The UKSC resolves a patent dispute but stirs conflict between advocates of monopolistic rights and defenders of competition

Unwired Planet v. Huawei, Judgment of 26 August 2020, [2020] UKSC 37, upholding the High Court and Court of Appeal decisions ([2017] EWHC 711 (Pat) and [2019] EWCA Civ 38) in the related cases Unwired Planet v. Huawei and ZTE v. Conversant

What are standards and why are they important to patents and competition law?

Whether we realise it or not, EU citizens make use of technological ‘standards’ every day. USB is a standard. MP3 is another. The 4G (and now 5G) communication technologies we use contain a host of standards. Without the use of standards there would be no interoperability between devices manufactured by different companies. Thus, standardisation enables efficiency gains that benefit consumers, by allowing manufacturers to increase the overall size of markets, achieving vast economies of scale as well as increased product substitutability. Standardisation is particularly crucial in the information and communication technology (ICT) and Internet of Things fields (IoT) (consumer electronics, automotive industry, and electricity grid industry).

Patents are a type of property. As with any kind of property, owners must be able to enforce their rights against competitors who are trespassing, or infringing, upon their patents. Without the ability to enforce, there would be no way to recoup the investment in resources required to create a new patentable invention in the first place. Patents cover new inventions, including important technology standards. Patents on standards are commonly known as Standard-Essential Patents (SEPs) and are frequently litigated.

The existence of SEPs – and associated litigation - has potentially disruptive consequences for the manufacture, marketing and distribution of complex products that include many patented standards, e.g. ICT products such as smart-phones incorporating a camera, a video, a web browser, wireless, text messages, etc, as well as an increasing array of IoT ‘networked’ products such as wearable devices and appliances for ‘smart homes’. By enforcing their patents – their time-limited monopoly rights - owners of SEPs could, if they wished, use the patent enforcement system to ‘hold up’ or prevent competitors from launching rival products that use the same standards.

For EU institutions, this raises serious concerns over competition in the EU marketplace and the need to maintain interoperability to ensure the IoT industry can develop. Therefore, tension exists between SEPs (which offer their owners R&D incentives/rewards in the form of monopolistic rights) and standards (which allow for widespread and collective use).

How can an appropriate balance be reached? How can the optimum scenario of incentivising the development of new inventive technologies, including standards, while also allowing fair competition be achieved? The answer is clear: fair licensing practices. In order to balance the need for standardisation, required for public use, with the private rights of SEP-holders, standard-setting organisations (SSOs) typically require SEP-owners to give an irrevocable undertaking that they are prepared to grant competitors licences on FRAND terms (fair, reasonable, and non-discriminatory).

Difficulties arise however, when a consensus cannot be reached between the parties as to what is FRAND in a particular scenario. If SEP-owners and prospective licensees disagree over e.g. the value of the royalties that should be considered fair and reasonable, or if the parties disagree over the territorial scope of the licence, this could lead to inconvenient hold-up of technology diffusion and marketing of products and service.

This makes the achievement of a balanced SEP licensing system a vital aim of the European Union. As we discuss below, in 2015 the Court of Justice of the European Union (CJEU) issued guidance to national courts on issues of competition law in the context of patent litigation and FRAND in Huawei v ZTE (Case C-170/13 Huawei Technologies, EU:C:2015:477 http://curia.europa.eu/juris/liste.jsf?num=C-170/13).

In this case comment we examine a recent example of a national court decision taken in the aftermath of the CJEU ruling. In late August the UK Supreme Court handed down its judgment in the Unwired Planet v Huawei case, making an important intervention in this field. Although as of January 2020 the UK is no longer a member state of the EU, the lower court decisions in this case were decided prior to ‘Brexit’, and the UKSC judgment itself does not depart from the CJEU guidance. As such it is still instructive.

Legal Background – resolving a conflict between monopolistic patents and principles of competition

As noted above, the debate over the role of standard-essential patents (SEPs) is necessarily distinguished as much by concerns over competition as questions of patent law per se. The EU institutions’ policy concern is that the owners of patents on technological standards (SEPs) could block competitors from making use of such standards – key to 4G and 5G communications - and thus obstruct the development of the information and communications technology (ICT), mobile communications and Internet of Things (IoT) sectors.

