Introduction,
the issues, confidentiality, evidence and factual background
|
1
|
FRAND
|
|
The
applicable principles
|
|
(i)
What is FRAND and what principles apply to it
|
83
|
(ii)
The history and purpose of FRAND
|
89
|
(iii)
Enforceability of the ETSI FRAND undertaking and French law
|
98
|
(iv)
Can there be more than one set of FRAND terms?
|
147
|
(v)
Can the court set a FRAND rate or other FRAND terms?
|
169
|
(vi)
How to assess what is FRAND
|
170
|
(vii)
A hard-edged non-discrimination aspect of FRAND
|
177
|
(viii)
Concepts used to derive a FRAND rate with telecoms standards
|
178
|
FRAND
on the facts of this case
|
197
|
(i)
Relevant SEPs – shares and ratios
|
198
|
(ii)
The parties’ rival submissions on royalty rates
|
232
|
(iii)
The MNPA and HPA techniques
|
273
|
(iv)
Findings about the strength of Unwired Planet’s portfolio
|
372
|
(v)
The comparables in this case
|
382
|
a. Unwired
Planet – Lenovo 2014
|
383
|
b. Unwired
Planet – Samsung 2016
|
390
|
c. Ericsson
- Huawei 2016
|
410
|
d. Ericsson
- Samsung 2014
|
414
|
e. Ericsson
- Huawei 2009
|
421
|
f-m. other
licences
|
433
|
(vi)
Other indications relating to rates
|
469
|
(vii)
What is the benchmark FRAND rate for Unwired Planet?
|
475
|
(viii)
Impact of hard-edged non-discrimination on the FRAND rate
|
481
|
(ix)
Rates - conclusions
|
522
|
(x)
The other disputed terms
|
523
|
a. What
licence scope is FRAND – UK or worldwide?
|
524
|
b. Should
the court settle the FRAND rates in a worldwide licence
|
573
|
c. FRAND
rates in a worldwide licence
|
582
|
d. Other
terms in a worldwide licence
|
593
|
e. The
terms of a UK only portfolio licence
|
596
|
COMPETITION
LAW
|
627
|
(i)
Dominant position
|
630
|
(ii)
Abuse of dominance
|
671
|
a. Premature
litigation: Huawei v ZTE
|
674
|
b. Unfair
excessive pricing
|
756
|
c. Bundling/
tying-in SEPs and non-SEPs
|
785
|
REMEDIES
|
792
|
(i)
Should an injunction be granted
|
793
|
(ii)
Damages
|
796
|
(iii)
Declarations
|
803
|
Summary
of conclusions
|
805
|
Annex
1 – Unwired Planet’s declared SEPs by country
|
Annex
|
Introduction
1.
Unwired Planet have a worldwide patent portfolio which includes numerous
patents which are declared essential to various telecommunications standards
(2G GSM, 3G UMTS, and 4G LTE). Most of the relevant portfolio was acquired
from Ericsson. Unwired Planet’s business is licensing those patents to
companies who make and sell telecommunications equipment such as mobile phones
and infrastructure. This action began in March 2014 when Unwired Planet sued
Huawei, Samsung and Google for infringement of six UK patents from their
portfolio. Five were claimed to be SEPs (see below). Unwired Planet contended
their patents were infringed and (so far as relevant) essential.
2.
The dispute was managed to consist of a series of trials, docketed to
me. First would be five “technical” trials relating to the validity and
infringement/essentiality of the six patents (two patents are divisionals).
These were called trials A to E and were to run from October 2015 to July
2016. The patent in trial A was patent EP (UK) 2 229 744 which is for an
invention concerning poll triggers, the patents in trial B were divisionals EP
(UK) 2 119 287 and EP (UK) 2 485 514 which are for an invention related to
self-configuring networks, the patent in trial C was EP (UK) 1 230 818 which
relates to inter-RAT handover, the patent in trial D was EP (UK) 1 105 991
which related to Hadamard codes, and the patent in trial E was EP (UK) 0 989
712 which relates to network messaging. The 712 patent was not said to be a
SEP.
3.
After the five technical trials would be a non-technical trial in autumn
2016. The non-technical trial was to address all the competition law issues as
well as the FRAND issues (see below), injunctive relief (if any) and, by a
later direction, damages for past infringements. Finally, and only if
necessary, there might be a further trial to deal with some outstanding
questions including pass through licences.
4.
This judgment arises from the non-technical trial and relates to the
patents which are or are said to be Standards Essential Patents or SEPs. Part
of the process of standardisation involves holders of patents which are
essential to an international telecommunications standard declaring them as
essential to the relevant standards body. In this case that body is the
European Telecommunications Standards Institute (ETSI). The ETSI IPR Policy
requires that a patentee declaring patents as essential to a standard commits
to licensing those patents on FRAND terms. FRAND stands for Fair Reasonable
And Non-Discriminatory. The judgment mostly concerns FRAND.
5.
After proceedings began, in April 2014, Unwired Planet made an open
offer to the defendants to license its entire global portfolio (SEPs and
non-SEPs). The defendants denied infringement/essentiality and contended the
patents were invalid, counterclaiming for revocation. So, they said, no
licence was needed. They also contended that Unwired Planet’s offer was not
FRAND. In addition, Huawei and Samsung raised defences and counterclaims based
on breaches of competition law. This involved both arguments about Art 101 of
the Treaty on the Functioning of the European Union (TFEU) relating to the
Master Sale Agreement (MSA) whereby Unwired Planet acquired patents from Ericsson
and arguments about Art 102 TFEU concerning abuse of dominant position. The
allegation that the offer was not FRAND was pleaded as a breach of competition
law. These allegations were the subject of counterclaims against other
companies in what was then the Unwired Planet group (the ninth and tenth
defendants) as well as against Ericsson, who were joined as the eleventh party
to the proceedings. Various other defences were also raised. After the April
2014 offer Unwired Planet made a further offer in July 2014. That offer
related only to Unwired Planet’s SEPs. That is also said not to be FRAND by
the defendants. The terms of these and other licensing offers are difficult
to summarise but at this stage it can be said that the SEP royalty rates in the
July 2014 proposals were global rates of 0.2% for 4G/-LTE and 0.1% for other
standards (i.e. GSM/UMTS). The percentages related to average selling price
(ASP) for mobile devices and revenue for infrastructure. These offers and
other of Unwired Planet’s offers also contained US dollar or sterling
alternative figures which operated as a cap if the royalty expressed as a share
of ASP would be a higher sum. This is the last time I will mention them. The
caps did not play a significant part in this case.
6.
Sometimes in this case the terms 2G, 3G and 4G are used to refer to
different standards and sometimes GSM, UMTS (or WCDMA) and LTE respectively.
They are not the same but the distinction rarely matters. In this judgment I
have tried to use the terms which reflect the way the argument and evidence
went in any given context but it is impossible to be consistent. A
complication is multimode handsets. A 4G/LTE handset will usually be able to
work on earlier standards (2G/GSM and 3G/UMTS). It is therefore “multimode”.
There can be exceptions and so calling a handset 4G or LTE can be ambiguous
since it probably refers to a multimode device but might not. Again it is
impossible to be consistent.
7.
In June 2015 as a result of directions from the court which are
considered further below, each side made certain open offers of licensing
terms. Unwired Planet’s June 2015 proposals included offers of a worldwide SEP
portfolio licence, a UK SEP portfolio licence (the UK portfolio consists of
more patents than just the five SEPs in suit) and per-patent licences for any
SEPs the licensee chose. The details do not matter at this stage but one point
to note is that the royalties claimed for per-patent licences or a UK portfolio
were higher than the global rate on offer. The rates all scaled by reference
to the same global rate proposals as in 2014, i.e. a global rate of 0.2% for
LTE and 0.1% for GSM/UMTS.
8.
Huawei’s June 2015 proposal was for a per-patent licence limited to the
UK SEPs in suit. The rates for all five SEPs together were 0.034% for LTE,
0.015% for UMTS and zero for GSM.
9.
In the summer of 2015 and before trial A, Google settled as regards the
SEPs. From then on they would only have played a role in the fifth technical
trial (E) since that related to the implementation patent. By about April 2016
three technical trials had been completed and the parties agreed to postpone
any further technical trials indefinitely. By that stage Unwired Planet had
won two and lost one of the technical trials. Two of Unwired Planet’s patents
had been found to contain claims which were valid and were essential to the
relevant standards while the other two patents were held invalid. The results
of all three technical trials are under appeal to the Court of Appeal. Also in
about April 2016, the claimant company and the tenth party (Unwired Planet LLC)
were acquired by PanOptis, a group ultimately held by PanOptis Equity Holdings
LLC. The ninth party, Unwired Planet Inc., was not acquired and changed its
name to Great Elm Capital Group Inc..
10.
In the summer of 2016 Samsung settled with Unwired Planet and Ericsson.
As a result of the settlement, proceedings against Samsung ended and, with the
court’s leave, Samsung’s competition law counterclaim was discontinued. This included
discontinuance against the ninth party. Huawei, also with leave, then
discontinued significant parts of their counterclaim, including all their
counterclaims against Ericsson and the ninth and tenth parties. Pursuant to
the settlement, certain terms in the MSA, which Samsung and Huawei had
contended were anti-competitive, were removed. An important term which was
removed from the MSA was a provision which at least arguably put a floor on the
royalty rate which Unwired Planet could offer. This rate is called the
Applicable Royalty Rate or ARR. As a result, the scope of the non-technical
trial narrowed considerably and the case was rescheduled to be dealt with in
seven weeks of elapsed time.
11.
On 1st August 2016 each side made new offers. Unwired Planet’s
offers were on the same terms as before but with lower rates. Unwired Planet
obviously felt able to offer lower rates at that stage at least in part because
the royalty floor provisions in the MSA had been removed. The global SEP
portfolio rate for 4G/LTE in this offer was 0.13%. The corresponding rates for
GSM /UMTS were 0.065%.
12.
For a UK SEP portfolio licence Unwired Planet’s August 2016 proposals
are:
i)
for LTE: infrastructure 0.42%; mobile devices 0.55%;
ii)
for GSM/UMTS: infrastructure 0.21%; mobile devices 0.28%.
13.
Huawei’s 1st August offer was on the same UK only per-patent
basis as before. The rates proposed were:
i)
for LTE: infrastructure 0.036%; mobile devices 0.040%;
ii)
for UMTS: infrastructure 0.015%; mobile devices 0.015%;
iii)
for GSM: infrastructure zero; mobile devices zero.
