Is the Standard Essential Patents system holding innovators back?

The Supreme Court has rejected the appeals of Huawei and ZTE in two important Standard Essential Patents cases. This leaves users (or “implementers”) of standards – technology producers both large and small – exposed to aggressive licensing practices and potentially damaging litigation.

The ruling involves a pair of similar cases. These deal with patents that are essential to the manufacture and use of mobile phones operating on the 2G (GSM), 3G (UMTS) and 4G (LTE) standards. These standards are established by international Standards Setting Organisations, or SSOs. The seven recognised SSOs cooperated to form the 3rd Generation Platform Partnership (3GPP) to develop and oversee those standards. Patent owners declare their essential patents to the SSO (in this case the European Telecommunications Standards Institute (ETSI)). The owners of these Standard Essential Patents (SEPs) must then abide by the SSO’s policy on access to patents. The ETSI IPR policy requires owners to give an irrevocable undertaking that they will license them to implementers on terms that are “fair, reasonable and non-discriminatory” (FRAND).

Licences to use SEPs are normally agreed on a global basis rather than country by country. (Sometimes one territory is dealt with separately.) This approach offers the implementer commercial certainty for a percentage royalty, without the need to negotiate separately in different countries, or challenge the validity of individual patents.

In contrast, patents are granted country by country (or by a regional body like the European Patent Office to cover a series of countries). So a national court can assess the validity of a patent, and grant injunctions and other remedies for infringement, but only in relation to its own territory. It is not normally able to do anything similar affecting patents in other countries.

The points addressed in the Supreme Court’s ruling are summarised briefly below. Overall, the ruling will be a serious disappointment to implementers. Any business that wants to offer goods or services making use of an international standard (pretty much any technology that needs to be interoperable with other devices and networks) has to take a licence of the relevant SEPs. Arguments made by Huawei and ZTE challenging the licensing practices of the SEP owners made little progress. The Supreme Court did not consider them to be anti-competitive, or in breach of FRAND principles.

In our view this, like the earlier Court of Appeal ruling, looks like a troll’s charter. We discuss the reasons why in detail here, but very briefly:

  • Many of the SEP portfolios currently in use have been bought up by patent assertion entities like Unwired Planet and Conversant Wireless in this case. These are not innovators and so the usual balance of interests between innovator and implementer no longer makes sense. Revenues flowing from SEP licences are unlikely to be ploughed back into research. The Supreme Court disagrees, saying that this may be most efficient way for innovators to monetise their research.
  • Owners of SEPs have an incentive to over-declare the numbers of patents that they say are essential. The more patents they contribute, the higher the percentage royalty they will achieve. It is difficult for implementers to assess how relevant the patents are, and so what royalty rate is reasonable in any particular licence.
  • Although global licensing cuts down the cost and burden of country by country litigation, it leaves the implementer with very little in its armoury, particularly when faced with a larger SEP owners. The information available to implementers about comparable licences is patchy and inadequate, and there is a good argument for SSOs making this available in a more structured way.

There were some favourable remarks for implementers: a provision permitting challenge of SEPs, and for adjustment of rates for individual countries or regions where there were significant differences (eg in patent validity) in assessing an overall royalty would be reasonable; and some suggestion that SEP owners should provide a published price list. 

Significantly, the decision is largely based on the terms of the ETSI IPR Policy, and some commentators have suggested that this leaves considerable scope for continuing disputes where other standards/SSOs are involved.

We note that the EU’s IP Action Plan Roadmap, currently under consultation, identifies SEP licensing as a problem that needs to be solved. It does not propose anything more concrete than a plan to “explore ways to promote more transparency and predictability on licensing of SEPs”.

Take away points

  • If you need to negotiate access to a SEP portfolio, you’ll need to be well prepared. We discussed some tips and pointers in our earlier article on the Unwired Planet case. Various calculation methods can be used. The main methods are the “top down” method, where an aggregate royalty is shared out across all licensors in proportion to their holdings, and a “comparable licence” method, examining comparable licences where these exist. It is important to negotiate carefully so that you are not seen as refusing a FRAND offer.
  • Don’t assume that if negotiations are under way but not complete you can go ahead with launch. The court was very clear that injunctions may be available to SEP owners if implementers are seen to be refusing the offer of a licence on FRAND terms.

Summary of the points addressed in the ruling

We have summarised below the issues decided by the Supreme Court.

  1. Did the English court have jurisdiction to decide the dispute?

Does the English court have jurisdiction to grant an injunction stopping infringement of a UK SEP unless the implementer enters into a global licence?

Can the English court determine the royalty rates and other terms of the global licence?

Yes to both questions. The English court does not have jurisdiction over non-UK patents, and the UK market accounts for a small percentage of the global market. However, the contractual arrangements ETSI has created under its IPR Policy give the English courts jurisdiction to determine the terms of a license of a portfolio of patents which includes foreign patents. The suggestion that “the English courts are uniquely setting themselves up as a de facto global licensing tribunal” was rejected. The English court was taking an approach consistent with other jurisdictions.

  1. Was England a suitable location for the litigation?

Should the English High Court have set aside service of legal proceedings on Huawei and ZTE in China, and stayed proceedings against their UK subsidiaries, because the Chinese courts were a more suitable forum?

No.  The dispute is mainly about the terms of the licence rather than national patent portfolios. The Chinese courts do not currently have the jurisdiction needed to determine the terms of a global FRAND licence, at least, without all parties’ agreement that they should do so. In contrast, the English court does have the jurisdiction to do this.

  1. What exactly does non-discrimination mean?

Is the non-discrimination requirement of the FRAND undertaking “hard-edged”, meaning that all licensing situations have to be treated in exactly the same way, and the best terms offered to all? Should Unwired Planet have offered Huawei a licence with a worldwide royalty rate as favourable that it had agreed with Samsung?

No. The FRAND undertaking is general rather than “hard-edged”. It is a single obligation to agree terms that are “fair, reasonable and non-discriminatory” – a single royalty price list available to all. It might make sense to offer a lower price to a first mover, for example, or if the SEP owner is in financial distress (a “fire sale” royalty). This does not mean that all other licensees have to be offered the same rate.

  1. Had the SEP owners breached competition law in their approach to licensing?

Should Unwired’s claim for a patent infringement injunction be treated as abuse of a dominant position contrary to competition law, because Unwired did not make a FRAND licence offer before applying for the injunction?

No. The decision of the European court in Huawei v ZTE (Case C-170/13 – more on that here) was a standard of behaviour rather than a strict protocol and did not have to be followed exactly. Discussions between Huawei and Unwired Planet, before Unwired Planet applied for an injunction, were adequate.

  1. Was an injunction or damages the right remedy?

Was it disproportionate to grant a patent infringement injunction? Was it more appropriate to order reasonable royalty damages instead?

No. Damages instead of an injunction is an option for the court, but is only rarely granted. Because a FRAND licence is available, the SEP owner cannot coerce an implementer into accepting exorbitant fees, so that reason is not relevant. If injunctions were not available to SEP owners, implementers would have an incentive to sit back and wait to be sued in each country – exactly the problem that the FRAND licensing system aims to avoid.

Our content explained

Every piece of content we create is correct on the date it’s published but please don’t rely on it as legal advice. If you’d like to speak to us about your own legal requirements, please contact one of our expert lawyers.

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