The aim, therefore, is to balance the role of monopolistic patent rights (granted at the non-EU EPO) in the context of the EU’s overriding focus on competition. Trying to achieve this is hampered by the inherent fragmentation of the European patent system, which has significant national, EU and non-EU aspects. Monopolistic patent rights are granted at the (non-EU) European Patent Office, but are validated and enforced as territorial patents in national courts. Yet patent owners must abide by the EU’s overriding focus on competition (embedded in Articles 101 to 109 of the Treaty on the Functioning of the European Union (TFEU)).

Further fragmentation is caused by the self-regulation model of standard-setting, which occurs at independent standard organisations such as European Telecommunications Standards Institute (ETSI). As noted above, patent owners who see their patents accepted as ‘essential’ to the standards being developed for ICT purposes must promise to license their patents on a fair, reasonable and non-discriminatory (FRAND) basis. Problems occur when companies involved in negotiations cannot agree on what is truly FRAND.

In disputes over SEPs national courts are obliged to follow the CJEU’s guidance on what amounts to fair, reasonable and non-discriminatory licensing of standard-essential patents (FRAND). Since the seminal 2015 CJEU case of Huawei v ZTE (the Court of Justice of the European Union (CJEU) (Case C-170/13 Huawei Technologies, EU:C:2015:477 http://curia.europa.eu/juris/liste.jsf?num=C-170/13)) the importance of a harmonised approach to FRAND across EU member states has become obvious. The CJEU highlighted the need for good faith in negotiations: injunctions concerning SEPs subject to FRAND commitments should not be issued automatically without full consideration of the parties’ behaviour in the context of their relevant bargaining power. Consequently, seeking an injunction against a willing licensee of a SEP can amount to abuse of a dominant position under Article 102 TFEU. But SEP-owners, who commit to grant third parties a FRAND-license, will not abuse their dominant position in seeking an injunction as long as they comply with certain strict obligations:

• prior to bringing that action, the proprietor should first alert the alleged infringer of the infringement complained about by designating that patent and specifying the way in which it has been infringed; and, secondly, after the alleged infringer has expressed willingness to conclude a licensing agreement on FRAND terms, the proprietor should present to that infringer a specific, written offer for a licence on such terms, specifying the royalty and the way in which it is to be calculated

• in a case where the alleged infringer continues to use the patent in question, seeking an injunction will not be abusive where the alleged infringer has not diligently responded to that offer in accordance with recognised commercial practices in the field and in good faith (this being a matter which must be established on the basis of objective factors, and which implies, in particular, that there are no delaying tactics).

The Unwired Planet case

The Unwired Planet case involved several issues including: the UK courts’ interpretation of the CJEU guidance in Huawei (2015); the effect of the non-discrimination component of the FRAND test (does it mean that materially the same licence terms as offered to Samsung must be offered to Huawei in the circumstances of the Unwired case?); and the question of royalty-rate calculation. In particular, the dispute focused on patents owned by Unwired Planet on iteration of cellular technology from 2G to 4G (that had been acquired from Ericsson), which were incorporated in Huawei’s products. Unwired Planet claimed that Huawei had violated six of its patents for all these generations of mobile communications technology, five of which had been declared SEP by ETSI. In a linked case, the UKSC also decided a case involving Conversant, Huawei and ZTE concerning whether England & Wales is an acceptable forum to decide global patent licensing disputes regarding patents valid in other territories. This was a key concern – taking account of the global nature of SEP disputes and the territorial nature of patents, how far can national courts go in interpreting their own jurisdiction to issue injunctions? This second dispute was started by Conversant against Huawei and ZTE which had been accused for violating four of its UK patents, which had been acquired from Nokia and covered LTE standards used by 4G handsets to download and send data.

