JUNE/JULY 2017

DEVOTED TO LEADERS IN THE INTELLECTUAL PROPERTY AND ENTERTAINMENT COMMUNITY

THE

Edited by Gregory J. Battersby and Charles W. Grimes

LicensingJournal

VOLUME 37 NUMBER 6

JUNE/JULY 2017 T h e L i c e n s i n g J o u r n a l 1

More Certainty for FRAND Licensing? The English High Court’s Judgment in Unwired Planet v. Huawei Sophie Lawrance and Helen Hopson

Sophie Lawrance is a partner at Bristows and specializes in EU and UK competition law. She has a particular interest in working with busi-nesses in technology and pharmaceutical sec-tors, and in relation to the competition issues

that arise in connection with standardized technology. Dr. Lawrance has a strong behav-

ioral practice, advising on issues spanning access to technology, duties to supply

and pricing issues, as well as regularly acting in competition litigation before the English

and EU courts.

Helen Hopson specializes in the competition/IP interface and has considerable FRAND and competition litigation experience. She was a

key member of the Bristows’ teams that represented Samsung in its seminal FRAND

and competition law disputes with Apple and Unwired Planet.

Owners of telecommunications patents that read onto industry standards (standard essential patents, or SEPs) are obliged to license those patents on FRAND (fair, reasonable and non-discriminatory) terms. The exact meaning of this obligation has been the object of considerable contention, and a large number of legal disputes around the world over the past two decades.

To date, FRAND litigation has been a particular feature of the telecoms and electronics sectors. However, standardized technologies are becoming ever more widespread. The advent of the Internet of Things and 5G likely will be a key test of the fitness for purpose of FRAND valuation techniques.

Judgments from recent years, in particular from the USA, have contributed to a gradual develop-ment of the law assisting stakeholders to execute their SEP licensing policy. The English High Court’s April 2017 judgment in Unwired Planet v. Huawei1 is a hugely significant development that has addressed many previously unanswered questions in this complex area, providing a comprehensive roadmap

for the negotiation and determination of FRAND licenses.

In this article we explore the aspects of the judg-ment relating in particular to the terms of FRAND licenses, and their implications for the licensors and licensees.

BackgroundIn March 2014, Unwired Planet (Unwired) sued

Huawei, Samsung, and Google for infringement of six of its UK patents. Five of these were SEPs that Unwired had acquired from Ericsson, relating to each of the three main mobile telecommunications stan-dards (2G/GSM, 3G/UMTS, and 4G/LTE).

A number of technical trials were listed to consider the validity and infringement of the patents at issue; these resulted in the revocation of some of Unwired’s patents, but two patents were also upheld as valid and standard essential.

This crystallized the need for a “non-technical” trial to consider the competition law and FRAND issues between Unwired and Huawei (the only remain-ing defendant, Google and Samsung having settled with Unwired during the two and a half year long proceedings).

Court’s Findings: Terms of a FRAND License

The (lengthy) judgment addresses a number of issues relevant to licensing. The Court made it clear that the ruling should determine the full terms of a license for the patents in suit. In doing so, the Court established a number of terms that will be FRAND in any license between Unwired and Huawei. The judg-ment thus reveals the English court’s current view on what is normal in deals of this nature and what terms are likely to be considered FRAND in similar cases. The most important findings are discussed below.

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FRAND Negotiations

Offers higher or lower than FRAND in negotia-tions are legitimate if they do not disrupt or preju-dice the negotiation. This is a key finding, which interprets a controversial aspect of the landmark 2015 Huawei v. ZTE judgment of the EU Court of Justice (CJEU). That judgment established a detailed process for licensing negotiations that established the circumstances in which injunctive relief was, and was not appropriate under EU com-petition law. A key part of that process involved first the licensor and then the licensee making “FRAND offers.” Although prescriptive, that judgment still left room for debate. In particular, commentators had disagreed as to whether this meant that the offer had to be FRAND in a formal sense, or whether the Court was referring merely to an offer of a FRAND type (leaving open the final adjudication as to what an actual FRAND rate would be).

