Unwired Planet v Huawei: Court of Appeal upholds Birss J’s judgment

The keenly awaited appeal judgment in Unwired Planet v Huawei was handed down yesterday. In its unanimous judgment, the Court of Appeal dismissed Huawei’s appeal, confirming Mr Justice Birss’s first instance decision (see previous commentary here and here) on FRAND licensing of standard-essential patents (‘SEPs’). We summarise the key findings below. 

1. Global licensing may be FRAND

The Court of Appeal held that a global licence can in principle be FRAND, and that if such a licence is refused by an implementer, the SEP holder should be entitled to the usual relief available for patent infringement, including an injunction. Agreeing with Birss J that Unwired Planet’s portfolio is substantial in size and scope and that Huawei’s business is global in nature, the Court decided that a global licence is what reasonable companies would have agreed on the facts of this case.

The Court of Appeal disagreed with Birss J on one point.  In the Court’s analysis, Birss J’s finding that there is only one set of FRAND licence terms in any given scenario was at odds with the complexities of patent licensing – and concepts such as fairness and reasonableness did not sit easily with Birss J’s rigid approach. This did not affect the Court’s overall conclusion on the global licensing issue, however. 

Implications

The Court of Appeal’s strong endorsement of Birss J’s approach means that the UK is likely to remain an attractive forum for SEP holders seeking to resolve global licensing disputes.  Nevertheless, the judgment still leaves scope for new issues to be raised: the Unwired Planet saga turned very much on its own facts and on Birss J’s assessment of those facts. The judgment does not mean that every future court-determined SEP licence will necessarily be global: this will depend on the nature of the portfolio to be licensed and the implementer’s sales and manufacturing footprint.  The law in this area is likely to continue to develop as new issues are raised (for example, an appeal of a jurisdiction challenge is currently pending before the Court of Appeal in another FRAND licensing case) and as other jurisdictions continue to develop their FRAND jurisprudence. 

2. Unwired Planet’s offer was non-discriminatory

The Court of Appeal agreed with Birss J that the ‘ND’ limb of the FRAND obligation only requires a SEP holder to offer a rate which reflects the proper valuation of the portfolio to all potential licensees. However, a SEP holder is not prevented from charging less than that benchmark rate if it chooses to do so. Indeed, the Court acknowledged that price discrimination is inherently neither pro- nor anti-competitive, stating that “an effects-based approach to non-discrimination is appropriate”. In cases where discrimination below the FRAND benchmark rate does cause competitive harm, this can be addressed by the application of competition law.

The approach of the Court of Appeal is in line with European competition law, which only identifies anti-competitive discrimination where there is a risk of competitive harm.  Arguably, the ruling at first instance went further, and required actual harm to be proved (the Court of Appeal did not address this point). 

Implications

SEP holders are likely to welcome this flexibility, which may also be beneficial for implementers who are looking to take advantage of a bespoke deal.  But in the context of litigation, implementers may be concerned that the ND obligation now lacks teeth. Nevertheless, prior licences of a particular portfolio are likely to remain of critical importance in any comparator licence analysis under the “fair and reasonable” limb of FRAND (unless they can be sufficiently differentiated, such that they are deemed not to be comparable), so the Court of Appeal’s judgment doesn’t give SEP owners a free hand to license at differential rates.

3. The Huawei v ZTE negotiation framework is not a set of prescriptive rules

The Court of Appeal has taken a pragmatic view, holding that just one part of the Huawei v ZTE framework is mandatory: the obligation on the SEP owner to contact and notify the implementer before starting litigation. The remainder of the framework is said to provide a ‘safe harbour’ – the licensor may stray from it, but in doing so faces risks of infringing Article 102 and being unable to obtain an injunction.

Implications

Whilst the Court has endorsed Birss J’s relatively flexible approach to applying the Huawei v ZTE framework, parties should nonetheless think carefully before straying too far from the scheme established by the CJEU.  Non-compliant conduct may remain high-risk if litigation occurs in the courts of other EU member states.

What next for FRAND?

The High Court’s judgment has been upheld and so the ‘FRAND injunction’ issued by Birss J will now take effect, unless a further suspension is ordered while an appeal to the Supreme Court takes place.  Huawei has already indicated that it may seek permission to appeal.

It remains to be seen to what extent the courts of other countries, including emerging FRAND centres such as China, will sit back and allow the UK courts to play ringmaster on FRAND/SEP issues. Recent guidelines issued by the courts of Guangdong (an important tech centre in China) suggest that global FRAND disputes may also find a home in other jurisdictions.

In any event, FRAND in the UK will continue to be influenced by developments in other countries, whether that is the approach of the US courts (as seen in cases like TCL v Ericsson), or the policies of the European Commission (which published a Communication on SEPs in November 2017), or guidance issued by other authorities such as the Japanese Patent Office (which issued a guide to SEP licensing negotiations in June this year).


SEP holders’ guidelines on IoT / 5G FRAND licensing

The Commission’s SEP Communication was designed to offer guidance on FRAND and SEP licensing. However, as we have noted before, it did not take a position on certain controversial issues such as use-based licences, or whether the FRAND obligation requires licences to be offered to any company that asks for one.  These issues will become increasingly important as the Internet of Things (IoT) continues to develop and more companies at different levels of the supply and distribution chain enter the SEP licensing arena for the first time.  

