In a landmark decision, the United Kingdom’s Supreme Court has unanimously dismissed the appeals brought by Huawei and ZTE against decisions of the Court of Appeal and the Patents Court below in parallel proceedings against Conversant and Unwired Planet. In so doing, the Supreme Court has set the basis for the UK to be a willing and convenient forum for litigation of standards essential patents in the telecoms sector at a global level.
Background to the appeal
The issues before the Supreme Court (of which there were five) arose from two parallel sets of proceedings in the Patents Court, both of which pitted implementers of mobile phone technology and alleged infringers against the proprietors of patent portfolios said to contain so-called “standards essential patents”, or SEPs. In both cases, the patent proprietors were companies referred to as Patent Assertion Entities (“PAEs”), defined by the Supreme Court as entities whose income derives solely from the accumulation and licensing of patent portfolios.
In Unwired Planet v Huawei, Unwired Planet alleged infringement of the UK designations of six European patents by Huawei, Google and Samsung. Proceedings in the UK began in March 2014, with parallel proceedings also initiated in Germany and China. Over the course of three technical trials in 2015 and 2016, Birss J held that two of the patents in issue were both valid and essential. Shortly thereafter, Unwired Planet settled with Samsung and Google, with Unwired Planet granting a licence to its portfolio to Samsung. In a trial to determine the remedies appropriate for the infringement of Unwired Planet’s patents by the remaining defendant, Huawei, the judge concluded that a FRAND undertaking (required by standards setting organisations (SSOs) to be given by a SEP owner when declaring patents to be essential to a standard, to grant licences to such patents to implementers of the protected invention on so-called “fair, reasonable and non-discriminatory” terms), could be enforced by an English court and that an implementer that refused to take a FRAND licence could be subjected to an injunction to prevent infringement of a valid and infringed UK patent.
Furthermore, the judge held that such a FRAND licence in the circumstances could only be a worldwide licence and not, as Huawei contended, a licence limited to the UK, and that it would not be discriminatory if the fair and reasonable royalty rate determined by the court for a licence between Huawei and Unwired Planet were to be higher than the rate offered by Unwired Planet to Samsung. Finally, the judge held that Unwired Planet had not breached article 102 of the Treaty on the Functioning of the European Union (“TFEU”) by abusing its dominant position, following the decision of the Court of Justice of the European Union (“CJEU”) in Huawei v ZTE.
Concluding, the judge granted an injunction in favour of Unwired Planet. However, the judge granted the injunction on the condition that it would fall away if Huawei were to enter into a FRAND licence with Unwired Planet (a “FRAND injunction”), and stayed enforcement of the injunction pending appeal. The Court of Appeal, in October 2018, upheld the judge’s decision and dismissed Huawei’s appeal entirely, disagreeing with the judge on only a single issue: in the Court of Appeal’s view, circumstances could allow for both a local/national and global licence being considered FRAND, in which case it would be for the SEP owner to elect which of the two it preferred. Our report on the Court of Appeal’s decision can be found here.
Conversant v Huawei & ZTE
In a similar vein, Conversant commenced proceedings in the Patents Court in July 2017 seeking an injunction in respect of the alleged infringement by Huawei and ZTE of such of its UK patents as were found to be valid and essential. In addition, Conversant asked the court to make a declaration that the licence it had offered to each of the defendants was FRAND or, if not, to determine FRAND terms for such a licence. In so doing, Conversant sought permission from the court to serve its claim out of the jurisdiction on the defendants’ Chinese entities.
In response, both Huawei and ZTE challenged the jurisdiction of the Patents Court, arguing that the courts in China were better-placed to determine the issues, not least because (on the evidence) the majority of the defendants’ sales on allegedly infringing products took place in China with only negligible sales in the UK. As in Unwired Planet, parallel proceedings were on foot in both Germany and China. According to the defendants, the appropriate course of action was therefore the determination of the validity and infringement of Conversant’s Chinese patents, and the determination of the terms of a FRAND licence (if required) by a Chinese court.
