Standards setting organisations seek to create valuable standards in technology. By enabling interoperability and compatibility, follow-on innovation and new product development are encouraged. However, by encompassing solutions to technical issues, technology which is the subject of patent protection may be incorporated into a standard. Therefore, in order to comply with the standard, manufacturers/operators need to implement the patented technology and, in doing so, will infringe the essential claims of the patents.
Where patent owners participate in standard setting negotiations, the policy of the organisation will typically require their members to notify any patents that they consider are, may be or may become essential to a standard. In conjunction with obligations to notify, patent owners are typically required to state whether they will grant irrevocable licences for their ‘standard essential patents’ (SEPs) on ‘fair, reasonable and non-discriminatory’ (FRAND) terms, with such terms frequently being agreed through subsequent bilateral negotiation. Should an implementer refuse to negotiate or agree a licence upon FRAND terms, and nevertheless infringe or threaten to infringe an SEP, injunctive relief may be sought from the courts. It is important to note that standards setting bodies, and in particular the European Telecommunications Standards Institute (ETSI)ETSI, do not dictate the terms of template licences nor do they give guidance on what FRAND might be. Further they do not set a royalty rate which may be considered FRAND and they do not check or scrutinise the purported essentiality of any patent notified to them. Consequently, there is scope for uncertainty, debate and, potentially, litigation.
Given the obligation to indicate whether one is prepared to grant licences in relation to SEPs, it has become a subject of debate whether a patentee who seeks an injunction in relation to any allegation of infringement of a SEP is acting in an anti-competitive manner. Clearly if the ability even to seek an injunction were to be removed from a SEP owner then their ability to bring a recalcitrant party to the negotiating table would be severely compromised. On the other hand, if a SEP owner has committed to grant licences, some question whether they should be able to injunct those operating in accordance with the standards.
The debate regarding whether a SEP owner seeking an injunction is falling foul of competition law came to a head in July 2015 when the CJEU ruled in Huawei Technologies v ZTE, making clear that it is not, per se, anticompetitive for a SEP owner to seek injunctive relief to restrain infringement. It all depends upon the facts, which include whether the terms of any licence offered are in fact FRAND and whether the potential licensee has engaged with the negotiating process.
So what terms are FRAND? And, if there can be more than one set of FRAND terms, where a patent owner and an implementer fail to agree a licence, how will the court go about determining FRAND terms?
These questions have recently been explored in the context of mobile telecommunications disputes before the High Court (Patents Court) of England and Wales in two cases: Unwired Planet v Huawei & Others and Vringo v ZTE.
Case 1 – Unwired Planet v Huawei & Samsung
In March 2014 Unwired Planet brought a claim for patent infringement against Google, Samsung and Huawei. The claim was brought for infringement of six of Unwired Planet’s patents, five of which are said to be essential to standards produced by the ETSI. All these asserted SEPs were transferred to Unwired Planet from Ericsson (along with over 2,800 other patents) under a Master Sales Agreement (MSA), in January 2013.
The defendants responded that Unwired Planet’s patents are invalid and not infringed. They also put forward a number of defences based on FRAND principles and competition law, some of which were based on the provisions of the MSA. As a result of the MSA-related defences, Ericsson was joined to the proceedings. Since then, Google has settled its dispute with Unwired Planet and is consequently no longer actively involved in the FRAND action.
The court has listed five ‘technical trials’ to hear the validity and infringement issues in relation to each of the six patents in suit, followed by a 13-week ‘non-technical’ trial to hear the FRAND and competition law issues.
In the first of the five technical trials, Unwired Planet emerged as the victor. Patent EP(UK) 2,229,744, which concerns a polling system for a wireless communications network, was held to be valid, essential to an LTE/4G telecommunications standard and, accordingly, infringed by Samsung and Huawei. The second of the technical trials was heard in November 2015, and Birss J’s judgment is expected to be handed down in early 2016.
