18 February 2019

The English Courts As A Forum For SEP Disputes & FRAND Patent Licences

The recent Court of Appeal decision in Conversant Wireless Licensing S.A.R.L v Huawei Technologies Co. Ltd, ZTE Corporation and Ors [2019] EWCA Civ 38 builds on the same court’s decision in Unwired Planet International Ltd & Anor v Huawei Technologies Co Ltd & Anor [2018] EWCA Civ 2344 to firmly establish the English Courts as a forum for considering SEP disputes and the setting of global Fair, Reasonable and Non-Discriminatory (FRAND) patent licences.

We explore further what this decision means.

What are SEPs?

In the field of digital technologies, and in particular telecommunications, standards are used to ensure interoperability.  They allow products from one manufacturer to communicate and operate with products from another manufacturer.  The standards are set by standard setting organisations (SSOs).  SSOs are normally formed from a collection of industry participants, who evaluate technologies for inclusion in a new standard, encourage those participants to contribute their most advanced technologies to that standard and then promote the standard once it has been agreed.

There are various SSOs around the world and each of them operates in much the same way.  The European SSO is the European Telecommunications Standards Institute (ETSI).

Therefore an owner of a patent which relates to a standard set by an SSO (a Standard Essential Patent, SEP) may have a strong and valuable patent right.  However, to avoid this leading to potentially anti-competitive behaviour, ETSI and other SSOs require the owners of SEPs to give an irrevocable undertaking in writing that they are prepared to grant licences of their SEPs on fair, reasonable and non-discriminatory (FRAND) terms.

What is a FRAND licence?

An undertaking to grant licences of SEPs under FRAND terms is designed to ensure that any technology protected by a SEP which is incorporated into a standard is accessible to users of that standard on fair and reasonable terms and that its owner cannot impede the implementation of the standard by refusing to licence it or by requesting unfair, unreasonable or discriminatory licence fees. However, there is no one-size-fits-all solution to what FRAND is and that what can be considered fair varies from sector to sector and over time.  Solutions can therefore differ from sector to sector and depending on the business models in question.  As noted in the decision in Unwired Planet, in practice, the negotiation of licences for SEPs on FRAND terms may be far from straightforward, with the owner of the SEP using the threat of injunction to force the payment of excessive licence fees, or the infringer refusing to engage constructively or behave unreasonably in the negotiation process to avoid paying the licence fees to which the SEP holder is properly entitled, a process known as “hold-out”.

Global licensing

It should be remembered that a patent such as a SEP only applies to the countries in which it is granted and therefore has limited territorial scope.  For example, if a UK SEP is found valid and infringed, a UK Court will only grant relief in respect of the infringement of that patent in the UK.  As Aldous LJ explained in Coflexip SA v Stolt Comex [2001] RPC 9 at [18], the injunction must equate to the statutory right given; a right which has been held to have been validly granted and infringed.  So, for example, a UK Court will only grant an injunction to restrain infringement of a UK SEP.  The same applies to a claim for damages: they will only be awarded for infringement of a UK SEP.

However, the position in relation to a FRAND undertaking is rather different.  ETSI is the SSO for the EU but what is important is that its standards are of international effect.  As a result, the FRAND undertaking given by a patent owner to ETSI in return for the incorporation into the standard of the technology protected by the patent is also of international effect.  It applies to all patents which belong to the same family irrespective of the territory in which they subsist.

As noted in the Unwired Planet decision, in practice SEP holders and infringers (who normally have more or less global sales), if acting reasonably, would therefore agree on a worldwide licence.  They would regard country by country licensing as madness.  A worldwide licence would also be far more efficient.  In particular, for products with a global circulation, SEP licences granted on a worldwide basis may contribute to a more efficient approach and therefore can be compatible with FRAND.

A global licence might well have different rates for different regions and for different standards – for example, if the licensee was a Chinese multinational like Huawei, they might well agree on different rates for China as for the Rest of the World – but again they would not go for country by country licensing.

The decision in Unwired Planet International Ltd & Anor v Huawei Technologies Co Ltd & Anor [2018] EWCA Civ 2344 considered these issues at length and established the English Court as willing to tackle FRAND disputes and get involved in the fine detail of royalty calculations.

Conversant v Huawei [2019] EWCA and the UK as a forum for SEP disputes

The Appeal in Conversant v Huawei [2019] related to four UK patents that had been acquired from Nokia in 2011 as part of a large patent portfolio acquisition.  Interestingly, however, the UK represented only 0.07% of ZTE’s mobile device sales, and only 1% of Huawei’s worldwide sales on which royalties are claimed.  As such, both Huawei and ZTE sought to argue that the English Courts were a forum non conveniens and that instead the issue of a global SEP licence should be considered by the Chinese Courts.  The dispute also centred around whether a global licence would be FRAND and what relief would be granted if infringement were established.

Huawei and ZTE submitted evidence in favour of their assertion that the Chinese Courts were the correct forum by submitting Guidelines issued by Guangdon High People’s Court: “Guidelines of Guangdong High People’s Court on Adjudicating Cases of Disputes Over Standard-Essential Patents (Trial)”.  However, the English Court found that no evidence was presented in the submission of the Guidelines that the Chinese Courts would actually determine or set the terms of a global FRAND licence, and that so far the Guidelines had only been brought in for a trial period.

In the present decision the Court considered that whether or not English Court is the correct forum depends on how broadly you characterise the claim.  Too broadly means you focus on a different property right and different underlying facts.  Too narrowly and you focus only on the relief available in the English Courts.  At the end of the day it was considered that what was at issue was a number of UK rights, and an assessment of whether these UK rights are valid and infringed.

In the end, the Court held that (at point 99 of the Decision):

(i) The UK patents are SEPs;

(ii) Conversant has complied with their ETSI undertaking;

(iii) Huawei and ZTE have not so complied;

(iv) Conversant are therefore entitled to enforce their UK SEPs including a FRAND injunction.

What was potentially also relevant was that there were no equivalent family members in China for the four UK patents at issue.  As such, at point 101 of the Decision it was held that:

“Leaving Conversant to seek a remedy in China would be compel them to advance a case based on different patents.  The Chinese patents are not the UK patents viewed through the lens of Chinese law, but are different property rights applied for and registered in China. They are not even in the same families as the UK patents.  They will have different claims […] I find it impossible to view such a dispute as being the same dispute as that which would arise in the English Court.”.

The Court held (at point 107) that: “Conversant is seeking to enforce UK patents, governed by English law”.  The Court also noted that the appellants were free to pursue their claims in respect of the Chinese patents in the Chinese Courts, and the result of those Chinese proceedings would be taken into account in any global FRAND licence.

As such it was held that the English Courts are the right forum for considering this issue and the fair assessment of a global licence for these SEPs, and therefore cemented the English Court’s position as a forum for the consideration of global SEP disputes and the setting of global FRAND patent licences.

If you would like any more information regarding this article, please contact the author, Andrew White.