In his judgment in April 2018, the late Henry Carr J granted Conversant’s application for service out and dismissed the defendants’ challenge to jurisdiction. According to the judge, the assessment and enforcement of a FRAND licence required no determination of the validity or infringement of foreign patents, which would be the exclusive jurisdiction of the appropriate national courts. Further, the judge held that, on the evidence before him (and in contrast to the English courts), the Chinese courts did not have jurisdiction to determine FRAND terms in relation to non-Chinese patents in the absence of the agreement of all parties. Both defendants appealed the judgment on jurisdiction, with both appeals dismissed by the Court of Appeal in January 2019.
Turning to the patents themselves, the first technical trial took place in June 2019 before Arnold J (as he then was), with the patent in issue held to be invalid for added matter (but infringed). In the second technical trial, Birss J held that two Conversant patents were partially valid and infringed while a third patent was invalid. The trial to determine the terms of a FRAND licence, originally listed to be heard in April 2020, has since been postponed as a result of COVID-19, and will now fall to be re-listed following the Supreme Court’s decision to dismiss the defendants’ appeals.
The issues on appeal to the Supreme Court
The appeals brought by Huawei and ZTE in both actions raise five different issues, three of which apply uniquely to one of the two actions:
- Does a court in the UK have jurisdiction, without the agreement of the parties, to (a) grant an injunction to restrain infringement of a UK patent unless the implementer of the patented invention enters into a global licence and (b) determine the royalty rates and other terms of such a licence?
- Are the English courts an appropriate forum to determine such issues? (Conversant action only)
- What is the nature of the requirement that licence terms be “non-discriminatory”? (Unwired Planet action only)
- Should an injunction be refused in circumstances where it is alleged that the SEP owner has breached article 102 TFEU by failing to comply with the conditions (for pre-litigation conduct) set out in the CJEU’s decision in Huawei v ZTE? (Unwired Planet action only)
- In what circumstances is it reasonable and proportionate to grant an injunction as opposed to damages?
Following the lead of the Supreme Court, we take each of these issues in turn below:
Issue 1 – Jurisdiction
In their appeal, both ZTE and Huawei (hereafter “the Appellants”) argued that the English courts lacked jurisdiction to grant an injunction against them in respect of UK patents unless they entered into global licences to Conversant’s and Unwired Planet’s portfolios. In so doing, the English courts would be treading on the toes of foreign judges: first, by entering into a global licence the Appellants would effectively lose their ability to challenge the validity and infringement/essentiality of foreign patents that would otherwise be outside the jurisdiction of the English courts. Second, that argument was then compounded by the fact that the English courts would then determine the terms and royalties payable in respect of such foreign patents without any regard to what a foreign court might decide.
Furthermore, the Appellants argued, the policy on protection of intellectual property rights laid down by ETSI, the European SSO, was such that a SEP owner’s right to seek an injunction had been removed and its right to damages limited until such time as the validity and essentiality/infringement of the relevant SEPs had been determined. That determination would, by necessity, have to take place in the national courts with jurisdiction over the SEPs.
Finally, the Appellants argued that it was inappropriate for a court to impose licence terms on a party, when a real-world, voluntary negotiation of such terms would likely lead to a very different result. Compromises that a company might choose to make in such circumstances (such as foregoing enforcement of certain patents) should not be determined by a court.
In dismissing the Appellants’ arguments, the Supreme Court noted that ETSI’s IPR policy established a clear balance between the interests of SEP owners on the one hand and those of implementers on the other. Failing to strike that balance could result either in “holding up”, whereby the advancement of technological standards could be delayed by refusal or delay on the part of SEP owners to licence their technology, or “holding out”, in which implementers could continue to infringe SEPs during the period in which SEP owners were required, by ETSI’s IPR policy, to refrain from seeking an injunction. It was common practice in the telecoms sector for parties to enter into global licences to portfolios in which it was tacitly accepted that some patents would be invalid or not essential, without the need, therefore, to engage in the lengthy and prohibitively expensive exercise of determining validity and infringement of each SEP in each jurisdiction. In the Court’s words, “It is a sensible way of dealing with unavoidable uncertainty.”
