In recent years, “FRAND” issues have been a hot topic, subject to litigation and administrative scrutiny around the world. Generally speaking, Standard-essential patents (“SEPs”), are patents that are required to implement a technical standard. Numerous technical standards govern a wide range of technologies from WiFi and cellular telephones to electrical plugs and outlets. In many cases, the organizations that set the standards require their members to be prepared to license their SEPs to implementers of the standards on fair, reasonable and non-discriminatory, i.e., FRAND, terms and conditions. But what exactly does that mean? On May 4, 2017, the UK High Court of Justice (Patents), Mister Justice Birss, weighed in, issuing a 166-page opinion that sets a FRAND royalty for a portfolio of patents asserted against providers of wireless products. Although the extent to which this decision will be followed is unclear, particularly in the United States, anyone currently grappling with the complex process of assessing contractual and competition law obligations in the context of FRAND commitments should be familiar with it.
In March 2014, Unwired Planet (“UP”) sued Huawei and other companies for infringement of six UK patents, taken from a portfolio of about 2000 patents that UP had acquired from Ericsson, contending the patents are essential to the 2G GSM, 3G UMTS, and 4G LTE standards. After filing suit, UP offered the defendants a license to the entire portfolio and then later offered terms for a license limited only to essential patents. The defendants, in turn, challenged the validity and essentiality of the asserted patents and contended UP’s conduct was an “abuse of dominant position” under EU competition law. (Unwired Planet 5.) After a series of separate technical trials in which the court concluded two of the UP patents were valid, essential and infringed, the court conducted a comprehensive bench trial to assess these issues and set forth his conclusions in a detailed 166-page opinion, which is available at https://www.judiciary.gov.uk/wp-content/uploads/2017/04/unwired-planet-v-huawei-20170405.pdf.
The High Court’s Opinion
The UK court’s opinion is multi-faceted and includes many points of interest. Among other things, the UK court concluded the “underlying purpose” of FRAND is to reward innovation while avoiding “hold up” by the SEP owner and/or “hold out” or “reverse hold up” by economically powerful licensees. (Unwired Planet 92-95.) In the former situation, a SEP owner is able to “hold implementers to ransom” by declining to license the SEP, and in the latter situation the potential licensee “unduly drag[s] our the process of license negotiation,” eventually forcing the SEP owner to accept a lower than FRAND licensing rate. (Id.) In examining the tension between “hold out” and “hold up,” the court looked to decisions from other jurisdictions, including the European Union Court of Justice’s decision in Huawei v. ZTE (Case C-170/13) 16th July 2015  Bus LR 1261, as well as Microsoft v Motorola, Case No. C10-1823JLR2013, US Dist LEXIS 60233 (W.D. Wash. April 25, 2013), a Washington district court decision which considered FRAND license terms in the context of a breach of contract inquiry under Washington law.
Relatedly, the UK court provided its view on what FRAND obligations mean for parties to a negotiation, with the court reasoning that FRAND not only describes a set of license terms but also “the process by which a set of terms are agreed.” (Id. 162.) According to the court, both the patent holder and the implementer are required to negotiate fairly to agree on FRAND terms, with the understanding that offers during negotiation may be higher or lower than FRAND as long as they do not “disrupt or prejudice the negotiations themselves . . . .” (Id. 765.)
The UK court appears to depart from U.S. decisions in notable ways. First, unlike in Motorola, where the court concluded that FRAND extends to a range of possible royalty rates, the UK court concluded that FRAND should denote a single-rate. The court explained that each party would be “entitled to insist on FRAND terms and neither would be entitled to insist on anything other than FRAND terms.” (Id. 156.) But as a corollary to this finding, the court also concluded that an offer above or below the single FRAND rate would not violate competition law unless its departure from the actual FRAND rate was “excessive” (Id. 153), and that a party need not to show a violation of competition law to invoke rights stemming from a FRAND commitment.
Second, in calculating the FRAND royalty rate, the UK court permitted the patent owner to recoup some of the value attributable to incorporation of the patented technology in the standard in contrast to the Federal Circuit’s recent conclusion that “the patentee’s royalty must be premised on the value of the patented feature, not any value added by the standard’s adoption of the patented technology.” Ericsson, Inc. v. D-Link Sys., Inc., 773 F.3d 1201, 1232 (Fed. Cir. 2014).
The UK court employed two methodologies to calculate a FRAND royalty rate, the first an analysis of comparable license rates including past licenses for the same technology, and the second a “top down” approach used to “cross check” the results of the comparable license analysis. (Unwired Planet 806(10).) The “top down” approach assigns a value to the total aggregate SEP royalty burden of a particular standard on a product and then allocates some portion of that aggregate royalty burden to the particular patent at issue.
The Unwired Planet decision is a significant addition to a fairly limited, but growing, body of FRAND-related case law. Although it is unclear whether and, if so, the extent to which this decision will be adopted by other courts, any lawyer whose practice concerns SEPs and FRAND licensing disputes should be aware of it.