Earlier this year we reported on the establishment of two CEN-CENELEC workshops, one primarily backed by SEP holders, one primarily backed by implementers, that both seek to produce guidance on industry best practice for SEP licensing. We noted that each workshop was likely to take a different view on these kinds of issues. 

The first workshop, backed by Nokia and IP Europe, has now produced a first draft of its Guidance for licensing SEPs in 5G and the IoT. The draft is available for public review and comments until 13 December 2018. It sets out six principles that should apply in SEP licensing: 

  1. Owners of patent rights which are essential for using standardised technologies (SEPs) should allow access to that patented technology for implementing and using the standard. 
  2. Both the SEP owner and the potential licensee should act in good faith with respect to each other with the aim of concluding a FRAND licence agreement in a timely and efficient manner.
  3. Each party should provide to the other party, consistent with the protection of confidentiality, information that is reasonably necessary to enable the timely conclusion of a FRAND licence.
  4. “Fair and reasonable” compensation should be based upon the value of the patented standardised technology to its users.
  5. A SEP owner should not discriminate between similarly situated competitors.
  6. If the parties are unable to conclude a FRAND licence agreement within a reasonable timeframe they should seek to agree to third party determination of a FRAND licence either by a court or through binding arbitration. 

Taken at face value, these principles may sound uncontroversial.  However, implementers may feel that the devil is in the detail.  One point which is likely to provoke dissent is the question of who is entitled to benefit from SEP licences.  The document observes that there is usually one point or level in the supply chain where a SEP owner will choose to license its technology for a given product or service.  It is suggested that some consensus around this will simplify licensing, reduce costs for all parties and help maintain a level playing field between licensees. In other words, it indicates that ‘licensing to all’ is not required. 

The basis on which royalties are to be calculated is also likely to prove controversial.  In suggesting that compensation “should be based upon the value of the patented standardised technology to its users”, the document does not make clear whether this should include value attributable to the technology’s inclusion in a standard (the EC Communication and previous guidance in the Horizontal Guidelines suggests that such value should in principle not be included).  Other indicators which the Guidelines suggest may be considered include consumer demand, measurable benefits of the patented standardised technology, and the price difference between substantially identical products with and without the standardised technology.  This text suggests that there is indeed an intention to move away from the ‘incremental value’ rule, an issue which has recently been raised as part of the wider, significant debate about the role of antitrust in FRAND in the United States. (See for example, this letter by 77 former government enforcement officials and professors of law, economics, and business to Assistant Attorney General Delrahim, in which they criticise a number of speeches the AAG has made. They suggest that patent hold-up is a serious antitrust concern partly because “implementers are vulnerable to paying supra-competitive royalties based on the entire value of the product, not on the value of the patented technology”; the AAG’s response, supported by a number of other experts, is here.)

The second workshop is yet to publish the first draft of its alternative proposal. However, based on previous positions adopted by the Fair Standards Association (FSA) and ACT | The App Association, it seems likely that it will:

  • Stipulate that a patent owner cannot seek to increase the value of its patents by focusing on value created by downstream innovators and devices.
  • Call for an obligation on SEP holders to license only relevant patents – which may not necessarily be an SEP holder’s entire SEP portfolio.
  • Require licensing to any and all that seek a license.

In short, it is likely to take the opposing view to the first workshop on the key unresolved issues in the interpretation of FRAND.  

If the final products of each workshop are completely opposed to one another, they will not be particularly helpful as guidance to new potential licensees. It may require judicial or regulator intervention to resolve these issues before the full rollout of the IoT and 5G.  It remains to be seen where the first real determination of these kinds of questions will take place. One possibility is the FTC v Qualcomm case in California (discussed here), where the FTC is seeking a declaration that Qualcomm must be prepared to license competing chipset manufacturers. That could provide a persuasive authority on whether FRAND requires licences to be offered to all, although other jurisdictions may of course take a different view.

Global FRAND issues unpicked in Japan Patent Office’s new licensing guidance

We have previously reported on FRAND guidance from other jurisdictions outside of Europe, such as those published in South Korea a couple of years ago (see here), as well as on EU initiatives, such as last year’s Commission Communication (see our comments here).

Earlier this year, the Japan Patent Office (“JPO”) published a “Guide to Licensing Negotiations Involving Standard Essential Patents”, which aims to shed light on key topics concerning FRAND licensing. It provides a useful summary of licensing negotiations and royalty calculations for standard essential patents (“SEPs”), including taking into account the possible implications of the rise of the Internet of Things on future FRAND-based negotiations.

The Guide focusses on the “two aspects of FRAND”: the negotiation process itself, and the terms of the resulting licence agreement. 

For the first aspect, it gives advice on how to negotiate in good faith, from the perspectives of both the patent holders and the implementers of patented technology. It also sets out actions that it suggests are likely to increase the efficiency of FRAND licensing negotiations, including around timing and issues such as the level of the supply chain at which negotiations should take place. Generally, the Guidelines limit themselves to outlining the issues, and are far from prescriptive.  However, the footnotes provide useful examples of cases from around the world that demonstrate how courts have dealt with particular aspects of these negotiations, including Unwired Planet v Huawei ([2017] EWHC 711 (Pat)) and Huawei v ZTE (Case C-170/13 [2015] CJEU), which we have reported on previously (see, for example, here and here).  Indeed, the licensing negotiation methods proposed are closely aligned to the perspective of the Court of Justice.

