The UK Supreme Court’s decision was widely seen as a victory for SEP owners but, says Rouse’s Doug Clark, it might prove to be a Pyrrhic victory.

The August 2020 decision of the UK Supreme Court (UKSC) in three joined appeals Unwired Planet v Huawei, Huawei v Conversant and ZTE v Conversant has been hailed by many as a win for licensors of standard essential patents (SEP). While in the specific case this may be true, it may turn out to be a Pyrrhic victory. In effect, the UKSC has turned over the setting of global FRAND rates against Chinese parties to the Chinese courts.

The UKSC held that UK courts could, as the price for not granting an injunction against infringement in the UK, require an implementer who has been found to infringe a SEP to take a global portfolio licence. Unwired Planet and Conversant are both non-practising entities (NPEs) who acquired the bulk of their portfolios from Ericsson and Nokia respectively.

What does the decision mean for future licence negotiations with Chinese implementers?

The key to the UKSC decision is that if an implementer chooses not to enter into the global FRAND licence, it will be excluded from the UK market in relation to the patent that has been found to be valid, infringed and essential. In other words, the implementer is given two choices. They can either: (i) enter into a global FRAND licence; or (ii) have an injunction imposed. The logic behind the decision is that normally when negotiating a licence for SEPs, the parties will almost invariably agree to a global licence and, therefore, a global agreement is FRAND.

However, the threat of an injunction in the UK may not be that significant. As the UKSC itself noted, not all patents are created equal. There may be a work-around that will mean that the injunction can be avoided all together.

In the early 2010s, Nokia and HTC, for instance, both claimed to have developed work arounds when the English courts granted injunctions against infringement of a patent owned by the NPE IPCom.

The standard that is infringed may be a “nice to have” feature but not truly essential to the operation of handsets or equipment (although such features are relatively rare).

Validity can also continue to be challenged if new prior art is found. If the patent is invalidated either in the EPO or domestically, the injunction will be lifted. Indeed, one of the patents found to have been infringed (EP (UK) 1 230 818) expires in October 2020, so an injunction will be of no concern at this stage.

Even in the case of a truly essential and valid patent that cannot be worked around, in the greater scheme of things, the post-Brexit UK market is not that important to Chinese implementers. Many Chinese implementers will be more than willing to walk away from it rather than enter into a global FRAND licence on terms with which they do not agree.

The Chinese telecoms market is, however, where the action is. The market for mobile devices is booming and will continue to grow for years. There can be no doubt that Chinese implementers will now turn to the Chinese courts to set a global FRAND rate and that the Chinese courts will be more than willing to do so.

Any Chinese case will be dealt with very quickly with a first instance hearing in one of the IP courts or an intermediate court followed by a direct appeal to the Supreme People’s Court IP Tribunal. If it wished to, the Supreme Court IP Tribunal could hear a case at first instance directly. A case could be over in less than 18 months.

In China, the courts have already set China-only FRAND rates. In 2013, in Huawei v InterDigital, the court in Guangdong set what was generally considered to be a very low China-only FRAND rate of 0.019%. The case was, however, referred to arbitration and settled before a final appeal was heard by the Supreme People’s Court. More recently, Xiaomi has sued InterDigital in Wuhan over a FRAND dispute and other suits are pending in China where Chinese parties have asked for FRAND rates to be set. The Nanjing Intermediate Court last year set a China-only FRAND licensing rate between Conversant and Huawei at rates much lower than those sought by Conversant. There is no reason for the Chinese courts not to set global FRAND rates now.

The foundations for the Chinese courts to take jurisdiction to set global FRAND rates have been clearly laid in the UKSC decision where it was held:

• The setting of a global FRAND rate can be done as part of the enforcement of the contract made when the patent is declared to a standard setting organisation (in this case, ETSI); and
• The UK was the forum conveniens because there was no procedure to set a global FRAND rate in China.

