Case Law post CJEU ruling Huawei v ZTE

Unwired Planet v Huawei, [2017] EWHC 711 (Pat)

5 April 2017 - Case No. HP-2014-000005

http://caselaw.4ipcouncil.com/english-court-decisions/unwired-planet-v-huawei-2017-ewhc-711-pat

A. Facts

The claimant is a company that grants licenses for patented technologies in the telecommunications industry. The patents at issue (EP (UK) 2 229 744, EP (UK) 2 119 287, EP (UK) 2 485 514, EP (UK) 1 230 818, EP (UK) 1 105 991, EP (UK) 0 989 712) relate to telecommunication network coding and procedures. [427] Most were part of a large patent portfolio that the claimant had acquired from a major telecommunications company in 2013. [428] In 2014, the claimant made a declaration under the ETSI IPR Policy that it was willing to grant licenses on FRAND terms. There were five technical trials relating to the validity, infringement and essentiality of these patents. This summary focuses on the non-technical trial addressed competition law issues, FRAND issues, injunctive relief and damages for past infringements. [429]

In April 2014 the claimant made an open offer to the defendant, a major international smartphone manufacturer, to grant a license in respect of the claimant’s entire global patent portfolio (containing SEPs and non-SEPs). The defendant refused the offer, contending that there was no patent infringement, that the patents were not essential, and that they were invalid. The defendant also argued that the offer was not FRAND and thus did not constitute an abuse of a dominant market position under Art. 102 TFEU. In July 2014 the claimant made a further offer, limited to the claimant’s SEPs. Again, the defendant refused, arguing that the license conditions were not FRAND. [430] In June 2015 both parties made further offers. These offers were the result of directions from the court. The claimant offered a worldwide portfolio license while the defendant wanted to limit the territorial scope to the United Kingdom. [431] Between August and October 2016 the parties exchanged further offers without reaching an agreement. [432]

The Patents Court (Birrs J) held that the claimant was in a dominant position, but did not abuse this position. [433] The defendant was not prepared to take a license on FRAND conditions and the claimant was not in breach of competition law. Thus, the court held that a final injunction to restrain patent infringements should be granted. An injunction for infringements of patents EP (UK) 2 229 744 and EP (UK) 1 230 818 was granted on 7 June 2017. [434]

B. Court’s Reasoning

1. Market Power

The court defined the relevant market for assessing dominance as a distinct market for licensing each SEP individually. [435] European case law indicated that owning an SEP could be a rebuttable presumption for the existence of a dominant position. [436] The claimant’s pleaded position was a non-admission of dominance rather than a denial coupled with a positive case to the contrary. It was the view of the court that this was insufficient to rebut the presumption. In particular, the claimant’s argument of countervailing buyer power was unconvincing because it had not been supported by a proper economic analysis. [437]

2. SEP Proprietor’s Licensing Offer

a. FRAND Declaration as Conceptual Basis

The court pointed out that that the FRAND undertaking also applied in the case that the SEP proprietor was not in a dominant position. It held that the FRAND undertaking operated as a practical constraint on a SEP owner’s market power. [438] The ETSI declaration made by the SEP proprietor is also the starting point for determining the FRAND rate. The underlying issue, which is discussed at length by the court, [439] is if such a declaration forms a contract and whether that contract can benefit third parties. The court acknowledged that the legal effect of this declaration, in particular its enforceability, is a controversial issue under French law. [440] However, the court reasoned that the FRAND declaration is an important aspect of technology standardisation. Holders of SEPs are not compelled to give a FRAND declaration. If they do, the undertaking would be enforceable and irrevocable due to public interest. [440]

The court applied a procedural approach to FRAND. It emphasised that FRAND describes not only a set of license terms, but also the process by which a set of terms are agreed. [441] It applies to both the SEP-holder and the implementer/defendant. In particular, this approach allows for starting offers that leave room for negotiation. On the other hand, making extreme offers and taking an uncompromising approach which prejudices fair, reasonable, and non-discriminatory negotiation is not a FRAND approach. [442] This approach also means that the SEP proprietor is under an obligation to make a FRAND offer and to enter into FRAND license agreements. [443]

b. ‘True FRAND Rate’

The court considered that there is only a single set of terms for a given set of circumstances that would meet FRAND conditions (‘true FRAND rate’). [444] This eliminates the so-called Vringo-problem, [445] i.e. if FRAND were a range there would be two different but equally FRAND offers. Thus, if the court would grant or not an injunction, it would be unfair for the alleged infringer or SEP holder respectively. [446]