For the second aspect of FRAND, namely the terms of the licence, the Guide focusses predominantly on different ways of calculating a FRAND royalty, including the “top-down” and “bottom-up” approaches for calculating the royalty rate. It also sets out the advantages and disadvantages of using the smallest saleable patent practising unit compared to the entire market value as the royalty base, a subject that has sparked debate in recent years with the emergence of new technology such as smart phones and connected vehicles. 

Of particular note is the fact that the JPO’s Trial and Appeal Department now provides non-binding advisory opinions in relation to the technical scope of a patented invention. Also, since April 2018 the JPO has been offering opinions to parties in disagreement over the essentiality of a patent. This appears to be in line with an increased emphasis in Japan on arbitration and alternative dispute resolution: in June 2018, it was announced that Asia’s first international arbitration centre specialising in patent disputes would be opening in Tokyo later in the year (see here). 

From the European perspective, the global reach of the Japanese guide is of note: drawing on case law from around the world, it suggests that different national approaches to FRAND can be unified.  For the authors, it is too soon to assume that there is a consistent global approach of FRAND.  Recent announcements from US policy-makers, for example, suggest that the approach to the balance to be struck between licensor and licensee may be changing in a way which differs from that seen in Europe (compare and contrast, for example, Assistant AG Delrahim’s rejection of the role of antitrust in FRAND violations which appears likely to favour licensors, evident desire for balance between licensor and licensee interests in most of the European Commission’s recent statements.

Nevertheless, for those with an interest in FRAND issues, the JPO Guide is well worth reading for an overview of the key considerations for parties engaged in SEP licensing negotiations. The JPO has stated that it aims to keep the Guide updated regularly, with contributions from experts from around the world.  

Summer FRAND developments: some big antitrust news to come

Back in May this year, the Court of Appeal sat for five days to hear Huawei’s appeal of Birss J’s judgment in Unwired Planet.  The bench included two of the Court’s most experienced patents judges in Lord Justices Kitchin and Floyd (and Kitchin LJ has now been appointed to the Supreme Court, see here). Although rumours circulated that the Court of Appeal’s judgment might be forthcoming before the summer vacation, nothing materialised, and the expectation now is that the judgment will be published at the start of the Michaelmas term, which begins on 1 October. (A reminder of the issues being appealed can be found here.)

That judgment will be hugely significant for the conduct of FRAND negotiations, licensing and litigation both in the UK and elsewhere. This is not least because there are now several FRAND cases before the High Court, including Apple v Qualcomm, Conversant v ZTE & Huawei, Philips v ASUS & HTC and TQ Delta v Zyxel (the latter on ASDL, rather than ETSI telecoms standards). All of these are likely to be affected by the Court of Appeal’s decision.

However, the upcoming judgment isn’t the only relevant FRAND news. FRAND is a global concern, and recently there have been other FRAND developments around the world that are worth noting.

Delay to German Supreme Court ruling in Sisvel v Haier 

Back in 2015, the Düsseldorf Regional Court granted Sisvel an injunction against Haier for infringement of two its SEPs. However, on appeal, the OLG Düsseldorf held that Sisvel had failed to offer Haier FRAND terms as per Huawei v ZTE because Sisvel’s offer was discriminatory (there was a significant difference between Sisvel’s treatment of Haier and its competitors). Sisvel appealed to Germany’s Supreme Court, the Bundesgerichtshof.

In parallel, Haier had brought proceedings challenging the validity of the two Sisvel SEPs. One has now expired, and the other was declared invalid at first instance. Sisvel has appealed this decision.

The Supreme Court has now suspended its decision on the FRAND side of the case until the patent proceedings are completed, to avoid the risk of conflicting judgments (the decision is here, in German).  

It seems likely that if the invalidity decision is upheld, the Supreme Court will decline to make a final determination on the FRAND issues. Given the limited case law available on the discrimination aspect of FRAND (see here for some discussion of this), as well as the lack of consensus on the approach to FRAND in the German regional courts, this will mean that uncertainty continues at least as regards the German position for the foreseeable future.

Haier fails to convince US Court to take up digital TV case

Meanwhile, over in the USA, Haier had sought to turn the tables on other holders of declared SEPs, having brought a case in the Northern District of New York alleging a conspiracy by the holders of SEPs reading onto the ATSC standard.  Haier claimed that a patent pool established by companies including LG and Panasonic and administered by MPEG LA was artificially inflating prices above a FRAND level, and that licensors were refusing to license individually.

The Court rejected the claim on limitation grounds earlier this month (September 2018) and did not engage with the substance of the allegations (see here). 

FTC moves for summary judgment on Qualcomm’s obligation to license competitors 

In the Northern District of California, the FTC is engaged in proceedings against Qualcomm, alleging that Qualcomm has excluded competitors and harmed competition by withholding its baseband processors unless a customer accepts a licence on terms favourable to Qualcomm (including disproportionately high royalties). The trial is scheduled for early January 2019.

However, at the end of August, the FTC filed a motion for partial summary judgment regarding a key aspect of the case. It has asked for a declaration that under its FRAND obligations, Qualcomm must license its SEPs to its chipset competitors such as Intel.