14.
On 11th October 2016, about two weeks before the trial,
Huawei made a new licensing proposal. This amended the per-patent royalties on
offer and also proposed a licence under the whole of Unwired Planet’s UK SEP
portfolio. The UK portfolio rates were:
i)
for LTE: infrastructure 0.061%; mobile devices 0.059%;
ii)
for UMTS: infrastructure 0.046%; mobile devices 0.046%;
iii)
for GSM single mode: infrastructure 0.045%; mobile devices 0.045%.
15.
The August 2016 Unwired Planet proposals and October 2016 Huawei
proposals represent the parties’ positions going into the trial, subject to a
point referred to in this judgment as “hard-edged non-discrimination” arising
from the settlement with Samsung.
16.
By the opening neither side had actually set out complete terms of a
licence they were prepared to enter into. Up to trial each side’s licensing
proposals had been made in outline terms rather than based on a fully worked
out licence. That was sensible up to a point since the parties took the view that
they were so far apart on the main terms that spending time on the details was
not worthwhile. Nevertheless in order to try to ensure that all matters are
resolved in one go, I directed the parties to engage and exchange full terms so
as to identify areas of dispute before closing. The parties did engage on the
terms of a UK portfolio licence but Huawei did not engage on Unwired Planet’s
proposed terms of a global licence.
The issues
17.
Simply stated the main dispute to be resolved is about whether and to
what extent various terms on offer are or would be FRAND. One key battleground
is the value of Unwired Planet’s patents which is reflected in the royalty
rate. However that is not the only issue. There is a major dispute about the
proper scope of any licence. The case also involves important questions of
whether the April or July 2014 offers were FRAND and/or whether they amounted
to an abuse of a dominant position by Unwired Planet contrary to Art 102 TFEU.
18.
Depending on the outcome of the main dispute the question of an
injunction to restrain patent infringement may arise together with the issue of
whether Huawei have a defence to a claim for an injunction under competition
law.
19.
Also depending on the outcome of the main dispute, there may need to be
a decision on appropriate reasonable royalty rates to be used in a calculation
of back damages for the infringements committed by Huawei in relation to the
two SEPs which have been found to be valid and infringed as well as the other
three SEPs in issue in the technical trials (including the one found invalid in
Trial B since they are subject to appeal).
20.
In opening it emerged that there was a fundamental disagreement about
the scope of the main dispute.
21.
Huawei contended that the procedural position which had been reached
meant that as a matter of principle a UK SEP portfolio licence was the
inevitable and mandatory outcome. This necessarily also meant that an
injunction would never be granted even if, contrary to Huawei’s case, Unwired
Planet were entitled to seek an injunction and Huawei had no defence to an
injunction under competition law. That was because the court was going to
settle a UK portfolio licence.
22.
This had not been apparent to me either from the written openings or the
evidence and it came as a surprise to Unwired Planet, whose clear preference
was for a global licence rather than a UK portfolio licence. Huawei argued
that the result it contended for followed from a combination of three steps:
first, Huawei had stated that it no longer intended to maintain that Unwired
Planet was obliged to offer per-patent licences, second, therefore the only
thing on offer from Huawei was a UK SEP portfolio offer and Huawei had
undertaken to accept whatever royalty rate the court set for that licence, and
third, a licence of that scope was one of Unwired Planet’s offers.
Consequently, Huawei submitted, a licence of that scope must be the outcome.
This was so even though it was obvious that what Unwired Planet really wanted
was a global licence and even though global rates and the FRAND status of
global offers were at the heart of the dispute. I will need to examine this
issue in more detail below.
23.
Aside from the clear dispute about the value of Unwired Planet’s patents
and the concomitant FRAND royalty, the parties’ submissions as to the outcome
of this non-technical trial are as follows:
i)
Unwired Planet contend that they have established that they hold valid
and essential SEPs (winning technical trials A and C) and that they have made
offers of a licence on FRAND terms. Its preferred offer is for a global
licence and since global licences are FRAND a patentee is entitled to insist on
a global licence. In terms of rate Unwired Planet will accept whatever rate
and terms are set by the court. They submit that Huawei are not willing to
take this FRAND licence and are an unwilling licensee. Accordingly the court
should grant an injunction restraining Huawei from infringing. If the court
decides that Unwired Planet are not entitled to insist on a global licence then
Unwired Planet have offered a UK portfolio licence and will accept such a
licence at a rate and on terms set by the court.
ii)
Huawei contend that Unwired Planet’s 2014 offers were not FRAND. They
also contend that Unwired Planet’s commencement of this action was an abuse of
their dominant position and contrary to the CJEU’s judgment in Huawei
v ZTE (Case C-170/13) 16th July 2015 [2015] Bus LR
1261. Accordingly Huawei have a complete defence to any claim for an
injunction. In any event Unwired Planet are not entitled to insist on a global
licence because such a licence would not be FRAND. Only a UK portfolio licence
would be FRAND and Huawei will accept any royalty rate set by the court.
Huawei cannot state that they will accept whatever terms of a UK licence are
set by the court, but that is only because of a manoeuvre by Unwired Planet
addressed below. Huawei accept they must have a licence to be permitted
to sell products in the UK and therefore hope that the terms set by the court
are ones they can abide by. They recognise that if there is no licence in
place and no defence under competition law then an injunction would follow.
24.
It is convenient to divide the issues I have to decide into three broad
topics. The first is FRAND. This involves working out what FRAND is and the
principles which apply to it. Then I need to resolve what royalty rates are
FRAND in order to determine whether any of Unwired Planet’s offers were FRAND
and if not, what would be FRAND? After that I need to resolve arguments about
any other disputed terms in a FRAND licence. This first broad task represents
the bulk of the work. The second broad topic is competition law, resolving
Huawei’s case that Unwired Planet have abused their dominant position. Finally
there are remedies – injunction, damages and declarations.
Confidentiality
25.
One of the challenges in trying this case was confidentiality. The
arguments, evidence and disclosure documents included a large amount of
material in which confidentiality was claimed. Some of the claims were from
parties or companies who had been parties (Ericsson and Samsung) but some of
the confidential material was confidential to third parties such as licensees.
The legal representatives of all parties were privy to all the material but
some aspects, e.g. material relating to Samsung or Ericsson, was maintained as
confidential from Huawei or Unwired Planet staff. Attempting to determine the
confidential status of material during the hearing would have been impossible,
so the trial was conducted accepting many of the claims to confidence for the time
being. While wide claims to confidentiality had been made before trial, they
were reduced considerably at and during the hearing. Thus much of the trial
took place in public. Once judgment has been handed down there will be a final
determination concerning confidential status.
26.
I made it clear that I wished to hold as much of case in public as
possible. During the hearing there were occasional slips and parties who
claimed their confidentiality had been breached wrote to the representatives.
From my perspective the solicitors and counsel for all parties before me did an
excellent job in tricky circumstances to conduct an open trial and pay due
respect to claims to confidentiality. This judgment includes material about
which some claims to confidence are maintained. I indicated that when the
confidential draft judgment was distributed to the parties (Unwired Planet and
Huawei) I was prepared to include the lawyers for Samsung and Ericsson. The
lawyers for Samsung and Ericsson would not be entitled to discuss the draft
with their clients but they would be able to make submissions about
confidentiality. A public judgment, or public version of the judgment, could
then be produced.
[26B Once the draft
was circulated a hearing in private was convened to work out a way forward. The
result of that process was a redacted public version of the judgment which was
handed down at the same time as the full judgment ([2017] EWHC 705 (Pat)),
which was confidential. That first redacted public version was [2017] EWHC 711 (Pat). The date on which these two judgments were delivered was 5th
April 2017. The confidentiality issues were finally resolved and this public
form of the judgment was settled. The reasons for the redactions in this
version are set out in judgment [2017] EWHC 3083 (Pat). All the changes as
compared to the unredacted 705 judgment are in square bracketed italics like
this paragraph. Some of the redactions have been left as square bracketed
ellipsis. In others, some explanatory text and anonymised designations have
been included. The draft was given to the parties in advance for checking.
The evidence
27.
Unwired Planet called the following fact witnesses:
i)
Sami Saru;
ii)
Timothy Michael Robbins;
iii)
Leslie Dale Ware.
28.
Mr Saru has been Unwired Planet's Vice President of Standards of
Licensing since early 2013, and has been the Managing Director since February 2014.
He joined Unwired Planet shortly before the MSA with Ericsson closed, and he
was responsible for making the necessary declarations to ETSI. His evidence
related to the licence negotiations between Unwired Planet and Huawei,
including Unwired Planet's approach to determining what was FRAND, and
specifically the MNPA (see below).
29.
Mr Robbins was, until 1 July 2015, Executive Vice President and General
Manager of the Intellectual Property Division of Unwired Planet. His evidence
related to the relationship between Unwired Planet and Ericsson, including the
MSA, and Unwired Planet's approach to FRAND and the offers it made in 2014, and
the Lenovo licence.
30.
Mr Ware is the Chief Executive Office of PanOptis Equity Holdings LLC. He
founded the PanOptis Group in September 2003. On 30 June 2016, PanOptis
acquired Unwired Planet LLC and Unwired Planet International Limited (and so
the Unwired Planet portfolio of patents) from Unwired Planet Inc. His evidence
related to PanOptis's business model and focus on long-term relationships with
licensees. In particular, his evidence related to the negotiation and
circumstances of the Unwired Planet/Samsung licence.
31.
Unwired Planet also served Civil Evidence Act Notices in respect of: (i)
a recording of the “Unwired Planet Management Webcast and Conference Call” on 6
April 2016 and a copy of an accompanying presentation entitled “Unwired Planet
Corporate Transformation”; (ii) a Schedule 14A Form filed by Unwired Planet
with the United States Securities and Exchange Commission on 20 April 2016;
(iii) witness statements from Boris Teksler, Unwired Planet’s former Chief
Executive Officer; (iv) witness statements from Gustav Brismark, Head of Region
IPR and Licensing at Ericsson; and (v) three ETSI FAQs dated 22 December 2008,
10 July 2014 and 26 March 2015.
32.
Huawei’s fact witnesses were Xuxin Cheng, Emil Zhang (also known as
Xiaowu Zhang), and Chaobin Yang.
33.
Mr Cheng has been the Deputy Director of Huawei's IP Department since
February 2008, and Vice President for IP Licensing & Transactions. He gave
his evidence through an interpreter. His evidence related to Huawei's position
on FRAND, whether any steps have been taken to avoid infringing Unwired
Planet's patents, and Huawei's conduct in licence negotiations.
