INSIGHT

UK Supreme Court affirms jurisdiction to determine global FRAND terms

By Miriam Stiel, Tommy Chen
Health Intellectual Property Patents & Trade Marks Telecommunications

Long arm of the English law? 13 min read

The UK Supreme Court has delivered its highly anticipated judgment in the case of Unwired Planet v Huawei, concerning patents essential to telecommunications standards, such as 3G or 4G.

The decision confirms that disputes between organisations that own these patents, and equipment manufacturers that use the patents, can be brought and resolved on a worldwide basis in England.

This decision will directly affect the licensing strategies of any business that makes or uses telecommunication components and has any exposure (however small) to the UK market, as well as the enforcement strategies of standards essential patent holders against such businesses. As a 'first' in several respects, it is also likely to influence future court decisions in Australia and elsewhere.

Key takeaways

  • The UK Supreme Court confirmed that, where the implementer of a telecommunication standard has not agreed a licence with the owner of patents essential to that standard (standards essential patents, or SEPs), an English court has jurisdiction to determine the terms of a fair, reasonable and non-discriminatory (FRAND) licence between them on a worldwide basis.
  • If the implementer does not accept the licence determined by the court, an injunction can be granted, stopping it from making and selling equipment that use the standard in question – though only in the UK.
  • The UK courts may well still exercise this jurisdiction, even if there is a possibility of a conflicting judgment given by another national court, and even if the UK is only a small part of the implementer's business.
  • As one of the highest-level courts to consider these issues anywhere in the world, this judgment is likely to influence future decisions in this area by Australian courts.

Who in your organisation needs to know about this?

Legal and risk teams need to keep this decision in mind when negotiating SEP licences and considering IP infringement risks in relation to new telecommunications products or third party components.

The long road to the Supreme Court

The appeal to the UK Supreme Court arises out of two English cases concerning SEPs: one between Huawei and Unwired Planet, the other between Huawei and ZTE on the one hand and Conversant on the other. Huawei and ZTE are telecommunications manufacturers based in China. Unwired Planet and Conversant are so-called 'patent assertion entities' (PAEs), because their businesses earn royalties by licensing portfolios of telecommunications patents, mainly bought from Ericsson and Nokia respectively.

Many of these patents have been declared to the European Telecommunications Standards Institute (ETSI) as essential to telecommunication standards (eg 2G, 3G and 4G) – they are SEPs. This means the patent holder believes an implementer of the standard (component manufacturers and downstream manufacturers) cannot make a device that operates to that standard without infringing these patents. In return, ETSI requires SEP holders to undertake to license any declared SEP on FRAND terms to all would-be users. This balance of interests between SEP holders and implementers, managed through standards setting organisations like ETSI, is accepted industry practice around the world.

The parties in these cases failed to agree a FRAND licence, which led to a long series of litigation in England, Germany, China and elsewhere. The PAEs claimed the implementers infringed their patents without licence, while the implementers claimed the patents were invalid or not infringed, or that the PAEs did not offer a FRAND licence. In England, a first instance decision was given in 2017 in the Unwired Planet case, which granted an injunction against Huawei in the UK, unless Huawei accepted the terms of a FRAND licence as determined by the court. That decision was groundbreaking as it was the first court decision in the EU to substantively determine FRAND licence terms and royalties. It was also the first decision anywhere in the world to determine that a FRAND licence under the ETSI undertaking should be a worldwide one, not limited to the court's home jurisdiction. The first instance decision was upheld by the English Court of Appeal, and both the first instance decision and the appeal decision have since been cited in cases in other jurisdictions. As a result, the UK Supreme Court's decision was highly anticipated.

Have jurisdiction, will use it

The UK Supreme Court's decision, given unanimously by a panel of five judges, dismissed Huawei's and ZTE's appeal on all issues.

The key finding is that an English court has jurisdiction to determine that the FRAND licence was a worldwide one, and to injunct the implementers if they did not accept such a licence.

The key finding is that an English court has jurisdiction to determine that the FRAND licence was a worldwide one, and to injunct the implementers if they did not accept such a licence.

Patents are national rights and the English court only has jurisdiction to determine the infringement and validity of UK patents, and can only grant injunctions in respect of UK activities that infringe UK patents. The Supreme Court agreed that, without the FRAND undertaking given by SEP holders to ETSI, English courts would have no jurisdiction to impose a FRAND licence on a worldwide basis. A worldwide FRAND licence involves implementers paying to license a global portfolio of patents, which includes non-UK patents over which the English courts have no jurisdiction.