Whether FRAND requires SEP holders to grant a licence to any company that asks for one (known as licensing to all) is a hotly debated topic.  The answer is potentially of wide significance, because it could fundamentally affect the licensing model that has applied in the sector for the past 20 years. For example, if all chipset manufacturers were licensed (potentially at royalties based on the chipset price rather than on the price of a smartphone) the manufacturers of smartphones may not require licences at all (depending on laws relating to pass-through and exhaustion) which would have a major impact on how SEP licensing currently operates.  Alternatively, the price of chipsets themselves might need to rise significantly to account for the increased IPR costs.  Or manufacturers may start to seek to tailor licences to different uses, splitting value along different parts of the supply and distribution chain. 

Examples of any judicial authority considering this topic are rare. The Commission dodged the issue in preparing its 2017 Communication on SEP Licensing (see here), although the Korea Fair Trade Commission has found Qualcomm’s refusal to license its SEPs to competing chipset manufacturers abusive (the decision is here, but note that Qualcomm is appealing). Although the California Court’s judgment will relate to the ATIS and TIA standards interpreted on the basis of US law (rather than ETSI FRAND interpreted on the basis of French law), it is still likely to be influential in Europe.

European Commission sets up SEP Licensing Expert Group

Introduction

The Commission’s November 2017 Communication on SEPs (on which we reported here) referred to the Commission’s intention to set up an expert group to gather industry practice and expertise on FRAND licensing that could be used to support the Commission’s policy making (the “Expert Group”).  On 5 July 2018 the Commission adopted a decision establishing the Expert Group. As well as setting out what the Expert Group’s tasks will be and noting that the Commission may consult the Expert Group on any matter relating to licensing and valuation of SEPs, the decision explains how the members of the Expert Group will be selected and how observer organisations can play a role. Further information is available on the Commission website.

Membership and selection process

The Expert Group will comprise up to 15 members with substantial experience in licensing and / or the valuation of SEPs (other experts with specific expertise may also be invited to work with the Group on an ad hoc basis). At least two thirds of the members will be appointed in a personal capacity and must act independently and in the public interest. 

The remaining members may be appointed to represent a common interest shared by stakeholders (the member and interest represented will be listed in a Transparency Register). The application form gives the following list of interests that can be represented:
 
a) Academia/Research
b) Civil society 
c) Employees/Workers
d) Finance
e) Industry
f) Professionals
g) SMEs
h) Other (to be specified) 

Applicants will also be required to indicate the policy areas in which the stakeholders they represent operate. The categories of interest are surprisingly broad. Within ‘Industry’ for example, there are likely to be a wide range of (conflicting) views presented.  We have previously discussed some of the areas of fierce debate within industry on topics such as use-based licensing, licensing to all and the appropriate royalty base– see here and here

The deadline for applications is 20 August 2018. Members shall be appointed by DG GROW, after consultation of the other Commission services concerned, for a term of two years. Given its responsibility for IP and standardisation, DG GROW is the directorate taking the lead here: the Expert Group will act at its request and will be chaired by a representative of DG GROW.

Observers

Organisations directly involved in licensing or valuing SEPs may (by invitation) be granted observer status. If appointed, the organisation will be able to nominate an experienced representative to participate in Expert Group meetings, although the representative will not have voting rights or be able to participate in the recommendations or advice produced by the Group. The names of observer organisations and their representatives will be listed in the Transparency Register.

Thoughts

We have previously noted that rival CEN-CENELEC workshops have been set-up to produce Codes of Conduct on best practices for SEP licensing, and that these Codes are likely to adopt very different positions on the most contentious unresolved issues in SEP licensing (here). Recommendations produced by the Commission-backed Expert Group should take into account a wider range of views, and are likely to be more persuasive.

It will therefore come as no surprise that lobbying groups have been quick to set out their views on the sorts of members that should be appointed to the Expert Group. For example, IP Europe “urge[s] the European Commission to ensure broad representation on the expert group from leading European innovators of wireless open standard technologies” (here), whereas ACT | The App Association emphasises the importance of including “the perspective of innovators from all along the value chain” (here). 

Whoever DG GROW decides to appoint (and there is no deadline currently set for when the list of appointed members will be published), it will need to ensure that the Expert Group is capable of grappling with the many complicated issues currently arising in FRAND licensing disputes, as well as new issues that will do doubt arise as the Internet of Things continues to evolve.   

FRAND in the UK (May 2018 edition): Unwired Planet appeal; Apple v Qualcomm

This week has seen the English Court of Appeal hear Huawei’s appeal of the FRAND and remedies judgments issued last year by the High Court in the Unwired Planet litigation (see our reports here and here, and a more detailed analysis here).

Huawei’s appeal spans three main arguments:
 
  • The High Court should not have determined FRAND terms, including rates, for territories other than the UK: it was mistaken in holding that there can only be one set of FRAND terms in any given set of circumstances and erred in finding that this meant that the only FRAND licence was global.  
  • The Judge was mistaken to decide that the non-discrimination (ND) limb of FRAND allows a standard essential patent (SEP) holder to charge similarly situated licensees substantially different royalty rates for the same SEPs.
  • The Court should have found that Huawei had a defence to Unwired Planet’s injunction claim under Article 102 TFEU, and by application of the CJEU’s ruling in Huawei v ZTE: the Court was wrong to hold that the steps laid down by the CJEU in Huawei v ZTE were discretionary factors rather than mandatory conditions.
 