34.
Mr Zhang is the deputy director of Huawei's IP litigation department and
has day-to-day conduct of this action. He gave his evidence in English with
the interpreter standing by to help if need be. His evidence related to Huawei's
conduct in the dispute, including the pre-action correspondence between Huawei
and Unwired Planet and Huawei's level of sophistication in conducting
litigation, and the geographical extent of Huawei's activities.
35.
Mr Yang is the Vice President and Senior Marketing Officer for Huawei's
Wireless Network product line. He has worked at Huawei's Shanghai R&D
centre since 1998. He gave his evidence through an interpreter. His evidence
related to the significance of certain releases of technical specifications in
the context of LTE deployment since 2013. This was relevant to the relative
value of patents that are essential to the earlier releases relative to those
that are essential to later releases.
36.
All six of Mr Saru, Mr Robbins and Mr Ware for Unwired Planet and Mr
Cheng, Mr Zhang and Mr Yang for Huawei were good witnesses. Unwired Planet
suggested that Mr Zhang did his best to defend Huawei’s conduct but at times
was somewhat argumentative when answering the questions. That is not a useful
observation because in my judgment the equivalent point could be said of all
fact witnesses, including Mr Saru, Mr Robbins and Mr Ware. None of the fact
witnesses called by either party was neutral but in my judgment all of them
tried to explain their position as fairly as they could. If it is necessary I
will deal with any detailed point or criticism about something a witness said
in context.
37.
At this stage I must pay tribute to the interpreter, Ms Langtree. Her
work was of great assistance both to the witnesses and the court. I am very
grateful to Ms Langtree.
38.
There were further witness statements in the trial bundles from a number
of witnesses. The statements were from Jay Shim and Tae Hyung Kim for Samsung;
Christina Petersson, Andreas Iwerback, Jon Lawrence and John Han for Ericsson.
Unwired Planet also had statements from Annabel Thomas, Timothy Ellis, Andrew
Wynn, and Andrew Sharples.
39.
The expert witnesses called by Unwired Planet were Dr David Cooper, Mr
Mark Bezant and Dr Gunnar Niels.
40.
Dr Cooper is a Consulting Engineer at Hillebrand Consulting Engineers
GmbH. In 1978, he obtained a degree in Mathematics from Imperial College,
London. He was subsequently employed by several companies in software development
roles, and in 1987, he joined Coherent Research (a communication and
engineering consultancy) as a software manager.
41.
From 1994 to 1998, Dr Cooper was employed by NEC, during which time he
represented the company within ETSI in the development of the GSM and UMTS
Standards. In 1998 he was appointed the Vice-Chairman of the 3GPP standards
committee SA1, which was responsible for the definition of UMTS services. From
1999 to 2008, Dr Cooper worked for Panasonic, representing them in the context
of standardisation at 3GPP. In 2001 he earned his PhD in electronics and engineering
at Surrey University. Since 2008, Dr Cooper has been a consultant at
Hillebrand Consulting Engineers GmbH and has been retained as an expert witness
on multiple occasions. He appeared for Unwired Planet before me in Trial A.
42.
Dr Cooper’s evidence related to certain Unwired Planet patents and
whether they were truly essential. He also addressed the parties’ rival
approaches for identifying and counting truly essential patents.
43.
Mr Bezant is the head of Economic and Financial Consulting Practice for
Europe and a Senior Managing Director of FTI Consulting Inc. He is a fellow of
the Institute of Chartered Accountants in England and Wales and the founding
and current chair of the Valuation Special Interest Group of the Institute of
Chartered Accountants in England and Wales. He has acted as an expert witness on
numerous occasions, including over 60 IP cases and licensing disputes. His
evidence related to FRAND rates and the relevance of various comparable licences.
44.
Dr Niels is a partner at Oxera Consulting LLP. He holds a PhD in
Economics from Erasmus University, Rotterdam and is a professional economist of
20 years' experience in the field of competition policy, covering mergers,
restrictive agreements, abuse of dominance and damages. From 1995 to 1999, when
he joined Oxera, he worked at Mexico's Federal Competition Commission. He is
currently a non-governmental adviser to the International Competition Network
Working Group on Unilateral Conduct. He has acted as an expert witness in
competition and commercial disputes in a number of jurisdictions. Dr Niels’ evidence
related to the impact of the FRAND obligation and the potential for hold-out on
the behaviour of licensors and licensees.
45.
All three experts called by Unwired Planet were good witnesses, trying
to help the court. Huawei did not criticise these witnesses but they did point
out a very odd aspect of Mr Bezant’s evidence. In cross-examination Mr Bezant
repeatedly stated that he was not attempting to value the Unwired Planet
portfolio but only seeking to express a view on whether Unwired Planet’s
various offers were or were not FRAND. One aspect of this made sense in that
Mr Bezant was presenting a range of licence rates with a view to explaining
simply that a given rate fell within the range. Huawei sought to suggest that
this had something to do with the procedural argument about global rate setting
and suggested that in that sense Mr Bezant was the same as Mr Lasinski
(Huawei’s expert) in that he too was only concerned with what Huawei called
“the binary question of whether Unwired Planet’s offers were or were not
FRAND?”. However, I do not accept these suggestions. The point is just as odd
in the context of setting a UK only rate as setting a global rate and Huawei
positively asked the court to set a UK only rate. In the end whatever Mr
Bezant’s purpose, or for that matter Mr Lasinski’s, they both gave evidence
which is relevant to the question of the value of the Unwired Planet
portfolio. I suspect that what was really going on was that Mr Bezant was
purporting to avoid answering the question of what in his opinion would be the
correct FRAND rate for Unwired Planet.
46.
The expert witnesses called by Huawei were Dr Apostolos "Paul"
Kakaes, Mr Michael Lasinski and Professor Damien Neven.
47.
Dr Kakaes is consultant at Cosmos Communications Consulting Corporation.
He holds a B.S. and M.S. in Applied Mathematics and Electrical Engineering
from the University of Colorado. In 1988, he was awarded a PhD in Electrical
Engineering from the Polytechnic Institute of New York. From 1987 to 1994, he
worked in the Department of Electrical Engineering at George Washington
University, Washington DC, teaching graduate courses in the area of
communication engineering.
48.
In 1995, Dr Kakaes left George Washington University and went to work
full time for Cosmos Communications Consulting Corporation, a private
communications engineering consulting firm specialising in mobile
communications, which he formed some years earlier. He has acted as an expert
witness in a number of trials and arbitrations since 2006. His evidence
related to Huawei's patent analysis (HPA) and Unwired Planet's MNPA.
49.
Mr Lasinski is a Managing Director and the Chief Executive Officer of
284 Partners LLC, a professional services firm focussed on IP valuation,
litigation consulting, IP strategy and IP transactional services. He holds a
BSc in Electrical Engineering and an MBA from the University of Michigan, is a
Certified Public accountant licensed in the state of Illinois, is certified in
Financial Forensics by the American Institute of Certified Public Accountants
and is a Certified Licensing Professional originated by the Licensing
Executives Society (United States and Canada) (LES), one of North America's
largest IP licensing trade organisations. His consulting practice has focussed
on the financial aspects of IP since 1995. He is a past president of LES. He
has acted as an expert witness in tax proceedings in the US and in
international arbitrations, and provided IP valuations for taxpayers and the
IRS. His evidence related to whether certain of Unwired Planet's licence offers
were fair and reasonable, in particular by reference to various comparable
licences.
50.
Professor Neven is Professor of Economics at The Graduate Institute,
Geneva and a senior Consultant at Compass Lexecon, having previously been a
senior Academic Consultant to Charles River Associates. He holds a doctorate in
economics from Nuffield College, Oxford, and has taught at INSEAD, the College
of Europe and the University of Lausanne. From 2006 to 2011, he was Chief
Competition Economist at the European Commission and has previously acted as an
expert witness in the General Court and the Court of Justice. His evidence
related to the relevance of the FRAND obligation in assessing market dominance,
and the potential for hold-out on the behaviour of licensors and licensees.
51.
Unwired Planet rightly made no criticism of Prof Neven, who was a good
witness. They suggested his evidence was rather theoretical. There is
something in that but it applies to Dr Niels too, albeit with less force.
Unwired Planet did criticise Dr Kakaes and Mr Lasinski. The criticisms of Dr
Kakaes and some of the criticism of Mr Lasinski relate to the Ericsson-Huawei
arbitration and are best addressed in that context.
52.
Unwired Planet also submitted that Mr Lasinski seriously lacked
objectivity, stepped outside the ambit of his expertise and was prepared to
speculate and did not approach the joint experts’ statement appropriately.
53.
The challenge to objectivity relied on four alleged inconsistencies,
which were that: Mr Lasinski was inconsistent in placing reliance on the words
of a licence when it suited him but then relying on context in other cases; he
was inconsistent in rejecting all pre-2013 licences because they all involved
hold-up but then relying on the 2009 Ericsson-Huawei licence when it suited
him; his approach to the two Unwired Planet licences with Lenovo and Samsung
was inconsistent, relying on Samsung when it suited him but not on Lenovo when
it did not; and he was inconsistent in his approach to using a figure for
Unwired Planet’s share of Ericsson’s patent portfolio, having been happy to use
a share of 10% at the beginning but then changing to a lower figure once Unwired
Planet’s claimed rate dropped from 0.2% to 0.13% because the 10% share would
have supported Unwired Planet.
54.
Five points were relied on to illustrate the submission that Mr Lasinski
exceeded the ambit of his expertise and speculated. They are: that he passed
judgment on whether terms in the Lenovo agreement were purely cosmetic; that he
ignored Mr Ware’s evidence about the Unwired Planet-Samsung licence; that he
decided for himself to accept or reject certain evidence about a commitment
(thin modem) in the Ericsson-Samsung 2014 licence; that he was not an expert on
the technical issues underpinning the two rival portfolio comparison
methodologies but decided for himself to use the HPA but not the MNPA; and that
he was prepared to express the view that there had been hold-up leading to a
licence but never addressed hold-out.
55.
The point on the joint experts’ statement was that he approached the
exercise as one of identifying where his evidence was on a topic rather than by
engaging with the issues raised by the other experts.
56.
