Unwired Planet v Huawei: FRAND terms and rate
In Unwired Planet v Huawei, Mr Justice Birss, sitting in the Patents Court, has offered standard essential patent (SEP) owners valuable guidance on the determination of 'fair reasonable and non-discriminatory' (FRAND) terms.
Following the expiry of a licence agreement between Ericsson and Huawei in 2012, Unwired Planet acquired a portion of Ericsson's patent portfolio (including some of those patents previously licensed to Huawei). Between September 2013 and January 2014, Unwired Planet initiated contact with Huawei with a view to it taking a licence of its patents. Discussions, however, appear to have stalled regarding the terms of a non-disclosure agreement. Without further notice (and arguably prematurely), in March 2014, Unwired Planet commenced patent infringement proceedings against Huawei (and others) in the UK.
The patent infringement proceedings pertained to six patents, five of which were claimed to be essential to certain standards.
As a result, five technical trials were listed between October 2015 to July 2016. Following the first three technical trials, two of the six patents were found to be valid, essential and infringed (with two other patents being held invalid). The parties agreed that the remaining two technical trials should be postponed indefinitely.
The terms of a FRAND licence, therefore, fell to be determined. The hearing to address this took place between October and early December 2016, with judgment (some 166 redacted pages) being handed down in early April 2017.
Procedural & legal issues
Before addressing Mr Justice Birss' findings regarding the FRAND royalty rate and terms, it is worth considering some of the procedural and legal issues raised and addressed by him.
In Vringo v ZTE, Mr Justice Birss had explained that, for a FRAND licence, the Patents Court would not engage in a 'copyright tribunal type exercise' (namely, crafting a complete set of new FRAND terms). Further, in an earlier case management conference in the case at hand, while he decided that the court could declare that a set of terms offered by the parties were (or were not) FRAND, he was silent as to the court's ability to determine new terms.
It fell to be considered, therefore, whether the Patents Court could and would determine FRAND terms.
This was of particular importance as Unwired Planet had declined to offer a patent by patent licence and Huawei had declined to offer to take a global licence. Qualifying its previous position, the court held that:
... the court's jurisdiction is not restricted to the binary question of assessing a given set of terms but extends to deciding between rival proposals and coming to a conclusion different from either side's case on such a proposal.
The relationship between FRAND and competition law
In Huawei v ZTE, the Court of Justice of the European Union, in the context of an alleged abuse of dominant position, set out a scheme that a SEP owner and prospective licensee should follow. The question arose as to whether any deviation from this scheme would be in breach of FRAND obligations and/or competition law.
Mr Justice Birss drew a distinction between FRAND and competition law. He reasoned that, as a result of the declaration made by SEP owners to the European Telecommunications Standards Institute (ETSI), a legally enforceable contract is created under French law which a third party (for example, a prospective licensee) may enforce. It was not necessary for a potential licensee to rely on competition law.
Further, he explained that while an offer may not be FRAND, it does not follow that it is a breach of competition law. With regard to Huawei v ZTE, Mr Justice Birss explained that while the standard of behaviour set out by the court was exemplary to avoid a breach of competition law, it did not follow that behaviour inconsistent with that standard was a breach.
FRAND royalty rate
The court considered two approaches to determining a FRAND licence rate: 'comparable licences'; and 'top-down' (although it suggested that the latter may be better as a cross-check for the former).
1. Comparable licences
Mr Justice Birss noted that the difficulty posed by using other licences as a comparator is that "... many patent licences in this industry have terms which make the comparison difficult. The two major problems are that they may be based on a lump sum rather than a running royalty and they may be cross-licences with a balancing figure which may be a rate or a lump sum."
To address this, he adopted a process of 'unpacking' the licences in question. For a lump sum he derived a notational royalty rate by treating the lump sum as the net present value of an income stream from running royalties analysed using a discounted cash flow based on some appropriate estimates of sale figures.
As to cross-licences, he held:
The unpacking of a cross-licence can resolve two one-way royalty rates from a single balancing figure based on the notion that the single figure represents the effect of balancing the value in royalty terms of each party's patent portfolio. If the balancing figure is a lump sum then unpacking will involve net present value assessments for each party with the attendant uncertainties. In any event there also needs to be some means for assessing the relative value of each party's portfolio unless one has a figure for one or other party directly.