As well as seeking to rebut these points, and uphold the first instance decision, Unwired Planet is disputing:
 
  • The first instance finding that Unwired Planet held a dominant position (despite an acknowledged 100% market share in the market for the licensing of SEPs owned by Unwired, and the admitted indispensability of the infringed SEPs).
  • The decision that its unusually worded injunction claim was in fact a claim for a prohibitory injunction in the sense contemplated by the ruling of the Court of Justice in Huawei v ZTE.  (Unwired had claimed an injunction “save insofar as the Defendants … are entitled to and take a licence to the Declared Essential Patents on FRAND terms (in accordance with the Claimant’s undertakings and the ETSI IPR Policy) and insofar as the Claimant is and remains required to grant such a licence”.)
 
Meanwhile, the English court has this week adjudicated on the summary judgment claim in Apple v. Qualcomm.  (See here for our summary of the original scope of the case; Apple supplemented its claims against Qualcomm shortly before the March hearing to add a follow-on case based on the European Commission abuse decision – as to which, see here.)
 
Unlike in the recent Conversant v. Huawei & ZTE decisions, which confirmed that the English court had jurisdiction to hear a global FRAND claim at the remedies stage of a patent infringement action (although also granted permission to appeal that decision), in Apple v. Qualcomm, the High Court declined to allow Apple to bring its case alleging breach of Qualcomm’s FRAND undertaking.  The difficulty stems primarily from the attempt to use the UK Qualcomm subsidiary – which does not own relevant patents, and did not give FRAND undertakings – as an anchor defendant for a claim based on FRAND declarations given by its ultimate parent company, Qualcomm Inc.  The Judge, Morgan J, held that the reference in clause 6.1 of the ETSI IPR Policy to “the owner” of SEPs did not mean that affiliates of the owner should be required to comply with the ETSI FRAND undertaking.  Such an obligation would apply only if such affiliates themselves also owned IP to which the undertaking directly applied (e.g. other patents within the same family).  The Judge did not consider his ruling to be in any way inconsistent with Birss J’s ruling in Unwired Planet.  He therefore granted Qualcomm ‘reverse summary judgment’ against Apple’s claim, preventing Apple from continuing to advance this case (subject to the outcome of any permitted appeal).  
 
Apple had also brought a number of related claims, including for patent revocation/non-infringement and exhaustion.  These have been allowed to proceed (but arguably do not address the central dispute between the parties).  However, other issues relating to Qualcomm’s licensing practices were held not to meet the jurisdictional gateways, and not to be sufficiently closely related to the patent claims.  Apple’s competition law damages case, including a claim that Qualcomm charged “supra-FRAND royalties” also hangs in the balance – while the Judge was not concerned about similar US proceedings, he has expressed concerns about whether loss was actually suffered by the claimants in the jurisdiction, and has permitted Qualcomm to adduce evidence on this point, to which Apple may respond.
 
The judgment of Morgan J shows that the English court is alive to the need to allow only appropriate cases to proceed, but also contains valuable guidance on how future claimants can improve their chances of passing through the relevant jurisdictional gateways. 
 
We will report in due course on the outcome of the Unwired Planet appeal – judgment is expected before the Court’s August break. 

The CJEU guidance in MEO on price discrimination in licensing may also impact FRAND / SEP licences

Introduction

AG Wahl began his Opinion in MEO v Autoridade da Concorrência by noting that it presented the CJEU with an opportunity to clarify the law on differential pricing. Under Article 102(c) TFEU it can be an abuse for a dominant undertaking to apply “dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage”. Discrimination has always been a tricky issue under Article 102 (it is one of relatively few competition issues to have received a thorough discussion by the English Court of Appeal - see British Horseracing Board, paragraphs 265-278)  and it has never been entirely clear to what extent the EU authorities consider that the practice of price differentiation necessarily results in a finding of competitive disadvantage, or how much disadvantage is required to infringe Article 102. 

Price differentiation is a topical issue. The increasing use of pricing algorithms offers the potential for companies to engage in ‘personalised’ pricing on a mass scale, offering different prices to different consumers based on an algorithmic assessment of the highest price each individual is likely to pay. But they may also facilitate anti-competitive price coordination and so could give rise to concerns (see here and here).

Similarly, as the Internet of Things and 5G lead to new market entrants requiring SEP licences, it will be important for licensors to consider how to charge different licensees different prices without infringing the non-discrimination limb of FRAND.

Can it be assumed that price differentiation is likely to distort competition? Should a competition authority have to demonstrate that the competitiveness of any business placed at a disadvantage by differential pricing has suffered? The CJEU decision in MEO offers some useful guidance on these questions.

Facts

MEO is a mobile / telecoms service offered by Portugal Telecom. As part of this service MEO provides television content, and therefore pays royalties to the Portuguese collecting society that manages the rights of artists and performers, GDA.  In 2014 MEO made a complaint to the Portuguese Competition Authority that GDA had abused its dominant position by (amongst other things) applying different terms and conditions (including price) to MEO compared to another entity also providing television content, NOS. The Portuguese Competition Authority found that GDA had applied different tariffs to different customers between 2009 and 2013. However, it concluded that this price differentiation had no restrictive effects on MEO, and so took no action against GDA. MEO appealed this decision to the Portuguese Regulation and Supervision Court, which referred a number of questions regarding differential pricing to the CJEU.