In terms of the specific points taken by Unwired Planet, the first three
points on objectivity and the first three points on ambit are best addressed in
context. Having heard Mr Lasinski, the suggestion, if made, that I should
reject his evidence wholesale would be unwarranted. Mr Lasinski gave his oral
evidence fairly, however many of these criticisms arise from Mr Lasinski’s
approach to his written evidence in this case. In that respect I was concerned
about Mr Lasinski’s approach. Overall his reports and his oral evidence left
me with the impression that Mr Lasinski has tried to avoid making written
statements which might be construed as adverse to Huawei. I infer that is why
he never presented figures based on the MNPA, unlike Mr Bezant who presented
figures calculated using both sides’ preferred methodologies (the HPA and the
MNPA). That also explains why he used a different, lower figure for Unwired
Planet’s share of Ericsson’s patent portfolio in his third report from his first
report after Unwired Planet had reduced the rate claimed, and it explains why
he never mentioned hold-out but only hold up. His approach to the joint
statement had the same effect, unlike the approach of Mr Bezant (and Dr Leonard
for Samsung), both of whom properly explained and qualified their opinions in
the course of agreeing the joint statement.
57.
The parties exchanged evidence of French law from Prof Fauvarque-Cosson
for Unwired Planet and Prof Libchaber for Huawei. Prof Fauvarque-Cosson has
been a Professor of Law at the Université Panthéon-Assas (Paris II) since 2002,
while Prof Libchaber has been a Professor of Law at the Paris I University
(Panthéon-Sorbonne) since 2001. Neither witness was cross-examined and neither
side challenged the qualifications of these witnesses to cover the matters they
addressed in their reports.
Concurrent
evidence – a “hot tub”
58.
During the trial I decided that it would be useful if the evidence of
Prof Neven and Dr Niels started with a short period of concurrent evidence (CPR
35PD section 11). This was in order to address certain general questions which
I would otherwise have asked the experts during their oral evidence. They were
not points addressed to either witness in particular and it seemed to me that
the fairest way of dealing with it was to ask them both, hence a concurrent
evidence session. Prof Neven was scheduled to be cross-examined first,
followed by Dr Niels so the concurrent session took place just before Prof
Neven’s cross-examination. It helped me clarify my understanding of some of
the economic issues and I am grateful to both experts.
The factual background
59.
What follows is a summary of the factual background. Although some
detailed points are addressed later, it is convenient to set out the overall
history from start to finish here.
60.
The business which became Unwired Planet was founded in 1994 as Libris
Inc. Its purpose was to develop technology concerned with how mobile devices
(phones) could access the internet. In 1996 Libris changed its name to Unwired
Planet Inc. and launched its first commercial product, called up.link, which
was a mobile network system. In 1998 Unwired Planet was a member of the WAP
Forum. At the time WAP was an early approach to mobile internet access. The
WAP forum included Ericsson, Motorola and Nokia. Between 1999 and 2001 what
had been Unwired Planet was now called Openwave Systems Inc. In 2002 Openwave
was one of 200 companies to found the Open Mobile Alliance. This group
included the WAP Forum companies. The general aim of both groups was similar,
to try and come up with global standardised protocols for mobile internet and
to lobby standard setting organisations. Openwave continued to develop mobile
internet technology but by the time Mr Robbins joined in 2011 the company’s
success was uncertain. That was because of a shift in the balance of power
away from Openwave’s customers (carriers) and towards device makers like Apple
and Google. In November 2011 Openwave decided to sell its product business and
concentrate on earning revenue from its intellectual property. After the sale
the business was renamed Unwired Planet and so Unwired Planet became a
licensing business. Unwired Planet was staffed by a small group of IP
specialists and accountants. The business had a portfolio of patents and
applications, now called the Openwave Legacy Portfolio. The portfolio consists
of 140 implementation patent families. Unwired Planet believed it contained
significant value.
61.
The history of Ericsson’s business up to 2011 does not matter. By 2011
Ericsson was a major technology developer in telecommunications and a
participant in standard setting. It had a handset business via a joint venture
with Sony and an infrastructure business. Ericsson also had a major licensing
business earning revenue from its patents. Ericsson had licensed a wide range
of companies including Samsung. In 2009 Ericsson and Huawei had signed a
telecommunications patent licence which was still in force in 2011.
62.
In October 2011, Ericsson announced that they were going to leave the
handset business, selling their shares in the joint venture Sony-Ericsson to
Sony. The transaction completed in February 2012. Since then Ericsson has
remained active in infrastructure. Its largest competitor is Huawei. At the
same time, Ericsson started thinking about selling some patents. Ericsson’s
motives for this come up later. Part of this exercise involved identifying
organisations which might take some patents from Ericsson with a view to
licensing them to the industry. The patents would include SEPs. At some point
before June 2012, Ericsson identified Unwired Planet as a possible candidate.
63.
By early June 2012 the discussions between Ericsson and Unwired Planet
were underway with the name “Project Cluster”. In July and August 2012,
Unwired Planet and Ericsson engaged in extensive discussion concerning the
composition of the “Cluster portfolio” of patents to be transferred. Ericsson
were in control of the process. The process included swaps, in that Unwired
Planet could ask for a patent which was earmarked to be transferred to be
swapped out and replaced by another. During the negotiations possible royalty
rates were discussed. The evidence is clear that Unwired Planet did not see
Ericsson’s actual royalty rates, because the licences were confidential.
Unwired Planet made its own assessment based on whatever material was
available, including public statements by Ericsson and others.
The Master Sale
Agreement (MSA)
64.
On 10th January 2013 the MSA was executed. One of the parties is an
entity called Cluster LLC but the detailed corporate arrangements do not
matter. Pursuant to the agreement 2,185 patents and applications were
transferred to Unwired Planet from Ericsson via Cluster LLC. In numerical
terms this represented about 5% of Ericsson’s relevant portfolio. Initially
this included 37 families with SEPs declared to 2G, 3G or 4G. The portfolio
also included 786 implementation patent families. Unwired Planet reviewed the
portfolio and declared some of the implementation patent families as standards
essential. As a result, the number of declared SEPs held in the portfolio
increased to 40 in August 2013.
65.
The MSA included, in clause 3.2(a), three “tiers” for the revenue split
between Unwired Planet and Ericsson, being 20:80 in Unwired Planet’s favour
between $0m and $100m, 50:50 from $100m to $500m and 70:30 in Ericsson’s favour
above $500m. The MSA also contained royalty floor
provisions in clauses 3.2, 3.4(a) and 6.1(aa). The clauses are quite
complicated. They include a floor rate referred to as the ARR. The ARR is
0.10% for 3G and 0.15% for 4G. If Unwired Planet entered into a relevant
licence at a rate below the ARR, then in the revenue split Unwired Planet were obliged
to make up the difference between the sums actually earned and the ARR. So
once Unwired Planet had reached the second tier, if Unwired Planet agreed a
rate at less than 50% of the ARR, it would make a loss. That is why the ARR
operates as a royalty floor.
66.
After the MSA had been executed, Unwired Planet began to formulate a
strategy for approaching potential licensees under its new portfolio of
Ericsson-derived patents and in particular SEPs. Unwired Planet’s initial aim
was to contact and commence negotiations with various manufacturers they had
identified with a view to closing three deals by the end of the year. The initial list of manufacturers did not include Huawei
but by April 2013 Unwired Planet had identified Huawei as a company to be
contacted by the end of June. Unwired Planet decided to offer a flat rate
of $1 per LTE multimode handset. Taking a handset sale price as $200, that
would be 0.5%. At that time Ericsson’s publicly stated expectation for a rate
for their 4G/LTE patents was 1.5%.
The patents
transferred under the MSA
67.
Before entering into the MSA and thereby transferring patents to Unwired
Planet, Ericsson’s portfolio consisted of about 15,000 patent families. Of
those patents just over 800 were declared as essential to GSM, UMTS or LTE.
The portfolio transferred to Unwired Planet amounted to 825 patent families of
which 37 were declared as essential. The transfer process was a bit more
complicated than this but for this purpose that does not matter. Ericsson
ranked its patents in tiers and selections of patents were chosen in each
tier. The numbers mean that the total number of patents transferred to Unwired
Planet represented about 5.5% of Ericsson’s portfolio (825/15,000). The size
ratio, if one considers declared essential patents, is 4.6% (37/800). So
purely on a numerical basis based on total numbers and declared numbers there is
a ratio of about 5% between Unwired Planet’s and Ericsson’s patent portfolios.
Contacts with
Samsung and others
68.
Unwired Planet’s contacts with Samsung started in October 2012. Under
the cover of a Non-Disclosure Agreement (NDA) claim charts were provided on
17th December 2012 along with some other information about litigation brought
by Unwired Planet against Apple and Google in Nevada USA. The first meeting
took place in May 2013 and a second meeting took place between Unwired Planet
and Samsung in August 2013. Unwired Planet’s position is that since the start
in October 2012, Samsung were holding out.
69.
By August 2013, according to Mr Robbins, Unwired Planet had contacted 27
manufacturers and was in “active conversations” with 14, whilst the remaining
13 had “refused to engage with us at all”. In oral evidence, Mr Robbins stated
that there was not “much market interest in even discussing rates” and that he
had hardly managed to “speak about economics with anybody”, it being “largely
technology discussions”. Before me Unwired Planet contend that this shows that
the licensees in general were holding out. Huawei contend that in fact the
rates Unwired Planet were demanding were just too high. There is evidence that
[…] were prepared to at least contemplate deals at […] per LTE
unit rather than the $1 being proposed by Unwired Planet. There was a debate
about how much the ARR played a part here. Mr Robbins downplayed its
significance but in my judgment from the beginning the ARR was an important
factor driving Unwired Planet’s strategy.
Contacts with
Huawei
70.
In June 2013, Unwired Planet decided to approach Huawei. The approach
was about a possible purchase by Huawei of Ericsson-derived infrastructure
patents. Unwired Planet discussed this with its advisors Evercore and the
approach occurred on 2 July 2013. Correspondence ensued and by 22nd August
2013 Huawei had informed Evercore that it was not interested in acquiring
Ericsson patents.
71.
A point which Unwired Planet emphasise in these proceedings is that the
Ericsson-Huawei 2009 licence had expired at the end of 2012 and that, as a
result of the MSA, by 2013 certain Ericsson SEPs were now held by Unwired
Planet. The significance of this point is that while I accept Huawei’s case
that this first approach from Unwired Planet to Huawei via Evercore concerned a
purchase and not licensing (contrary to suggestions from Unwired Planet),
nevertheless, as Unwired Planet submit, by 2013 Huawei ought to have known that
they would need a licence from Unwired Planet to continue to use SEPs they had
formerly licensed from Ericsson. There is no evidence Huawei considered this
point at the time at all and I doubt they did. In cross-examination Mr Zhang
made the point that since Unwired Planet were trying to sell the patents it had
acquired from Ericsson, then from Huawei’s point of view it was not clear the
patents would remain with Unwired Planet. They might be sold on elsewhere.
