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UK appellate court finds global license of SEPs and non-SEPs as FRAND

Thursday, February 14, 2019   (0 Comments)
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UK appellate court finds global license of SEPs and non-SEPs as FRAND and finds that the framework under Huawei v. ZTE provides a safe harbor, rather than mandatory requirements, for SEP owners seeking injunctive relief

By John Paul, Brian Kacedon, Cecilia Sanabria, and Ryan McDonnell

Edited by John Paul, Brian Kacedon, Cecilia Sanabria, and Clara Jimenez

Abstract: A UK appellate court upheld a chancery court’s findings that (1) a global license to Huawei for Unwired Planet’s SEP and non-SEP portfolio was FRAND; (2) offering a different global rate to Huawei than what was offered to Samsung satisfied the non-discriminatory requirements of Unwired Planet’s FRAND obligations; and (3) Unwired Planet did not abuse its dominant position in the market, in part, because compliance with the framework under Huawei v. ZTE was not mandatory, but instead provided a safe harbor for SEP owners seeking injunctive relief.

Background
Unwired Planet’s worldwide portfolio included patents declared as essential to the implementation of certain telecommunications standards, such as 2G-GSM, 3G-UMTS, and 4G-LTE, set by the European Telecommunications Standards Institute (ETSI).

Unwired Planet sued Huawei Technologies, Samsung, and Google in the UK’s Chancery Division, Patent Court for infringing five of the standard essential patents (SEP). The dispute was divided into a series of trials addressing the validity and essentiality of the SEPs with the final trial concerning whether Unwired Planet’s licensing offers were fair, reasonable, and non-discriminatory (FRAND). Before the final trial, Unwired Planet settled with Google and Samsung, resulting in Samsung taking a license for Unwired Planet’s global SEP and non-SEP portfolio at a discounted price and leaving Huawei as the only remaining defendant.

Over the course of the proceedings, Unwired Planet made a series of licensing offers:

  • an initial offer to license its worldwide portfolio of SEPs and non-SEPs;
  • a second offer to license only its SEP patents with different rates for devices that met the various technology standards;
  • a third offer to license its worldwide SEP portfolio, its UK SEP portfolio on a per-patent basis, where the global rate was lower than the UK rate; and
  • a fourth offer to license its worldwide SEP portfolio at a lower rate.

Huawei also made a number of licensing proposals:

  • an offer for license on Unwired Planet’s UK SEP portfolio only with specific rates for the different technology standards; and
  • a revised offer for the same patents but with higher rates.

The parties were unable to reach an agreement, so the chancery court judge was left to decide whether the licensing terms the parties offered were FRAND, and if not, what terms would be FRAND. The chancery court judge also determined whether Unwired Planet abused its dominant position by not meeting its FRAND obligation and was therefore barred from obtaining injunctive relief.

After a seven-week trial, the chancery court made three determinations:

  • a worldwide license could be FRAND for the type of portfolio held by Unwired Planet;
  • the rates Unwired Planet offered were too high and it was proper for the court to set the appropriate FRAND rates between the parties; and
  • Unwired Planet was in a dominant position in the market, but did not abuse that position.

Huawei appealed each of the three findings to the UK Court of Appeal (Civil Division).

The Unwired Planet Decision
In its opinion, the appellate court set forth the specifics of the FRAND framework under ETSI’s policies for intellectual property rights and, for each issue, analyzed decisions from various jurisdictions to determine if the chancery court committed error on any of the grounds for appeal.

Ground 1: Whether a FRAND license can be global in scope?
Huawei argued that it was wrong in principle for the court to require a global license between the parties for the following reasons.

  • A global license would result in the bundling of rights for Unwired Planet’s UK and non-UK SEPs, even though the non-UK SEPs would not have been the subject of an action in the UK, which would amount to abuse of a dominant position.
  • A global license would amount to a presumption of infringement of valid SEPs outside of the UK.
  • A global license would not be FRAND because Unwired Planet did not have SEPs in every country and Huawei made a considerable number of sales in countries where Unwired Planet did not hold SEPs.
  • Allowing national courts to impose global licenses would lead to a race between SEP holders and implementers to bring suit in more favorable jurisdictions, resulting in a divided system.

The lower court disagreed with Huawei. In its reasoning, the court found that it was common industry practice and more efficient to have a global license for a global portfolio.  It also found that Unwired Planet’s SEP coverage was not very different from that of Huawei’s exposure and that Huawei was not so differently situated from Samsung to justify different treatment. The court also rejected a country by country approach in this case and found that, in any one case, a national and a global license cannot both be FRAND.

On appeal, the court found only one point of error with the chancery court: that in any one case, a national and a global license cannot both be FRAND. But the appellate court did not find the error had a material effect on the ultimate conclusion in the chancery court’s opinion. 

Regarding the rest of Huawei’s arguments, the appellate court accepted without question that a UK SEP was limited in territorial scope, and courts in that jurisdiction would only determine disputes concerning infringement and validity of UK patents and will only grant relief for infringement of UK patents. But the appellate court found that this did not support Huawei’s arguments. While FRAND undertakings protect implementers so they can freely use a standardized technology and not be subject to excessive licensing fees, SEP owners also need protection and must be free to engage in constructive FRAND negotiations. In cases like this where SEP owners have large portfolios, FRAND obligations do not justify condemning SEP owners to engage in expensive litigation in every territory in which they seek to recover a royalty. 

