UK Supreme Court Affirms English Courts May Enjoin Infringing Activity Upon Refusal of Alleged Infringer to Enter a Global License of an International SEP Portfolio (Complete Summary)
Written by: Shayne D. Rasay & Jonathan H. Spadt
Editor’s Note: Given the complexity of the procedural history and number of issues on appeal, this paper cites directly to the numbered paragraphs of the Court’s decision, found here: https://www.supremecourt.uk/cases/uksc-2018-0214.html
In Unwired Planet International Ltd. v. Huawei Technologies Co Ltd. [2020] UKSC 37, the UK Supreme Court addressed three appeals, which collectively raised issues concerning the infringement of standard essential patents (SEP)1 and the obligation of SEP owners bound under the European Telecommunications Standards Institute (ETSI), a telecommunications Standard Setting Organization (SSO), to grant a license to manufacturers of equipment using the SEP technology2 (“implementers”) on “fair, reasonable, and non-discriminatory” (FRAND) terms. Specifically, the Court analyzed five overarching issues raised by the three appeals: (1) jurisdiction, (2) forum choice, (3) “non-discriminatory” prong of FRAND, (4) breach of European Union (EU) competition law, and (5) appropriate remedy (injunctive relief vs. monetary damages). ¶ 1.
Background
The first appeal (“Unwired appeal”) concerned an infringement action3 brought by Unwired Planet International Ltd and Unwired Planet LLC (collectively “Unwired”)4 against Huawei Technologies Co Ltd (“Huawei (China)”) and Huawei Technologies (UK) Co Ltd (“Huawei (UK)”), a UK subsidiary of Huawei (China) (collectively “Huawei”).5 ¶ 16. Unwired, a Patent Assertion Entity (PAE),6 previously acquired from Ericsson a worldwide patent portfolio, of which five patents were the subject SEPs in suit. ¶¶19-29. Technical trials concluded that two of the five SEPs in suit were valid and essential. ¶ 20. In addition, a trial judge held that an offer by an SEP owner (Unwired) to grant a global license, not a UK-only license, under threat of injunction properly satisfies FRAND requirements and is appropriate for a licensor having a multi-national patent portfolio, such as Unwired, and a licensee having a global sales market, such as Huawei. ¶¶ 25-29. The trial judge ruled that a FRAND license between two multi-national companies, such as Unwired and Huawei, is unavoidably a worldwide license. Huawei appealed the decision to the UK Court of Appeal, which affirmed that “only a global license [in this case] would be FRAND,” notwithstanding the appellate court’s conclusion that there may be multiple sets of appropriate FRAND terms depending on the circumstances. ¶ 29.
In the other two appeals (collectively “Conversant appeal”), Conversant Wireless Licensing SARL (“Conversant”), another PAE, brought infringement actions7 against each of (1) Huawei and (2) ZTE Corporation (“ZTE (China)”) and ZTE (UK) Ltd (“ZTE (UK)”), a UK subsidiary of ZTE (China) (collectively “ZTE”). ¶ 17. Like Unwired, Conversant acquired from Nokia a worldwide patent portfolio, of which four were the subject SEPs in suit. ¶17. Technical trials concluded that one of the four SEPs in suit and one of its divisional family members were valid and essential, but appeals challenging the validity judgments of at least two of the four SEPs are ongoing. ¶¶ 30-35. In addition, a trial judge dismissed arguments based on jurisdiction and forum choice, ruling that UK courts had jurisdiction (1) to enforce the contractual ETSI Intellectual Property Rights Policy (“ETSI IPR Policy”) and (2) to determine the terms of a FRAND license.8 ¶ 30. Huawei therefore appealed to the UK Court of Appeal, which ultimately affirmed the trial court’s rulings on jurisdiction and forum. ¶ 33.
Overall, the UK Court of Appeal affirmed the trial courts’ decisions, which rendered favorable judgments for Unwired and Conversant. Huawei and ZTE thus appealed to the UK Supreme Court, which ultimately dismissed the appeals and affirmed the rulings of the lower courts.9
Issue (1): Jurisdiction
The UK Supreme Court upheld the lower courts’ ruling that UK courts have jurisdiction to rule on contractual obligations and arrangement between an SEP owner and an implementer pursuant to an ETSI IPR Policy regime. ¶¶ 49-91.