To assess the relative value of each party's portfolio entails counting patents (as to which, please see below).
The 'top-down' approach identifies the value of each patentee's portfolio for a particular standard and applies that proportion to the total royalty burden for that standard. This exercise entails counting the number of relevant SEPs owned by the patentee for a particular standard and the total number of relevant SEPs applicable to a particular standard. This gives a share of the total relevant SEPs.
Counting relevant SEPs
However, counting SEPs (whether for the purposes of the 'comparable licence' or top-down' approach), is problematic. For example, patents are incorrectly declared to the standards, are declared in relation to optional aspects of the standards or are declared in relation to features of the standard which are not deployed.
To address this, the parties advanced two approaches, referred to as MPNA and HPA in the judgment. Having considered both, Mr Justice Birss concluded that they each produced the wrong answer but, on balance, preferred (Huawei's) HPA, albeit with significant adjustments made.
HPA broadly consisted of the following steps:
- A list of declared essential patents and patent applications was created using the ETSI and Korean Telecommunications Technology Association database [see note 1 below];
- The patents and applications were then collected into families which were, in turn, classified by core network or handsets and then divided into five groups: at least one issued and non-expired patent and an English or Chinese language member; at least one issued and non-expired patent but no English or Chinese language member; only expired members; no issued (ie, granted) patents; and family information not available on INPADOC;
- The families were then classified into three classes by reference to the standards to which they were declared: GSM/2G, UMTS/3G and LTE/4G; and
- The essentiality of the first group of families (namely, at least one issued and non-expired patent and an English or Chinese language member) was assessed.
- To assess essentiality, one patent from each family was selected according to given rules. Spending thirty minutes per family, the claims were compared to the relevant standard specification to determine if the standard required all the elements of the claim. If there was no clear reason to rule out the patent as being essential, then the family was so deemed.
With the adjustments made, Mr Justice Birss concluded the following:
This finding of fact regarding the adjusted denominator, while very approximate, means that any SEP owner can calculate the 'top down' royalty rate for its own portfolio.
Mr Birss did recognise, however, that a patent may cover some 'keystone' invention which should be accorded particular value. He also recognised that a FRAND licence could allow for the adjustment of rates in the event that patents were held to be invalid.
Unwired Plant share (s) for handsets
|Unwired Planet patent||HPA denominator||Adjusted denominator||S (%)|
|Unwired Planet Patent||HPA denominator||Adjusted denominator||S (%)|
Major & other markets
In response to evidence that a worldwide licence would have different rates for major markets (such as the US) and other markets (such as China), Mr Justice Birss held that:
The comparable licences show that rates are often lower in China than for the rest of the world. [For example, in Huawei v InterDigital the Guangdong High People's Court upheld the FRAND rate of 0.019% for InterDigital's portfolio.] The relative factor varies. I find that a FRAND licence would use a factor of 50%.
Further, because Unwired Planet's portfolio was smaller in China than elsewhere and it had fewer relevant SEPs, Mr Justice Birss reasoned that:
A fair and reasonable approach consistent with everything which has gone before would be to scale the rate with an additional factor determined by the number of Relevant SEPs in China ...
Notably, Mr Justice Birss held that the non-discrimination limb of FRAND must consider potential distortion of competition.
Although Samsung had been granted a licence at a rate lower than the benchmark rate and, it was held, were similarly situated to Huawei, there was insufficient evidence that such distortion would arise and therefore Huawei were not entitled to demand the lower (Samsung) rate.
Two principal issues fell to be determined when determining the terms: whether it was FRAND to offer a worldwide portfolio licence; and whether it was FRAND to offer a SEP and non-SEP portfolio licence.
Huawei reasoned that, as Unwired Planet was in a dominant position [see note 2 below], it was not entitled to tie or bundle one product or service with another (be it UK patents with non-UK patents, or SEPs with non-SEPs). In doing so, it relied on Microsoft Corp, in which the Court of First Instance approved a fourfold test:
- "the tying and tied products are two separate products"
- "the undertaking concerned is dominant in the market for the tying product"
- "the undertaking concerned does not give customers a choice to obtain the tying product without the tied product"
- "the practice in question forecloses competition."
