Implementer Hold Out

Another major development in global standard essential patent litigation was handed down today, as the UK Supreme Court upheld lower court rulings that forced an efficient infringer of essential patents to accept a global license or face an injunction.  The decision in Unwired Planet v. Huawei demonstrates a continuing trend of harmonization of global SEP outcomes that rebalance and better equalize the bargaining positions of innovators and implementers.  While long anticipated, today’s decision will hopefully usher in an era of robust and consistent FRAND jurisprudence that will allow innovators and implementers to better focus their energy on licensing discussions rather than litigation.

After almost seven years of litigation, and after more than 16 hours of oral argument last October, the UK Supreme Court’s publication of its opinion earlier today in the Unwired Planet (“Unwired”)-Huawei patent litigation is a monumental event because the high court soundly rejected Huawei’s spirited defense of hold out as an SEP licensing strategy.  Huawei dressed its appeal in arguments of sovereignty and comity but the real, and dispositive, issue concerned how properly to interpret the FRAND undertaking required by ETSI’s intellectual property rights (“IPR”) policy, and what a UK court could provide as a remedy to Unwired, as patent owner, if Unwired had complied with that undertaking but Huawei nonetheless refused to enter into what the court had determined was a FRAND license.  The core of Huawei’s argument was that ETSI’s IPR policy imposed a FRAND obligation only with respect to actually essential and valid patents, rather than patents merely declared as essential to the standard.  Therefore, Huawei contended that, where the parties dispute essentiality or validity, a court must resolve the dispute before one can determine the terms of a FRAND license and whether the SEP owner has complied with its commitment to the standard setting organization.  Huawei argued that such disputes must be resolved on a country-by-country, and indeed a patent-by-patent, basis. 

The Supreme Court rightly concluded, however, that ETSI’s IPR policy did not envision or support Huawei’s interpretation.  The high court agreed with the reasoning of the lower courts that, if ETSI’s contractual terms were as Huawei suggested, it would frustrate the necessary balance of the parties’ interests in a FRAND negotiation.  Such an imbalance would make it impractical and prohibitively expensive for an SEP holder to secure, timely if at all, a license that would fairly compensate it for the value of its SEP portfolio.  The Supreme Court’s decision champions a framework that restores such a balance and should focus SEP owners and implementers on good faith negotiations rather than judicial proceedings. 

In a 58-page opinion, the UK Supreme unanimously affirmed the 2018 ruling of the Court of Appeals on each of the five issues presented for review (“Opinion”), which provides Unwired with a resounding win and a deserved end to the protracted legal battle with Huawei.  Most significantly, the Supreme Court ruled that English courts do have jurisdiction to determine the terms of a global license of a multi-national patent portfolio, and, where the infringing products are sold and used worldwide, the court may grant an injunction restraining further infringement of an SEP unless the infringing implementer enters into the global license. On the remaining issues, the Opinion ruled that Unwired had not discriminated against Huawei in violation of its FRAND undertaking, nor had it abused a dominant position under TFEU Article 102, and that, as a general principle, injunctive relief is an available remedy under the circumstances presented in the appeal.  The Opinion also resolved the forum non conveniens issue arising out of the proceedings between Conversant Wireless, Huawei, and ZTE.

The long history of these proceedings has been well publicized.  In 2014, Unwired initiated patent infringement litigation against several parties in the UK on several standard essential patents it had acquired from Ericsson.  After three trials in 2015 and 2016, Unwired secured a ruling that two of the asserted SEPs were valid and infringed.  Those rulings were stayed pending appeal but resulted in defendants Samsung and Google settling out and taking a license.  Only Huawei remained, and Huawei’s FRAND and competition law defenses and counterclaims were tried in 2016.  Mr. Justice Birss rendered a written decision in April 2017, which was affirmed by the appeals court in October of 2018. 

Judge Birss’s 2017 ruling was groundbreaking.  It determined all of the disputed FRAND terms that should govern a license between Unwired and Huawei, including, most importantly, the royalty rate and the geographic scope of the license.  Judge Birss acknowledged that the court could not compel Huawei to take the global license that it had determined was FRAND but ruled that the court could enjoin Huawei from selling the accused products in the UK unless Huawei entered into the global license.  The lower court’s methodology and calculation of a FRAND rate were not challenged before the Supreme Court.  Rather, Huawei focused on the global geographic scope of the determined license, and argued that the UK court lacked the jurisdiction to determine the terms of a global FRAND license, and could not enjoin Huawei from the UK market as a consequence of refusing to enter into such a license.

On first read, the Opinion is a straightforward affirmance of the sophisticated and well-reasoned decisions from the two lower courts.  The affirmance is an incredibly valuable and emphatic imprimatur. The value comes from its global significance and resonance with a similar outcome in Germany’s highest court’s opinion in the Sisvel v. Haier decision.  The SEP community has long clamored for consensus and consistent FRAND jurisprudence.  The collective outcome of these high court rulings is that, by and large, that jurisprudence exists.  Other jurisdictions, like the United States, should find it difficult and disadvantageous to be perceived as out-of-step with these decisions.  The FRAND principles that they edify and validate make sense from both a legal and economic perspective.  As the Opinion emphasizes, the vast majority of SEP licensing is a global undertaking that benefits greatly from this judicial consensus.  It is equally important that these high court decisions expressly recognized and reckoned with the problem of implementer hold out as a fundamental problem. 

The UK Supreme Court rightly re-centered SEP licensing on a framework that seeks to achieve a balance between competing interests, and one which properly incentivize the parties to promptly and constructively negotiate a FRAND license, including a worldwide FRAND license where it is consistent with normal industry practices, without the need to resort to costly and protracted litigation across the globe.  The UK now joins Germany in stating clearly to implementers that there will be serious and impactful consequences for failing to do so.  Recent developments in the United States that are favorable to patent owners show that domestic courts may be open to following suit with the UK and Germany.