In all three appeals, the issue of jurisdiction arose. Huawei advanced five arguments in support of its assertion that UK courts may not require an implementer to take a global license upon threat of an injunction to restrain otherwise infringing activity. ¶¶ 51-55.
- First, the UK courts would improperly encroach upon the right of foreign courts to adjudicate patent validity and infringement of foreign patents.
- Second, the UK courts would in effect be a “de facto international…licensing tribunal for the telecommunications industry.”
- Third, the judicial system may adversely impose compromises that would be contrary to commercial interests.
- Fourth, proper interpretation of the ETSI IPR Policy expressly upholds the legal rights of an implementer to challenge patent validity and infringement actions. On the other hand, the ETSI IPR Policy is silent with respect to determining the terms of a global license covering an international portfolio of patents.
- Finally, the imposition of a global license upon threat of injunction for infringement is a disproportionate remedy. Instead, the proper remedy is to enter a license with prospective royalty rates that are proportionate to retrospective damages for past infringement.10
ZTE rested much of its case on the issue of comity, asserting that the trial court’s determination of the terms of a worldwide FRAND license improperly interferes with patent, licensing, and competition regimes of other jurisdictions. ¶ 57.
Ultimately, the UK Supreme Court asserted that overall, the “contractual arrangement which ETSI has created in its IPR Policy…gives the court jurisdiction to determine a FRAND license.” ¶ 58. The IPR Policy seeks to strike a balance between providing implementers non-infringing access to SEP technology and awarding fair compensation to SEP owners. ¶ 61. Further, the IPR Policy was established in recognition of existing commercial practices, such as implementers in the telecommunications industry routinely taking “global licenses of a portfolio of patents, without knowing how many…are valid or infringed.” ¶60. Taken together, the balancing act of the IPR Policy is designed to lead parties to license agreements that conform to industry-specific practices. ¶¶ 61-63.
Against this backdrop, the court dismissed Huawei’s fourth argument and generally construed the IPR Policy as necessarily having an “international effect” that promotes the commercial practices in the telecommunications industry. ¶ 62. Further, the court interpreted the IPR Policy as discouraging litigation in favor of out-of-court negotiations for a commercial license. ¶ 61. Indeed, the threat of injunction is an appropriate incentive for an implementer to engage in negotiations with the SEP owner to accept FRAND terms for use of the SEP portfolio. ¶ 61. Accordingly, contrary to Huawei’s third argument, it logically follows that commercial interests and practices would be highly relevant in the judicial determination of FRAND terms. ¶ 62.
Additionally, the lower courts’ judicial determinations, which were the subject of this appeal, did not interfere with the right of foreign courts to adjudicate patent validity and infringement of foreign patents. ¶ 63. Contrary to Huawei’s first argument, the lower courts did not rule on the validity and infringement of foreign patents; instead, the conclusion that the IPR Policy promotes the pre-existing commercial practice of taking a global license involving potentially disputed foreign patents was within the proper purview of UK courts. ¶ 63. Furthermore, the trial court was likewise not out of step with other jurisdictions in determining the FRAND terms of a global license. ¶¶ 66-84. In contrast to Huawei’s second argument, the trial court did not establish itself as a “de facto tribunal” because the principles and approaches used in the determination were “consistent with several judgments in other jurisdictions,” including the United States,11 Germany, China, Japan, and the European Commission. ¶¶ 68-84. Notably, with the exception of China, all jurisdictions were deemed as affirmatively adopting similar principles as the lower court. ¶ 84.
Finally, the Supreme Court addresed Huawei’s fifth argument concerning remedies in the latter portion of its opinion, where the fifth issue of remedies was discussed. ¶ 85. Nonetheless, the court briefly concluded that the argument was not persuasive because an implementer purchases the legal right and opportunity to access the telecommunications market on a worldwide basis, irrespective of any appearance of inequity based on the specific market(s) implicated by refusal of a FRAND license. ¶¶ 86-91. Accordingly, the UK Supreme Court dismissed this basis of appeal. ¶ 90.