In an action where there have been a number of FRAND case management conferences this article considers an interim application by Ericsson (aligned with Unwired Planet) to strike out three of Samsung’s MSA-related defences.
The outcome was that one of Samsung’s defences was struck out by Mr Justice Birss. He found that Samsung’s allegation that Ericsson had failed to ensure the complete, proper and effective transfer of an enforceable FRAND obligation was ‘hopeless’.
The FRAND defences
As part of their defence, the defendants have pleaded the following breaches by Ericsson:
1. in transferring patents to Unwired Planet, there was a failure to ensure the complete, proper and effective transfer of an enforceable FRAND obligation (the first alleged breach);
2. by dividing its portfolio in the way that it did, Ericsson has caused unfair higher royalties to be earned, thus restricting or distorting competition (the second alleged breach);
3. certain terms of the MSA are stand-alone ‘price fixing’ infringements of Article 101 of the Treaty on the Functioning of the European Union (TFEU) (the third alleged breach).
Application to strike out pleaded defence
Ericsson, which stands to gain from the successful licensing of the patents in suit, applied to strike out all three of the defendants’ allegations as having no real prospect of succeeding at trial. The Court of Appeal has given Samsung permission to appeal this decision, with the appeal set to be heard in April 2016.
First alleged breach – transfer of FRAND obligation
The MSA requires the parties to acknowledge that the SEPs are subject to existing encumbrances (including FRAND commitments), which would continue after assignment. It also expressly requires Unwired Planet to make a FRAND commitment in accordance with the ETSI Intellectual Property Rights (ETSI IPR) Policy, which was made accordingly on 14 June 2013.
Despite the above, Samsung argues that the FRAND obligation was not transferred to Unwired Planet for the following reasons, each of which was rejected by Birss J as having no real prospect of succeeding at trial:
1. First, Samsung contended that the MSA does not compel Unwired Planet to give a FRAND undertaking. This was dismissed by the judge as ‘hopeless’.
2. Second, Samsung contended that even if the MSA does compel Unwired Planet to give a FRAND undertaking, the obligation under the MSA is expressly only enforceable by Ericsson and not by third parties. However, the judge agreed with Ericsson that once a party has made a FRAND declaration to ETSI, that commitment will be enforceable by a third party.
3. Third, Samsung contended that the MSA should transfer Ericsson’s FRAND obligation, not simply compel Unwired Planet to offer a FRAND undertaking of its own. Focusing on the ‘non-discriminatory’ element of ‘fair, reasonable and non-discriminatory’, Samsung argued that Ericsson’s FRAND obligation needed to be considered at the time it was made, when the SEPs were part of Ericsson’s much larger portfolio. Now, as part of a separate and smaller portfolio, the obligation does not take account of the SEPs remaining in Ericsson’s portfolio and therefore higher royalties could be earned on the SEPs. This argument was also dismissed. Birss J noted that a transferee of a SEP which is subject to an ETSI declaration should plainly be obliged to grant FRAND licences, but it would be commercially unworkable to require the transferor’s own FRAND obligation to be transferred, which would mean looking back at the position of the transferor in order to decide what FRAND terms should be given by the transferee today (when the patent is potentially in an entirely different portfolio).
Birss J therefore decided to strike out the first alleged breach from Samsung’s defence.
Second alleged breach – the division of Ericsson’s portfolio
Samsung’s second allegation is that the division of Ericsson’s portfolio is of itself, in the circumstances, a breach of Article 101 TFEU. In support of this allegation Samsung cites two main reasons:
1. First, Ericsson retains the right under the MSA to a ‘substantial share’ in the licensing revenue generated by Unwired Planet and can transfer a further 500 patents to Unwired Planet under the MSA between 2014 and 2019 for no further consideration.
