Setting global licence rates for standard essential patents: will the UK take centre stage?

January 2020 | SPECIAL REPORT: INTELLECTUAL PROPERTY

Financier Worldwide Magazine

January 2020 Issue

Standard essential patents (SEPs) are patents that have been declared by the patent holder to be essential to technologies that have been incorporated by standards setting organisations (SSOs) into technological standards, such that a party that implements a given standard will, as a matter of course, infringe the SEPs underlying it. Standards facilitate compatibility and interoperability between devices and technologies from different manufacturers and across regions. They are of increasing importance across telecommunications and consumer electronics, as well as the burgeoning field of autonomous vehicles. In return for making a declaration that it considers a given patent or patent portfolio to be ‘essential’, a patent holder must irrevocably undertake to the relevant SSO to licence its SEPs on terms that are fair, reasonable and non-discriminatory (FRAND), thereby curtailing the SEP‑holder’s ability to obtain injunctive relief in respect of SEP infringement if an implementer agrees to take a licence on FRAND terms.

There has, in recent years, been a trend toward the litigation of SEP infringement disputes in national courts, such as in the UK, US, Germany, China and the Netherlands. In some cases, these courts have been called upon to determine the royalty rates that they would consider to be FRAND for a given patent portfolio. The two key methodologies employed for the determination of FRAND royalty rates are a comparable licence approach, whereby (broadly speaking) the court extrapolates rates on the basis of comparable licences entered into with third parties, and a so-called ‘top-down’ approach, whereby the court multiplies the proportion of SEPs in a given standard owned by a particular SEP-holder as against the total value of all the SEPs of the relevant standard. The latter approach is particularly adapted toward avoiding issues arising out of ‘royalty stacking’, whereby the aggregate value of individual SEPs making up a given standard exceeds the total value of that standard to the relevant device. Beyond determining royalty rates, courts may determine the appropriate royalty base to which the relevant royalty is applied. By way of example, in some instances this may be an entire device, whereas in others it may be a particular device sub-unit, such as a chip.

Unwired Planet – landmark decision on global FRAND

In 2017, Justice Birss of the High Court of England and Wales delivered a groundbreaking decision in Unwired Planet v. Huawei in which the UK Court, following a finding that two of Unwired Planet’s UK patents had been infringed, concluded that a FRAND licence was, in the circumstances, a worldwide licence of the relevant multinational SEP portfolio, rather than a licence limited to the UK patents in the portfolio. Consequent upon this finding, Birss J granted a ‘FRAND injunction’, whereby unless the implementer (Huawei) agreed to take a worldwide licence based on the royalties determined by the court, it would face an injunction in the UK in respect of its infringing products. This was made in circumstances where the vast majority – more than 75 percent – of Huawei’s relevant sales took place in China, and only a negligible proportion took place in the UK. The royalty rates that were determined by Birss J were substantially higher than those that have since been awarded in other jurisdictions.

Following this decision, in respect of which the finding that a global licence rate can be FRAND was upheld by the Court of Appeal in 2018, the UK has become a ‘go-to’ forum for SEP-holders seeking to obtain a global FRAND licence on the basis of potentially only one single infringed UK SEP from a worldwide portfolio. Many such entities are (like Unwired Planet) non‑practicing entities (NPEs) that have acquired all or part of a patent portfolio from another entity, often large telecommunications companies seeking to monetise their portfolios.

Post-Unwired Planet – further UK developments

In 2017, the NPE Conversant brought proceedings against Huawei and ZTE in the UK court, seeking a global FRAND determination as well as a FRAND injunction in the event that the defendants refused to take a licence on the basis ordered by the UK court. Huawei and ZTE subsequently brought a jurisdiction challenge, contending that the UK court lacked the jurisdiction to grant a global licence, since this would impermissibly involve assessing the validity of foreign patents in the portfolio, and further because the UK was not the proper forum to hear this dispute, when the vast majority of relevant sales relate to China. This jurisdiction challenge was rejected by the court at first instance, and then again by the Court of Appeal earlier this year.

In 2018, the NPE TQ Delta brought proceedings in the UK court against Taiwanese networking device manufacturer ZyXel for infringement of two UK SEPs relating to broadband technology. Consequent upon a first instance finding of patent infringement, and faced with the prospect of a FRAND injunction, in 2019, ZyXel elected to irrevocably waive any and all of its rights to enforce TQ Delta’s FRAND obligations to licence its UK-designated asserted SEPs in the UK, so as to suggest that it would rather exit the UK market than be forced to take a global FRAND licence on terms determined by the UK court.