Turning to the Appellants’ argument that a SEP owner was precluded from seeking an injunction until validity and infringement/essentiality had been determined, the Court stated that the existence of injunctive relief for SEP owners was provided for by ETSI’s IPR policy and indeed a necessary incentive to the negotiation and conclusion of FRAND licences. Furthermore, ETSI’s IPR policy had clearly been drafted so as to have international effect, since the undertaking required of SEP owners extended to all members of a patent family, regardless of territory. That policy also anticipated that parties would seek to agree FRAND terms themselves, and that in such circumstances the commercial practice was to agree licences on a global scale. Therefore, the Appellants’ argument that the policy required SEP owners to seek injunctive relief from a national court only once infringement of the national patent had been determined failed.
Next, the Supreme Court considered whether the English courts had jurisdiction to determine the terms of a FRAND licence to a portfolio of patents that comprised both UK and foreign patents. Concluding that they did, the Supreme Court highlighted the fact that the decisions of the courts below had not required any assessment of the validity or infringement of foreign patents; rather, they had focused on the real-world, commercial practice regarding the licensing of SEP portfolios in the telecoms industry. That practice, as stated above, brought with it the necessary assumption that each licence to a portfolio was in effect blind to the validity or infringement of the patents it contained. To that end, the Supreme Court noted that it was not beyond a party negotiating such a licence to reserve the right to challenge the validity or infringement of particularly significant patents in national courts, and to provide contractual mechanisms by which the appropriate royalty rate could be adjusted accordingly, and indeed this is often done.
While Huawei had argued that the English courts were effectively engaging in a process of self-advertisement for future global licensing disputes, the Supreme Court disagreed and pointed to decisions from other jurisdictions (the USA, Germany, China, Japan and the European Commission) that supported the approach of the English courts, on all fronts: case law from the US courts had shown that there was a recognition that the determination of a FRAND licence arises from a contractual SEP obligation that is independent of the territorial limitations of the underlying patents, and that as a result the US courts were willing to determine the terms of such a licence on a global basis. Further support for the reliance on the usual, commercial practices of companies in the industry when determining FRAND terms could also be derived from case law in Germany, as well as an acceptance that a worldwide licence might be FRAND (while a national licence might not).
Finally, the Court turned to the issue of discretion and whether it was proper for an English court to grant an injunction in circumstances where an implementer refused to enter a global FRAND licence. The Supreme Court again found in favour of Unwired Planet and Conversant: the benefit of a global FRAND licence was the certainty afforded to implementers that they are able to sell their products globally, and an injunction limited to the UK market if the implementer refused that licence was not disproportionate in that context. An implementer could avoid being subjected to an injunction by accepting such a licence, which was precisely the arrangement established by SSOs such as ETSI.
Issue 2 – Forum
In the Conversant action, the Appellants had argued that service out of the jurisdiction on the Appellants’ Chinese entities should be set aside and the proceedings against the Appellants’ UK entities permanently stayed on the basis that China was a more appropriate forum according to the forum non conveniens assessment. In the alternative, the Appellants argued that the broad case management powers afforded the Court by the Civil Procedure Rules should be engaged so as to temporarily stay the English proceedings pending the outcome of the parallel Chinese litigation.
Having already determined that the English courts had jurisdiction to determine a global FRAND licence, the question was therefore whether another jurisdiction was the more appropriate forum for resolution of the dispute. Critical in that analysis was the identification and definition of that dispute: if, as Conversant contended, the dispute was “both in form and substance about the vindication of the rights inherent in English patents”, then the natural conclusion would be that the English courts were the appropriate forum. It was open to Conversant to choose the patents (and therefore the jurisdiction) it wished to enforce. However, if the dispute was more appropriately defined by reference to a global licence, then, said the Appellants, the Chinese courts were the more appropriate.
