The Supreme Court has handed down its first judgment concerning the obligations upon the holders of standard essential patents (SEPs) to grant licences on fair, reasonable and non-discriminatory (FRAND) terms.
The issues before the Supreme Court arose in the joined cases of: (1) Unwired Planet International Ltd and another (Respondents) v Huawei Technologies (UK) Co Ltd and another (Appellants); (2) Huawei Technologies Co Ltd and another (Appellants) v Conversant Wireless Licensing SÀRL (Respondent); and (3) ZTE Corporation and another (Appellants) v Conversant Wireless Licensing SÀRL (Respondent). The respondents licensed patents for royalty income, and had brought actions for infringement of patents, which they claimed were SEPs.
To promote the development of global markets for telecommunications products, including mobile phones, the infrastructure equipment and devices produced by competing manufacturers need to communicate and inter-operate with one another, and the phones need to be available for use internationally by consumers who travel with their phones from one country to another. Two attributes of patent law have militated against this development: (1) the entitlement of the owner of a patent to prohibit, by injunction, the use of its invention within a national jurisdiction, which has the potential to disrupt a global market for equipment using that invention; and (2) the jurisdictional nature of patent monopolies, which forces the patent owner seeking to protect its monopoly to raise proceedings in individual national courts, making it difficult, if not wholly impracticable, for a patent owner to protect an invention, which is used in equipment manufactured in another country, sold in many countries, and used by consumers globally.
The first attribute may give owners of patents, included in an agreed standard, excessive power to disrupt an otherwise global market, to the prejudice of manufacturers of equipment using such inventions (implementers), and to exact excessive royalties for the use of their inventions. The second attribute may enable implementers to avoid paying an inventor a proper price for the use of its invention internationally. Organisations involved in the telecommunications industry have sought, therefore, to address these evils by establishing Standard Setting Organisations (SSOs), to which they bring their most advanced technologies, promoting standards using those technologies, and putting in place contractual arrangements. SSOs aim to promote both technological innovation, which is made available to the public, and competition between manufacturers, and thereby to benefit consumers through more convenient products and services, interoperability, lower product costs and increased price competition. The first telecommunications SSO was the European Telecommunications Standards Institute (ETSI), which is a French association formed in 1988, and which has adopted an intellectual property rights (IPR) policy, and contractual framework governed by French law.
The issues before the Supreme Court
The appeals raised several issues, important to the international market in telecommunications: (1) whether a court in the UK has jurisdiction, and may properly exercise a power, without the agreement of both parties, to: (a) grant an injunction to restrain the infringement of a UK patent, where the patented invention is an essential component in an international standard of telecommunications equipment, which is marketed, sold and used worldwide, unless the implementer of the patented invention enters into a global licence of a multinational patent portfolio; and (b) determine royalty rates, and other disputed terms of such a global licence; (2) whether England is the appropriate forum to determine those matters; (3) whether the licence, which the owner of a SEP must offer to an implementer, be non-discriminatory; (4) whether the court should refuse to grant the owner of such a SEP an injunction on the ground that it has breached EU competition law; and (5) the circumstances in which it is appropriate for an English court to grant a prohibitory injunction, or to award damages instead.
This article considers some of the arguments put forward in support of the Supreme Court’s findings on those issues.
Issue 1 – Jurisdiction
Following foreign jurisprudence on the issue of jurisdiction, notably German, and US case law, the Supreme Court found that by the contractual arrangements created under ETSI’s IPR policy, the implementers and the SEP owners had invited a national court to rule upon and enforce the contracts into which the SEP owners had entered. Accordingly, the English courts had jurisdiction to determine the contractual defence relied upon by the implementers, having regard to the true meaning, and effect of the irrevocable undertaking the SEP owners had given pursuant to the ETSI regime, and settle a global licence on FRAND terms for a multinational SEP portfolio, even without the specific consent of the parties involved.
The Supreme Court also noted that if it was determined the SEP owners had not breached the FRAND obligation in the irrevocable undertakings they had given to implementers, they could seek to enforce, by obtaining the grant of injunctive relief in the usual way, the patents which had been found to be valid and to be infringed, and that the English courts had jurisdiction to rule upon whether the UK patents in suit were valid, and had been infringed, noting that English courts purporting to rule on the validity and infringement of foreign patents is not justiciable in the courts of England and Wales.
Issue 2 – Forum non conveniens
In the Conversant proceedings, the Supreme Court noted the main plank in the appellants’ case on forum was, in substance, the real dispute between the parties as to the terms of a FRAND licence, with the claim to enforce English patents by injunction being no more than a convenient peg upon which to hang the dispute, so as to attract English jurisdiction, which it was said (by Huawei and ZTE) Conversant had preferred to the less generous outcome likely to be obtained in the Chinese courts. The Supreme Court found that the evidence before it had not shown the Chinese courts (the only alternative courts suggested by Huawei and ZTE) had, at the time, jurisdiction to set the terms of a global FRAND licence, at least in the absence of agreement by all parties that they should do so, whereas the English courts had such jurisdiction. Accordingly, no alternative forum was available, and so England was the proper forum.