Issue (2): Forum Choice
The UK Supreme Court upheld the lower courts’ ruling that the UK was the appropriate forum to adjudicate a global license on FRAND terms for an international SEP portfolio. ¶¶ 92-104.
The issue of forum choice arose in the Conversant appeal. There, Huawei and ZTE argued that China, not the UK, was the proper forum to determine the FRAND terms of the subject global license. ¶ 92. Stated differently, Huawei and ZTE alleged that the infringement action covering the UK patents in suit was “no more than a convenient peg upon which to hang the dispute so as to attract English jurisdiction,” rather than Chinese jurisdiction that would have likely produced a “less generous outcome” for Conversant. ¶ 93.
The court began its analysis by defining “the case” to be tried. ¶¶ 94-95. On one hand, Huawei and ZTE argued that the substance of the dispute concerned FRAND terms of a global license. ¶ 95. On the other hand, Conversant argued that the substance of the dispute concerned infringement of the UK patents in suit and that the FRAND terms arose from a contractual defense to the infringement action. ¶ 95. Ultimately, the court dismissed the forum choice arguments. ¶¶ 97-98. First, the court reasoned that the SEP owner “is in principle entitled to [choose] which patents (and therefore in which country or countries) to seek to enforce” and such choice cannot be compelled by a “common FRAND defense” to the enforcement. 95. Second, there theoretically exits multiple alternative forums with the requisite jurisdiction (i.e. other than China) due to the global nature of the SEP portfolio. ¶ 96.
Next, the court considered the “case management” implication of the forum choice argument. ¶¶ 99-105. Due to the ongoing nature of legal proceedings in China, the issue of “case management” considered on appeal was limited to whether the appellate court incorrectly refused the Huawei-submitted case management alternatives, all of which were based on the argument that the Chinese court system was the proper forum to determine global FRAND license terms. ¶ 103. Ultimately, the UK Supreme Court summarily approved the reasoning put forth by the appellate court, asserting that the case management alternatives were “no more than speculative” and further delay would unduly hinder Conversant’s enforcement of rights enshrined in its “elderly patents.” ¶ 104. Thus, the UK Supreme Court dismissed this basis of appeal.
Issue (3): “Non-Discriminatory” Prong of FRAND
The UK Supreme Court upheld the lower courts’ ruling that the “non- discriminatory” obligation is “general,” such that license terms must be based on the fair market price of the SEP portfolio. ¶¶ 105-127.
In the Unwired appeal, the issue of whether the license terms were non- discriminatory arose. More specifically, Huawei advocated for what the trial court termed as the “hard-edged” interpretation the non-discrimination obligation of FRAND: an SEP owner must effectively grant equivalent terms to all similarly situated licensees. ¶¶ 105-106. In accordance with that strict interpretation, Huawei cited the license agreement between Unwired and Samsung (“Samsung license”) as a “relevant comparator for the purpose of working out the FRAND…terms which should have been offered to Huawei by Unwired.” ¶ 105.
In response, Unwired argued that the Samsung license was “not a comparable transaction” and in the alternative, that the “hard-edged” interpretation is inapposite for a FRAND undertaking pursuant to the ETSI IPR Policy. ¶ 107. Rather, the proper frame of reference is what the trial court referred to as the “general” non-discrimination obligation: an SEP owner must grant the “standard fair market royalty rate available to market participants for use of the SEPs,” which is subject to commercial negotiations that may result in terms that are more favorable. ¶ 107. Further, the “mere existence of differential” terms, such as royalty rates, cannot constitute breach of said “general” obligation. Instead, the challenger has the burden of proof to demonstrate that the “differential” terms causes a “distortion of competition, as per EU competition law in Article 102(c) of the Treaty on the Functioning of the European Union (TFEU). ¶ 107.