Huawei sought to overturn the earlier High Court (https://www.judiciary.uk/wp-content/uploads/2017/04/unwired-planet-v-huawei-20170405.pdf) and Court of Appeal (https://www.bailii.org/ew/cases/EWCA/Civ/2018/2344.html) rulings that held that seeking a global FRAND licence (rather than a territory-by-territory one) is a fair and reasonable approach in the context of SEPs. Here, Birss J. in the HC had been critical of the idea that country-by-country licensing approach was workable. In his view, if an implementer of the SEP technology refuses a FRAND global licence, an injunction can be sought by the SEP holder and granted by the court (as it will not constitute abuse of dominance). The Court of Appeal agreed. UKSC thus had to consider to uphold this or grant the appeal.

The UKSC decision

The judgment (https://www.supremecourt.uk/cases/docs/uksc-2018-0214-judgment.pdf) was a resounding victory for the patent owners. The UKSC held unanimously that the national courts of the UK may issue injunctions enjoining the sale of infringing products that feature an industry standard (covered by a SEP) in a situation where the parties have failed to agree a global patent licence.

Crucial to the UKSC’s decision was reliance on the patent policy of ETSI. The UKSC acknowledged the inherent territorial limitations on the jurisdiction of national courts – a UK court can make a determination of patent infringement within the UK’s borders, and issue an injunction covering the UK. But the UK courts cannot issue judgments on whether on the same facts patent infringement has occurred in e.g. France or Germany or China.

However, ETSI patent policy requires a global commitment to FRAND and contemplates the extension of national court jurisdiction to the determination of global royalty rates. The UKSC stated in its judgment: “[i]t is the contractual arrangement which ETSI has created in its patent policy which gives the [English] court jurisdiction to determine a FRAND licence” for a multi-national patent portfolio. By upholding the decisions of the High Court and Court of Appeal, the UKSC grounds its decision firmly on the ETSI patent policy.

Conclusions – what might happen next?

The global licence approach embraced by the UK Supreme Court has attracted criticism for its alleged extra-territorial impact. Although the UK injunction itself does not cover jurisdictions outside the UK, it nonetheless gives the patent owner significant leverage in the negotiations over a global licence. This in practice – if not in law - affects patents valid in other territories, including key patent jurisdictions in the EU such as France, Germany, the Netherlands and Italy.

For this reason the appellants had argued that it is unreasonable to ask the courts of the UK jurisdiction (where implementers have relatively negligible sales) to decide the royalty terms of a global licence encompassing China (where the majority of the SEP implementers’ sales take place). It is not difficult to see the controversy in the fact that a SEP implementer might end up paying high global royalties as a result of a UK judgment on a UK patent because of the indirect impact on foreign patents valid in other jurisdictions (which cannot be disputed in the UK).

Although the UKSC rejected the appellants arguments and endorsed the High Court and Court of Appeal approach, it is true that the UKSC did not seem entirely comfortable with the extra-territorial nature of its decision. While the UKSC judgment has the benefit of making the UK legal approach clear, the controversial question remains – what happens if other jurisdictions seek to make rulings over the terms of global licences that have an indirect effect on UK patents?

In an intriguing move, the UKSC suggested that rather than country-by-country enforcement, a world tribunal would be best placed to resolve SEP disputes:

“Those policies … do not provide for any international tribunal or forum to determine the terms of such licences. Absent such a tribunal it falls to national courts, before which the infringement of a national patent is asserted, to determine the terms of a FRAND licence. The participants in the relevant industry … can devise methods by which the terms of a FRAND licence may be settled, either by amending the terms of the policies of the relevant SSOs to provide for an international tribunal or by identifying respected national IP courts or tribunals to which they agree to refer such a determination” (Para. 90).”

At present no such tribunal is being contemplated in the international or EU arenas, but it is an interesting idea that may gain ground if country-by-country litigation becomes unworkable.

Looking ahead to 2021 it is also worth pondering what the impact of a ‘no deal’ or ‘bare-bones’ exit from the EU might be for the UK’s legal system post-transition at the end of 2020? Could the impact of Brexit mean UK courts choosing (in coming years) to depart from the CJEU’s guidance in Huawei v ZTE and develop an alternative approach? It remains to be seen whether the UKSC will continue to reference the CJEU Huawei guidance in future litigation that takes from 2021 onward.