On August 26, 2020, the UK Supreme Court gave judgment in Unwired Planet v. Huawei and Huawei and ZTE v. Conversant, concerning the FRAND licensing of standards essential patents (SEPs). The UK Supreme Court upheld the decisions at first instance and in the Court of Appeal that the UK courts have jurisdiction which they may properly use to establish the terms of global FRAND licenses of a multinational portfolio, and to grant an injunction with respect to a UK patent unless the implementer enters into such global FRAND license.

In light of the UK Supreme Court’s decision, the United Kingdom is likely to remain a hot spot for global SEP litigation. We consider below the key implications of this decision for implementers and SEP owners, including considerations for SEP licensing negotiations and issues left open following this judgment.

Key Takeaways

1. The UK courts can establish the terms of global FRAND licenses. In its judgment, the UK Supreme Court focused on the international nature of telecommunications and the commercial realities of negotiations for worldwide licenses in the industry. It found that the ETSI IPR Policy is intended to have international effect and that the policy impliedly provides for the possibility of worldwide FRAND licenses which fall to be determined by national courts in the absence of any other specified tribunal. 

   Going forward, it seems unlikely that the UK courts will find a UK-only license to be FRAND in cases involving global SEP portfolios and implementers with international business models.

   Having surveyed the approach to global licenses in other jurisdictions, the UK Supreme Court found that even though no foreign tribunal had made such an order, the cited foreign cases were not inconsistent with the UK position.

2. Approach to NPEs. The UK Supreme Court is alive to the risk of NPEs using FRAND injunctions as a “bargaining tool to charge exorbitant royalties,” but held that there is no basis in UK law to treat NPEs differently from other SEP owners, unless they have different interests which merit different remedies.
3. Is the UK the appropriate forum? The UK Supreme Court accepted that challenges to the United Kingdom’s status as the appropriate forum might arise if and when other countries decide to exercise jurisdiction to settle global licenses, but such challenges did not arise on the facts of this case. The only alternative forum put forward was China, and there was not sufficient evidence that courts in China would settle the terms of a global license absent agreement of both parties.
4. The non-discrimination requirement is not “hard-edged” or “most favored nation.” The Non-Discrimination prong of FRAND is not discrete from the Fair and Reasonable prongs. It indicates that the terms should be those that are generally available as a market price without depending on the individual characteristics of a particular market participant. There should be a single royalty price list available to all implementers, but there is no general presumption that differential pricing is problematic for licensees; it reflects commercial reality and can sometimes increase efficiency, e.g., the “first mover advantage” (which gives the SEP owner initial income and validates its portfolio).
5. The approach in Huawei v. ZTE is not “mandatory” (apart from the notice requirement). Drawing upon the Court of Justice of the European Union’s (CJEU) dicta in Huawei v. ZTE, the UK Supreme Court noted several times that the question of whether a SEP owner has breached EU competition law by failing to comply with the negotiation scheme set out in Huawei v. ZTE, and so should be refused an injunction, will depend on the facts of the case. This was necessary “given the wide variety of factual situations” that may arise. However, a SEP owner bringing an action for an injunction without any prior notification and consultation will be in breach of EU competition law.
6. Damages in lieu of an injunction are unlikely to be adequate in SEP cases. Damages are unlikely to be an adequate remedy for a SEP owner, because the global nature of standardization means it “may well be impracticable for the patent-holder to bring proceedings to enforce its rights against an infringing implementer in every country.” The UK Supreme Court held that an injunction is likely to be a more effective remedy, arguing that it does not add only a small increment to the cost of products which infringe UK patents, but prohibits infringement altogether.

Considerations for SEP Licensing Negotiations

Royalty adjustment mechanisms:

• The inclusion of royalty adjustment and recoup mechanisms in licenses is likely going to be a ripe area for negotiation. This follows from the emphasis that the UK Supreme Court put on such mechanisms to alleviate the “pressure” of multinational patent portfolios where an implementer wishes to challenge patents and then recoup any paid fees. The UK Supreme Court said that such a mechanism might be “fair and reasonable” for the implementer to include, although it “appears that that has not been usual industry practice.” The Court referenced Huawei and ZTE’s successful challenges to the Conversant Chinese patents in China as an example of where such a mechanism could be deployed.
• Licensees might accordingly wish to explicitly reserve the right to challenge patents in national courts and provide for successful challenges to lead to financial adjustment and/or recoupment.

Royalty rates:

• The UK Supreme Court decision was not concerned with determining the appropriate FRAND royalty rates, and there is no authority as to this above the first instance decision. Nonetheless, the UK Supreme Court suggests that rates are to be judged objectively, taking into account the value of the royalty stack, and refers briefly to the “top down” calculation method. The rate should reflect the “untested” nature of many patents in the portfolio.
• In accordance with the requirement of non-discrimination by SEP owners, licensees might seek to obtain a copy of the single, royalty-rate list that is to be available to all during negotiations.

Open Issues

Since the actual royalty rate and methodology for calculation were not in issue before the UK Supreme Court, this will likely be a key area for argument in future FRAND litigation. Similarly, the decision is not concerned with the particular terms of FRAND licenses, including the operation of adjustment mechanisms, which remain issues for argument.

Regarding the approach to negotiating a SEP license, the UK Supreme Court’s approach to Huawei v. ZTE focused on the requirement for prior notification, and otherwise leaves the question of whether the conduct of a SEP owner has breached EU competition law as an open question to be determined on the facts of each case.

The decision also leaves the door open for courts in other jurisdictions to determine global FRAND rates. In such cases, questions are likely to arise as to which is the appropriate forum and, when that leads to parallel proceedings, whether one of them should be stayed.