In China, Article 24 of the Supreme People’s Court Judicial Interpretation on “Several Issues Concerning the Application of Law in the Trial of Disputes over Infringement of Patent Rights (II)” issued in 2016, allows Chinese courts to set FRAND rates where there is an unwilling licensor or unwilling licensee. The Judicial Interpretation is not specifically limited to setting FRAND rates for China only.

Further, in 2018, the Guangdong Higher People’s Court issued the “Guidelines for Adjudicating Cases over Standard Essential Patents” which allows the setting of a global FRAND rate where the other side does not raise an objection. The guidelines were discussed in the English Court of Appeal’s 2019 decision in Huawei v Conversant.

Given the UKSC decision, the Chinese courts now have no reason based on comity not to set global FRAND rates. They will no doubt also be more than willing to show they are the forum conveniens for doing so.

How Chinese can courts set global FRAND rates and how they can enforce them

The simplest approach for Chinese courts to set global FRAND rates will be to apply the ETSI contract theory applied by the UKSC. They could also apply a theory that refusal to license on FRAND terms is a breach of the Anti-Monopoly Law, but this will likely not be necessary. An ETSI contract theory is far more palatable and now in line with international practice.

If infringement is found, for implementers with sales in China the choice will be to either enter into a global FRAND licence as set by the court or give up sales in China. Given its size and continued potential for growth, no serious implementer will give up the Chinese market. While the enforcement of injunctions remains a weak area of Chinese law, no large western entity would be willing to take the risk of breaching an injunction.

The only real issue will be how to force an NPE to accept the global FRAND licence. You cannot injunct an NPE from selling a product. You can, however, order them to pay damages. If, for example, an NPE sought to obtain higher royalties outside China, despite the Chinese court setting the terms of a global FRAND licence, the Chinese court could award damages for breach of the licence. If the damages are not paid, Chinese law allows for the seizure of assets to satisfy a judgment which, in the case of a patent licensor, will be their Chinese patents. This threat to seize patents to ensure compliance has already been made in at least one Anti-Monopoly Law investigation involving FRAND licensing.

Every serious licensor has a Chinese patent portfolio and much of a claim for royalties is based on the putative licensee working those Chinese patents. Huawei made the point before the UKSC that 64% of its sales were in China or in countries where Unwired Planet did not have patents so the claim for royalties was effectively based on Huawei’s production in China.

NPEs (or even other licensors) seeking royalties from Chinese entities will then face the invidious choice of either giving up their Chinese patent portfolio or accepting a court-set global FRAND licence. They could also even face arguments that their rights have been exhausted if the Chinese implementer pays royalties in accordance with the Chinese-set FRAND rates.

The FRAND licensing industry is already awash with anti-suit (or anti-anti-suit) injunctions. Just this past month, the SPC IP Tribunal granted an anti-suit injunction against Conversant from enforcing a judgment of the Dusseldorf court against Huawei. The fights to file first and keep jurisdiction in a friendly court will undoubtedly be intensified and could even end up with anti-anti-anti-suit injunctions.

Where will this end?

The UKSC noted that the key cause of the problem was that no dispute resolution body was created under ETSI to set FRAND rates. Obviously, establishing such a body would be the best solution. However, given the numerous disparate interests, this is unlikely to ever occur. Arbitration has been tried by a number of parties, but it is not generally favoured because of the very substantial cost and loss of leverage that litigation can give.

The flicker of good news is that a Chinese court-determined global FRAND rate may not be as low as some expect and certainly not as low as the rates that were set in Huawei v InterDigital. Chinese companies (particularly Huawei and ZTE) are looking to be net licensors in the coming years, so rates will not necessarily be low to protect licensees. In countries where they are banned from selling products, Huawei, ZTE and other Chinese companies may even be looking to recover relatively high rates, giving the Chinese courts an incentive to establish principles that could be relied on to set rates at a higher rate than some may expect.

The author expresses his thanks to Eric Stasik of Avvika and David Cohen of Kidon IP for providing useful comments on a draft of this article.

This article was first published by

Intellectual Asset Magazine on 26 November 2020.

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