Hold Up or Hold Out? UK Court Addresses FRAND Licensing Of Essential Cellphone Patents

Unwired Planet International v. Huawei, [2017] EWHC 711 is a UK case regarding the FRAND royalty rates applicable to patents that are deemed “essential.”

Worldwide telecommunications standards are formulated and set by Standards Setting Organizations so that different manufacturers can produce equipment that is interoperable and so manufacturers can compete with one another (for example, so that all 4G phones will work with any 4G network). Standardization involves holders of patents which are essential to an international telecommunications standard declaring them as essential to the relevant standards body. European SSOs require the holders of essential patents to give an undertaking to license on fair, reasonable and non-discriminatory (“FRAND”) terms.

The goal is to strike a balance between the interests of the public, inventors and implementers. Patentees should obtain sufficient returns from their technical innovations but should not be permitted to leverage their powerful position forged by the standards to demand exorbitant royalty rates or unreasonable terms. The core of the FRAND obligations lies in the determination of reasonable and non-discriminatory royalties or royalty rates.

The Plaintiff, Unwired Planet, holds a worldwide patent portfolio with numerous patents essential to telecommunications standards. The Court previously completed five “technical” trials regarding the validity, infringement and essentiality of the patents. It was thus common ground that Unwired Planet was bound to license on FRAND terms and the present case addressed the FRAND royalty rates and the availability of injunctive relief.

To determine FRAND terms, the Court looks at what a willing licensor and licensee would agree upon in the relevant circumstances, acting without holding out or holding up. The Court determined a royalty rate by examining numerous factors in detail, including the number of relevant patents and patent families, comparable royalty rates, applicable standards and so on. The Court held that there can be only one set of licence terms which are FRAND in a given set of circumstances. The parties had exchanged numerous licensing offers before trial, however, since those terms were either higher or lower than the FRAND terms determined by the Court, the offers were not FRAND.

The patents were previously found valid and infringed and Unwired Planet wished to enter a worldwide licence. Huawei argued that it could take a license under only UK patents and that Unwired Planet could not insist otherwise. The Court disagreed, holding:

Before turning to the impact of the litigation, this is a convenient point to ask what sort of licence for Unwired Planet’s portfolio would be FRAND in terms of its geographical scope when applied to a multinational licensee like Huawei? I will start by asking what a willing licensor and a willing licensee with more or less global sales would do. There is only one answer. Unwired Planet’s portfolio today is (and in 2014 it was) sufficiently large and has sufficiently wide geographical scope that a licensor and licensee acting reasonably and on a willing basis would agree on a worldwide licence. They would regard country by country licensing as madness. A worldwide licence would be far more efficient.

I conclude that a worldwide licence would not be contrary to competition law. Willing and reasonable parties would agree on a worldwide licence. It is the FRAND licence for a portfolio like Unwired Planet’s and an implementer like Huawei. Therefore, Unwired Planet are entitled to insist on it. It follows that an insistence by Huawei on a licence with a UK only scope is not FRAND.

The Court further noted that requiring a worldwide FRAND license does not prevent a licensee from challenging validity or essentiality of licensed patents in other jurisdictions.

The Court ruled that an injunction ought to be granted because Huawei stood before the court without a licence but had the means to become licensed on FRAND terms. Huawei argued that Unwired Planet abused its dominant market position in negotiations and by commencing the litigation before offering FRAND terms, and thus Unwired Planet was not entitled to an injunction. The Court disagreed, holding that Unwired Planet had not abused its dominant position. The parties had been in contact prior to the litigation. Offers in negotiation with rates higher or lower than the FRAND rate which do not disrupt or prejudice the negotiation are legitimate. For a sophisticated organization like Huawei, the fact that an injunction was being claimed in the legal proceedings did not prevent the parties from negotiating. The commencement of the action, including the claim for an injunction, was not an abuse of Unwired Planet’s dominant position.

A copy of the judgment can be found here.