Patent privateers - plain sailing or time to jump ship?
20 October 2016
Smartphone litigation has attracted a lot of media attention over the past few years. As a result of this, the media has chosen some quite imaginative names. One famous name is 'patent troll' to refer the rather less cool sounding 'non-practising entity' or NPE. Another name that has been adopted over the last couple of years is the rather swashbuckling name of 'privateer'.
As with patent troll, a privateer is not as glamorous as it sounds. Basically, a privateer is a company that assigns its standards essential patents (SEPs) to an NPE so that the NPE can monetise the patent. The NPE does not pay much for the patent, but instead agrees to give a proportion of the money received from the patent to the privateer. Two recent cases at the UK Patents Court have involved privateering.
A Standards Essential Patent?
'Standards' define the mechanism by which a smartphone will communicate with the cellular network. Where the mechanism defined in the standard is the subject of a patent, (sometimes called a standard essential patent or SEP), then all smartphone manufacturers will need to obtain a licence of the patent to be able to operate, otherwise they will be infringing the standard essential patent. The agreement governing the use of the standard stipulates that the licence will be given on fair, reasonable and non-discriminatory (FRAND) terms. However, a definition of a FRAND term has not been provided and is open to interpretation.
Vringo v ZTE
The first dispute involving a privateer was between Vringo and ZTE. In this case, Vringo was an NPE to whom Nokia had assigned a number of its standard essential patents. Vringo brought an action against ZTE alleging infringement of its standard essential patents. The dispute ultimately centred around what constitutes a FRAND royalty as the validity of the patents was decided at an earlier hearing and as the patents were deemed essential to the standard, infringement of the patent was not in doubt. Many commentators were looking forward to receiving guidance around a FRAND royalty rate.
Vringo's position was that a FRAND royalty rate was 2% on the eNodeB (which communicates with the smartphone). Since the price of the eNodeB is around £120,000, this amounted to a royalty of £2,400-£3,000 per eNodeB. Unsurprisingly, ZTE did not agree with this and said that the royalty rate should be calculated with reference to the smallest saleable compliant part of the product. On this basis, ZTE argued that the royalty rate should be £2.40 per eNodeB – 1,000 times smaller than the rate argued by Vringo.
Unfortunately, in December 2015, a global settlement was signed between both parties. Accordingly, there was no opportunity for the UK Court to comment on what constitutes a FRAND royalty.
Unwired Planet v Huawei and Samsung
This dispute in the UK courts is of great interest to the standards industry as the case will decide issues central to validity and infringement of standards essential patents, the impact of EU competition law and a definition of a FRAND term.
Ericsson transferred a number of patents relating to various standards (including GSM, UMTS and LTE) to Unwired Planet. The terms of that transfer agreement allowed for Ericsson to receive a proportion of the revenue generated from monetising these patents. Unwired Planet brought various actions for infringement including cases against Huawei, Samsung and Google.
The UK judge split the case into five technical trials (where both infringement and validity are heard), followed by a non-technical trial to decide what constitutes a fair, reasonable and non-discriminatory licence and the various competition law issues.
The first technical trial concluded that the first patent was upheld as being valid and, as the patent was essential to the LTE standard, infringed.
The second technical trial concluded that two of the patents were invalid for obviousness.
The third technical trial concluded that a fourth patent was valid and, as the patent was essential to the GSM standard, infringed.
The defendants rely on a defence against infringement based on EU competition law. The terms of that claimed defence relate to:
- the legitimacy of the transfer of rights from Ericsson to Unwired Planet and specifically that the obligation to licence on FRAND terms had not been transferred;
- by dividing the portfolio into two parts (some parts with Ericsson and some with Unwired Planet), this was anti-competitive as unfair higher royalty rates would be earned and competition would be restricted; and
- certain terms in the agreement were anti-competitive and infringed Art. 101 of the Treaty of the Functioning of the European Union.
The Court of Appeal has decided that all three competition law defences will be heard at full trial.
If the competition law defence raised by Samsung is successful it is possible that the privateering arrangement between Ericsson and Unwired Planet may render the patents unenforceable. The court's final judgment will obviously shape future commercial decisions as to whether or not to use a privateer arrangement when monetising and enforcing a patent.
We await the outcome of this trial with interest.