However, looking at the terms and external contexts of the undertaking given to ETSI, the Supreme Court determined that the FRAND undertaking establishes a bargain where implementers pays for a FRAND licence in order to buy access to the new standard and obtain certainty that it can legally manufacture and sell products that comply with the standard across the full scope of the SEP portfolio. As a matter of commercial practice, most SEP holders have large, international portfolios, and parties do not negotiate FRAND licences on a country-by-country basis. The ETSI undertaking is consistent with this.

The undertaking permits SEP holders to seek injunctions in national courts if the implementer does not accept or comply with the licence. Faced with such a claim, an implementer can rely on the FRAND undertaking as a contractual defence, and the English court has jurisdiction to determine the meaning and effect of the undertaking. In an appropriate case, this may mean a global licence is FRAND.

Are the English courts out of step?

The court reviewed decisions in other jurisdictions and concluded that, while this is the first case to determine that a FRAND licence under the ETSI undertaking should be worldwide, this is not inconsistent with the approaches in other countries.

It remains to be seen whether, after this decision, other courts will confirm or decline jurisdiction to determine a worldwide FRAND licence.

For example, US courts have long been willing to impose worldwide licences under similar undertakings given to other standards-setting organisations that expressly envisage worldwide licences. Although the ETSI undertaking does not expressly refer to a worldwide licence, since the court decided that its true meaning and effect may require a worldwide licence in appropriate cases, it is consistent with the US approach for the English courts to determine a worldwide licence when appropriate.

While courts in other jurisdictions, such as China, have not exercised jurisdiction to determine a worldwide FRAND licence, their case law does not deny the possibility that a court may have jurisdiction to determine a worldwide licence in an appropriate case.

It remains to be seen whether, after this decision, other courts will confirm or decline jurisdiction to determine a worldwide FRAND licence.

Conflicting decisions

The court acknowledged that national patents protecting the same invention may (and often are) judged valid and infringed in one country, but not valid or not infringed in another. However, this does not prevent the English court determining a worldwide FRAND licence.

The court observed that, as a matter of commercial practice, parties do not negotiate FRAND royalty rates by assessing whether each patent is valid and infringed in each country. Rather, royalty rates are worked out for the whole portfolio using a number of methods. One is the 'top-down' approach, which estimates the total IP royalty burden relating to a particular standard technology, then divides that amongst holders of relevant SEPs by the relative size of their portfolios. Another is to look at comparable licences. In either case, parties generally simply count the number of patents in each portfolio when comparing between different portfolios, regardless of validity.

The Supreme Court approved the approach of the trial judge in the Unwired Planet case. He divided the world into two groups of markets: one that included the UK and major markets except China; and another that included China and minor markets, where the royalty rate is lower as a matter of commercial practice. He then used a combination of these methods to determine the royalty rate for each group of markets.

This leaves the possibility that, after the English court determines worldwide FRAND royalty rates in this way, courts in another jurisdiction determine that many of the national patents in the portfolio are invalid or not infringed. The Supreme Court suggested that this can be dealt with by a mechanism, in the FRAND licence terms, to adjust royalty rates if there is a material change in the size of the relevant portfolio in a country. Huawei did not seek such a mechanism in this case, but the Supreme Court suggested they could ask for it in any future case or negotiations.

Forum shop till you drop?

An interesting feature of this case is that the UK is a relatively small market for both implementers. Infringement of UK patents in the SEP holders' portfolio makes up an economically small part of the case. By far the largest portion relates to China: this is the largest sales market for each implementer and is where the devices are manufactured, which means that in relation to sales in countries where the SEP holders have no patents, the SEP holders' claim must be based on the manufacture of the devices in China.

The court rejected an argument raised in the Conversant case that the UK was not a convenient forum for the case. The case was about infringement of UK patents, and the worldwide licence arises because of a contractual defence to that claim relied on by the implementer. The UK case is not just an artificial 'hook' to trigger jurisdiction. The court also found that, based on expert evidence, it was merely speculative whether Chinese courts would accept jurisdiction to determine the terms of a worldwide FRAND licence.

The court acknowledged that this position may change if other courts start exercising jurisdiction to determine global licences.

