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25 April 2017
The UK High Court holds that there can only be one set of licencing terms that are fair, reasonable and non-discriminatory (FRAND) for a given situation, FRAND royalties should be based on a common portfolio benchmark rate for all licensees, and in this case a licence restricted to one jurisdiction is not FRAND.
It is common for certain sectors, such as the telecommunications sector, to implement technical standards. Where it is necessary to implement a patented invention in order to comply with the technical standard, the patent is said to be a Standard Essential Patent (SEP). Holders of SEPs are obliged to grant a licence to anyone wishing to comply with the technical standard to which the SEP relates, however such licences are subject to specific provisions – in particular the terms of such licences have to be fair, reasonable and non-discriminatory (FRAND). Whilst the principle that licence terms for SEPs have to be FRAND is well established, determining what is or is not FRAND in practice has been a more complex matter.
In a highly welcomed and anticipated judgment, the Honourable Mr Justice Birss recently handed down his decision in the case of Unwired Planet v Huawei ( EWHC 711 (Pat). Huawei were willing to take a licence for patents owned by Unwired Planet that Huawei had been found to infringe in earlier trials. However, Unwired Planet and Huawei could not agree on what constituted FRAND.
This judgment has finally shed light on what FRAND is considered to be, how it might be calculated, the interaction with competition law and what the remedies might be in the event of infringement of SEPs. In particular, Birss J helpfully made a number of conclusions on the facts and the law that will be of interest to SEP holders and licensees.
As an initial point, Birss J held that there could only ever be one set of licencing terms that are considered FRAND for a particular situation. Accordingly, the question of whether an SEP holder and potential licensee can both make different offers that are FRAND (and, if so, whose offer takes precedence) is addressed, since there can never be a range of different offers that are all FRAND.
Birss J gave clarification on how a FRAND royalty rate should be calculated. In particular, he held that an appropriate way to determine a FRAND royalty is to determine a benchmark rate which is governed by the value of the patentee’s portfolio. The benchmark itself may be calculated based on comparable existing licences (if available), and the number of patents possessed by the holder.
Interestingly, Birss J held that this same benchmark rate should be used for all licensees, regardless of size: “[t]he rate does not vary depending on the size of the licensee. It will eliminate hold-up and hold-out. Small new entrants are entitled to pay a royalty based on the same benchmark as established large entities.” Accordingly Birss J suggests that FRAND should not be used as an insurmountable barrier to prevent new players entering the market, though at the same time new potentially smaller entrants are not entitled to a reduced royalty rate for SEPs.
Birss J also points out that the boundaries of FRAND and competition law may be different – in particular, a rate may be above the FRAND rate but not contrary to competition law. Therefore if a holder of an SEP makes a licencing offer that is not FRAND, it is not necessarily the case that the offer is in contradiction to competition law. Indeed Birss J noted that “[o]ffers in negotiation which involves rates higher or lower than the FRAND rate but do not disrupt or prejudice the negotiation are legitimate.”
The judgment also provides commentary on other licencing terms, including the jurisdictions for which a holder of an SEP is entitled to a licence. Birss J decided that in this particular case a refusal by a potential licensee to take a worldwide licence for a portfolio of SEPs covering a range of different countries, and instead offering to take a country-specific licence, was not considered FRAND. Accordingly, potential licensees of SEPs should be wary of insisting on taking a licence limited to one particular jurisdiction.
The decision in Unwired Planet v Huawei provides useful guidance to both SEP holders and potential licensees when agreeing on licence terms. A single benchmark rate should be calculated for a given SEP/SEP portfolio, and used as the basis for royalty rates for all potential licensees regardless of size. At least in some cases, it is legitimate for an SEP holder to insist on a worldwide licence being taken.
Dr David Nicholls and Dr Andrew Hey
Electronics, Computing & Physics group
If you require further information on anything covered in this briefing, please contact David Nicholls or Andrew Hey (+44 1926 310 700) or your usual contact at the firm. This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Withers & Rogers LLP, April 2017