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In this case preview, Caitlin Heard and Shayna-Radhika Patel, who both work within the intellectual property team at CMS, outline the decision awaited in the joint appeals of ZTE Corporation and another v Conversant Wireless Licensing SARL.  Oral submissions were heard in October 2019 and judgment is expected shortly. Caitlin is a partner in the intellectual property team at CMS. Caitlin specialises in intellectual property disputes, with a focus on multi-jurisdictional patent litigation, and has particular expertise advising clients on their IP strategy in respect of Standard Essential Patents and FRAND licensing disputes. Shayna is a trainee in the intellectual property team at CMS, with particular interest in patent disputes, including Standard Essential Patents and FRAND licensing disputes.

The joint appeals brought by ZTE and Huawei were heard in the Supreme Court in October 2019. The much anticipated decisions are expected some time soon. We summarise the background of both cases, the issues in question and the arguments put forward by parties before the Supreme Court.

Case Background: Standardisation FRAND and injunctions

For those in the telecoms industry, FRAND needs no introduction. Common technical standards are needed to ensure interoperability, and that safe technology is widely adopted. A patent that claims a monopoly over any aspect of standardised technology, and is therefore necessarily infringed by implementation of a standard, is a standard essential patent (“SEP”). Injunctions are generally granted as a matter of course if a patent is found to be valid and infringed. SEP holders can therefore block the implementation of a standard, so-called “patent hold-up”. To avoid hold-up, SEP holders are encouraged to commit to licensing SEPs on fair, reasonable and non-discriminatory (“FRAND”) terms.

The cases on appeal concern a number of SEPs to ETSI standards, each of which was subject to an undertaking to licence the patent on FRAND terms. The Supreme Court will consider what the FRAND undertaking requires, and specifically whether a global portfolio licence is FRAND in the context. It will also consider whether England is the proper forum to make a determination of FRAND terms by reference to a global portfolio of SEPs. In effect, the Court will decide whether it is appropriate for it to compel an implementor of a standard, who has been found to infringe one SEP, to be forced to take a licence over a global portfolio of SEPs, or be subject to an injunction, shutting it out of the UK market.

In giving its decision it is likely that the Court will consider circumstances in which damages in lieu of an injunction might be appropriate more generally, particularly in the case of non-practising entities (NPEs). The judgment is therefore likely to provide guidance on principles of wider application beyond SEPs and telecoms.

Case Background: The joint appeals

Unwired Planet v Huawei

Unwired Planet (“UP”) sued Huawei for infringement of five of its SEPs in the UK. At first instance, it was held that two of the patents were valid and essential, and an injunction was granted until such time as Huawei entered into a FRAND global licence agreement. A FRAND trial followed, pursuant to which Birss J was asked to decide whether the licence terms offered by UP and Huawei respectively were FRAND. The key findings of relevance to this Appeal were:
• willing and reasonable parties would agree on a global licence;
• the rates sought by UP were too high and it was appropriate for the court to set the appropriate global FRAND rates between the parties; and
• UP was in a dominant position in the relevant market but had not abused that dominant position by pursuing the proceedings in the way that it did.

Huawei appealed to the Court of Appeal on three grounds:
• the imposition of a global licence on terms set by a national court based on a national finding of infringement is wrong in principle and leads to results which are manifestly unjust;
• the non-discrimination limb of FRAND prohibits a SEP owner from charging similarly situated licensees substantially different royalty rates for the same SEPs, and so Huawei should have been offered the same rates as Samsung; and
• following the CJEU’s decision in Huawei v ZTE, the owner of a SEP cannot, without infringing Article 102 TFEU, bring an action for a prohibitory injunction against an alleged infringer without (a) notice or prior consultation and, if the alleged infringer has expressed a willingness to conclude a licensing agreement on FRAND terms, (b) offering to that infringer a licence on such terms.

The Court of Appeal dismissed the appeal on all three bases.

Conversant v Huawei and ZTE

Conversant sued both Huawei and ZTE for infringement of certain SEPs, where the relief sought was a determination of a global FRAND licence. Jurisdiction was challenged by the Huawei and ZTE on the basis that:
• the English court has no jurisdiction to decide these claims which are, in substance and effect, claims for infringement of foreign patents, the validity of which is in dispute; and alternatively
• the court should decline to exercise jurisdiction to decide the claims, because England is not the proper or appropriate forum; China is the natural forum.

Following the judgment in Unwired Planet, the High Court and Court of Appeal found that the English Courts have jurisdiction to determine the terms of a global FRAND licence, and that England is the appropriate forum.

Both cases were appealed to the Supreme Court, and were joined. Submissions were made over four days, with three parties (Apple, Qualcomm and Ericsson) providing written interventions.

Questions to be determined by the Supreme Court and submissions:

1. Is it appropriate for an English court to enforce FRAND terms by reference to a global portfolio of SEPs?
2. Does the CJEU’s Huawei v ZTE decision identify no more than a “safe harbour” within which a SEP owner would not abuse a dominant position?
3. Is the non-discrimination limb of the FRAND undertaking to be interpreted in such a way that it is breached if the licensee’s competitor receives better terms?
4. If the answer to Issue (1) is “Yes”, is England the proper forum for a determination of FRAND terms by reference to a global portfolio of SEPs?

