Unwired Planet: unpicking the UK Supreme Court's ruling

Out-Law Analysis | 15 Oct 2020 | 12:05 pm | 11 min. read

With a growing number of businesses whose operations, products and services are becoming smarter and more connected, the future of patent licensing in areas such as digital health and connected and autonomous vehicles will be shaped by a recent ruling by the UK Supreme Court that may on the face of it have been considered relevant only to the conventional telecoms industry.

In the case of Unwired Planet v Huawei, the Supreme Court decided that a UK court does have the power to grant an injunction to prevent the infringement of a standards essential patent (SEP) and determine the royalty rates and terms of a global 'FRAND' licence.

Now, as the dust settles following this landmark judgment, it is time to consider the future implications of this decision and how its impact is expected to permeate into technology-rich sectors where new products and solutions will depend on wireless communications and the innovative new wireless technologies, such as '5G', that underpin them.

When do FRAND obligations arise?

SEPs are patents that protect technology believed to be essential to implementing a technical standard. These standards are developed by businesses working together under the auspices of standard setting organisations (SSOs), such as the European Telecommunications Standards Institute (ETSI). It is a pre-condition that businesses benefiting from that framework of collaboration under SSOs make the patents they subsequently obtain relating to standardised technologies available to others by way of a licence on fair, reasonable and non-discriminatory (FRAND) terms. In the case of telecommunications, this requirement is set out in the ETSI intellectual property rights (IPR) policy, which is a contractual document that requires SEP holders to offer licences on FRAND terms. Other SSOs have comparable policies in place.

The role of the ETSI IPR policy, in the case of Unwired Planet v Huawei, leads to numerous questions, most notably around whether an obligation always arises on SEP owners to licence their SEPs on FRAND terms.

Marfe Mark

Mark Marfe

Legal Director

The terms agreed by Unwired Planet and Huawei may help pave the way for establishing a 'going royalty rate' for the use of standards essential patents in certain sectors.

In its judgment, the UK Supreme Court confirmed that, in the circumstances of that case, it was the contractual arrangement in the ETSI IPR policy which gave the English court jurisdiction to determine a FRAND licence of a patent portfolio which included foreign patents. Much has been made of this, but the jurisdiction of the court in this case is clear. What is not clear, however, is whether a UK court would have jurisdiction to issue a determination over foreign patents if the ETSI IPR policy, or an equivalent, did not apply. This situation remains untested.

It was not in dispute that the English court has no jurisdiction to rule on the validity or infringement of a foreign patent. Those issues are within the exclusive jurisdiction of the courts of the state which has granted that patent. As the Supreme Court acknowledged, neither the High Court nor the Court of Appeal overstepped the jurisdictional boundaries. Instead, they looked to the commercial practice in the industry of agreeing to take a licence of a portfolio of patents, regardless of whether or not each patent was valid or infringed by use of the relevant technology in the standard, and construed the IPR policy as promoting that behaviour.

In the absence of the ETSI IPR policy, or equivalent, the court is likely to look at what is considered standard industry practice. The UK Supreme Court found that, in considering Unwired Planet's case, the trial judge’s approach was consistent with several judgments in other jurisdictions. Those judgments contemplate that, in an appropriate case, the courts would determine the terms of a global FRAND licence.

Notably, the UK Supreme Court referenced the 2016 St Lawrence v Vodafone case in Germany. In that case, the Düsseldorf appeal court observed that, when assessing whether a worldwide portfolio licence is FRAND, it is relevant to consider industry practice. Where worldwide portfolio licences are the normal practice then an offer of such a licence will be FRAND unless the circumstances of the case justify a different conclusion. Therefore, the onus will be on the technology implementer to show that a UK licence and not a global one is the standard practice in its industry.

While the Supreme Court's judgment in the Unwired Planet v Huawei case focuses on the mobile telecommunications industry and the standards set by the ETSI, a question arises in respect of certain licensing circumstances, or industries, where no such contractual relationship exists. In such circumstances it raises questions of whether a FRAND obligation arises or whether licences would nevertheless need to be offered on FRAND terms. For example, if a company did not participate in an SSO obtains a patent that is later found to be essential to one of the SSO's standards, is that company obliged to offer the patent on FRAND terms even though it has not given an undertaking to license on FRAND terms to the SSO?