Unwired Planet/Conversant – UK Supreme Court appeal

At the end of October 2019, a panel of five justices of the UK Supreme Court heard joint appeals brought against the decisions of the UK Court of Appeal in Unwired Planet and Conversant, and in doing so commented upon their international commercial significance. These highly anticipated decisions, delivery of which is expected in the first half of 2020, will determine whether, and the circumstances under which, it is within the power and jurisdiction of the UK court to require upon a finding of infringement of a UK SEP that a defendant in the UK take a global FRAND licence upon threat of a UK-wide injunction. At the heart of these cases is the tension between the territoriality of patent rights and national courts as against the international nature of standards, licensing arrangements and supply chains.

On the one hand, the appellants argued that the UK court has exceeded its jurisdiction by determining the licensing terms of portfolios containing mostly foreign patents, the validity (and essentiality) of which has not been assessed by the UK court, especially in circumstances where only a small proportion of the products implementing such SEPs are sold in the UK as compared to key commercial centres, such as China. On the other hand, the respondents focused in their arguments on the international nature of the contractual SSO regimes governing the licensing of SEPs as distinct from the underlying patents themselves, as well as the impracticality of litigating each SEP in a portfolio on a jurisdiction‑by‑jurisdiction basis before requiring an implementer to take a FRAND licence.

Key recent FRAND decisions from other jurisdictions

An important recent FRAND decision in the US is the December 2017 decision of Judge Selna of the District Court for the Central District of California in TCL v. Ericsson. In this decision, the court, with the agreement of both parties, determined FRAND rates for the relevant Ericsson portfolio on a worldwide basis adopting a modified top-down approach, with a comparable licence cross-check. The royalty rates determined by the US court in TCL v. Ericsson were significantly lower than the rates set by Birss J in Unwired Planet, so as to be significantly more favourable to implementers. An appeal in this matter was heard by the US Court of Appeals for the Federal Circuit in August 2019, which is expected to shed light on the correctness of the FRAND approach adopted by Judge Selna.

More generally, the fact that FRAND litigation can be commenced in domestic courts in multiple jurisdictions has the potential to result in jurisdictional battles, whereby opposing parties commence parallel and potentially overlapping proceedings in multiple countries that are perceived to be of strategic benefit, while challenging jurisdictions in others, or even potentially seeking to obtain anti-suit injunctions to prevent an opposing party from filing a competing claim in another jurisdiction.

For instance, shortly after Conversant commenced proceedings against Huawei in the UK, Huawei commenced proceedings in the Intermediate People’s Court of Nanjing in China, in which it sought to invalidate certain of Conversant’s Chinese patents, initiated a non-infringement action and requested a FRAND determination in respect of certain patent families in China. In September 2019, following the invalidation of certain of Conversant’s Chinese patents, the Nanjing Court set royalty rates which were substantially lower than those awarded in other jurisdictions including the UK and the US. If maintained, it remains to be seen whether and how such rates might be incorporated into any global rates determined by the UK court.

Commercial implications and considerations

Should the UK Supreme Court uphold the decisions in Unwired Planet and Conversant, the UK’s newfound status as a global centre for FRAND litigation will be further reinforced, attracting SEP-holders seeking to avail of this jurisdiction to obtain the relatively high rates that the UK court has so far granted as compared to other jurisdictions.

One key issue for clarification in such a case will be whether and how any regional FRAND rates set by courts in other jurisdictions will factor into the UK court’s royalty calculation methodology. Even if the court considers that setting global rates may be appropriate in some instances, it will, nevertheless, need to grapple with the potential for overlap between any global or multinational rates it determines and national rates determined by the relevant national courts and the UK court is likely to be sensitive as to the concerns of foreign courts about having their jurisdiction usurped.

The upholding of these decisions is also likely to have a lasting effect on licensing and negotiation strategies adopted by implementers and SEP-holders, potentially giving SEP-holders additional leverage through which they may seek to obtain more favourable royalty rates and territorial coverage, or to compel implementers to take licences in circumstances where they may otherwise have faced delay and a lack of cooperation.

It is also possible that we will see more implementers (particularly those whose current UK operations are marginal) electing (as ZyXel did) to waive their rights to a FRAND licence in the UK in order to avoid a global determination of FRAND terms.

Conversely, if the UK Supreme Court overturns these decisions, there may be a shift away from FRAND litigation in the UK toward other markets, with a renewed focus on disputes in key markets or regions, but with no single forum prepared to determine global FRAND without the consent of both parties.

These recent cases, as well as FRAND/SEP licensing developments in the UK more broadly, are of particular commercial and strategic significance to those involved in international consumer electronic product markets, among others, and should be followed closely given their potential to influence licensing, negotiation and litigation strategy going forward.

Katie Coltart is a partner and Brett Shandler is an associate at Kirkland & Ellis. Ms Coltart can be contacted on +44 (0)20 7469 2163 or by email: katie.coltart@kirkland.com. Mr Shandler can be contacted on +44 (0)20 7953 2714 or by email: brett.shandler@kirkland.com.