That is true but it does not take away the force in Unwired Planet’s point that
after early 2013 Huawei knew all they needed to know to appreciate that certain
SEPs which they had formerly licensed were now held by a different company and,
if and to the extent a licence was required, it would have to come from Unwired
Planet or its successors.
72.
On 13th September 2013, Mr Saru wrote letters to Mr Guo Ping and Mr Ren Zhenfei,
who are two Board members of Huawei, the latter being the founder and CEO,
suggesting that the two companies should “sit down and have an extended
discussion” at some point in October 2013 with a view ultimately to concluding
a licence. No reply was received to these letters. Huawei justified this on
the basis that the letters were not copied to Huawei’s IP or Licensing
departments. Mr Zhang explained that they were not brought to the attention of
those departments. No chasing letters were sent by Unwired Planet until 25th
November 2013 (see below).
October 2013
73.
By October 2013 further meetings with Samsung had taken place. Mr
Robbins said he feared that Samsung had no intention of ever engaging in
sensible commercial negotiations. By now Unwired Planet were concluding that
the underlying thesis, that the strength and depth of the portfolio would be so
compelling that licensing deals could be reach without litigation in many
cases, was wrong. On 23rd October 2013, Unwired Planet’s CEO told Ericsson
that “…we are having to initiate new litigation due to lack of any licensing
happening”.
November 2013 -
further contact with Huawei
74.
On 25th November 2013 Unwired Planet contacted Huawei’s IP department.
Huawei responded very promptly. There was a brief delay during December 2013.
On 13th January 2014 Huawei asked Unwired Planet for claim charts. On 16th
January 2014, Unwired Planet agreed to produce charts under an NDA and included
draft terms. On 29 January 2014 Huawei proposed different NDA terms. On the
same day, Unwired Planet replied stating “thank you for your message. We will
consider this”. Mr Saru passed Huawei’s draft NDA to “our contract lawyer” for
consideration. There was no further contact until 10th March when
the litigation started.
The Lenovo deal
75.
Unwired Planet’s contacts with Lenovo had started in May 2013 with a
licensing proposal. In August 2013 Evercore had discussions with Lenovo about
Lenovo acquiring part of Unwired Planet’s patent portfolio. Negotiations
continued from then on. The contract was finally agreed in March 2014. The
details of the contract are discussed below as a comparable. Lenovo paid $100m
to Unwired Planet and so under the MSA from that time only the second tier
arrangements apply. Under the contract Lenovo acquired 21 families from
Unwired Planet, 18 of which were already in the Unwired Planet portfolio and 3
more were acquired by Unwired Planet from Ericsson to assign to Lenovo.
Unwired Planet also acquired some further patents from Ericsson to add to its
portfolio. After the Lenovo transaction was complete Unwired Planet claimed to
own 30 SEP families.
The litigation
76.
In order to facilitate litigation arrangements had to be made which
required Ericsson’s consent. This was embodied in an agreement dated 27th
February 2014. On 5th March 2014, the Board of Unwired Planet approved the
European litigation.
77.
On 10th March 2014 Huawei received an email from Mr Saru stating that
Unwired Planet had decided “to proceed with enforcement in Europe” by suing
Huawei for patent infringement in the UK and Germany. Mr Saru says in his
witness evidence that his email was to “confirm” that they were suing Huawei in
Germany and the UK, but this was the first Huawei had heard of being sued.
The previous contact between Unwired Planet and Huawei had been about the terms
the NDA, whereby Huawei was waiting to receive comments from Unwired Planet.
78.
On the same day, Unwired Planet issued patent infringement proceedings
in the UK and Germany against Huawei, Samsung and Google, and against HTC in
Germany. There is an issue about the nature of the relief claimed by Unwired
Planet which I will address in the competition law section below.
79.
The April 2014 offer followed. In June 2014, Unwired Planet
completed an NDA with Huawei. Discussions continued thereafter. A debate
between Unwired Planet and Huawei arose about without prejudice privilege. On 30 July 2014, Unwired Planet made a without prejudice
licensing proposal which was later repeated in open correspondence and is
referred to as the July 2014 offer. Without prejudice negotiations
continued after that.
80.
In September 2014, Unwired Planet commenced working on a method of
counting and classifying SEPs to use in licensing negotiations. It is called
the “modified numeric proportionality approach” (MNPA). It is addressed at
length below.
81.
The litigation continued with various case management and strike out
hearings in 2014/2015. In June 2015, following directions from the court, the
parties made open offers. In February 2016 Unwired Planet and Huawei exchanged
open correspondence concerning their lack of progress in concluding a FRAND
licence. Each accused the other of the blame for the lack of progress.
82.
Unknown to Huawei, Unwired Planet and PanOptis had been negotiating and
on 6 April 2016 the acquisition by PanOptis was announced. On 10 August 2016,
Unwired Planet’s solicitors disclosed the 2016 Unwired Planet-Samsung Licence.
This licence is addressed in detail below. On any view it has an effective
royalty rate far below the ARR. No doubt that is one reason the ARR was
removed from the MSA.
FRAND
(i) What is
FRAND and what principles apply to it?
83.
The point of FRAND in standard setting is fairly easy to understand.
Standards exist so that different manufacturers can produce equipment which is
interoperable with the result that the manufacturers compete with one another.
So the phone makers compete in the market for phones and the public can select
a phone from any supplier and be sure (for example) that if it is a 4G phone,
it will work with any 4G network. As a society we want the best, most up to
date technology to be incorporated into the latest standards and that will
involve incorporating patented inventions. While the inventor must be entitled
to a fair return for the use of their invention, in order for the standard to
permit interoperability the inventor must not be able to prevent others from
using the patented invention incorporated in the standard as long as
implementers take an appropriate licence and pay a fair royalty. In this way a
balance is struck, in the public interest, between the inventor and the
implementers. The appropriate licence is one which is fair, reasonable and
non-discriminatory. That way a standard can safely incorporate the invention
claimed in a patent without giving the inventor or his successors in title
unwarranted power over those who implement the standard. Thus the public
interest is served because telecommunication standards can be set using the
best and most up-to-date technical expedients available and the inventor’s
private interest is served because the FRAND undertaking ensures they or their
successors will obtain a fair reward for their invention.
84.
Telecommunications standards worldwide are formulated and set by SSOs
(Standards Setting Organisations). In Europe the relevant SSO is ETSI. SSOs
require the holders of patents which are essential to the standards to give an
undertaking to license on FRAND terms if they wish to participate in standard
setting.
85.
In ETSI this process is based on its Directives which include Rules of
Procedure and a Guide to IPRs. Within the Directives, as an annex to the Guide
to IPRs, is an IPR Policy. The policy and the rules have been adjusted over
time but none of the issues before me turn on any differences. Article 4.1 of
the ETSI IPR Policy requires members of ETSI to inform ETSI of "ESSENTIAL
IPRs" in a timely fashion. ESSENTIAL and IPR are defined terms (article
15). A patent which would inevitably be infringed by operating in accordance
with a standard is an example of an ESSENTIAL IPR. By definition a SEP is an
ESSENTIAL IPR. Once an ESSENTIAL IPR has been declared by its owner to ETSI,
the owner will be requested by ETSI (Article 6.1 of the ETSI IPR Policy) to
give an irrevocable undertaking in writing that it is prepared to grant
irrevocable licences on FRAND terms. In its form applicable to the 2014 offers
the relevant policy is dated 20th March 2013. Article 6.1 in that
form is:
“6.1 When an ESSENTIAL IPR relating to a particular STANDARD
or TECHNICAL SPECIFICATION is brought to the attention of ETSI, the
Director-General of ETSI shall immediately request the owner to give within
three months an irrevocable undertaking in writing that it is prepared to grant
irrevocable licences on fair, reasonable and non-discriminatory (“FRAND”) terms
and conditions under such IPR to at least the following extent:
● MANUFACTURE, including the right to make or have made
customized components and sub-systems to the licensee's own design for use in
MANUFACTURE;
● sell, lease, or otherwise dispose of EQUIPMENT so
MANUFACTURED;
● repair, use, or operate EQUIPMENT; and
● use METHODS.
The above undertaking may be made subject to the condition
that those who seek licences agree to reciprocate.”
86.
Whether a declarant is an ETSI member or not does not matter in that
undertaking. Under the rules anyone declaring a patent to ETSI as essential
IPR is asked to give a FRAND undertaking. A question is whether the commitment
to ETSI is enforceable by a third party putative licensee such as Huawei in
these proceedings. This is addressed in the next section.
87.
Other relevant terms in the ETSI IPR Policy are:
i)
Article 6.1bis which provides that the undertaking should be binding on
successors in title.
ii)
Article 6.2 which provides that an undertaking for one patent applies to
all members of the same patent family unless a specific written exclusion is
made at the time. Unwired Planet also pointed out that Mr Cheng of Huawei
agreed that an undertaking restricted to a particular national jurisdiction
would not make much sense [Day3 p125-126]. I accept Mr Cheng’s evidence.
iii)
Article 6.3 which provides that so long as the undertaking is not given
the relevant committee should be wary of adopting the relevant part of the
standard and may suspend work on it.
iv)
Article 8.1 which provides for consequences if the patentee refuses to
give the undertaking.
88.
A notable feature which is not in the ETSI IPR Policy is any obligation
on ETSI to check whether declared patents are in fact essential. The only
mechanisms which exist to decide these questions are court proceedings or
arbitration.
(ii) The history
and purpose of FRAND
89.
ETSI was established in 1988 and the FRAND undertaking was developed by
it with the close involvement of the European Commission, which reflects the
importance of FRAND from the point of view of competition policy. The first
public formulation by the Commission of a specific requirement for FRAND terms
in the context of IP and standardisation was in a paper “Communication on
Intellectual Property Rights and Standardisation” on 27th
October 1992 (COM (92) 445 final at 4.3.3). Nevertheless the concept has its
origin in US anti-trust law (see “A Brief History of FRAND: Analyzing
Current Debates in Standard Setting and Antitrust Through a Historical Lens”
Jorge Contreras 80 Antitrust Law Journal 39 (2015)). In the US it is sometimes
called “RAND” rather than FRAND but there is no material difference between the
two. The idea of FRAND licences for patents essential to standards is not
unique to ETSI. It is something other international SSOs require as well (e.g.
the IEEE and ITU referred to by US District Judge James Robart in Microsoft
v Motorola Case C10-1823JLR, 2013 US Dist LEXIS 60233 (W.D. Wash.