The court was of the opinion that the true FRAND rate approach does not cause problems under competition law. Theoretically, if only one set of terms is truly FRAND, and if FRAND also represents the line between abusive and non-abusive conduct under Art. 102 TFEU, then every agreed SEP-licence could be at serious risk of being abusive. [447] However, the court took the view that FRAND-compliance and compliance with Art. 102 TFEU are not the same thing (the court pointed out that the CJEU in the Huawei ruling appears to equate an obligation to make a FRAND offer with compliance with Art 102 TFEU).Unwired Planet v. Huawei [2017] EWHC 711(Pat), para 154./span> Since Art. 102 TFEU condemns excessive pricing, [449] a royalty rate can be somewhat higher than the true FRAND rate and still not be contrary to competition law. Conversely, for a breach of competition law, it will be necessary but not sufficient that the rate is not the true FRAND rate. [449]

c. Discrimination

The court held that the correct approach is to start from a global rate as a benchmark and to then adjust this rate as appropriate. [450] It distinguished between two concepts of discrimination. First, the ‘general’ concept of non-discrimination describes an overall assessment of FRAND which can be used to derive the benchmark mentioned above. [451] It is based on the intrinsic value of the patent portfolio, but it does not depend on the licensee. The court held that this benchmark should be applied to all licensees seeking the same kind of license. [452]

Second, the ‘hard-edged’ non-discrimination obligation, which takes into account the nature of the potential licensee, [451] is a distinct concept that could be used to adjust license terms. However, the court held that the FRAND declaration does not introduce such a hard-edged non-discrimination concept. [453] If, contrary to the view taken by the court, the FRAND undertaking did include hard-edged non-discrimination, a licensee could only have the right to a lower rate granted to another licensee (i.e. a specific non-discrimination obligation resulting from the FRAND declaration) if the difference would otherwise distort competition between the two licensees. [452]

d. Territorial Scope of License

The court held that the defendant’s offer that was limited to UK licenses was not FRAND. In the court’s opinion country by country licensing is inefficient for goods such as mobile telecommunications devices that are distributed across borders. [454] It would also be inefficient to negotiate many different licenses and then to keep track of so many different royalty calculations and payments. No rational business would do this, if it could be avoided. [454] This was illustrated by the fact that the vast majority of licenses introduced in the trial were worldwide licenses. [455] Further, it is common ground that the industry assesses patent families rather than individual patents within the family. Assessing portfolios on a family basis inevitably involved tying a patent in one jurisdiction with a patent in another. [456] Thus, according to the court, a worldwide license would not be contrary to competition law. As willing and reasonable parties would agree on a worldwide licence, the insistence by the defendant on a license which was limited to the UK was not FRAND. [457]

C. Other Important Issues

1. Comparable agreements and reasonable aggregate royalty rate

The court held that for determining the royalty rate, the evidence of the parties would be relevant, including evidence of how negotiations actually work in the industry. [458] Other freely-negotiated license agreements might be used as comparables. [459] This may be compared with a top down approach [460] can also be used in which the rate is set by determining the patentee’s share of relevant SEPs and applying that to the total aggregate royalty for a standard, but this may be more useful as a cross-check. [461] Royalty rates determined by other courts might be useful as persuasive precedents. However, in the eyes of the court, a license rate determined at a binding arbitration does not carry much weight as to what parties are usually paying. [458] License agreements must meet certain criteria to be comparable. [462] First, the licensor is the claimant. Second, the license agreement is recent. However, it is not necessary that the licensee is the defendant or a comparable company because different market participants have different bargaining powers, which is reflected in the negotiations and the resulting royalty rates. [462] Finally the court confirmed that a royalty based on the handset price was appropriate and implied a reasonable aggregate royalty rate of 8.8%of the handset price. The court found that the 8.8% was reasonable, in part, because the aggregate implied by either party’s case was higher (10.4% and 13.3%). [463]

2. Principles derived from Huawei v. ZTE

The court also provided a compiled overview of its interpretation of the Huawei v. ZTE ruling. [464] In the eyes of the court, the ‘willingness to conclude a licence on FRAND terms’ refers to a willingness in general. The fact that concrete proposals are also required does not mean it is relevant to ask whether the proposals are actually FRAND or not. If the patentee complies with the procedure as set out by the CJEU, then bringing a claim for injunction is not abusive under Art 102. But even if sufficient notice is given, bringing a claim can constitute an abuse because complying with the procedure does not mean that a patentee can behave with impunity. In other words, there might be other aspects that make the claim abusive. Conversely, bringing such a claim without prior notice will necessarily be abusive.