CJEU decision

The CJEU referred to its previous decisions in Intel and Post Danmark II in setting out three key principles that applied:

  1. Proof of actual, quantifiable deterioration of a particular customer’s competitive position is not required for a finding of competitive disadvantage.

  2. All the relevant circumstances must be examined to determine whether price discrimination produces or is capable of producing a competitive disadvantage

  3. The mere presence of an immediate disadvantage affecting operators who are charged more does not mean that competition is distorted or capable of being distorted.

The CJEU also noted that when assessing particular prices charged by a dominant undertaking, the authorities may assess the undertaking’s negotiating power, the conditions and arrangements for charging any tariffs, their duration and amount, and the existence of any strategy aimed at excluding companies from a downstream market. The CJEU also reaffirmed that there is no de minimis threshold for the purposes of determining whether there is an abuse of a dominant position, albeit this will feed into the analysis of potential effect (paragraph 29). 

Impact

This decision offers helpful clarifications on how Article 102(c) should be interpreted. Although relatively narrow in scope, it has broad implications, particularly in the FRAND context; price discrimination between licensees is a controversial topic that has received relatively little judicial or regulator attention to date.  

As we describe in this article, in its Communication on SEPs, the Commission appeared to endorse a specific non-discrimination obligation in FRAND, stating that SEP holders cannot discriminate between implementers that are ‘similarly situated’. However, it did not specifically say that there is a requirement for distortion of competition between those similarly situated licensees (as for example the High Court had held in Unwired Planet, though this issue is being appealed), or whether harm to an individual firm rather than harm to competition might be sufficient (as a US court recently decided in TCL v Ericsson).

The CJEU’s MEO decision suggests that price discrimination will only be abusive if it leads to a distortion of competition (paragraph 27). So it seems there is scope for licensors to charge similarly situated licensees different royalty rates without breaching their FRAND obligations, as long as they do not distort competition by doing so.

Race to publish rival SEP & FRAND Codes of Conduct: new CEN-CENELEC working groups established

In October last year we reported on the difficulties that the Commission was facing in drafting its Communication on SEPs, in particular relating to the issues of use-based licensing or chipset licensing (see here).  We also noted that certain industry participants, such as Nokia and Ericsson, had confirmed their intention to establish an industry-wide code on best practices for SEP licensing.

In the subsequent months there have been some significant developments. The Commission’s Communication has been published (here, analysed in an article we wrote for the CIPA Journal here), although there was a notable absence of any specific reference to use-based or chipset licensing. The Nokia-backed proposal for a Code of Conduct has also crystallised into the form of a CEN-CENELEC workshop that kicked off in October 2017 (WS-SEP). 

Perhaps alive to the risk of that workshop producing a Code of Conduct that favoured SEP holders, a rival CEN-CENELEC workshop was set up by ACT (The App Association) and the FSA (Fair Standards Alliance) in February 2018 (WS-SEP2). Although slower off the mark, this second workshop is operating to a faster timetable; both workshops aim to produce a final text of their Code of Conduct by June 2018.

The detailed project plans for each workshop reveal exactly the sorts of differences in approach that one might expect. Both workshops intend their participants to discuss a range of FRAND issues in order to identify best practices from which a Code of Conduct can be developed. However, there are some clear differences in emphasis from each workshop.

WS-SEP focuses on the goal of concluding licence agreements and resolving licensing disputes quickly and efficiently. As part of this, it proposes the establishment of an ‘IoT SEP Licensing Gateway’, describing this as a “process and structure to engage in licensing discussions and resolution in a streamlined or more systematic way”.

On the other hand, WS-SEP2 envisages a broader range of topics being covered, making specific reference to the issues of patent hold-up and licensing without mandatory bundling on a portfolio only basis.

The differences in approach are perhaps most clearly seen in the sections of each workshops’ project plan which deal with what we have previously described as use-based and chipset licensing (here) – topical issues that the Commission did not address directly in its SEP Communication. 

Both workshops recognise the importance of developing guidance on the value of a standardised technology. However, while WS-SEP2 states that “a patent owner cannot seek to exaggerate the value of its patent by focusing on value created by downstream innovators and devices”, WS-SEP warns that “the price of a car does not reflect the value of connectivity in a car, equally the price of a chip may not reflect the value that connectivity, enabled by a chip brings to an end product”.

And though WS-SEP2 intends its guidance to cover “[t]he long history of FRAND licensing at all levels of the supply chain”, by contrast, WS-SEP takes a much narrower approach, proposing discussion on “[t]he appropriate licensing points to efficiently provide access-for-all”. 

The Commission’s decision to avoid taking a stance on either of these issues in its Communication, the value at stake in the light of the IoT and the impact that use-based and chipset licensing could have on royalties paid in new licences meant that these areas were always likely to become a battleground.  

We will be very interested to see the final products of both workshops. However, if the end result is two conflicting Codes of Conduct, they may have little impact on resolving the most contentious FRAND issues. 

The chips are down! The Commission fines Qualcomm for abuse of dominance

The Commission has fined Qualcomm €997 million for abuse of dominance. The Commission found that Qualcomm had paid Apple to use only Qualcomm LTE baseband chips in its smartphones and tablet devices (see here) and that this was exclusionary and anti-competitive. 