Ultimately, the UK Supreme Court affirmed the trial court’s decision that the global license offered to Huawei satisfied the non-discriminatory prong of FRAND. ¶ 112. On one hand, the trial court rejected Huawei’s reliance on the Samsung license as a “comparable transaction” because the negotiation of the agreement involved “specific economic circumstances.”12 ¶ 108. On the other hand, the trial court did not go insofar as to outright reject the relevance of the Samsung license, asserting instead that Huawei and Samsung were similarly situated licensees for the purposes of FRAND because both were market participants seeking to utilize Unwired’s SEP portfolio. ¶ 109.
However, with respect to the competing interpretations of the non-discrimination obligation within the meaning of FRAND, the trial court adopted a bright line rule in favor of Unwired (“general” interpretation). In other words, the proper frame of reference in assessing the non-discriminatory nature of a license term, such as a royalty rate, is the fair market value of the SEP portfolio, “without adjustment [for]…individual characteristics of a…market participant.” ¶ 114. The court reached its conclusion based on a textual interpretation of “fair, reasonable and non- discriminatory” as imposing a “single unitary obligation,” such that with respect to royalty rates, there should be a “single royalty price list available to all.” ¶¶ 113-14. Such interpretation is consistent with the policy evident in rejections of previous ETSI IPR Policy drafts that included a “most favorable clause” license term, which would have been acceptable under Huawei’s “hard-edged” interpretation of non- discriminatory. ¶¶ 116-18. Accordingly, the UK Supreme Court dismissed this basis of appeal.
Issue (4): Breach of EU Competition Law
The UK Supreme Court upheld the lower courts’ ruling that it is not a per se abuse within the meaning of EU competition laws, for an SEP owner to seek an injunction against an infringer, provided that sufficient advance notice is provided. ¶¶ 128-58.
In the Unwired appeal, the court considered whether an SEP owner’s claim for injunctive relief conflicts with EU competition laws that prohibit “abuse…of dominant position.” ¶ 130. More particularly, Huawei argued that the trial court should not have granted Unwired an injunction because Unwired did not strictly comply with an alleged “series of mandatory conditions,” which were prerequisites to an SEP owner commencing obtaining injunctive relief, as established by the Court of Justice of the European Union (CJEU) in an earlier case involving Huawei and ZTE. ¶¶ 129-30. However, the lower courts held that only one of the conditions was “mandatory,” such that a “failure to [strictly] follow” the other non-compulsory conditions was not fatal. ¶¶ 146-48. In other words, the alleged “series of mandatory conditions” established a standard against which “both parties’ behaviour can be measured,” rather than a bright line rule that demands strict compliance, subject to violation of EU competition laws. ¶ 146.
Against that backdrop, the trial court concluded that contrary to Huawei’s position, it was not necessarily abusive for Unwired to commence an action for injunctive relief without strict compliance with the CJEU-established protocol because Huawei had “sufficient notice” and the action did not constitute refusal to license, especially since Huawei “knew” that the SEP owner was open to a license. ¶ 147. The UK Supreme Court largely affirmed this line of reasoning, further noting that it:
…makes obvious sense…[to] have built in a degree of flexibility, given the wide variety of factual situations in which the issue might arise, and the fact that different legal systems will provide very different procedural contexts for the SEP owner’s injunction application. ¶ 151.
In sum, the proper analysis of the issue is fact-intensive and depends on individual circumstances of the case. ¶¶ 151, 157-58. Here, Unwired did not behave abusively in violation of EU competition laws, for the reasons stated above. Thus, the UK Supreme Court dismissed this basis of appeal.
Issue (5): Appropriate Remedy
The UK Supreme Court upheld the lower courts’ ruling that an injunction was proper and that monetary damages is not a proper substitute for the awarded relief. ¶¶ 159-69.
In all appeals, the court considered the issue of remedies in the first instance (the parties did not raise the issue in the lower courts). ¶ 163. Succinctly, Huawei argues that the proper and proportionate remedy to infringement is monetary damages, not injunctive relief. ¶ 159-61. The UK Supreme Court found no persuasive basis to award damages in lieu of an injunction. ¶¶ 164-69.