2. Second, Samsung cites Unwired Planet’s existence as a ‘patent assertion’ or ‘non-practising’ entity. Samsung argues that, unlike Ericsson, which competes in the downstream market and would probably need to enter into cross-licences with its competitors (eg Samsung), an NPE such as Unwired Planet is not interested in cross-licences and can therefore act ‘aggressively’ without fear of adverse consequences.
Ericsson, on the other hand, submitted that if Samsung was correct, it would lead to the ‘astonishing proposition that Ericsson can never sell part of its portfolio of essential patents but would be forced to increase its patent portfolio year on year’. Ericsson further argued that Art 6.1 of the ETSI IPR Policy and the Commission’s Guidelines on Technology Transfer Agreement expressly contemplate the transfer of patents. Ericsson argued that what really matters for competition law is the FRAND obligation, which is secure in circumstances where Unwired Planet has given an undertaking to ETSI.
The judge appeared to be in broad agreement with Ericsson. He stated:
‘I am troubled by the following aspects of the second alleged breach. Although it denies it, at times Samsung’s argument does appear to cut across the idea that a subset of patents from a portfolio could ever be transferred out of a larger portfolio. That must be wrong. Moreover the transfer obviously takes the patents out of Ericsson’s portfolio and so out of the ambit of Ericsson’s FRAND commitment. I cannot see how that alone could be contrary to Art 101. Also there is real force in Ericsson’s point that the commitment of both transferor and transferee to license on FRAND terms is all that the law, including competition law, ought to require when transferring standards essential patents between undertakings. There is much to be said for the submission that a FRAND commitment is or ought to be the way in which the rights of the holder of a patent which is essential to a standard are to be constrained by law. In my judgment if the holder abuses a dominant position then that is a matter for Art 102 TFEU. The fact that a transferee might abuse a dominant position which they are in as a result of the transfer cannot make the transfer contrary to Art 101. I am also sceptical about the breadth of Samsung’s complaint that Ericsson is trying to earn more money from its patents, as if that is a sin. It is not’.
However, despite these comments the judge was not able to find that there was no real prospect of Samsung’s allegation succeeding at trial and thus Ericsson’s application to strike out the second alleged breach was, for the time being at least, rejected.
Third alleged breach – specific terms in the MSA
Thirdly, Samsung and Huawei rely on the terms of two clauses in the MSA, which they say are examples of ‘hardcore’ restrictions on competition in breach of Art 101 TFEU.
First clause
Clause 3.4 operates to set a minimum payment to Ericsson by Unwired Planet in respect of any licence to a patent transferred from Ericsson to Unwired Planet. The payment to Ericsson is set as a minimum percentage of the net sales of the relevant licensee, irrespective of the royalty paid by the licensee to Unwired Planet.
Ericsson submitted that this is no different to a normal commercial situation; clearly Unwired Planet will try to operate at a profit but it may choose, in a given case, to sell at a reduced price and make its profits on other sales. Samsung submitted that clause 3.4 creates ‘a powerful incentive’ on Unwired Planet to charge rates beyond the minimum rates it must pay to Ericsson, which is the type of price fixing Art 101 intends to prohibit.
The judge stated that, when considered in conjunction with the second alleged breach, he could see it was arguable that it could contribute to an anti-competitive incentive to charge higher royalties. He therefore refused Ericsson’s application to strike the clause 3.4 defence from Samsung’s and Huawei’s respective pleadings.
Second clause
Clause 6.1(aa) provides that Unwired Planet cannot license the patents other than on terms in which the royalty due is a percentage of the aggregate net sales revenue of the licensee. Ericsson argued that this doesn’t prevent Unwired Planet from licensing on a capped percentage basis, or from obtaining consent from Ericsson to agree to other licensing terms.
The judge stated that he thought this was a weaker case of the defendants’ than that regarding clause 3.4, but he did not allow Ericsson’s application to strike it out on the basis that the clause would need to be considered at trial in conjunction with the second alleged breach.