Huawei submissions

• The English court has overstepped its legitimate sphere. By settling the FRAND terms for a global portfolio the English Court was settling royalties for foreign patents, effectively stifling validity challenges to foreign patents, which it does not have jurisdiction to do.
• Damages in lieu of an injunction is the more appropriate remedy: for SEP infringement, particularly in the case of an NPE, where monetary damages are sufficient to compensate the patentee. As a matter of principle, UP has no right to an injunction restraining infringement in the UK to allow it to bargain for greater monetary compensation than the recoverable damages for patent infringement (which were determined to be royalties payable on only UK sales). It is also wrong in principle to condition a UK SEP injunction on payment of royalties of foreign SEPs. A finding of validity and infringement of a UK patent does not create an entitlement to a royalty for foreign patents.
• In settling global FRAND terms there is a risk of inconsistent judgments. For example, different Courts had assessed Ericsson’s portfolio differently, and antitrust law differs between jurisdictions.
• By compelling an implementer to take a global FRAND licence if a single UK SEP is found valid and infringed, the Court is creating a cost of entering the UK market. This could have a negative impact on UK consumers.
• The FRAND undertaking does not change that position: The FRAND undertaking is an obligation on the SEP holder. It is a unilateral undertaking, given for the benefit of standards users. It confers no rights on the patent owner, and the Claimant cannot use the FRAND undertaking to improve its position, or expand on the remedies available to it. The proper interpretation of the FRAND undertaking is that damages are an appropriate remedy – the purpose of the undertaking is to avoid investment in the standards being wasted by SEP licences not being available. Therefore, the undertaking requires the Claimant to offer a licence of whichever SEPs the implementer wishes to take a licence under.
• The lower courts had lost sight of the transition from commercial practice to implementation in Court.
• Forum conveniens: where invalidity of a foreign patent is raised, determining global FRAND terms becomes non-justiciable. If Huawei is wrong on that, then China is the appropriate forum for the determination. It is the place where the action has its most real and substantial connection – it is the place of manufacture, and only patents in the country of manufacture should be able to command global royalties. To establish the UK as the correct forum would “overwhelm” the Patents Court.
• Given that 85% of the relevant turnover is in China and only 0.2% in the UK, the UK is not the appropriate forum to settle the terms of a global licence.
• Non-discrimination: the ordinary and natural meaning of the expression means that like situations must be treated alike – Huawei therefore should have been offered the same (lower) rates as Samsung.

ZTE submissions

ZTE distinguished itself from Huawei in certain respects – it accepted that injunctions could be an appropriate remedy, including in the case of NPEs, and that SEP by SEP licensing is not necessarily appropriate in every case. ZTE’s submissions also recognised the need for Courts to appreciate the different socio-economic positions of different countries. For example, royalty rates are generally lower in China because that is fitting with the needs of the population. The English Court is not in a position to take these local nuances into account.

Unwired submissions

• The lower court had made a finding of fact that country by country and SEP by SEP licensing is impractical.
• Huawei’s position that an injunction cannot be proportionate in the case of a licensing entity is inconsistent with the ruling of the CJEU in Huawei v ZTE, in which an injunction for SEPs was clearly contemplated. If an injunction is never an available remedy in the case of SEPs and/or licensing entities, it severely affects the parties respective licensing positions and encourages hold-up.
• The vast number of declared patents is precisely why the FRAND undertaking should be applied on a global portfolio basis. The purpose of standardisation is to allow international use of a large number of patents. The ETSI undertaking applies to the entire patent family, not just the individual UK SEP.
• Forward looking royalties are not damages for the infringement of the patent, nor is the purpose of a FRAND undertaking to limit remedies for infringement. It is to purely make licences accessible and available, and is relied upon by the defendant as a contractual defence to an injunction.
• Determination of FRAND requires no determination of validity of foreign patents. In practice, parties agree a licence knowing that some patents may turn out to be invalid or non-essential and that is priced-in.
• Whether a global licence is FRAND depends on the facts. There are circumstances where it will not be fair and reasonable to negotiate separate licences with an international implementer, and only a global licence will be FRAND.
• There are both property rights and the FRAND regime in place, and it is important that the court enforces both; to do otherwise would result in “hold-up”.
• As to forum, the FRAND undertaking is a single worldwide restriction that is enforceable in any court. It is a promise to make a FRAND licence available as an alternative to ordinary enforcement of patent rights.

Conversant submissions

Conversant’s submissions focused on the “non-discrimination” limb of FRAND. Conversant argued that ETSI cannot have intended irreversibly to force the SEP holder to level down its royalties below the true value of the SEP portfolio.

Conclusion

The Supreme Court has indicated that it will “take some time” to consider the submissions. Given that no other Court has seized jurisdiction over global FRAND determinations in quite the same way, this decision could set a precedent not just in the UK, but globally if other Courts follow the UK’s lead. The Supreme Court is clearly alive to the international importance of this decision, and indeed commented that it would have been interested in submissions from the Chinese government.