In Unwired v. Huawei, English High Court inter-preted Huawei v. ZTE fluidly, holding that it is not a strict requirement for a SEP holder to make a license offer that could be adjudicated as FRAND before seeking an injunction. Indeed, given the Court’s find-ing (discussed further below) that there only is one true FRAND set of terms for any given license, the Huawei v. ZTE criteria would be unworkable without such flexibility. However, the Court held that compli-ance by the SEP holder with the CJEU’s criteria does not necessarily avoid a finding of abuse, and devia-tion from the framework will not always be abusive—it will depend on the circumstances.

Geographic ScopeThe judge held that for a portfolio such as Unwired’s,

which has significant global coverage, and for an implementer such as Huawei, which sells its products around the world, a FRAND license is global in scope. This is likely to have major implications for SEP nego-tiations and litigation. It is not uncommon for imple-menters, faced with patent infringement proceedings in particular jurisdictions, to offer to take per patent or national portfolio licenses limited to those specific jurisdictions. When litigation takes place in the United

Kingdom, this approach will now run the substantial risk of the possibility of products being injuncted from the United Kingdom, a valuable market.

FRAND RatesThe court concluded that at the stage when the par-

ties are negotiating a license, there is only one set of FRAND license terms in a given set of circumstances.

When royalties are concerned, the FRAND rate can be determined by making appropriate adjust-ments to a “benchmark rate” based on the value of the patent portfolio, and that the FRAND rate does not vary depending on the size of the licensee. The benchmark rate can be assessed by using freely negotiated comparables. Licenses resulting from binding arbitration do not carry much weight, unless the basis for the award is available. However, a “top-down” approach is a useful cross-check of the FRAND rate from comparables. In this case, based on the parties’ submissions, the judge estimated the total royalty stack (for SEPs) to be in the region of 7 to 9 percent.

Despite the finding that rates should in principle be the same for differently sized licensees, the non-discrimination limb of FRAND does not in itself justify a licensee being granted a lower rate than the benchmark rate merely because such a lower rate has been given to a different, but similarly situated, licensee. However, the judgment did consider that the situation may be different if there is evidence of a distortion of competition between the two licensees.

For sizeable portfolios, counting patents is con-sidered to be the only practical approach for assess-ing FRAND, although the judge did recognize that it may be possible to identify (and by implication, treat differently) exceptional patents covering “cor-nerstone” inventions.

Following an assessment of the evidence pre-sented by the parties, including notably comparator licenses and “top-down” analyses of the universe of SEPs, FRAND rates for a worldwide license of Unwired’s relevant essential patents (of which there were 10 or fewer in each country) is shown in Exhibit 1. National markets are defined as MMs or

Exhibit 1Major Markets (MM) China and Other Markets (OM)

Handsets Infrastructure Handsets Infrastructure

2G/GSM 0.064% 0.064% 0.016% 0.032%

3G/UMTS 0.032% 0.016% 0.016% 0.004%

4G/LTE 0.052% 0.051% 0.026% 0.026%

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OMs according to the number of declared SEPs held by Unwired in that market. Countries for which Unwired held more than two 2G/3G SEPs or three 4G SEPs were defined as MMs. For multi-mode handsets, the FRAND royalty will be the higher of the possible applicable rates.

The judgment refers to adjustments being made on an annual basis in the event that further declared SEPs are added to the portfolio or declared SEPs are determined to be invalid or not essential. This approach to dealing with the dynamic nature of SEP portfolios may in principle be attractive to both implementers and SEP holders. However, the pre-cise mechanism for this process remains unclear: The implication of the judgment is that rates would change only if a portfolio changes substantively in one country, taking it (e.g.,) from being a MM to an OM, or vice versa. In licensing terms, this poses some challenges. Express contractual mechanisms will be required in licenses to give effect to this mechanism, and it suggests that a greater measure of ongoing monitoring would be required to deter-mine license fees payable over time. Licensees in particular may wish to consider carefully whether they need to include terms to limit their obliga-tion to pay additional royalties in the event that, for example, a licensor acquires a new portfolio of essential patents for which the licensee had not budgeted (or under which it already was licensed in the hands of the former owner).

