First High Court judgment on FRAND royalties

UK Court takes tough stance on party unwilling to take Worldwide licence on FRAND terms.

The UK High Court has handed down its first decision determining FRAND royalties, and has provided clear guidance as to the rights and obligations of parties to licensing negotiations and litigation relating to standard essential patents (SEPs).

In the context of a dispute between patent owner, Unwired Planet, and prospective licensee, Huawei, relating to patents declared essential for various telecommunication standards, the Court has emphasised that FRAND characterises both the terms of a licence and a process by which a licence is negotiated. The Court will be prepared to grant an injunction against a party, such as Huawei, who fails to satisfy the Court of its willingness to take a license on FRAND terms.

The Court also answered many longstanding questions relating to the principles by which FRAND royalty rates are to be calculated. Among other things, the Court has favoured benchmarking using the proportional value of the patentee's portfolio, taking the view that royalty rates should not vary depending on the size of the licensee. It has also rejected the argument that the non-discriminatory requirement of the FRAND undertaking forced the licensor to offer the same or a similar royalty rate or terms as that agreed in any earlier licence with a similar licensee (so-called “hard-edged non-discrimination”).

Some aspects of the decision will no doubt lead to further questions but, overall, the decision demonstrates a willingness of the Court to grapple with, and take a clear position on, complex questions relating to SEPs and FRAND licensing.

The full judgment can be found here

Business impact

The judgment is likely to have a significant effect on how SEP holders and implementers negotiate licences and conduct litigation, given the Court's demonstrated willingness actively to determine FRAND terms and to grant injunctive relief in the appropriate circumstances.

The Court specifically acknowledged the potential for both "hold-out" (delaying and other tactics) by a would-be implementer or licensee and "hold-up" by an SEP holder (marking a significant change from decisions that have focused on the perspective of the implementer), and attempted to adopt an approach intended to obviate the strategies used by both parties in negotiations.

The relatively pragmatic and definitive position taken by the Court should facilitate a more constructive approach to SEP negotiations and litigation than has historically been the case.

In relation to negotiating a FRAND licence, key takeaways from the Court's decision include:
 

• The Court has clarified the obligations of the SEP holder and the implementer based on the CJEU’s decision in Huawei Technologies C-170/13. See our earlier article "Standard essential patent injunctions: guidance for all concerned" (on Practical Law) for background.
• FRAND characterises both the terms of the licence and the process for negotiating it. Even though the implementer does not have a contractual obligation to ETSI, it does have a reciprocal obligation to negotiate in a FRAND manner.
• Ultimately, there is only a single set of FRAND terms for any given set of circumstances.
• The offers made in the course of negotiations do not themselves need to be FRAND, provided that they are not so unreasonable as to disrupt or prejudice the negotiations. Such disruption or prejudice to the negotiations in practice is "a high standard to reach".
• For any particular circumstance, the (one and only) set of FRAND terms may (and often will) include a worldwide licence (as distinct from a licence with limited jurisdictional coverage).  However, each case will depend on the particular circumstances.
• In relation to the granting of injunctive relief, the Court made clear that SEP holders are entitled to maintain a claim for an injunction through to trial, provided that they take a FRAND approach to the conduct of the negotiations and the proceedings. Both parties must demonstrate an unqualified willingness to conclude a licence on FRAND terms. If an implementer fails to do so or only expresses a contingent or qualified willingness, then the SEP holder may obtain injunctive relief.

While the particular numbers reached by the Court in its FRAND royalty rate calculations are clearly specific to the case, some key principles that emerge are:

• A FRAND royalty rate can be determined by reference to the value of a licensor's patent portfolio relative to:
   

1. industry comparable licences (freely negotiated), where the royalty rate for the comparable licence (E) is multiplied by the relative value (R) of the licensor's portfolio relative to that of the comparable licensor; or
    
2. all SEPs relating to a particular standard (the "top down approach"), where the share of a licensor's patent portfolio relative to the industry as a whole (S) is multiplied by the total aggregate royalty burden for the given standard (T) (the values of T for 2G, 3G, and 4G for infrastructure and handsets were calculated to range from 3.1% to 8.8%).

Method 2 is likely to be more useful as a cross-check on method 1. 

• Counting patents is "inevitable" for standards such as LTE, given the number of patents. This leads to an acceptance of the principle of numerical proportionality.

In considering competition law issues:

• The Court rejected the argument that the non-discriminatory requirement of the FRAND undertaking forced an SEP holder to offer the same or a similar royalty rate as that agreed in any earlier licence with a similar licensee (hard-edged non-discrimination).  
• While the Court accepted that Unwired Planet was in a dominant position, it rejected all of Huawei's contentions that Unwired Planet had abused that position by (1) bringing premature litigation, (2) unfair excessive pricing, (3) bundling SEPs and non-SEPs, and (4) multi-jurisdictional bundling.
• The Court derived a set of eight principles, rather than rigid rules, from the CJEU's judgment in Huawei Technologies (Case C-170/13). These included that the CJEU had set out a scheme which both the patentee and implementer are expected to follow in the context of a dispute about a SEP. Failure to comply with the guidelines set out in Huawei, means a licensor cannot rely on an assumption that they have not abused their dominant position.  

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