Many standards essential patent (SEP) holders are shouting from the rooftops saying yesterday’s decision of the UK Supreme Court in Unwired Planet is a victory for SEP holders generally, and on the face of it, that may be the case for some aspects of SEP licensing issues in the UK. However, the judgment may have more significant ramifications for practising SEP holders than they are saying and that the press has been reporting.
The Supreme Court has ruled that a UK court can determine the FRAND terms and rates for a worldwide SEP licence, and can grant an injunction preventing UK sales if the Defendant does not agree to the court-determined FRAND terms, and it remains to be seen how courts in other jurisdictions view the Supreme Court’s judgment, but there are a number of statements and rulings in the judgment that are noteworthy for those engaged in SEP licensing.
Firstly, on transparency and valuation, the Supreme Court has made its position clear that although the Court takes the view that the FRAND obligation is not ”hard-edged” (i.e. that every licence agreement must be exactly the same), the FRAND obligation is such that the terms and conditions on offer should be such as are generally available as a fair market price for any market participant, to reflect the true value of the SEPs to which the licence relates, and without adjustment depending on the individual characteristics of a particular market participant. As the Supreme Court says, put another way, there is to be a single royalty price list available to all.
So, we can expect to see all SEP holders having to publish their royalty rates and price lists, and existing licensees may want to renegotiate their licences when the royalty rates and price lists are published. This will be important for SMEs and others who are involved in developing and selling products that have wireless functionality, such as smart factories, smart meters and wireless medical devices. The Court said those engaging with the ETSI regime are highly sophisticated and well informed about economics, practice in the market and competition laws across the world, but unfortunately that is not the case for many companies such as SMEs, energy companies and healthcare providers.
Secondly, the Supreme Court said that non-discrimination between licensees is achieved “because the FRAND rate is objectively determined based on the value of the portfolio and it does not take into account the characteristics of individual licensees. It satisfies the obligation to treat like cases alike, because the same rate is made available to all licensees who are similarly situated in the sense that they seek the same kind of licence”.
Many SEP holders have advocated an interpretation that ‘similarly situated’ means similarly situated in size (i.e. that the SEP holder can charge different rates to SMEs compared to multinationals). That interpretation and practice would appear to contradict the Court’s ruling and would not be FRAND conduct. The Supreme Court has said that it expects there to be the same kind of rate for the same kind of licence. Mr Justice Birss (soon to be appointed to the UK Court of Appeal) said at first instance that it would not be FRAND for a small new entrant to the market to have to pay a higher royalty rate than an established large entity, and that the FRAND offer must be non-discriminatory and determined primarily by reference to the value of the patents being licensed with the result that all licensees who need the same kind of licence should be charged the same kind of rate. That position has been endorsed by the Supreme Court and made clearer.
‘Similarly situated’ is not therefore dependent on the type of entity seeking a licence, as has been suggested by many SEP holders, but on the same kind of licence, and SEP holders will need to ensure that their licences and FRAND offers meet those obligations. It follows that a royalty payable on the price of chipset in a phone sold by a major manufacturer should be the same when a different phone (using the same chipset) is sold by an SME; in the IoT sphere, it means that a royalty payable on a chipset used in a ‘smart football’ should be the same when the same chipset is used in a ‘smart heart monitor’, and that it must reflect the true value of the SEPs, not the value of the end product.
Thirdly, on availability of licences, the Court makes clear that the terms on offer must be available to any market participant. Many SEP holders are refusing to license companies that seek a FRAND licence, and such conduct appears to be contrary to the Court’s ruling on the FRAND obligations of an SEP holder; the non-availability of licences was a matter that the German Competition Authority recently asked the Mannheim Court to refer the CJEU.
Fourthly, we will in the future have standard clauses in SEP licences that provide for rebates or clawbacks to licensees if SEPs are later found to be invalid or not infringed, for example SEPs in other jurisdictions. The Supreme Court expressly acknowledges that it would be fair and reasonable for an implementer to have an entitlement to recover sums paid as royalties attributable to foreign patents in the event that the relevant foreign court held them to be invalid or not infringed. Rebate or claw-back clauses will present some interesting challenges for the financial accounting and reporting obligations of SEP holders, as claims for rebates will be able to go back 6 years and could be substantial if, as some studies show, more than 80 per cent of SEPs are later found to be invalid or not infringed.
Finally, it is interesting that the terms of the injunction will be against Huawei for use of the patents in the UK. One might ask what the value of that injunction is, when Huawei has been excluded by the UK Government from the UK market for 5G networks, but we might also see Huawei play back the injunction aspects of the Supreme Court’s ruling when they start to assert their 5G SEPS against practising entities like Nokia, Ericsson and network operators in the UK.
Huawei is the largest SEP holder of 5G patents and they may want to obtain injunctions against Nokia and Ericsson for use of their SEPs relating to 5G networks unless Nokia and Ericsson and other implementers pay Huawei’s FRAND rates.
Despite being excluded from the UK’s 5G market, and despite it ‘losing’ this case, the UK courts may still be an SEP battleground for Huawei in the future.
For more information on the issues raised in this article, please contact Robert Pocknell.