Commissioner Vestager has said Qualcomm “denied consumers and other companies more choice and innovation – and this in a sector with a huge demand and potential for innovative technologies”, as “no rival could effectively challenge Qualcomm in this market, no matter how good their products were.

LTE baseband chips enable portable devices to connect to mobile networks. The Commission considers Qualcomm to have had a market share of over 90% between 2011 and 2016 (the period of the infringement). 
 
The Decision centres on an agreement between Qualcomm and Apple in force from 2011 to 2016 under which Qualcomm agreed to make significant payments to Apple. The payments were conditional on Apple not using chips supplied by Qualcomm’s rivals, such as Intel, in Apple’s mobile devices. Equally, Apple would be required to return a large part of Qualcomm’s previous payments if it decided to switch chip suppliers. The Commission also identifies Qualcomm’s IP rights as contributing to the significant barriers to entry in the chip market, reinforcing Qualcomm’s dominance.

The Qualcomm Decision is similar to the Commission’s 2009 Decision to fine Intel €1.06 billion for giving rebates to major customers in return for them exclusively stocking computers with Intel chips – a decision recently remitted by the CJEU to the General Court for further consideration of the ‘as efficient’ competitor analysis (see here and here). 

Applying the CJEU’s reasoning in Intel, Qualcomm sought to justify its rebate arrangements with Apple on the basis of the ‘as efficient competitor test’. However this attempt was rejected by the Commission as there were “serious problems” with Qualcomm’s evidence (see here).

Separately, Apple has also argued that Qualcomm’s dominance may be reinforced by its strategy for licensing its standard essential patents (SEPs) to competing chip manufacturers. Apple is bringing cases against Qualcomm around the world, alleging that it has engaged in “exclusionary tactics and excessive royalties”. In litigation launched in the English Patent Court in 2017, Apple alleges that Qualcomm is unwilling to license its SEPs to competing chip manufacturers, offering only patent non-assert agreements (see here) which could have a foreclosing effect on other chip manufacturers. (We understand that this case is subject to a jurisdiction challenge, due to be heard in the coming months.)

Qualcomm’s patent licensing arrangements are described (by Apple in its pleadings) in the diagram below:

The Qualcomm Decision reiterates the aggressive approach adopted by the Commission to policing rebates given by dominant companies and potential foreclosure effects. Following the Qualcomm Decision, Commissioner Vestager said “[t]he issue for us isn't the rebate itself. We obviously don't object to companies cutting prices. But these rebates can be the price of an exclusive relationship – the price of keeping rivals out of the market and losing the rebate can be the threat that makes that exclusivity stick” (see here). 
 
As litigation and antitrust clouds swirl around Qualcomm’s business model, in a separate case filed in the Northern District of California in 2017, the US Federal Trade Commission has similarly alleged that Qualcomm is using anti-competitive tactics to maintain its monopoly of baseband chips and has rejected requests for SEP licenses from Intel, Samsung and others (see here and here).

In parallel, competition authorities in China, South Korea, Japan and Taiwan have fined the company a total of $2.6 billion in relation to its SEP licensing policies and pricing (see here).

In summary, while the EU Commission fine is significant, and interesting for competition lawyers as it perhaps suggests that the significance of the Intel CJEU judgment may be more limited than anticipated, it is only part of the overall picture for Qualcomm (and for the sector as a whole). Indeed, even with today’s decision, the Commission has not brought its interest in Qualcomm to an end, as it is still investigating a separate predatory pricing complaint which was filed in 2015.  

The cumulative impact of these legal issues (as well as Qualcomm’s rejection of Broadcom’s takeover bid) may have contributed to a fall in Qualcomm’s share price – although Qualcomm had better news from DG Comp recently when its proposed acquisition of NXP was cleared by Brussels on 18 January (see here and here).

USA v. UK – a united approach to FRAND? Comparing the new judgment in TCL v. Ericsson with Unwired Planet v. Huawei

On 21 December 2017, Judge Selna of the US District Court for the Central District of California released a judgment which is likely to be the most significant US FRAND decision yet. In a case brought to end the global dispute between two giants, TCL (the seventh largest manufacturer of mobile phones worldwide) and Ericsson (holder of one of the largest mobile telecommunications SEP portfolios), Judge Selna set a FRAND royalty rate for Ericsson’s 4G, 3G and 2G patents as part of a five year global licence agreement.

The judgment is of comparable length and complexity to last year’s UK Unwired Planet decision (which we discussed here and here). The approach taken by Judge Selna shares a number of similarities with that of Birss J in Unwired Planet, making use of a top-down methodology and comparable licences. However there are also a number of key differences that, if applied in future judgments, could have a significant impact on how FRAND rates are calculated.

Key differences at a glance 


Analysis

Due to the wealth of detail contained in the TCL judgment, we have picked out just a few key points in this article. For a more detailed analysis, we recommend a post by Professor Contreras (here).

Ericsson’s offers: Judge Selna concluded that Ericsson’s offers were not FRAND, but that (as in Unwired Planet) offering a rate higher than that ultimately determined as FRAND was not a breach of FRAND obligations. Interestingly, Judge Selna also explicitly stated that royalty floors proposed in Ericsson’s offers, aimed at ensuring minimum levels of revenue despite the low prices of TCL’s products, were discriminatory and non-compliant with FRAND. 

