Licensing standard-essential patents – the UK court takes a firm FRAND

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We are often asked to analyse issues relating to FRAND licensing. A recent high court decision gives useful guidance on how best to approach the negotiations and how to assess what rate is appropriate.

We are often asked to analyse issues relating to FRAND licensing. Potential licensees may wish to assess and challenge the validity of a declared patent, or may be presented with licence terms that they consider to be excessive. Either side in licensing negotiations may feel that they are being unfairly pressured into a bad bargain. A recent court decision gives useful guidance on how best to approach the negotiations and how to assess what rate is appropriate.

Standards, SEPs and FRAND licensing

The issue of FRAND licensing arises in the context of agreed technical standards. These standards are needed to allow devices and supporting infrastructure to talk to each other effectively, and without them we would lose the connectivity that we have all come to rely on. They are used for a wide range of technologies like mobile phones, smart cards, and internet addressing. Standard setting is usually done through a collaborative process overseen by a not-for-profit organisation like ITU (the International Telecommunication Union) or ETSI (the European Telecommunications Standards Institute).

Where an agreed standard involves the use of patented technology, patentees are encouraged to disclose all of their relevant patents and commit themselves to licensing it to other market participants on fair, reasonably and non-discriminatory (FRAND) terms. This enables adoption of the standard by all players, large and small, and provides a revenue stream to innovators. Patents that are notified in this way are known as Standard Essential Patents, or SEPs.

The dispute between Unwired Planet and Huawei

Unwired Planet acquired a worldwide patent portfolio from Ericsson in 2013. The portfolio of over 2,000 patents included protection vital to 2G, 3G and 4G mobile data standards. The sale agreement was controversial – instead of an upfront price Ericsson would receive percentages of any revenues that Unwired Planet generated from the portfolio. And because Unwired Planet is a non-practicing entity, its acquisition and enforcement of patents that are part of the standard setting and FRAND licensing process attracted a lot of adverse comment.

In 2014 Unwired Planet kicked off patent infringement litigation in London (and Dusseldorf, Germany) against mobile handset and infrastructure producers Huawei and Samsung, and against Google. Unwired Planet said that there had been infringement of five SEPs and one other patent. Negotiations for a licence were ongoing, but the potential licensees could not agree Unwired Planet’s proposed terms. In the end, both Google and Samsung settled part or all of their disputes, leaving Huawei to carry on alone.

Alongside five separate technical trials to determine the validity, infringement and essential nature of the six patents, the London litigation included a non-technical trial addressing the competition and licensing issues. What this decision offers is a set of helpful principles that will inform businesses facing disputes over SEPs.

The FRAND undertaking is an enforceable obligation

A key ruling in this case is that the FRAND undertaking given by Unwired Planet to ETSI shortly after acquiring Ericsson’s patent portfolio could be enforced directly by a potential licensee like Huawei. The judge decided that although governed by French law, the undertaking could be relied on in the UK courts, because of the French law principle of “stipulation pour autrui” (an agreement for the benefit of third parties). This was independent of any competition/antitrust issues that may arise.

The FRAND undertaking can be enforced through patent infringement remedies

How can the undertaking be enforced? The judge decided that there was no need to force a patentee to enter into a contract unwillingly. Instead, a court could refuse remedies for patent infringement (including an injunction) where the patentee declined to licence on FRAND terms, or allow these remedies against a user of the technology who would not accept a FRAND licence.

There is only one set of FRAND terms

The purpose of the FRAND undertaking is to strike a fair balance, securing a proper reward for innovation while avoiding: 

  • “hold up” where a patentee holds implementers to ransom by declining to grant a licence or offering unfair, unreasonable or discriminatory terms,
  • "reverse hold up" or "hold out”, where a licensee drags out the process of licence negotiation, putting the patentee to additional cost and forcing it to accept a lower royalty rate than was fair.

The correct FRAND rates in a particular set of circumstances could be objectively assessed.

This did not mean that different agreements reached by negotiation would be “wrong”. Once an agreement has been reached, it has the effect of discharging and replacing the FRAND undertaking. Only if the rates agreed were so far away from FRAND rates as to breach competition law could they be called into question. But in the absence of agreement, it is important for a court to settle on a single set of FRAND terms, rather than a range of acceptable terms, to avoid uncertainty and unfairness between the parties.

FRAND as a process

The patentee and potential licensee should approach the licensing process in an appropriate way. This does not mean that there is no room for opening offers, but extreme offers and intransigent behaviour are inappropriate.     

How are the FRAND rates set?