Case 2- Vringo v ZTE
In addition to the Unwired Planet action, Mr Justice Birss had also been considering FRAND issues in the context of a claim brought by Vringo against ZTE.
Initially, Vringo asserted six of its patents against ZTE, all of which had been notified by Nokia, the previous owner of them, as essential to standards produced by the ETSI. Nokia also undertook to license the patents on FRAND terms, an undertaking that Vringo said it would honour as Nokia’s successor in title.
Vringo’s position was that it had complied with its FRAND obligations by offering ZTE a FRAND licence to all SEPs in its global patent portfolio. In particular, Vringo argued that ZTE was not entitled to an individual licence under any of the patents in suit but, rather, ZTE would be required to accept Vringo’s portfolio offer in the event that the offer was FRAND and the patents in suit were valid and infringed by ZTE.
Determining FRAND rates
On that basis, in June 2013, Vringo asked the court to schedule a trial to decide the FRAND issues prior to the technical trial on validity and infringement taking place. Vringo’s reasoning (as summarised by Birss J), was that ‘It will not be a trivial question to try, but it will be less costly and time consuming than patent cases on the merits which will need to be tried instead.’ However, Mr Justice Birss refused to schedule a FRAND trial at that stage, stating that, in circumstances where a defendant is only willing to take a licence to patents found to be valid and infringed (as was ZTE’s position), ‘there is no basis on which the court could compel defendants to accept a licence arrived at by approaching the matter as if the licensee was willing to take a licence without having a judicial determination of validity and/or infringement‘.
Thus, the technical trials of the six SEPs were scheduled to be heard first, with the FRAND issues to follow. However, only one patent made it to trial. In November 2014, Mr Justice Birss held that EP (UK) 1 212 919 was valid (as proposed to be amended) and infringed by ZTE. The patent concerned a method used in a communication system for relocating a protocol termination point.
The FRAND trial was scheduled to be heard by the Court in January 2016. However, in December 2015, the parties reached a global settlement, reported to be valued at around $21.5 million.
Relationship between FRAND proposals and injunctions
With FRAND arguments developing in parallel in the separate Unwired Planet and Vringo actions, it was inevitable that a decision in one case was likely to influence the parties’ strategy in the other. In particular, following an interim hearing between Unwired Planet, Samsung and Huawei, Birss J considered the relationship between an SEP owner’s obligation to license its SEPs on FRAND terms and its right to obtain an injunction – his comments seemingly shaping Vringo’s position against ZTE.
Birss J noted that ‘the question of whether any given licence terms are FRAND is not simply a freestanding issue. It is closely connected to the question of injunctions‘. Birss J stated that there are three legally relevant ways of considering whether licence terms are FRAND: (1) are they FRAND insofar as competition law is concerned, (2) are they FRAND within the contractual meaning of the ETSI IPR Policy, and (3) are they ‘equitably refusable‘?
Birss J explained that the category of ‘equitably refusable’ offers is ‘directed to granting and refusing injunctions…In other words are the terms of the offer such that an injunction would be granted if the defendant refused to accept them? Conversely, are terms proposed by the defendant such that an injunction would be refused if a patentee, obliged to license on FRAND terms, refused to accept them? The third context is not necessarily only concerned with the first two contexts since it will also relate to the exercise of the court’s discretionary power to grant injunctive remedies. Even if a patentee is not contractually obliged by the ETSI IPR Policy to accept FRAND terms offered by a defendant, perhaps a court might refuse to grant an injunction in such a case‘.
Subsequently, and no doubt encouraged by Birss J’s comments in Unwired Planet, Vringo offered an individual licence to the ‘919 Patent, limited to the UK only (without accepting that it was under an obligation to offer single patent licences in circumstances where it says it has offered a global portfolio licence on FRAND terms). Vringo then went on to propose heads of terms to ZTE which it said were not ‘equitably refusable‘.