April 25 2013 at page 3)).
90.
Moreover although ETSI is a European organisation, it is truly
international in scope. The ETSI FRAND undertaking has been considered in
courts all over the world including the German courts (see further below), US
International Trade Commission (see decisions between InterDigital v
Nokia and ZTE dated 13th June 2014 Inv No. 337-TA-868
and 27th April 2015 Inv. No. 337-TA-613), the IP High Court of Japan
(see the Apple v Samsung Case No 2013 [Ne] 10043 dated 16th
May 2014) and the Guangdong Province High People’s Court in China (see Huawei
v InterDigital (2013) Guangdong High Ct. Civ. Third Instance No
305).
91.
This international scope arises because the standards supported by the
ETSI FRAND undertaking are and are intended to be interoperable globally both
from the point of view of implementers and also users (see e.g. Art 6.2 and Mr
Cheng’s evidence above). A benefit of standardisation is that implementers
will be able to make and sell products compliant with the standards all over
the world. Another benefit is that users will be able to use the same
equipment globally.
92.
The underlying purpose of the FRAND undertaking is to secure a proper
reward for innovation whilst avoiding “hold up”, i.e. the ability of the owner
of a SEP to hold implementers to ransom by reason of the incorporation of the
invention into the standard by declining to grant them a licence at all or only
granting one on unfair, unreasonable or discriminatory terms. The idea is to
strike a fair balance. This way of describing the purpose of FRAND is not in
dispute and can be seen in numerous sources. It was put in the following way
in the Huawei v InterDigital case in China:
“For good faith users who are willing to pay reasonable
royalties, holders of standards-essential patents should not directly refuse to
grant licenses. On the one hand, it is necessary to ensure that patentees can
obtain sufficient returns from their technical innovations. On the other hand,
holders of standards-essential patents should be prevented from charging
exorbitant royalty rates or attaching unreasonable terms by leveraging their
powerful position forged by the standards. The core of the FRAND obligations
lies in the determination of reasonable and non-discriminatory royalties or
royalty rates.”
[section IV 2nd paragraph (p56 of the
translation)]
93.
I agree with the Guangdong High People’s Court’s succinct summary of the
purpose of FRAND.
94.
The same principles have been recognised in other courts
internationally, see:
i)
the EU Commission Decision AT.39985 Motorola – Enforcement of
GPRS Standard Essential Patents of 29th April 2014 at
para 76-77;
ii)
the CJEU in Huawei v ZTE at paras 48-55;
iii)
the US courts in Microsoft v Motorola (Judge
Robart) at para 71-72 (p25); Ericsson v D-Link 773 F.3d
1201 (Fed Cir 2014) at page 7-8; In re Innovatio IP Ventures LLC
Patent Litigation Case No 11 C 9308, 2013 WL 5593609 (N.D. I11 Oct.
3, 2013) pages 14-15.
95.
However eliminating hold up value is not the only consideration to take
into account. The authorities and the economics literature have identified a
countervailing factor called “reverse hold up” or “hold out”. The idea is that
an unscrupulous licensee may use their economic strength to avoid paying
anything to a patentee, unduly dragging out the process of licence negotiation,
thereby putting the patentee to additional cost and forcing it to accept a
lower royalty rate than is fair. The possibility of delaying tactics from a
licensee is recognised in Huawei v ZTE (CJEU) at paragraph
71 and also paragraphs 37-38 (referring to the referring court).
96.
In a paper of which Prof Neven was an author (“Injunctions for
Standard-Essential Patents: Justice is not Blind” Neven et al
Jnl of Competition Law & Economics 9(2), 285-311.), he showed by economic
modelling that in certain idealised circumstances involving the way patent
litigation works, a licensee has an incentive to defend patent cases in Europe
and end up with a lower royalty than the idealised FRAND rate. The extent to
which that modelling applies to the real world does not matter, neither does
the fact that in economic literature hold up has been discussed more than hold
out. In my judgment what counts is that both hold up and hold out are possible
and both concepts are relevant in analysing a given set of facts. Unscrupulous
behaviour by either the patentee or the licensee can lead to unfairness. In
order to arrive at fair, reasonable and non-discriminatory licence terms the
patentee must not engage in hold up nor must the licensee engage in hold out.
97.
When talking about FRAND economists refer to the idea that the FRAND
rate represents the rate which would be agreed “ex ante”, in other words before
the patented invention is adopted into the standard. This is another way of
saying that the rate seeks to eliminate hold up and to that extent is
uncontroversial. In the concurrent evidence session Prof Neven explained that
he did not regard FRAND as a scheme which meant the patentee could not
appropriate some of the value that is associated with the inclusion of his
technology into the standard and the value of the products that are using those
standards. Dr Niels agreed with that. Neither side disputed this and to the
extent it is a matter for the economists, I accept their evidence. The
economists’ opinions show that it is not necessary to deprive the patentee of
its fair share of those two sources of value in order to eliminate hold up and
fulfil the purpose of FRAND. To that extent I may be differing from certain
parts of the decisions in Innovatio IP Ventures and Ericsson
v D-Link in the US but it is not necessary to look into that any
further since neither side before me took the point.
(iii) Enforceability
of the ETSI FRAND undertaking and French law
98.
Although it is common ground in this case that Unwired Planet is bound
in law to license on FRAND terms, the questions of its enforceability and the
legal basis for it are not purely academic for two reasons, first because a
correct identification of the legal basis may inform decisions about the undertaking’s
scope and effect, and second because the degree of uncertainty around its
enforceability plays a part in the argument about abuse of dominance.
99.
My judgment on the strike-out in April 2015 ([2015] EWHC 1029 (Pat) para
29) noted that FRAND could be considered in three relevant legal contexts: (1)
compliance with the FRAND commitment as a matter of contract, (2) compliance
with competition law and (3) the grant or refusal of injunctions (“equitable
refusability”). At this stage I am concerned with the first context.
100.
Article 12 of the ETSI IPR Policy provides that it is governed by French
law and the IPR declaration forms also refer to French law. They provide that
the construction, validity and performance of the undertaking is governed by
French law (see the extract from the forms set out later in this judgment).
The parties exchanged reports of French law experts.
101.
Unwired Planet referred to the judgment of the Court of Appeal from the
strike-out judgment ([2016] EWCA Civ 489) in which it was held that:
“38 […] UP LLC and UP were required to give FRAND
undertakings and they each did so shortly after the SEPs in issue were
transferred to them. It is true that UP is not a member of ETSI but it is just
as constrained by the FRAND undertaking it has given as it would be if it were
such a member and the judge was right to hold that, as a practical matter, any
third party may require UP to grant it a licence under the SEPs on FRAND
terms.”
102.
No doubt this clear decision is the reason why neither side actually
disputes that as a practical matter the FRAND undertaking is binding on Unwired
Planet and enforceable by Huawei. However the opinion of Huawei’s French law
expert, Prof Libchaber, is that in French law those conclusions are not correct
and, as is said in his second report (paragraph 10 footnote 7) the Court of
Appeal did not explore the legal basis for its conclusion and French law
matters were not in issue on the appeal. Given that the French law matters
were argued before me (in writing) and for the reasons already explained, it is
necessary to address the issue.
103.
It is not in dispute that ETSI as an association was formed under the Loi
du 1er juillet 1901 relative au contrat d'association (the French law of 1
July 1901 and the decree of 16 August 1901), Article 1 of which states: (in
translation): “An association is a contract by which two or more persons bring
together, in a permanent manner, their knowledge or their activities for a
non-profit purpose. It is ruled, as to its validity, by the general principles
of law applicable to contracts and obligations”.
104.
Prof Libchaber explained that as an association which results from a
contract, the legal principles governing contracts are applicable and he
pointed out that Article 1165 of the old French Civil Code provides that
agreements only produce effects between the contracting parties. It is only as
an exception that they can benefit a third party and that is in the case
provided for in Article 1121. I will address Article 1121 and third party
rights below.
105.
Prof Libchaber noted that paragraph 1.4 of the ETSI Guide states that
the IPR Policy defines the rights and obligations of ETSI as an Institute for
its members and states that while non-members have certain rights under the
policy they (non-members) do not have obligations. Accordingly his opinion is
that non-members of ETSI such as Unwired Planet are not subject to any legal
obligations arising from French contract law under the policy. At this stage
the analysis is not concerned with the effect of making a declaration to ETSI
of SEPs and the French law expert relied on by Unwired Planet, Prof
Fauvarque-Cosson, did not disagree with Prof Libchaber so far.
106.
Prof Fauvarque-Cosson’s view is that making a declaration under Art 6.1
of the ETSI IPR Policy gives rise to a binding contract between ETSI and the
declarant and this is so regardless of whether the declarant is a member of
ETSI or not. Prof Libchaber does not agree. The dispute has a number of
dimensions which are best taken separately although they interact. The first
is whether making an ETSI declaration forms a contract at all. The second
dimension relates to Art 1121 of the old French Civil Code and the French law
doctrine of stipulation pour autrui, in other words the law whereby
third parties may acquire enforceable legal rights against one party to a
contract. The third dimension relates to the nature of any obligation which
does arise, Prof Libchaber expressing the view that it is not the usual
practice for French courts to compel a party to enter into a contract. Finally
the fourth dimension concerns the efficacy of a unilateral commitment under Article
1000-1 of the old French Civil Code.
107.
The French Civil Code referred to in the previous paragraphs is called
the “old” French Civil Code because on 1st October 2016 a new Civil
Code relating to contract law came into force in France. The new Civil Code is
not retrospective and so it is not applicable to Unwired Planet. Prof
Fauvarque-Cosson referred to both and expressed the view that the changes did
not make any difference to the result for any of the matters in debate although
in some cases the law was clearer under the new Civil Code. Prof Libchaber
explained that the new Civil Code did not apply to Unwired Planet but he did
not identify any specific aspect in which the difference mattered. In this
section I will refer to the two codes as the old Civil Code and the new Civil
Code.
(1) Does making
ETSI declaration form a contract at all
108.