Significantly, the court held, the legal circumstances of this case differ from the circumstances assumed by the CJEU in a crucial respect. A FRAND undertaking can be effectively enforced irrespective of Art 102. The defendant does not need Art 102 TFEU to have a defence to the injunction claim.
  • [427] Unwired Planet v. Huawei [2017] EWHC 711(Pat), para 2.
  • [428] Unwired Planet v. Huawei [2017] EWHC 711(Pat), paras 54 et seqq.
  • [429] Unwired Planet v. Huawei [2017] EWHC 711(Pat), para 3.
  • [430] Unwired Planet v. Huawei [2017] EWHC 711(Pat), para 5.
  • [431] Unwired Planet v. Huawei [2017] EWHC 711(Pat), paras 7-8.
  • [432] Unwired Planet v. Huawei [2017] EWHC 711(Pat), paras 11-14.
  • [433] Unwired Planet v. Huawei [2017] EWHC 711(Pat), para 807.
  • [434] Unwired Planet v Huawei, EWHC 1304 (Pat).
  • [435] Unwired Planet v. Huawei [2017] EWHC 711(Pat), para 631.
  • [436] Unwired Planet v. Huawei [2017] EWHC 711(Pat), para 634.
  • [437] Unwired Planet v. Huawei [2017] EWHC 711(Pat), paras 636-646.
  • [438] Unwired Planet v. Huawei [2017] EWHC 711(Pat), para 656.
  • [439] Unwired Planet v. Huawei [2017] EWHC 711(Pat), paras 108-145.
  • [440] Unwired Planet v. Huawei [2017] EWHC 711(Pat), para 146.
  • [441] Unwired Planet v. Huawei [2017] EWHC 711(Pat), para 162.
  • [442] Unwired Planet v. Huawei [2017] EWHC 711(Pat), para 163.
  • [443] Unwired Planet v. Huawei [2017] EWHC 711(Pat), para 159.
  • [444] Unwired Planet v. Huawei [2017] EWHC 711(Pat), para 164.
  • [445] See Vringo v ZTE [2013] EWHC 1591 (Pat) and [2015] EWHC 214 (Pat).
  • [446] Unwired Planet v. Huawei [2017] EWHC 711(Pat), para 158.
  • [447] Unwired Planet v. Huawei [2017] EWHC 711(Pat), para 152.
  • [448] Unwired Planet v. Huawei [2017] EWHC 711(Pat), para 154./span> Since Art. 102 TFEU condemns excessive pricing,Unwired Planet v. Huawei [2017] EWHC 711(Pat), para 153. a royalty rate can be somewhat higher than the true FRAND rate and still not be contrary to competition law. Conversely, for a breach of competition law, it will be necessary but not sufficient that the rate is not the true FRAND rate.Unwired Planet v. Huawei [2017] EWHC 711(Pat), para 153.
  • [449] Unwired Planet v. Huawei [2017] EWHC 711(Pat), para 153.
  • [450] Unwired Planet v. Huawei [2017] EWHC 711(Pat), para 176.
  • [451] Unwired Planet v. Huawei [2017] EWHC 711(Pat), para 177.
  • [452] Unwired Planet v. Huawei [2017] EWHC 711(Pat), para 503.
  • [453] Unwired Planet v. Huawei [2017] EWHC 711(Pat), para 501.
  • [454] Unwired Planet v. Huawei [2017] EWHC 711(Pat), para 544.
  • [455] Unwired Planet v. Huawei [2017] EWHC 711(Pat), para 534.
  • [456] Unwired Planet v. Huawei [2017] EWHC 711(Pat), para 546.
  • [457] Unwired Planet v. Huawei [2017] EWHC 711(Pat), para 572.
  • [458] Unwired Planet v. Huawei [2017] EWHC 711(Pat), para 171.
  • [459] Unwired Planet v. Huawei [2017] EWHC 711(Pat), para 170
  • [460] Unwired Planet v. Huawei [2017] EWHC 711(Pat), para 178
  • [461] Unwired Planet v. Huawei [2017] EWHC 711(Pat), para 806 (10)
  • [462] Unwired Planet v. Huawei [2017] EWHC 711(Pat), para 175.
  • [463] Unwired Planet v. Huawei [2017] EWHC 711(Pat), para 476.
  • [464] Unwired Planet v. Huawei [2017] EWHC 711(Pat), 744.