Vringo said that if ZTE refused the licence, Vringo should be entitled to injunctive relief, as the licence was the ‘quid pro quo‘ for Vringo agreeing to forego injunctive relief. Alternatively, if the court considered that Vringo’s terms were not FRAND, Vringo would modify them such that they were FRAND, and ZTE would be compelled to accept them.
In contrast, ZTE contended that both parties should put forward the terms that they consider to be FRAND, and the Court should decide somewhere between the two. This argument would seem premised on there being more than one relevant set of FRAND terms, with some of those terms being equitably refusable.
Birss J ordered both parties to exchange licence proposals and then to respond to their opponent’s proposals. However, he noted that if the terms had not been agreed by trial ‘the court has to start somewhere and I rather think it will start with the patentee’s offer, but I do not know‘.
Royalty calculation
Vringo argued that it was entitled to 2.5% of revenue from any infringing eNodeB infrastructure sold by ZTE. For the purpose of drawing a comparison to ‘real-life’ licences, this was said by Vringo to equate to approximately 1% of ZTE’s overall turnover on UMTS/LTE infrastructure equipment (which results in approximately £3,000 per eNodeB box).
Vringo’s case was that there is a going rate for licences under 3G and 4G SEPs of 1% or 2%, and that the licensing exercise is conducted on the basis of the existence of one, two or (at most) three key SEPs, notwithstanding to which technology the key SEPs relate. Clearly, if this argument was to succeed it would be suggestive that a portfolio licence should not be incapable of being FRAND where only one, two or three SEPs have been found to infringe.
ZTE, on the other hand, contended that the royalty should be calculated by reference to the smallest saleable compliant part (SSCP) of the relevant ZTE products that practises the claims of the ‘919 patent in the UK. On this basis, ZTE argued that the royalty rate should be 0.002% of ZTE’s relevant turnover with reference to the SSCP.
The concept of the SSCP, also known as the ‘smallest saleable patent practising unit’, has been proposed by some users of patented technology in the US as an evidentiary principle, despite bearing no relation to real world licensing negotiations. In March 2015, the IEEE (a standards setting organisation) changed its patents policy to provide that determination of the ‘Reasonable Rate’ should include, but need not be limited to, the consideration of the value that an SEP contributes to the smallest saleable ‘Compliant Implementation’ that practises the infringed claim. A ‘Compliant Implementation’ is defined as ‘any product (eg component, sub-assembly, or end-product) or service that conforms to any mandatory or optional portion of a normative clause of an IEEE Standard’.
However, in Vringo v ZTE, the question arose of what is meant by ‘saleable’. Must the defendant (ZTE in this case) show that it has made actual sales of the compliant part for it to be deemed saleable, or would an offer for the sale of that part suffice? Could the sales or offers for sale include the sale of spare or replacement parts, and must they be made within the UK?
Understandably, given its aim to drive down the royalty as low as possible, ZTE was trying to cast a wide net, catching any compliant parts that have been offered for sale anywhere in the world as ‘saleable’.
Vringo, on the other hand, appeared to dispute that the parts identified by ZTE were saleable in the UK, thus arguing that any such parts were not the smallest saleable compliant part, and therefore should not form the basis of the royalty calculation. The author’s opinion is that it would have been difficult for ZTE to succeed with its SSCP argument, had it maintained it to trial.
Comment
The question of what terms are FRAND, the impact of FRAND negotiations on the availability of injunctive relief to restrain infringement of SEPs, and the interplay between patent law and competition law all remain to be clarified.
Whilst there has already been some preliminary guidance in Unwired Planet v Huawei & Samsung, in light of the Vringo v ZTE settlement, interested parties will be watching the Unwired Planet action closely to see how the FRAND-scape develops. A Court of Appeal decision on many of the issues in dispute would contribute greatly to the legal understanding of FRAND and SEP issues in the UK.
Tom Foster is an Associate in the Intellectual Property team of Gowling WLG.