In the relevant declaration a patentee declares to ETSI which patents it
contends are essential to the standards. In Prof Fauvarque-Cosson’s opinion it
is the making of this declaration to ETSI by a non-member which leads to that
non-member having a legally enforceable obligation to license on FRAND terms.
Since Unwired Planet is not a member of ETSI, this is crucial.
109.
Prof Fauvarque-Cosson explained that Article 1108 of the old Civil Code
provided that the conditions necessary for the formation of a contract were:
“1. the consent of the party assuming the obligation
2. capacity to contract
3. a definite object which is the subject matter of the
obligation
4. a cause licit”
110.
The Professor explained that under the new Civil Code the concept of a “cause”
is no longer stated as a condition governing the formation of contracts and is
not relevant to the issues arising in this case. Under Article 1128 of the new Civil Code the corresponding conditions are: 1.
the consent of the parties; 2. their capacity to contract; 3. content which is
lawful and certain.
111.
The Professor explained that under French law a contract is formed once
the parties agree on its essential elements. This can be by means of a
sufficiently precise offer and acceptance. Although the old Civil Code did not
contain detailed provisions expressly dealing with formation, the new Civil
Code does and the rules generally enshrine existing case law. Once an offer
has been made it must be accepted and the acceptance does not require any
particular formality. It can be express or implied unless the offer specifies
that acceptance must be express. Prof Libchaber did not disagree with any of
this.
112.
Prof Fauvarque-Cosson analysed the position in the following way:
i)
The ETSI IPR declaration form sets out the terms of an offer made by
ETSI to IPR holders who wish to declare their IPR as essential to a standard.
ii)
The declaration form identifies the conditions on which ETSI will either
include or maintain the IPR holder’s IPR in ETSI’s database of essential IPR,
namely that the IPR holder must agree to grant irrevocable licences under its
IPR on terms and conditions which are in accordance with Clause 6.1 of the ETSI
IPR Policy.
iii)
The IPR holder accepts the offer made by ETSI when it completes and
signs the IPR Licensing Declaration Form and sends it to the Director General
of ETSI.
iv)
This gives rise to a contract on the terms set out in the IPR Licensing
Declaration Form between ETSI and the IPR holder.
v)
In addition to its contractual obligation to ETSI, the IPR holder is
also contractually bound with respect to any third party who wishes to practice
the standard to grant irrevocable licences under its IPR on terms and
conditions which are in accordance with Clause 6.1 of the ETSI IPR Policy. This
is because the contract between ETSI and the IPR holder is a contract for the
benefit of third parties.
113.
Point (v) will be addressed below. At this stage I am concerned with steps
(i) to (iv) which in Prof Fauvarque-Cosson’s opinion create a binding contract
between the IPR holder and ETSI.
114.
The question has three aspects: (a) whether making the declaration
imposes any sufficient obligations on ETSI to form a contract, (b) whether the
declaration forms lack sufficient clarity to impose legal obligations on the
declarant, and (c) whether in truth the declaration is really just a way of
giving information to ETSI and the market.
(a) whether
making the declaration imposes any sufficient obligations on ETSI to form a
contract
115.
Prof Libchaber explained that a contract must create legal consequences
for both parties. He referred to the new Civil Code in Article 1101 which
provides that a contract is (in translation) “a meeting of wills between two or
more parties designed to create, modify, transmit or extinguish obligations”
(i.e “Le contrat est un accord de volontés entre deux ou plusieurs personnes
destiné à créer, modifier, transmettre ou éteindre des obligations”). Prof
Fauvarque-Cosson did not disagree with this nor was there any suggestion that
the principle was any less applicable to cases governed by the old Civil Code.
The idea underlying this is not difficult to grasp and is akin to the English
law concept that for a promisor’s promise to be enforceable as a contract,
consideration must move from the promisee.
116.
Prof Libchaber’s view was that no contract was formed by the steps (i)
to (iv) because even if a declaration form which is completed and sent by a
patentee to ETSI creates obligations for the patentee (perhaps because they are
an existing member of ETSI), it does not have any corresponding obligatory
consequences for ETSI.
117.
It is true that the ETSI IPR Policy itself does not purport to impose
anything by way of an obligation on ETSI in return for receiving an
essentiality declaration form from a patentee but Prof Fauvarque-Cosson
explained that there is a step which ETSI will take after receiving a
declaration, that is to include or maintain the declared essential patent on
the ETSI database of essential IPR. Prof Libchaber’s view is that that is not
sufficient to support the theory that making a declaration triggers the
formation of a contract under French law because the entry of the patent in the
database is not the counterpart to a declaration but rather a tool designed to
assist interested parties in finding out which patents have been declared
essential and are said to be available to license. His view is that it is
artificial to analyse this as if it were a contractual advantage, and he
doubted that a declarant would be able to compel ETSI to enter the declaration
into the IPR database if this procedural step were not taken. He also pointed
out that while the registration procedure may be implicit from the Policy, it
appears nowhere in the Licensing Forms and so while the registration of the patent
in the ETSI database could be seen as an obligation on ETSI where the
declaration is made by an ETSI member, there will be no such obligation where
the declaration is made by a non-member.
118.
Prof Libchaber is correct that neither the IPR Policy itself nor the
declaration form refers to the ETSI IPR database however the database is
described in Article 3.1.2 of the ETSI Guide to IPRs. To that extent steps (i)
to (iv) are too narrowly stated but the difference does not matter. These are
the provisions in the ETSI Directives to which the IPR Policy is an annex.
Article 3.1.2 explains that the database allows online access to declarations
such as those in issue in this case. The third sentence of the Article states
as follows:
“Unless otherwise specified, all IPRs contained [in the
ETSI IPR Database] have been notified to ETSI, with an undertaking from the
owner to grant licenses according to the terms and conditions of Clause 6.1 of
Annex 6 of the ETSI Rules of Procedure (the ETSI IPR Policy).”
[ETSI Guide on IPRs 19 September 2013; ETSI Directives
Version 36, June 2016]
119.
This is a clear statement of ETSI’s registration policy. It shows that
Prof Fauvarque-Cosson is correct to say that after receiving a declaration ETSI
will include or maintain the declared essential patent(s) on the ETSI IPR
database. Moreover, as the statement explains, unless otherwise stated the owners
of the IPRs on the database will have given a FRAND undertaking. Article 3.1.2
is an express and public statement of what ETSI will do when it receives
declarations. In my judgment the fact it is not mentioned in the declaration
form is irrelevant. On its face this article applies whether the declarant is
a member of ETSI or not and it would make little sense otherwise. I am not
persuaded by Prof Libchaber’s view that at best this might be applicable to
members rather than non-members.
120.
If a contract is formed from the four steps described by Prof
Fauvarque-Cosson (adjusted to include reference to Article 3.1.2) then one can
see that an obligation with far reaching legal consequences for the declarant
(to grant patent licences to all comers on FRAND terms) is an obligation of
much more weight and significance than the apparently minor counterpart
obligation on ETSI (if it exists) to enter the declaration on the IPR
Database. However English contract law would not weigh up the relative values
of the promise and the consideration for it and neither Professor suggested
French law would do that either. Prof Libchaber’s view is that a requirement
to put the declaration on the database is not “sufficient” to support the
contract but that was not because of its inconsequential nature, it is because
of the Professor’s view that it is not the counterpart of the declaration but
rather a tool to assist interested parties. I accept that placing the
declarations on the public database is a tool to assist interested parties but
I do not accept that this is not a “counterpart” to the declaration. If Prof
Libchaber is just referring to the fact that the database is not mentioned in
the declaration form then I have dealt with that point.
121.
Considering the issue as a matter of substance, the placing of the
declaration on the database is indeed the counterpart to the declaration
because the purpose of the declaration from ETSI’s point of view is to provide
information which will be useful to give notice to standard setters and
implementers. That information involves two important facts: first the
existence of a patent which is, or at least which the owner contends is,
essential to the standards, and second the fact that the owner is prepared to
grant licences on FRAND terms. A declaration to ETSI which is not made public
on the database is much less useful. Furthermore publication on ETSI’s own
database of the assertion of essentiality and of the undertaking to enter into
FRAND licences has a value to a patentee seeking to license its rights and
obtain fair return for the use of its invention.
122.
The terms of Article 3.1.2 are quite clear and do not leave room for
ETSI to choose not to place a regular declaration on the database. In the
Article ETSI is offering to declarants to behave in a particular way if a
proper declaration is provided. It seems to me therefore that a person who
provided a properly completed declaration form to ETSI would be entitled to
expect ETSI to do what it says it will do in Article 3.1.2. In that case ETSI
is obliged by Article 3.1.2 to place the declared IPR on the database in a
manner which shows that an undertaking has been given, i.e. not to “otherwise
specify”. Given the statements about French law both in the form and in the
ETSI Directives, declarants are entitled to expect these statements to
represent legally binding statements by ETSI about what it will do. In other
words a declarant who had supplied a completed declaration to ETSI is entitled
to expect they can compel ETSI to enter the declaration into the IPR database
in the unlikely event it failed to do so and therefore a binding contract under
French law will arise when a proper declaration is provided. That will be so
whether the declarant is a member of ETSI or not.
(b) whether the
declaration forms lack sufficient clarity to impose legal obligations on the
declarant
123.
Prof Libchaber’s view is that the licensing forms cannot be regarded as
an offer because they lack the necessary clarity and so do not have the
necessary quality of certainty to amount to an offer capable of acceptance
under French law. This is because they allow the declarant various options to
choose from. The options are described by Prof Libchaber as follows:
“In this regard I note that the declarant may choose to make
the declaration: (i) in respect of either IPR relating to contributions made to
the standard setting process by the declarant or any of its IPR; (ii) in
relation to specific ETSI standards / specifications or all of them; and (iii)
subject to a condition of reciprocity. It is also open to the declarant to
inform ETSI that it does not wish to make its IPR available for licensing on
FRAND terms at all.”
124.
Prof Libchaber is correct that these options exist but in my judgment
their existence does not amount to a lack of clarity which could lead to a
contract based on them being unenforceable. Each option is presented and it
will be clear which one the declarant has chosen. The fact that options exist
does not introduce a lack of clarity.
125.
Dealing with the individual options, the first is concerned with which
rights the declaration relates to if a general declaration is made. Either
choice has a clear effect – either the declaration will relate to IPRs
contained in technical contributions made by the declarant or its affiliates or
else it will relate to all its IPRs. There is nothing uncertain in either
option but in any case a general declaration is not the only option available.
