rule upon whether a U.K. SEP is valid and/or infringed (para 90). Similarly, both parties have invited the U.K. Court to rule upon and enforce contracts which the SEP holders have entered into (i.e. the ETSI IP policy) (para 90).
  1. A conspectus of foreign jurisprudence on the subject of jurisdiction shows that (para 84):
  • U.S. courts were willing to consider FRAND obligations on a global basis, grant an injunction of a national SEP in the implement refuses a license on FRAND terms, and determine the FRAND terms on a worldwide basis;
  • U.S. courts also typically consider examples of real-life commercial negotiation when fixing FRAND terms, though the determination of a FRAND license by one national Court does not preclude an implementer from challenging foreign patents on invalidity and/or essentiality;
  • German courts also recognise worldwide FRAND licenses and consider that an implementer’s counter-offer our national license confined only to Germany might not be FRAND. Thus, German courts are willing in principle to grant an injunction on a national SEP if the implementer refuses a license on FRAND terms;
  • German courts typically consider industry practice when determining the terms of a FRAND license;
  • The position is uncertain in China. Chinese courts have neither rejected the possibility of a worldwide license, nor have they expressly declined jurisdiction to determine a worldwide license.
  1. Implementers are also sufficiently safeguarded because the implementer can insist on the following as part of the FRAND license (para 64):
  • reserve the right to challenge the validity and/or essentially of the patents/sample thereof in the relevant national/foreign Court;
  • require that the license provide a mechanism to alter the royalty rates as a result; and
  • require that the license provide a mechanism to recover sums paid as royalties to that extent.
  1. There is no legal basis for treating non-practising entities or patent assertion entities holding SEPs any differently from other SEP holders because in either case, they are bound by the FRAND undertaking (para 89). In any event, this is not a question concerning jurisdiction.

Finding on issue 2 

  1. This argument was considered moot because the principle of forum non conveniens can only be raised if there is another forum having jurisdiction to determine the dispute (para 96). On facts, however, it was found that Chinese courts do not, at present, have jurisdiction to determine the terms of a global FRAND license, at least in the absence of agreements by all parties that they should do so (para 97).

Finding on issue 3 

  1. The “non-discriminatory” requirement is not equal to an MFN clause (para 106). The ETSI specifically considered, but subsequently rejected, an MFN condition (para 116-119).
  1. The FRAND undertaking imposes a “single unitary obligation” and thus, “non-discriminatory” aspect of the undertaking provides focus to what may be fair and reasonable. As far as royalty rates, this implies that it must be a “fair market price” that is “generally available” for any market participant, and 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 (paras 112-114). The role of the non-discrimination limb is to ensure that the fair and reasonable royalty “is one which does not depend on any idiosyncratic characteristics of the licensee” (para 122).
  1. Differential pricing occurs even in a voluntary license and can also be pro-competitive. It is difficult to interpret the ETSI IP policy so strictly to impose an obligation of identical royalties in all cases (paras 123-124). If such differential pricing is anti-competitive, there is a separate authority/forum to address that issue (para 124).
  1. In the facts of the case, the alleged benchmark agreement with Samsung was practically a “fire sale” licensing deal. If the same is applied across all implementers, it removes the incentive amongst implementers to take advantage of such a market opportunity. Similarly, it eliminates the ability of SEP portfolio owners to use such opportunities to raise funds without permanently devaluing the portfolio (para 126).

P.S: There is some doubt on what to Court meant as far as equality in royalties amongst various implementers. The overall tenor of the judgment suggests differential licensing rates would not ipso facto mean a violation of FRAND terms. On the other hand, there is one specific sentence where the Court stated: “…Put another way, there is to be a single royalty price list available to all” (para 114). In my reading, perhaps the sentence requires correction since the Court really wanted to say the opposite. Nevertheless, this is likely to be a bone of contention.

Finding on issue 4 

  1. While the ECJ in Huawei v. ZTE requires “notice or prior consultation” by the SEP holder before initiating infringement suit, the exact nature and content of such notice/consultation were left open by the ECJ and depended on the circumstances of each case (paras 151-152. 157).
  1. On facts, Unwired has complied with Huawei v. ZTE because Unwired was willing to license on whatever terms the Court determined were FRAND. In contrast, Huawei was only prepared to take a license with the scope specified by itself; Huawei never made an unqualified commitment to enter into a FRAND license (paras 144-158).

Finding on issue 5

  1. The Court took note of the concern expressed in the eBay case (U.S. Supreme Court) that non-practising entities may use the threat of injunction as a means of charging exorbitant fees and better leverage in negotiations. However, while this may be relevant in other cases, it was not relevant for SEPs where there was a FRAND undertaking (para 164).

An award of damages is unlikely to be an adequate substitute in SEPs for the simple reason that it would be impractical for the SEP holder to bring proceedings in every country where the patent has been infringed (para 166). This would actually incentivise implementers to infringe rather than take FRAND licenses (para 167).

Please click here to view Part II of this post. 

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