Top-down Approach: Both judgments made use of a top-down analysis, but in slightly different ways. In TCL, the focus was on the aggregate royalty burden, established by reference to statements about aggregate rates made by Ericsson and a number of other significant IP holders at around the time the standard was adopted. Whereas Birss J considered such statements to be unenforceable statements of intent, Judge Selna noted the role that they played in ensuring adoption of a particular standard (resulting in global use of LTE rather than WiMax for example), and considered it appropriate to tie the aggregate royalty rate for the standard to those rates. 

Having determined the industry total number of essential patents (a considerably lower number than the total number of declared patents, due to the problem of over-declaration, also considered in detail in Unwired Planet), the Judge then established Ericsson’s share of the total royalty rate.  This was cross-checked with an analysis of comparable licences to ensure a FRAND rate – in principle this was particularly important for 4G, where the ex ante statements pointed to a range of aggregate royalty rates (of between 6 and 10%) – but in practice, it was the 3G top down rate which was adjusted as a result of the comparator licences review. In Unwired Planet the opposite approach was taken, determining a rate using comparable licences, and cross-checking against the implied aggregate royalty. 

Expired Patents: When determining Ericsson’s share of the relevant standards, any of its patents which had expired prior to the date of closing arguments were excluded from its share. However, expired patents were left in the number of total SEPs used as the denominator. The judge argued that removing them would unfairly reward those patentees who still had patents remaining in the standard rather than the public.  While the exclusion of such patents was in part motivated by specific considerations of US law (the prohibition on paying royalties on expired rights), there also appears to be a sound economic basis for ensuring that patentees holding later-expiring patents are not over-rewarded for their rights. This is also arguably in line with the recent Commission Communication on SEPs (discussed here) which suggests that the value of technologies declines over time.

Non-Discrimination: In assessing the non-discrimination aspect of FRAND, both judges agreed that licensors cannot discriminate against similarly situated licensees. Judge Selna looked in some detail at what ‘similarly situated’ means and concluded that the basis for comparison must be all firms reasonably well-established in the world market. This excludes ‘local kings’ – firms that sell most of their products in a single country – but includes industry giants such as Samsung and Apple, despite their greater market share and brand recognition. This approach is good news for licensees whose products retail at lower price points, as it means they should benefit from the same level of rates they do.  Judge Selna explicitly dismissed the relevance of competition law (in this case the US Sherman Act) for this assessment – whereas Birss J. applied Article 102 in determining that – if his primary conclusion about benchmark rates was incorrect – Huawei would still need to show harm to competition resulting from any discrimination between it and other similarly situated licensees. (Coincidentally, the same approach to discrimination has recently been endorsed in the IP – albeit not the SEP – context by Advocate General Wahl in Case C-525/16 MEO – Comunicaçoes e Multimédia.)

Multi-mode: The issue of multimode devices was dealt with differently in the two cases. In Unwired Planet, Birss J computed separate multimode rates based on a set of ratios. In TCL, it was implicit that the rates were single mode, but they appear to apply to multimode products.  Notably, the top-down figures established by the Judge were held to be implicitly multimode rates.

Geographical Regions: Judge Selna considered Ericsson’s patent portfolio strongest in the USA, so applied a discounted rate elsewhere. He divided the world into three regions – USA, Europe and the Rest of the World and established a precise discount rate for each region and each standard. This was clearly a fact-specific exercise, and would depend on the particular; while the Judge indicated that it could have been helpful to break the regions down further, he also noted that any royalty regime should be reasonably straightforward.  
 
Compare this to Birss J in Unwired Planet where the world was divided into only two regions – major markets (for countries where Unwired Planet held 3 or more patents) and other markets.  One striking similarity between the two judgments was that both treated China (where the licensees in each case manufactured their products) as a floor for global royalties, allowing the licensors to claim rates on all global sales, even if there is no local patent protection.  In the case of the TCL judgment, this meant that for 3G, Ericsson’s lower patent holdings in Europe compared to China led to the Rest of World rate applying in Europe as well.

FRAND Rates: The aggregate patent numbers and final rates as determined in both cases are set out below:


It’s worth noting that once Unwired Planet’s and Ericsson’s respective shares of the total relevant SEPs are taken into account, the rates in TCL are more favourable to the licensee than those in Unwired Planet. The comparison between the cases is all the more interesting, given the provenance of the Unwired Planet portfolio which was drawn from Ericsson’s.  In Birss J’s judgment, the Unwired Planet portfolio was considered to be representative of a subset of Ericsson’s, while Ericsson’s 4G benchmark royalty rate was held to be 0.80%.  Given that Judge Selna calculated total industry patent numbers of close to double those found by Birss J, the fact that the Ericsson per patent rate in TCL was almost half that found in Unwired Planet is mathematically unsurprising, and points to considerable convergence on other parts of the analysis.

While the TCL judgment may be welcomed by implementers, an appeal is to be expected.  Meanwhile the appeal in Unwired Planet is due to come before the English Court of Appeal in May 2018, so there is no doubt there will be further developments in this field in the near future. Whether the outcomes of those appeals will further align both sides of the Atlantic or draw them further apart is something that we will have to wait to find out.