In reality, the question of whether a FRAND obligation arises in the event where no undertaking to licence on such terms has been given may be moot. This is because competition law could dictate that SEP licences would need to be offered on FRAND terms to avoid allegations of an abuse of a dominant position, especially where the technology implementer has expressed its willingness to take a licence on FRAND terms. If access is granted to the patent portfolio on FRAND terms, then it arguably cannot be abusive.

Application to other standardised industries

The dispute between Unwired Planet and Huawei pivoted on ETSI's telecom specific standards, but the judgment has a wider reach and will apply to all standardised technologies.

Examples include audio or video compression, which have also been the subject of licensing disputes. Such standardised technologies are relevant to the ongoing European Commission inquiry into 'Internet of Things' (IoT) products and services. In the past both Nokia and Ericsson have asserted patents said to be essential to video compression or speech coding standards.

This judgment therefore has wide implications, and FRAND-related disputes in other technology-rich industries are expected.

Licence terms, comparable licences and confidentiality

The UK Supreme Court did not provide guidance on the precise form of the FRAND licensing terms of Unwired Planet's patents in question, and therefore we anticipate future developments in this regard.

Nevertheless, while the UK Supreme Court did not settle the licence terms themselves, the FRAND licence terms that are finally agreed between the parties may, if disclosed, give an indication of what are considered 'reasonable' terms and may eventually form a standard industry template.

Ultimately, the terms agreed by Unwired Planet and Huawei may also help pave the way for establishing a 'going royalty rate' for the use of SEPs in certain sectors.  However, the method as to how appropriate royalty rates for a FRAND licence should be calculated is not addressed by the judgment.

One way of assessing appropriate royalty rates is by reference to by comparable licences. However, the confidentiality of SEP licences has often been a sticking point in FRAND disputes. There is a general movement by the English courts to make comparable licences, price lists and rates more transparent in negotiations and to shift away from onerous confidentiality agreements, a move which was endorsed by the High Court in London in the case between TQ Delta v ZyXEL. Pinsent Masons, the law firm behind Out-Law, advised ZyXEL in the dispute.

Terms and confidentiality agreements can only go so far, and in the interest of streamlining proceedings in the future to reduce costs and time, further transparency around comparable licences may gain significant traction in future litigation, both in the UK and further afield. The Supreme Court found that there is no requirement for SEP owners to grant licences on terms equivalent to the most favourable licence terms to all similarly situated licensees. Likewise, the German court in the recent Sisvel v Haier case, held that licensors are not obliged to treat all licensees equally and do not have to grant all licences on the same terms.

These findings may mean SEP holders will be less defensive about disclosing their past licences and more willing to accept less stringent confidential terms in the interests of a arriving at a speedier resolution to the dispute.

The role of the SSOs

Various international bodies, including the European Commission and Japanese Intellectual Property Office, are carrying out inquiries around the IoT and SEP policies respectively, with the intention of understanding more about connected consumer-facing products and service. This leads to questions about the role SSOs should play in ensuring standards are adopted.

There are suggestions that international SSOs should play a greater role in balancing the interests of SEP holders and implementers, and, further, that they should extend their roles to assist the courts by collating licence databases and sharing information so that courts, and parties to the proposed licences, do not have to start from the beginning on each licence negotiation and commercial pressures are balanced. However, setting up the necessary infrastructure will require investment and this leads to the question of whether SSO members will be prepared to cover this cost.

Funding issues aside, there appears to a growing public policy argument in disclosing licence information and royalty rates to ultimately ensure that the consumer, who pays the end prices, is protected.

Patent assertion entities and SEPs

Consistent with previous cases, the UK Supreme Court has continued to treat patent assertion entities (PAEs) – companies that acquire patent rights but who do not play any role in developing the underlying technologies – and traditional technology developers the same in respect of whether or not they are entitled to an injunction to restrain patent infringement. The central question remains: is the asserted patent valid and has it been infringed?

An attractive forum for FRAND disputes

It remains to be seen whether the UK Supreme Court's  ruling will lead to an increasing volume of FRAND litigation in the UK, or whether implementers will seek to raise legal proceedings outside the UK in an attempt to avoid a global licensing rate being set by a UK court. We have already seen a number of anti-suit injunctions, which prevent an opposing party from commencing or continuing proceedings in another jurisdiction, and corresponding anti-anti suit injunctions, have been filed in various FRAND disputes in a number of jurisdictions.

FRAND proceedings in the UK have, to-date, been characterised by lengthy, time consuming and therefore expensive litigation. This has been acknowledged by the English courts, and judges have indicated that FRAND trials could be streamlined in the future to reduce costs and court time. One suggestion as to how this may be achieved is by restricting expert evidence on the appropriateness of the licence terms and leaving the analysis of the licences as a matter solely for the court.