The objective is to determine what is fair, reasonable and non-discriminatory in a particular set of circumstances. Relevant considerations include:

  • What a willing licensor and licensee would settle upon in those circumstances? This can be informed by evidence from the parties about how negotiations work in practice in the industry. 
  • Other comparable licences. These can be helpful, although care is needed to assess how close the circumstances are. Here two agreed licences (with Lenovo and Samsung) had very different rates and so were of little help. Other licences granted by Ericsson over its remaining portfolio did offer some useful comparative information. 
  • Decisions of other tribunals. Court decisions can be persuasive, although a licence resulting from binding arbitration will not carry much weight because the detailed reasoning behind it is unlikely to be available. 
  • A top-down approach. This begins with the total aggregate royalty burden for the standard considered to be appropriate in the industry (taking account of public statements made by market participants). You then calculate the patentee’s share of the total relevant essential patents and allocate royalties to them in proportion to their share. 
  • An assessment of the relative value of the patent portfolio. The numbers of patents involved can be very high. Industry participants tend to calculate “portfolio strength metrics” based on categorising patents and then counting patents in each category, rather than analysing each one individually. The exact methods they use for doing this vary. This task is made more difficult because of the tendency of patentees to “over-declare” the numbers of patents essential to a particular standard. 
  • No “hard-edged” non-discrimination. The court does not have to reduce the royalty rate to reflect a lower rate agreed with another licensee. This takes the ND (non-discriminatory) part of the test too far. Rates should not vary depending on the licensee (with a smaller licensee getting less favourable terms, for example). But the overall assessment does not have to track the lowest rates that have been agreed, unless this is necessary to avoid distortion of competition.

What rates did the court set?

During negotiations each side made a number of offers, some of them for the UK portfolio only and some for a worldwide (ww) licence. The various rates, together with the court’s benchmark rate are summarised in the following tables. Where two figures are given, one refers to infrastructure and the other to handsets.

2G - 3G rates  
Basis  
FRAND Benchmark 0.016% - 0.064%
FRAND Major Markets in a ww licence 0.016% - 0.064%
FRAND China and OM rate in a ww licence  0.004% - 0.032%
FRAND UK portfolio only (100% uplift) 0.032% - 0.13%
   
Unwired Planet 2014-2015 ww 0.1%
Unwired Planet 2016 ww 0.065%
   
Unwired Planet 2014-2015 UK portfolio 0.325% - 0.425%
Unwired Planet 2016 UK portfolio 0.21% - 0.28%
   
Huawei 2015 UK SEP Zero – 0.015%
Huawei Oct 2016 UK SEP portfolio 0.045% - 0.046%

4G rates  
Basis  
FRAND Benchmark 0.062% - 0.072%
FRAND Major Markets in a ww licence 0.051% - 0.052%
FRAND China and OM rate in a ww licence  0.026%
FRAND UK portfolio only (100% uplift) 0.12% - 0.14%
   
Unwired Planet 2014-2015 ww 0.2%
Unwired Planet 2016 ww 0.13%
   
Unwired Planet 2014-2015 UK portfolio 0.65% - 0.85%
Unwired Planet 2016 UK portfolio 0.42% - 0.55%
   
Huawei 2015 UK SEP 0.034%
Huawei Oct 2016 UK SEP portfolio 0.059% - 0.061%

Major markets refers to countries with greater numbers of patent, including the UK. OM refers to “other markets” where fewer SEPs are in force.

The offers made by Unwired Planet were, for the most part, considerably higher than the court-set rates. But the court concluded that they were not so high as to breach competition law. Huawei’s offers were generally lower than the court-set rates, although there was some overlap.

Other terms

The court looked at other terms of the licence including: 

  • The degree of uplift applicable for having a UK-only licence. In fact, the court decided that a UK-only licence was in itself not FRAND, and a worldwide licence would be what willing and reasonable parties would agree on. 
  • The royalty base – should revenue derived from infrastructure include associated services revenue? What deductions should be made from Net Selling Price to reflect the costs of packing, insurance and transport? 
  • How to deal with roaming where products sold outside the UK were used within it. 
  • Record-keeping and audit procedures. 
  • An indemnity against third party claims in the event that Unwired Planet transfers its patents.

Rulings on these points were broadly in favour of Huawei.

Summary of the key points

  • The UK court has shown itself willing to set both FRAND rates and licence terms. 
  • There is only one correct FRAND rate. 
  • A FRAND licence is likely to be worldwide. 
  • The FRAND rate can be determined by reference to comparable licences already entered into, and using a “top down” analysis of the patentee’s share of the total number of relevant SEPs. 
  • If a patentee does not accept the court’s FRAND terms they are unlikely to obtain an injunction. 
  • If a potential licensee does not accept the FRAND terms they may have an injunction granted against them. 
  • Negotiations should be carried on in a FRAND way. The parties must not engage in tactics like “hold up” or “hold out”. 
  • This does not rule out the possibility of opening offers that leave room for negotiation upwards or downwards. 
  • The “non-discriminatory” concept in FRAND does not mean that a licensee is entitled to demand the same rates as other licensees, as long as the rates offered are not excessive. 
  • Starting court proceedings is sometimes used as a tactic to encourage discussion. This ruling gives comfort that this is unlikely on its own to amount to anti-competitive behaviour.

Tips for negotiators

  • Use the methodology and approach to analysis favoured by the court to build a persuasive case. 
  • Consider making open offers as soon as it appears negotiations are failing. 
  • Be aware that the court is willing to impose terms so you do not necessarily have to accept what you regard as an unfavourable deal. Although bear in mind that what is on offer by the court may not be exactly what you are looking for (for example, a worldwide as compared to a territorial licence).
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