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In this case comment, Caitlin Heard and Natalie Coan, who both work within the intellectual property team at CMS, comment on the decisions handed down in the conjoined appeals of Unwired Planet International Ltd and another v Huawei Technologies (UK) Co Ltd and another; Huawei Technologies Co Ltd and another v Conversant Wireless Licensing SÁRL; and ZTE Corporation and another v Conversant Wireless Licensing SÁRL, all reported as [2020] UKSC 37.  The conjoined appeals concerned a number of patents, which are declared to be essential to the practice of numerous telecommunications standards. 

The much anticipated decisions from the UK Supreme Court in the joined appeals Unwired Planet v Huawei and Conversant v ZTE was handed down on 26 August 2020. A case preview, which includes a full background of the legal issues in dispute, together with an introduction to standard essential patents and FRAND can be found here.

In essence, the Supreme Court was asked to determine how to address the competing interests of a patentee’s right to prevent infringement of its inventions versus the need for manufacturers of mobile phones (“implementors”) to access technology incorporated into an international standard at a reasonable cost. The mobile telecoms industry has sought to reconcile the interests of the two competing camps through the creation of Standards Development Organisations (“SDO”). In Europe, the relevant SDO is ETSI, whose intellectual property rights (“IPR”) policy seeks to balance the interests of patent owners and implementors by requiring that members who contribute IP to an international technical standard irrevocably undertake to grant a licence that is fair, reasonable and non-discriminatory (“FRAND”) in respect of any patent that is essential to a technical standard (a “standard essential patent” or “SEP”).

In the absence of an agreement between the patentee and the implementor a court can be asked to determine the terms of a licence, and a SEP owner is not entitled to an injunction if the implementor agrees to take a licence on FRAND terms. The difficulty that arises with seeking to agree licence terms is that SEP portfolios tend to be large, span many jurisdictions and are untested. It is likely that many SEPs are invalid or aren’t in fact essential to the technical standard – studies referenced before the lower courts suggest that only 10-50% of SEPs are in fact essential. That makes it impractical for the parties to test the validity and infringement of a SEP portfolio, and so industry practice is to enter into worldwide portfolio agreements which take into account the possibility that a proportion of patents are invalid/not infringed.

The central question considered by the Supreme Court is whether the UK courts have jurisdiction to require an implementor to take a licence of a worldwide SEP portfolio if it is established that a single patent in the UK has been found to be valid and infringed, or be subject to an injunction in the UK, which would effectively shut the implementor out of the relevant (standardised) part of the UK market.

Huawei and ZTE separately appealed decisions of the High Court and Court of Appeal relating to the above issue, and the appeals were joined by the Supreme Court. In a unanimous decision, the Supreme Court dismissed the appeals and held as follows:

Does the UK have jurisdiction to settle global portfolio licences?

Yes – the UK courts have jurisdiction as a result of the contractual arrangements set out in the ETSI IPR policy. The courts may exercise that power, without the parties’ agreement, to determine global licence terms (including royalty) of a multinational patent portfolio, and grant an injunction in the UK in respect of an infringed SEP unless the implementor enters into the court determined licence. In effect, the FRAND undertaking operates as a defence to the injunction that would otherwise follow from a finding of infringement. The courts have drawn on industry practice as the ETSI IPR policy envisages, and the exercise doesn’t require the UK courts to opine on the validity/infringement of foreign patents.

The Supreme Court recognised that the UK courts have gone further than courts in any other jurisdiction have gone in settling global licence terms, but the Supreme Court considered this did not reflect a difference in principle in approach from the courts of other jurisdictions. It remains to be seen how courts in other jurisdictions will respond.

Is the UK the appropriate forum?

Yes – on the facts a high proportion of the defendant companies’ turnover was in China, and it was argued the relevant focus should be on Chinese patents. However, the Supreme Court held that because the Chinese Court had not as yet made a finding it had jurisdiction to determine global FRAND terms without the consent of the parties, the UK was the appropriate forum. The Supreme Court also held that the lower courts were correct not to stay the FRAND determination pending the conclusion of challenges to the validity of certain Chinese patents in the SEP portfolio.

What does the “non-discriminatory” limb of FRAND require?

The ETSI IPR policy requires that the patentee offers a single royalty price list to all market participants based on the market value of the portfolio without adjustment for the characteristics of individual licensees. There is no requirement for a most favoured nation clause (or most favourable licence term).

Did the SEP owner abuse its dominant position because it had not made a FRAND offer before commencing legal proceedings?

No – the CJEU held in Huawei v ZTE that commencing litigation seeking an injunction without notice or prior consultation would be an abuse of a dominant position, but the nature of the notice and consultation depends on the fact of the case. On the facts of this case Unwired had shown itself willing to grant a licence on terms that the Supreme Court determined to be FRAND.

Should damages in lieu of an injunction have been awarded instead of the injunction?

No – the lower courts were not invited to consider the possibility of damages in lieu of an injunction, and the Supreme Court saw no basis to substitute an award of damages for the injunction already granted. The ETSI scheme prevents the SEP owner from demanding excessive royalties under threat of an injunction, as these rates would not be FRAND. In any event the award of damages would not be an adequate substitute for an injunction. If the SEP owner was confined to a monetary remedy implementors would be incentivised to continue infringing until the SEP owner had litigated its entire portfolio on a patent by patent and country by country basis.

Conclusion

Whilst the decision was not unexpected, it does confirm that the UK courts have created a cost of doing business in the UK. A company who wishes to enter the UK market and is found to have infringed a single SEP may be obliged to enter into a global portfolio licence with that patentee or face an injunction in the UK which will effectively block their access to the relevant market.

Litigating SEPs in the UK is now a very attractive economic prospect. A SEP owner simply has to pick its best SEP out of a worldwide portfolio, obtain a finding of infringement (in a jurisdiction where the successful party tends to recover a substantial proportion of its legal spend), and use this finding to obtain a global portfolio licence. Further, a SEP which has been through litigation in the UK and has been found essential and valid, is easier to enforce against third parties.

In those circumstances, one piece of UK litigation represents an excellent return on investment.

Whilst FRAND disputes have historically been focused on the mobile telecoms industry, with the advent of the “fourth industrial revolution” and the Internet of Things, we anticipate that the interoperability requirements in other sectors will ensure that companies operating in many industries will have to start grappling with these issues – either because of reliance on 5G, or because industries are developing their own technical standards.

This decision is therefore likely to have much wider application beyond the mobile telecoms industry and should come with a stark warning that SEP licensing strategy should be formulated into business planning at an early stage, given the potential to block market entry and the requirement to enter into global licences.