As to whether the approach of the English courts would encourage parties to 'forum shop' for an advantageous jurisdiction, the court acknowledged this was a consequence of the mechanism set up in the ETSI undertaking (and equivalent undertakings of other standards-setting organisations), which permitted any national court to exercise jurisdiction. The court suggested that industry participants could fix this by agreeing to refer disputes to an international arbitration tribunal or to specific, respected national courts.

Whether this suggestion is feasible remains to be seen. Once parties enter into FRAND licences, they are bound by the jurisdictional provisions of the agreement, whether that refers disputes to arbitration or a particular national court. The disputes in this case arose before any licence was entered into. The FRAND undertaking is given unilaterally by the SEP holder, making it difficult to use to bind a would-be implementer to a particular forum.

Meaning of FRAND

Two other issues in the appeal related to the content of the FRAND obligation.

First, the court confirmed that the 'ND' (non-discriminatory) part of FRAND is not a 'hard-edged' obligation: an SEP holder which offers low royalty rates to one licensee is not obliged to offer the same low rate to all implementers. The obligation is a 'general' one: that is, the SEP holder should generally offer a standard, fair market royalty rate to all similarly situated implementers, without discriminating between them by reference to their individual characteristics.

Second, the court considered the effect of the judgment of the Court of Justice of the European Union (CJEU) in the case of Huawei v ZTE. In that case, the CJEU set out a fairly prescriptive set of steps to be followed by the SEP holder. If the SEP holder follows these steps, then it would not breach EU competition law by abusing a dominant position. The court agreed with the courts below that Huawei v ZTE provided a safe harbour regime, but a SEP holder that does not follow those steps to the letter is not necessarily abusing its dominant position.

Damages or injunction?

The Supreme Court rejected Huawei's argument (not raised in the courts below) that, as a matter of equity, the court should not have granted an injunction in this case that would stop Huawei selling its products in the UK if it did not take the licence determined by the court. It is usual for an injunction to be granted to restrain patent infringement and the court should not exercise its discretion to withhold the injunction in this case. The SEP holder is only entitled to an injunction if they have offered a licence on FRAND terms, so it is not in a position to use the threat of an injunction to charge exorbitant fees or for undue leverage in negotiations. Conversely, once a FRAND licence is determined, then the injunction forces the implementer who holds out to either take the FRAND licence or stop dealing with the products.

Impact on Australian jurisprudence

Australia currently has its own highly anticipated decision on SEPs, in the dispute between Motorola and Hytera currently being heard by the Federal Court of Australia. To date, no cases concerning SEPs and FRAND have proceeded to judgment in Australia. The UK Supreme Court's decisions on a number of issues are likely to influence the reasoning of Australian courts in this and future cases. In particular, the issues of jurisdiction, the 'non-discriminatory' aspect of FRAND and the equitable remedy of injunction are also likely to be relevant under Australian law.

Previously, intellectual property licenses were exempt from the prohibitions in Australian competition law against anti-competitive behaviours, but the exemption was repealed in 2019. SEP licensing would therefore be subject to the law regulating anti-competitive behaviours, and the English courts' approach under EU competition law may also influence Australian courts' approach on this issue.

The Patents Act 1990 (Cth) provides for a compulsory licence of a patent to be ordered by the court where the patent holder has contravened the law on anti-competitive behaviours and where there is unmet demand in Australia and the patent holder has failed to meet the demand without satisfactory reason. The test to be applied in the latter situation was recently changed: see our previous Insight for details. Both of these circumstances might be relevant in a dispute about SEP licensing, resulting in a compulsory licence being ordered.

Actions you can take now

  • If you are an implementer, review your SEP licensing strategy. The decision is particularly relevant if you have any exposure (however small) to the UK market, but also consider the likelihood that it could influence an Australian court in a future case.
  • Whether you are a component manufacturer or downstream device manufacturer, take into account the risk of an injunction or a worldwide licence being imposed when assessing new telecommunications products or third party components.
  • If you are a SEP holder with an international portfolio, consider your licensing and enforcement strategy.

Drawing on the telecommunications and technology experience of our integrated team of IP lawyers and patent attorneys, we can assist at all stages of the process, from reviewing your existing portfolio and licensing strategies, through to helping you structure your commercial arrangements, identifying and implementing any necessary changes to limit your potential exposure, and handling SEP litigation.

Please get in touch if you would like advice in relation to these matters, or further information on any of the issues raised.