The appellate court also found the chancery court judge did not usurp the rights of foreign courts to decide issues of validity or infringement and grant appropriate relief because the chancery court only made a finding as to those issues for UK SEPs.  Moreover, nothing prevented Huawei from challenging the validity or essentiality of Unwired Planet’s non-UK SEPs.

After reviewing the relevant cases cited by both Huawei and Unwired Planet, the appellate court ultimately found that the chancery court judge was entitled to find that a global license would satisfy the FRAND requirement in light of all of the circumstances of this case.

Ground 2: Whether the licenses Unwired Planet offered to Huawei were non-discriminatory?
The chancery court found that Samsung and Huawei were similarly situated and the Samsung license was comparable to the offer Unwired Planet provided to Huawei, but did not agree that Unwired Planet acted in a discriminatory manner.

On appeal, Huawei argued that the global royalty rate Unwired Planet offered was not “non-discriminatory,” as required under the ETSI intellectual property policy because it was “much higher” than the rate offered to Samsung. Thus, according to Huawei, if the chancery court judge could set a global license, then he should have fixed the royalty rate to be no higher than the rates represented by the Samsung license.

The appellate court began by examining whether the two licenses were comparable. Here, the court noted the importance of focusing on the transactions themselves rather than the circumstances under which the transactions were entered into.  Under this approach, the Huawei and Samsung transactions were comparable because they were for the same portfolio and related to the same acts, despite the different circumstances at issue when the Samsung license was entered into.

Next, the appellate court analyzed whether a hard-edge versus general non-discrimination approach was appropriate. The general approach considers the value of the portfolio being licensed and does not depend on the licenses. The hard-edge approach, however, takes into account the nature of the particular licensee. The chancery court arrived at the general non-discrimination approach, which involved determining a benchmark royalty that would be available to all-comers who are similarly situated.  This approach precludes SEP holders from securing higher rates, but does not prevent SEP holders from granting licenses at lower rates. The appellate court agreed with this approach as the best way to ensure that the benchmark royalty rate was driven by the fair and reasonable rate of the portfolio, while still rewarding the SEP owner for its work in developing the technology.

Ground 3: Whether Unwired Planet had a dominant position and abused it in these proceedings?
Huawei contended that Unwired Planet had a dominant position in the market and abused it by bringing the proceedings prematurely, charging excessive royalty payments, and bundling SEPs and non-SEPs in its offers to license.  The chancery court found that Unwired Planet did have a dominant position but did not agree that it abused it.

The appellate court found no error with the chancery court’s findings. Regarding whether or not Unwired Planet had a dominant position, the appellate court explained that:

It is well established that, although the importance of market shares may vary from one market to another, the possession, over a long period, of a very large market share constitutes in itself and save in exceptional circumstances, proof of the existence of a dominant position, and that market shares of more than 50% constitute very large market shares.

As to whether Unwired Planet abused that dominant position, Huawei relied on the framework in which an SEP must comply before seeking injunctive relief set forth in Huawei v. ZTE. The appellate court set forth, in detail, the negotiations between Unwired Planet and Huawei, as well as the Huawei v. ZTE framework and found that Unwired Planet did not abuse its dominant position.

In its reasoning, the appellate court explained that Huawei v. ZTE did not lay down mandatory conditions parties must abide by when seeking injunctive relief such that non-compliance will result in a breach of the Treaty on the Functioning of the European Union (the “TFEU”) and finding of abuse.  Instead, the appellate court found that the requirements of Huawei v. ZTE provide a safe harbor, such that if an SEP owner complies with those requirements, the commencement of an action seeking injunctive relief will not, in and of itself, amount to abuse.  On review, the appellate court did not find error with the chancery court’s assessment that Unwired Planet’s behavior was not an abuse of its dominant position.

Lastly, the appellate court evaluated whether injunctive relief should have been refused in any other bases, and after reviewing the facts of the case, found the answer to be no.   

Strategy and Conclusion
In the standard setting context, at least one court has now found that global licenses that involve both SEPs and non-SEPs may be considered FRAND depending on the circumstances of the particular case at issue. Further, the court found that the Huawei v. ZTE framework does not impose mandatory requirements SEP owners must meet before seeking injunctive relief for SEPs in non-US courts. Instead, the framework provides a safe harbor for SEP owners, such that if the SEP owner complies with the Huawei v. ZTE framework requirements, seeking injunctive relief will not, in and of itself, amount to abuse.  It remains to be seen whether other courts in Europe and the rest of the world will agree with the approach taken in this case.
The Unwired Planet decision can be found here.

Editors and Authors
The editors and authors are attorneys at Finnegan, Henderson, Farabow, Garrett & Dunner, LLP.
John Paul                        john.paul@finnegan.com
Brian Kacedon               brian.kacedon@finnegan.com
Cecilia Sanabria             cecilia.sanabria@finnegan.com
Clara Jimenez                 clara.jimenez@finnegan.com
Ryan McDonnell            ryan.mcdonnell@finnegan.com

This article is for informational purposes and does not constitute legal advice.
The views expressed do not necessarily reflect the views of LES or Finnegan.


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