The principal debate before the court was with regard to the fourth limb, with Unwired Planet arguing that there was no evidence to show that competition was foreclosed and Huawei arguing that it was to be assumed in circumstances of tying or bundling.
In relation to this, Mr Justice Birss held that:
For abuse to be established there must be a finding that the practice in question forecloses competition. The legal principle I take from the authorities is simply that such a finding may be based on inference but the inference must be justified in all the circumstances. Just because it is normally assumed, it does not follow that it will always be assumed. The circumstances may be such that such an assumption cannot be made and a close analysis of the actual effects is required.
On the question of a worldwide licence, the judge drew from the prevalence in the industry of worldwide licences the inference that such a licence was not inherently likely to distort competition (subject to certain caveats such as the licences providing for circumstances where a patent is found to be invalid or non-essential in a particular jurisdiction).
As to the 'bundling' of SEPs and non-SEPs together, Mr Justice Birss held that:
I am in no doubt that a patentee subject to a FRAND undertaking cannot insist on a licence which bundles SEPs and non-SEPs together. But it does not follow from this that it is contrary to competition law to make a first offer which puts SEPs and non-SEPs together. There is clear evidence that in some cases the parties agree to a licence which includes both SEPs and non-SEPs together. The mere fact a licence includes both does not take it out of FRAND nor does it indicate that a patentee has used the market power given by the SEPs to secure a licence under the non-SEPs. Everything will depend on the circumstances.
In any litigation, the threat of an injunction is a powerful tool. However, the grant of that injunction is closely intertwined with competition law issues. The question fell to be determined, therefore, whether Unwired Planet, as an SEP, could obtain an injunction and, if so, in what circumstances. This was of particular relevance because Unwired Planet had, arguably, commenced the litigation prematurely.
The court concluded as follows:
The relevant patents have been found valid and infringed. Unwired Planet wish to enter into a worldwide licence. Huawei is willing to enter into a UK portfolio licence but refuses to enter into a worldwide licence. However a worldwide licence is FRAND and Unwired Planet are entitled to insist on it. In this case a UK only licence would not be FRAND. An injunction ought to be granted because Huawei stand before the court without a licence but have the means to become licensed open to them.
As to whether the premature commencement of the litigation was an abuse of a dominant position, Mr Justice Birss reasoned:
I am far from being convinced that a refusal of an injunction in 2017 would have been a proportionate remedy for Unwired Planet's abuse on that assumption. A single patent normally takes about one year to come to trial on validity and infringement in the Patents Court. The abusive commencement of this action in April 2014 would have justified refusal of an injunction in April 2015 and no doubt for a good time after that but we are now two years on from that time, a year on from the finding of infringement and three years overall from the start of the proceedings. Any prejudice to Huawei from the commencement of the proceedings has been outweighed by time and by Huawei's stance in relation to a FRAND licence.
Mr Justice Birss held that neither Unwired Planet or Huawei's offers had been FRAND, but that neither had been in breach of competition law. Rather, he concluded that the following were FRAND rates:
|Unwired Planet (August 2016) (%)||Huawei (October 2016) (%)||Court (April 2017)|
|Major markets (%)||China & other markets (%)|
|Global licence||2G/GSM||Infrastructure(3)||0.065||[Not applicable](4)||0.064||0.032|
|Mobile devices||0.065||[Not applicable]||0.064||0.016|
|Mobile devices||0.065||[Not applicable]||0.032||0.016|
|Mobile devices||0.13||[Not applicable]||0.052||0.026|
- The TTA list had duplications removed and was supplemented with family members not expressly declared to ETSI.
- It should be noted that this was assumed, but the court implied that a different conclusion may be reached on a proper economic analysis.
- The judgment does not report Unwired Planet making a distinction in its offer between infrastructure and mobile devices for the global SEP portfolio rate.
- Huawei declined to engage in terms of a global licence.
Case details at a glance
Jurisdiction: England & Wales
Decision level: High Court of Justice Chancery Division Patents Court
Parties: Unwired Planet International Ltd and (1) Huawei Technologies Co. Ltd (2) Huawei Technologies (UK) Co. Ltd and Unwired Planet LLC
Date: 05 April 2017
Citation:  RPC 19,  EWHC 2988 (Pat),  4 CMLR 17