The award of an injunction in these cases was proper because (1) concerns regarding the threat of an injunction for “undue leverage in negotiations” are inapposite in the ETSI IPR Policy regime, ¶ 164, and (2) monetary damages would be an inadequate substitute, ¶166-67. In both lines of reasoning, the “critical feature” was the recognition that SEPs are “designed to operate on a global basis.” ¶ 166. First, the IPR Policy concerning SEPs eliminates the concern of an injunction as a “means of charging exorbitant fees,” ¶ 164, because FRAND terms (to the satisfaction of the courts) are prerequisites to an SEP owner’s enforcement of patent rights. ¶¶ 161-65. Second, withholding an injunction would negate the incentives for parties to enter FRAND licenses because infringers would continue to infringe until “patent by patent, and country by country,” they are “compelled to pay royalties,” an undertaking that would be too cost-prohibitive for SEP owners having a worldwide patent portfolio. ¶¶ 166-67. Simply put, an injunction was proper here because the infringer/implementer (Huawei) “stand[s]…without a license but have the means to become licensed open to them.” ¶ 165. Thus, the UK Supreme Court dismissed this basis of appeal.
In general, the UK Supreme Court issued a favorable decision for SEP owners on the grounds of (1) jurisdiction, (2) forum choice, (3) “non-discriminatory” prong of FRAND, (4) breach of European Union (EU) competition law, and (5) appropriate remedy (injunctive relief vs. monetary damages). Additionally, in reaching this decision, the UK Supreme Court predominantly considered the underlying principles of the ETSI IPR Policy and analyzed the issues in the context of industry practices.
1 Equivalent to “Essential Intellectual Property Rights” (Essential IPRs).
2 The standards implicated by the subject SEPs in the three appeals concerned “telecommunications standards for 2G (GSM), 3G (UMTS) and 4G (LTE)…equipment and devices.” ¶ 5.
3 Unwired also filed suit against Google and Samsung in the same litigation, but Unwired reached separate settlements with each entity prior to trial (Oct. 2016 – Dec. 2016). ¶ 19. Additionally, parallel legal proceedings were commenced in Germany and China. The UK Supreme Court noted that “subject to continuing appeal proceedings in Germany and China, Huawei has been held to be infringing one or more of Unwired’s SEPs through its use of patented technology in both the UK and Germany and in China challenges to two patents have failed.” ¶ 23.
4 Unwired was sold to the PanOptis group prior to trial (Oct. 2016 – Dec. 2016). ¶ 24.
5 Ericsson had previously licensed the patents in suit to Huawei, but the license expired. ¶ 16.
6 An intellectual property licensing company, which licenses patents for royalty income.
7 Huawei and ZTE filed parallel legal proceedings regarding patent validity in China. The UK Supreme Court noted that subject to continuing appeals, two of the eleven Chinese patents in suit were deemed valid and one is partially valid. Notably, none of the Chinese patents held to be valid are of the same families as the UK patents in suit. ¶ 34.
8 After the trial court rendered a decision in favor of Conversant, Conversant filed infringement actions in Germany against the German subsidiaries of Huawei and ZTE. ¶ 31.
9 Recognizing the potential significance of this litigation, three telecommunications industry giants: Apple Inc., Ericsson, and Qualcomm Incorporated, submitted written interventions weighing in on the issues, industry practices, and interpretations of the ETSI IPR Policy. ¶ 18.
10 Huawei raises additional arguments that did not necessarily go to the question of jurisdiction, including concerns over the increasing involvement of PAEs, which may abuse the threat of injunction to charge exorbitant royalties. The UK Supreme Court did not provide a full-throated analysis of the merits of the argument, but noted that “it is not evident that a PAE should necessarily be treated differently from a SEP owner which manufactures and sells…equipment.” ¶ 89.
11 See Apple Inc. v. Motorola Inc., 757 F.3d 1286 (Fed. Cir. 2014); Microsoft Corp. v Motorola Inc., 871 F.Supp 1089 (W.D. Wash. 2012), aff’d 696 F.3d 872 (9th Cir. 2012); Apple Inc. v. Qualcomm Inc., 2018 WL 3861893 (S.D. Cal. Aug. 14, 2018).
12 Unwired, not yet acquired by PanOptis, was in a more vulnerable bargaining position relative to Samsung when Unwired entered the agreement. ¶ 108.