We could also see courts provide case management directions in each FRAND case to reduce time and costs involved so as to further promote the UK as an attractive forum for settling these disputes.

Withdrawal from the UK market 

The Supreme Court held that the UK court may set global FRAND licence terms based on a finding of infringement of only one single patent in the UK. Clearly, this is an attractive result for SEP holders, and is likely to provide greater leverage in negotiations with prospective licensees.   

However, a FRAND injunction covering the UK is only a threat for licensees if the UK market is materially important to the business in question. In a post-Brexit world, it remains to be seen if the UK will still be a significant market for certain technology users. Clearly if the licensee decides revenue generated from the UK is minimal they may then withdraw entirely, which avoids SEP holders seeking an injunction and the determination of a global licence rate by the UK court.   

This strategy is currently in vogue, in light of the case of TQ Delta v ZyXEL, where ZyXEL withdrew from the UK and did not enter into a global licence with the SEP owners. ZyXEL considered the UK was not materially important to its business and did not generate significant revenue.

If a business follows this route, it must consider the appropriate point at which to withdraw from the UK market. If planned correctly and at an early stage in proceedings, the exiting party can avoid incurring legal costs as well as escaping any licensing arrangements. However, this course of action will not be appropriate for all technology implementers.

Other jurisdictions

In the event that certain businesses do decide that the UK is not an attractive forum for litigating FRAND disputes, or they decide to withdraw from the UK market altogether, other jurisdictions may become more popular forums for FRAND disputes.

However, now that the UK Supreme Court has confirmed that UK courts are able to set global FRAND licence terms, courts in other European jurisdictions may follow in setting global FRAND rates too.

There are previous examples of courts in other jurisdictions following the UK lead. For example, with the recent ruling of the German Federal Court of Justice in the case of Sisvel v Haier, the law on the licensing of SEPs in Germany came into closer alignment with the position in the UK. In that case, the court, among other things, confirmed that businesses using SEPs will only be considered to be 'willing' licensees of that technology if they are willing to take a licence from patent holders on whatever terms are deemed to be FRAND.

SEP litigation is very active in Germany. In August 2020, Nokia secured a nationwide injunction from the District Court of Mannheim against Daimler in relation to connected cars. However, enforcement of this injunction requires the payment of a €7 billion bond, illustrating the potential high expense involved in litigating in Germany. An appeal is inevitable, raising important questions about FRAND licensing and the automotive industry and the attractiveness of Germany as a forum for FRAND disputes.

Nevertheless, the German courts remain active in FRAND disputes, and in related proceedings between Nokia and Daimler, the Regional Court of Düsseldorf is currently considering whether to make a referral to the CJEU, seeking clarification as to which company in a supply chain the SEP holder must grant a licence. A judgment is expected in November 2020.

However, the high litigation and enforcement costs in Germany may encourage parties to settle such disputes by entering into licences for the SEPs. In September 2020, the Regional Court of Munich upheld Sharp's complaint that Daimler's connected cars infringed one of its LTE patents.  Sharp was awarded an injunction, which it was entitled to enforce on payment of a €5.5 million bond. However, the parties entered into a licence agreement, which was deemed more cost effective than continuing the court proceedings.

The growing relevance of FRAND disputes

The Supreme Court's judgment makes clear the English courts' willingness to set global FRAND licences.

However, although the general principles have been confirmed, the details, including precise licence terms, remain unclear. To date, these issues have only affected the telecommunication industry but greater convergence means other industries will face such licensing disputes. These sectors will have different cultures and perspectives and their approach to licensing will differ. This is therefore unlikely to be the end of the FRAND story in the UK, and more widely. As case law develops further in other jurisdictions, it should become clearer which  forums are the most appropriate for global licence setting. 

The 'smartphone wars' taught many mobile phone companies that their position in the market could be improved by investment in R&D and establishing their own SEP portfolios. Businesses in other industries seeking to use standardised technologies should also consider this as part of their long term IP strategy.

Additional reporting by Fiona Timms of Pinsent Masons, the law firm behind Out-Law.

The Pinsent Masons team will be chairing a webinar on 18 November 2020 in which experts will look at the wide ranging ramifications of this decision and its likely impact on technology-rich sectors. Further details will be published in due course, but in the meantime please sign up to receive regular Out-Law notifications, including details of forthcoming events.