However, the Supreme Court effectively side-stepped the argument (while indicating it would have found in favour of Conversant) by noting that a challenge to jurisdiction on the basis of forum non conveniens places a positive obligation on the challenging party to identify another, more appropriate forum. The Appellants had only put forward China and therefore it was not open to the Supreme Court to consider whether other jurisdictions might also be equally or more suitable to resolve the issues. All three parties relied on evidence on Chinese law and procedure as to whether the Chinese courts had jurisdiction to determine the terms of a global FRAND licence. On the basis of that evidence, the Supreme Court found that the Chinese courts did not have such jurisdiction in the absence of agreement from the parties, and that it was no more than “speculative” that they would do so even with that agreement. Consequently, the Appellants’ appeal on the basis of forum non conveniens failed.
Turning to the Appellants’ argument that the court could use its case management powers to temporarily stay the English proceedings, the Supreme Court found no fault in the reasoning of the courts below and therefore refused to stay the proceedings.
Issue 3 – Non-Discrimination
As noted above, following the technical trials in the Unwired Planet proceedings, a settlement was reached between Samsung and Unwired Planet that included a licence being granted to Samsung. Huawei argued that that licence was a useful comparator in the exercise assessing the terms of any licence to be granted by Unwired Planet to Huawei, and that the non-discrimination component of FRAND required that the terms offered to Huawei be no less favourable than those offered to Samsung. As reported in our earlier article on the Court of Appeal decision, that argument failed before the courts below.
The argument therefore boiled down to Huawei’s “hard-edged” construction of non-discrimination (that in effect would require a SEP owner to grant terms equal to the most favourable terms offered to similar licensees) and Unwired Planet’s “general” construction of that term. The Supreme Court again found in favour of Unwired Planet and affirmed the reasoning of the Court of Appeal. According to the Supreme Court, the undertaking made by SEP owners comprised “a single unitary obligation” and that the “fair, reasonable and non-discriminatory” requirement should be construed “as a composite whole”.
The fact that prospective licensors might offer different royalty rates was a true reflection of commercial reality and would not necessarily result in harm to either public or private interests. As noted by the Court of Appeal, provided an offer of a royalty rate is fair and reasonable, it could not be deemed discriminatory simply because a lower rate had been offered to another party.
Issue 4 – Breach of Art. 102 TFEU?
Huawei argued, in the context of the Unwired Planet proceedings, that Unwired Planet should be refused an injunction on the basis that it had not complied with the clear conditions established by the CJEU in Huawei v ZTE, and was therefore in breach of competition law for having abused its dominant position (Art. 102 TFEU). That argument had failed at first instance before Birss J and again before the Court of Appeal (see our earlier article on the Court of Appeal Decision).
In affirming the decisions of the court below, the Supreme Court pointed to the fact that the CJEU had emphasised early on in its decision that “due account must be taken of the specific legal and factual circumstances in the case.” For this reason, the Supreme Court concluded that, in relation to the positive obligation on SEP owners to give notice to and consult with alleged infringers before applying for an injunction, the various steps required were not prescriptive nor intended to establish a set of conditions. Hence failure to comply with any or all of them would not necessarily result in a breach of competition law (nor the refusal of an injunction as abusive).
Issue 5 – Injunction or damages?
Lastly, Huawei argued before the Supreme Court that the grant of an injunction would be neither an appropriate nor proportionate remedy, relying on English case law that endorsed the award of damages in lieu of an injunction where appropriate.
The Supreme Court began its analysis at the very beginning, noting that the award of damages in lieu of an injunction is a “classic exercise” of judicial discretion. Further, Huawei had not argued the point before either of the courts below and there was no basis for the Supreme Court to effectively substitute the injunction that those courts had granted, with damages.