The judgment accepts, without significant dis-cussion, that it is appropriate for royalties to be assigned on a percentage basis and to be applied against the approximate net selling price of hand-sets (subject to usual discounts, and established in cases where the actual price is difficult to determine as cost +20 percent), as opposed to any smaller royalty base such as the chipset. When infrastruc-ture revenue is concerned, the appropriate royalty base is the selling price of the equipment, excluding associated services. Royalties are thus metered on sales, rather than on manufacture or any other acts which, from a technical point of view, may consti-tute patent infringement.

Other Terms in a Worldwide LicenseWhile royalty rates and the geographic scope of

the license were self-evidently the most contentious issues in this case, a number of other license terms were considered in the judgment.

Perhaps the next most significant discussion concerns the question of whether licenses can legiti-mately bundle SEPs (for which a FRAND obligation applies) and non-SEPs (for which there is no such

obligation). While parties may make an offer that bundles such patents together, the judgment con-cludes that it would be contrary to EU competition law to compel a licensee to take license non-SEPs in return for obtaining a license to the SEPs. However, the mere fact that a concluded license contains both types of patents does not in itself make it non-FRAND.

The judgment deals with a number of other com-mon licensing terms, finding that the following are FRAND (in the factual context under discussion):

• Term: In this case, seven years was considered appropriate.

• Reporting: Conventional terms on recordkeep-ing, reporting (quarterly), and audit. A 5 percent error margin is required to shift the costs of the audit from the licensor to the licensee; in the event of underpayment of royalties, the licensee only is required to provide information that is reasonably necessary.

• Jurisdiction: The jurisdiction and governing law of England and Wales is FRAND for a global license, but no term ousting the jurisdiction of foreign courts should be included.

If, contrary to the Judge’s main finding, the appeal court considers that Unwired should be required to grant a UK-only license, a 100 percent uplift should apply to the royalty rates, together with a 4 percent charge to allow for roaming.

ConclusionsThe judgment has huge ramifications for SEP

licensing. It makes some potentially far-reaching findings (often using considerable judicial discretion).

Considered overall, the judgment is simultane-ously pragmatic, and (in parts) also quite prescrip-tive. This begs the question about whether other terms, such as (in the case of royalties) per unit rates, or an upfront lump sum, are permissible. In answering this question, it should be recalled that judgments in English law cases are inevitably the result of the evidence placed before the Court, and that a different case with different evidence could potentially lead to a different result. In the authors’ view, this means that no particular alternative forms of contractual terms are necessarily excluded by this judgment, but where there is a direct contradiction with this case, and similar factual circumstances apply, it may not be straightforward to persuade

an English court to take a different view. Equally, it should be borne in mind that the judgment notes that certain of the comparator licenses contained different terms from those terms determined to be FRAND in this case. For example, one of the licenses carved out a particular geographic territory, even though it resembled this case on the facts, in that the licensor and licensee generally were active on a global basis. This suggests that the conclusion that there is only one set of FRAND terms in a given case is perhaps rather theoretical, and should not be viewed with concern by parties engaged in con-tractual negotiations (or, indeed, in litigation, given that the judgment also concludes there will be no sanction for offers made on moderately non-FRAND terms). The judgment also helpfully makes clear

that this is not a recipe for unwinding concluded licenses: once consensually entered into, licenses will not be open to challenge unless they deviate so far from FRAND terms as to be unfair, and thus anti-competitive.

As an English judgment that primarily relates to the interpretation of a contractual obligation under English law it is binding only on the courts of England and Wales. However, it will be persuasive in other jurisdictions particularly given the English court’s reputation and experience in dealing with SEP licensing disputes. Parties involved in SEP licensing anywhere in the world should read the judgment and watch out for further developments including on remedies (yet to be decided) and any potential appeals.

1. Unwired Planet v. Huawei, [2017] EWHC 711 (Pat).

Copyright © 2017 CCH Incorporated. All Rights Reserved.Reprinted from The Licensing Journal, June/July 2017, Volume 37,

Number 6, pages 3–6, with permission from Wolters Kluwer, New York, NY, 1-800-638-8437, www.wklawbusiness.com