UK Supreme Court hands down landmark decision with international significance in licensing of Standard Essential Patents

In a landmark decision, the UK Supreme Court today upheld decisions of both the UK High Court (as reported here) and the Court of Appeal (as reported here).  A copy of the decision can be obtained here.

As noted in the decision itself, the issues decided upon have major importance to the international telecommunications market and in particular relating to Standard Essential Patents (SEPs).  It holds that a UK court has the jurisdiction to, and may properly exercise a power to, both (a) grant injunctions and (b) determine royalty rates for a global licence of a multinational patent portfolio.  It also holds that the English courts can be an appropriate forum to hear such matters.

The decision

The decision clarifies a number of disputed issues:

1. Whether the English courts have the jurisdiction to set a global FRAND rate

The Supreme Court looked to industry practice and noted that due to the size of telecom companies’ patent portfolios and the large number of SEPs, the “practical solution therefore is for the SEP owner to offer to licence its portfolio of declared SEPs” (paragraph 60).  The court acknowledged that such a portfolio may include “untested” patents (which may be of questionable validity and/or not infringed) but held that “by taking out a licence of an international portfolio of generally untested patents the implementer buys access to the new standard. It does so at a price which ought to reflect the untested nature of many patents in the portfolio; in so doing it purchases certainty.”  The court held that the commercial reality means that the licences must have international effect and therefore be global (paragraph 62).

The Supreme Court also held that the previous decisions by the High Court and Court of Appeal did not rule on the validity or infringement of a foreign patent, as that would be beyond their jurisdiction.  Instead, the court held that the lower courts had looked to the commercial practice in the industry in determining what is FRAND behaviour.  The Supreme Court noted that while it has not been industry practice to challenge patents that had been licensed as part of a global licence, “it might in our view be fair and reasonable for the implementer to reserve the right to challenge those patents or a sample of those patents in the relevant foreign court and to require that the licence provide a mechanism to alter the royalty rates as a result.” (paragraph 64).  The court looked to practice in other jurisdictions and noted that, while foreign courts may not yet have gone so far, there appeared to be a willingness in principle (at least in the US and Germany) to do so (paragraph 84).  As such the court concluded that the English courts do have the jurisdiction to set a global FRAND rate.

2. Whether the English courts are an appropriate forum to hear such disputes

It had previously been argued that China was a more appropriate forum for the action rather than the UK (not least because China represented a greater share of the relevant market than the UK).  The decision noted that “how the dispute should be defined has been the main bone of contention between the parties” (paragraph 95) (i.e. are they proceedings relating to obtaining a global FRAND licence, or are they proceedings to enforce a national patent).  The court held, however that “a challenge to jurisdiction on forum conveniens grounds requires the challenger to identify some other forum which does have jurisdiction to determine the dispute” … “In the present case, China is the only candidate which the appellants have put forward.”.  In response to this, the court noted that “the Chinese courts do not, at present, have jurisdiction to determine the terms of a global FRAND licence, at least in the absence of agreement by all parties that they should do so. Even in the event of such an agreement … the prospect that the Chinese courts would embark on the exercise [is] no more than speculative.” (paragraph 97).  As such, the English courts were held to be an appropriate forum.

3. How “non-discriminatory” do FRAND terms have to be?

This issue really focused on whether an SEP holder needs to license on comparable terms to similarly situated patentees (i.e. “hard edged”), or whether it is more general and only requires an SEP holder to licence according to market circumstances, which may for example allow lower rates as an incentive for licensees that enter into a licence earlier.  The court looked to ETSI’s IPR policy (the body responsible for standard setting in Europe) and held that “the non-discrimination element in the FRAND undertaking is ‘general’ and not ‘hard-edged’” and that “since price discrimination is the norm as a matter of licensing practice and may promote objectives which the ETSI regime is intended to promote (such as innovation and consumer welfare), it would have required far clearer language in the ETSI FRAND undertaking to indicate an intention to impose the more strict, ‘hard-edged’ non-discrimination obligation”.  As such, the court held that the FRAND terms are not ‘hard-edged’ and that different licence rates can be offered to different licensees.

4. The interplay between UK law and European competition law

This issue really relates to the conduct of the patentee and their obligation to make a FRAND offer in order to avoid falling foul of European competition law.  The court held that the duty on the patentee to make a FRAND offer only arises when the alleged infringer has expressed its willingness to conclude a licensing agreement on FRAND terms.  Although the court did not explicitly decide on this issue, they indicated that a patentee making a FRAND offer may represent a “safe harbour” from abuse of a dominant position (paragraph 153).  The court did hold that it does not necessarily follow, however, that an absence of a FRAND offer necessitates an abuse of a dominant position.  Instead “to answer that, due account has to be taken of the particular circumstances of the case” (paragraph 153).

5. The proportionality of injunctions

The court noted that the requirement when working with SEPs to license on FRAND terms meant that concerns surrounding the use of injunctions as a threat to obtain exorbitant royalty rates did not apply.  The court held that “we are not in any event persuaded that there is any basis on which this court could properly substitute an award of damages for the injunction” (paragraph 163) and that “the threat of an injunction cannot be employed by the claimants as a means of charging exorbitant fees, or for undue leverage in negotiations, since they cannot enforce their rights unless they have offered to license their patents on terms which the court is satisfied are fair, reasonable and non-discriminatory.”  The court also noted that “if the patent-holder were confined to a monetary remedy, implementers who were infringing the patents would have an incentive to continue infringing until, patent by patent, and country by country, they were compelled to pay royalties. It would not make economic sense for them to enter voluntarily into FRAND licences” (paragraph 167).  As such, the court held that injunctions are proportional when considering SEPs.

Conclusion

This is a far-ranging decision with international significance.  It holds that the UK is an appropriate forum to hear SEP disputes, that the English courts can set global FRAND rates, and that injunctions can be an appropriate remedy.  It also provides further guidance on the conduct required of SEP holders and on the terms that they can offer to different licensees.