The Supreme Court also pointed to the “impossibly high” costs of bringing enforcement proceedings on a patent-by-patent, country-by-country basis, and stated that such costs (and the time required to litigate globally) meant that implementers would be incentivised to continue infringing. Consequently, the Court concluded that an injunction “is likely to be a more effective remedy, since it does not merely add a small increment to the cost of products which infringe the UK patents, but prohibits infringement altogether” and that the grant of an injunction against Huawei was therefore necessary.
While the full ramifications of the Supreme Court’s decision will take time to crystallise, it is nonetheless a clear and decisive victory for Unwired Planet and Conversant. For Conversant, attention will now turn to the forthcoming FRAND trial, and in particular the mechanism by and extent to which the High Court decides to determine the terms of a licence between the parties.
Looking at the broader picture, this decision lends support to portrayal of the English legal system as fertile ground for the resolution of global disputes, particularly in the telecoms industry. While such disputes have often been arbitrated behind closed doors, the increasing volume of case law from the English courts will give SEP owners greater confidence that the English courts will accept jurisdiction of disputes with global ramifications. Given that the English legal system offers a specialist patents court and the ability to argue validity and infringement simultaneously (which may be a blessing for either side depending on the specific case), this decision may prompt increasing volumes of litigation of this type in the future.
The consequences of this decision will of course create controversy. On the one hand, Huawei stands to suffer considerably if forced to remove its products from the UK markets unless it enters into a FRAND licence with Conversant and Unwired Planet. On the other hand, however, the decision will feed the flames of a wider dispute relating to the actions of PAEs and their willingness to engage in so-called “forum shopping” and the use of injunctions as a form of gunboat diplomacy during licence negotiations.
This controversy is not one to which the Supreme Court were blind: in assessing Issue 1, Huawei had drawn the Court’s attention to the “increasing involvement of Patent Assertion Entities (PAEs) in the SPE licensing market and in litigation” and expressed “concern that PAEs may abuse the power which ownership of SEPs gives.” The Court had been invited to review the comments of the European Commission on the potential such activity had to cause harm, and the opinion expressed by Justice Kennedy of the US Supreme Court in eBay Inc v Mercexchange to the effect that PAEs might (in the words of the English Supreme Court) “use injunctions as a bargaining tool to charge exorbitant royalties.”
The Supreme Court, however, noted that it was “alive” to that risk, but concluded that the rights of a PAE were no different to those from whom they had acquired their portfolios. Equally, their obligation to engage in licence negotiations in a FRAND manner was no different to that of an implementer and first or original owner of a SEP portfolio. As a result, a PAE could only obtain an injunction if it could show that the terms it offered to an implementer were FRAND. As to forum shopping, the Supreme Court concluded that the phenomenon was no more than a consequence of the way in which SSOs had chosen to operate: while SSOs’ policies clearly provided the possibility of worldwide FRAND licences, no such provision was made for an international tribunal or forum to arbitrate disputes or determine the terms of such licences. It therefore fell to national courts to do so, the natural consequence of which (in the context of large portfolios of patents from multiple territories) was that SEP owners would be able to select their jurisdiction of choice.
While the Supreme Court’s views on forum shopping may come as no surprise, given the need to position the UK as an attractive venue for litigation post-Brexit, the acknowledgment and subsequent acceptance of the PAE/implementer dispute may cause brows to rise. A central pillar of patent disputes is the oft-cited patent bargain, which seeks to balance the public interests against those of the patentee entitled to its monopoly. By analogy, a similar balance exists between implementers that also participate in the SEP declaration process as SEP owners: all have skin in the game in the form of patents that they own, patents they need to licence in to comply with standards, and products that they wish to sell. This is a powerful factor in commercial settlements being reached between implementers. By contrast, this balance, insofar as it exists between a PAE and implementer, is now likely tipped firmly in favour of PAEs: by confirming that the English courts have jurisdiction to grant injunctions if global FRAND licences are not agreed, the Supreme Court may well have given PAEs an advantage in future licence negotiations.