Issue 3 – FRAND and non-discrimination
The Supreme Court considered the non-discrimination element of the FRAND undertaking of SEP owners. The choice regarding the obligation as ‘general’ or ‘hard-edged’ came down to interpretation, and found the non-discrimination element within the FRAND undertaking did not involve a distinct ‘hard-edged’ discrimination obligation, but instead the text of the undertaking read in a unitary way, so that the non-discrimination element was to be read as part of a single obligation to license on terms which were “fair, reasonable and non-discriminatory”, and not two distinct obligations, that the licence terms should be fair and reasonable and also, separately, that they should be non-discriminatory.
By this interpretation, the Supreme Court upheld the decision of Birss J at first instance  EWHC 711 (Pat) at para. 177 (as well as the Court of Appeal):
“Some arguments were addressed to the non-discrimination (“ND”) aspect of FRAND as opposed to the “FR” aspect of FRAND as if they were distinct… Most of the time the concepts of non-discrimination, reasonableness and fairness relate to one another… it is useful to characterise a royalty rate as FRAND rather than try to distinguish between something which is merely fair and reasonable as opposed to fair, reasonable and non-discriminatory… I will distinguish between a “hard-edged” and a “general” non-discrimination obligation. The general non-discrimination obligation … is part of an overall assessment of the inter-related concepts making up FRAND by which one can derive a royalty rate applicable as a benchmark. This rate is non-discriminatory because it is a measure of the intrinsic value of the portfolio being licensed but it does not depend on the licensee. The hard-edged non-discrimination obligation, to the extent it exists, is a distinct factor capable of applying to reduce a royalty rate (or adjust any licence term in any way) which would otherwise have been regarded as FRAND. This will take into account the nature of the particular licensee seeking to rely on it.”
A powerful indication the non-discrimination element should be considered ‘general’ rather than ‘hard-edged’ was that ETSI had previously considered and rejected the imposition of a most-favourable licence clause in the undertaking. This was shown by documents that were published and accessible to all market participants. In 1993, ETSI published its original proposed licensing regime, which sought to:
“include a clause requiring the licensor to promptly notify a licensee of any licence granted by it to a third party for the same IPRs under comparable circumstances giving rise to terms and conditions that are clearly more favourable, in their entirety, than those granted to the licensee and allowing the licensee to require replacement of the terms and conditions of its licence, in their entirety, either with those of the Page 41 third party licence, or with such other terms and conditions as the parties may agree.”
Such a clause is common in global licensing. The deletion of the most-favourable licence term from the undertaking in 1994, and in later versions of the ETSI IPR policy, however, showed that a deliberate choice was made not to subject a SEP owner to an obligation of that kind. To have interpreted the FRAND undertaking as incorporating a ‘hard-edged’ non-discrimination element, therefore, would have had the effect of reintroducing a most-favourable licence clause by the back door.
Accordingly, the Supreme Court indicated the terms and conditions on offer should be such as are generally available as a fair market price for any market participant, to 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. Put another way, there is to be a single royalty price list available to all. By reason of its finding, it followed the non-discriminatory element imposed upon a SEP owner, did not mean that FRAND licences necessarily needed to be comparable, and a rate did not cease to be FRAND simply because a SEP owner had previously granted a licence on more favourable terms.
Issue 4 – Abuse of dominant position
The fourth issue for consideration concerned whether the court should refuse to grant a SEP owner an injunction in circumstances where it had not fully complied with the guidance given by Court of Justice of the European Union in Huawei Technologies Co Ltd v ZTE Corp and another company C-170/13,  All ER (D) 237 (Jul). The Supreme Court agreed with the lower courts that the only mandatory condition in the Huawei v ZTE framework was a requirement for the SEP owner to notify or consult with the alleged infringer before bringing a claim for an injunction, and the nature of that notice or consultation depended upon the circumstances of the case. Compliance with the other steps in the Huawei v ZTE framework was not mandatory, but did sign post a safe harbour for the SEP owner against a finding of abuse of dominance under Article 102 of the Treaty on the Functioning of the European Union.
Issue 5 – Remedies
The final issue for determination was not argued in the lower courts, and concerned whether the equitable jurisdiction to award injunctions was prohibited by the nature of SEPs. The Supreme Court considered that if SEP owners were confined to a monetary remedy, implementers who were infringing the patents, would have an incentive to continue infringing until, patent by patent, and country by country, they were compelled to pay royalties. It would not make economic sense for implementers to enter voluntarily into FRAND licences. In practice, the enforcement of patent rights on that basis might well be impractical, and damages in lieu of a prohibitory injunction would not be an adequate substitute. An injunction was likely to be a more effective remedy, however, since it would not merely add a small increment to the cost of products, which infringe the UK patents, but would prohibit infringement altogether.
The decision of the Supreme Court is detailed, and well-reasoned. It is also surprisingly straightforward to understand. It is likely to prove a valuable reference to SEP owners and implementers around the world, for its persuasive value and wisdom, as well as providing greater certainty. It is likely, in the light of the Supreme Court ruling, further guidance being handed down through agencies such as ETSI, or those other established SSOs in China, India, Japan (two), South Korea and the United States, to potential parties as to the context of FRAND licensing, and how clauses are intended to be interpreted.
The judgment is here.