A declarant can list the IPRs to which the declaration relates and in such a
case there is no lack of clarity at all.
126.
The second point is about the standards to which the IPR is declared to
be essential. Declaring IPRs as essential to all ETSI standards is not
unclear, it is simply wide. And while a wide declaration like that may not
help an implementer decide if they need a licence in particular circumstances,
the database does not warrant that the IPRs are in fact essential in any case.
The implementer will always have to form their own view about that (or have the
matter resolved in court). I suppose a declarant could define the standards in
an ambiguous way but regardless of how realistic the possibility is, it does
not undermine the clarity or enforceability of the process itself. Assuming
the declarant identifies the relevant standards sufficiently then the
declaration will be clear and the undertaking could be enforced.
127.
Similarly the third point, on reciprocity, does not introduce a lack of
clarity. A declarant may state that they will only offer FRAND licences on
condition that those who seek licences reciprocate. Whether they do or do not,
either option is clear.
128.
Finally the declarant can refuse to give the FRAND undertaking
altogether. Again this is not unclear. If they do refuse it means that ETSI
will know that there are patents alleged to be essential for which no FRAND
undertaking is available. This is vital information and the ETSI Directives
have a number of provisions dealing with the possibility (Article 8 of the ETSI
IPR Policy). Broadly in that case ETSI will try and ensure that whatever the
relevant technology is, it is removed from the standards.
129.
I am not persuaded by this aspect of Prof Libchaber’s evidence. I can
quite see that French law, like English law, imposes a requirement of certainty
before a contract can be enforceable. That makes sense. However none of the
grounds identified give rise to any material lack of certainty about the
obligations which would be imposed on the declarant.
(c) whether in
truth the declaration is really just a way of giving information to ETSI and
the market
130.
Although it was not strongly advanced as a separate legal ground for
rejecting the enforceability of the FRAND undertaking in the declaration, Prof
Libchaber made the point in paragraph 17 and 18 of his third report that really
a declarant is simply “informing” ETSI, and indirectly interested parties, that
it is prepared to grant licences in accordance with Clause 6.1 of the Policy
and that this is not consistent with the view that a binding contractual
relationship is formed. The Professor put the word “informing” in quotation
marks because that language comes from the declaration form. The word
“informs” is used in the form. It appears in conjunction with the IPR
Information Statement in which a declarant can list particular IPRs and
standards, the language is as follows:
“In accordance with Clause 4.1 of the ETSI IPR Policy the
Declarant and/or its AFFILIATES hereby informs ETSI that it is the
Declarant and/or its AFFILIATES’ present belief that the IPRs disclosed in the
attached IPR Information Statement Annex may be or may become ESSENTIAL
in relation to at least the ETSI work Item(s), STANDARD(S) and/or TECHNICAL
SPECIFICATIONS identified in the attached IPR Information Statement Annex.”
(underlining mine)
131.
There is also a general declaration but the use of “informs” is the
same. The language has to be seen in the context of the declaration form as a
whole. The next part, in which the declarant makes or refuses to make an
irrevocable FRAND licensing declaration, is important:
“IPR LICENSING DECLARATION
In accordance with Clause 6.1 of the ETSI IPR Policy the
Declarant and/or its AFFILIATES hereby irrevocably declares the following
(check one box only, and subordinate box, where applicable):
To the extent that
the IPR(s) disclosed in the attached IPR Information Statement Annex are or
become, and remain ESSENTIAL in respect of the ETSI Work Item, STANDARD and/or
TECHNICAL SPECIFICATION identified in the attached IPR Information Statement
Annex, the Declarant and/or its AFFILIATES are prepared to grant irrevocable
licences under this/these IPR(s) on terms and conditions which are in
accordance with Clause 6.1 of the ETSI IPR Policy.
This irrevocable undertaking is made subject to the condition that those who
seek licences agree to reciprocate (check box if applicable).
The Declarant
and/or its AFFILIATES are not prepared to make the above IPR Licensing
Declaration (reasons may be explained in writing in the attached IPR Licensing
Declaration Annex).
The construction, validity and performance of this IPR
information statement and licensing declaration shall be governed by the laws
of France.
SIGNATURE
By signing this IPR Information Statement and Licensing
Declaration form, you represent that you have the authority to bind the
Declarant and/or its AFFILIATES to representations and commitments provided in
this form.
[signature etc] ___________”
132.
These passages are from the form to be used when specific patents are
identified. The general form is not materially different. The language is
clear and at face value reads as something which would be understood as being
intended to have binding legal force (for example note the reference to the
laws of France and the reference to having authority to bind the Declarant).
The fact that in the earlier part of the form the declarant is “informing” ETSI
about particular IPRs makes sense since ETSI needs to be informed about what IPRs
are the subject of the declaration, not least so that they can be identified on
the database. I reject Prof Libchaber’s idea that all this amounts to is a
means of providing information to the market rather than a formal commitment
capable of binding the declarant. On the contrary the text as a whole is
plainly written in such a way that the person signing it understands they are
making a formal legal commitment on behalf of the declarant.
(2) Art 1121 of
the old French Civil Code and stipulation pour autrui
133.
Prof Fauvarque-Cosson explained that French law includes a doctrine of “stipulation
pour autrui” (an agreement for the benefit of third parties). While the
concept is derived from Art 1121 of the old Civil Code, she explained that the
provisions of the new Civil Code, which codify existing law, state the
principles more clearly, as follows (in translation):
Art. 1205. – A person may make a stipulation for another
person.
One of the parties to a contract (the ‘stipulator’) may
require a promise from the other party (the ‘promisor’) to accomplish an act of
performance for the benefit of a third party (the ‘beneficiary’). The third
party may be a future person but must be exactly identified or must be able to
be determined at the time of the performance of the promise.
Art. 1206. – The beneficiary is invested with a direct right
to the act of performance against the promisor from the time of the
stipulation.
Nevertheless, the stipulator may freely revoke the
stipulation as long as the beneficiary has not accepted it.
The stipulation becomes irrevocable at the moment when the
acceptance reaches the stipulator or the promisor.
Art. 1207. – Revocation may be effected only by the
stipulator, or, after his death, by his heirs. The latter may do so only after
a period of three months has elapsed from the date when they put the third
party on notice to accept the benefit of the promise.
If it is not accompanied with the designation of a new
beneficiary, the revocation benefits the stipulator or his heirs, as the case
may be.
Revocation is effective as soon as the third party
beneficiary or the promisor becomes aware of it.
Where it is made by testament, it takes effect from the
moment of the testator’s death.
The third party who was initially designated is deemed never
to have benefited from the stipulation made for his benefit.
Art. 1208. – Acceptance may come from the beneficiary or,
after his death, his heirs. It may be express or implied. It may take place
even after the death of the promisee or the promisor. ”
Art. 1209. – The stipulator may himself require the promisor
to perform his undertaking towards
the beneficiary.”
134.
The term translated as “stipulator” in this extract may also be
translated as “promisee”. Prof Fauvarque-Cosson explained the provisions on
revocation but nothing turns on them. Prof Libchaber did not disagree with
Prof Fauvarque-Cosson that these provisions restate the previous law without
substantive change.
135.
Prof Fauvarque-Cosson’s view is that the FRAND undertaking given by a
declarant has the effect of engaging this doctrine under French law. Her view
is as follows:
i)
Where an IPR holder gives an undertaking under Clause 6.1 of the ETSI
IPR Policy, the IPR holder is the “promisor”; and ETSI is the “stipulator”. A
person wishing to implement the standard is the “beneficiary”.
ii)
The primary effect of the declaration is to create a contract between
the promisor (the IPR holder) and the stipulator (ETSI), the terms of which
require the promisor to grant a right (a licence on FRAND terms) to the
beneficiaries (the implementers of the standard).
iii)
Once it has exchanged consent with the stipulator (ETSI), the promisor
has entered into a contract by virtue of which it is bound under French law to
be prepared to grant the licence on FRAND terms.
iv)
The fact that the precise FRAND terms and conditions are yet to be
agreed between the promisor (the IPR holder) and the beneficiary (the
implementer) and that there is no licence does not detract from this. The
promisor’s undertaking suffices, as a matter of French law, to create a
contract between ETSI and the promisor.
v)
The fact that an IPR holder may be a non-member of ETSI is not relevant
to this analysis.
136.
Prof Libchaber does not agree with this. He explained that the doctrine
was not commonplace in French law because the conditions were rarely satisfied
and there were two classic situations in which it applies – insurance (e.g.
where a person takes out an insurance policy on their life, in which someone
else is the beneficiary) and shipping (e.g. where a sender contracts with a
carrier for the benefit of a recipient of goods). Prof Libchaber’s particular
objections were these. First he did not agree that a contract between the
declarant and ETSI was formed at all. I agree that such a contract is a
necessary element for the doctrine to apply but I have already found that such
a contract is formed. Second he did not consider the doctrine applied because
ETSI imposes no requirement as to what the terms of any contract between the
declarant and ETSI were. In other words, declarants can choose to declare IPRs
to ETSI but not give a FRAND undertaking or do so conditionally. Again I have
addressed this already. Prof Libchaber is right that a declarant can choose
not to give the FRAND undertaking or to attach conditions to it. However the
fact that the declarant has options does not seem to me to undermine the
existence of a legally enforceable contract at least in the relevant case, in
which the declarant gives an unconditional FRAND undertaking. Prof Libchaber’s
view was that the doctrine could only apply if ETSI was imposing a particular
obligation on the declarant instead of permitting them to choose between
several options, but I do not see why that follows. An insurer could provide
an insured with different options such as levels of cover but that would not
undermine the contract between the two once it was formed on the basis of
whatever option the insured had chosen nor would it undermine the fact that the
contract was for the benefit of a third party.
137.
Prof Libchaber’s next objection was as follows:
“If Professor Fauvarque-Cosson’s analysis is correct, the
same Licensing Form would be considered as: (i) the offer made by ETSI; (ii)
the acceptance by the IPR holder; and (iii) setting out the key terms of future
contracts to be formed with interested third parties. As a matter of French
contract law this plurality is unconvincing and does not allow for the
identification of the various different components of those separate legal
operations: a first contract between ETSI and an IPR holder, and a second
between the IPR holder and a third party implementer.”
138.
I am not persuaded by this. I cannot see any reason why a blank form is
incapable of being an offer made by ETSI nor any reason why a properly
completed form cannot be an acceptance of that offer, indicating which of the
pre-defined options the form shows ETSI is prepared to offer, the declarant has
chosen to accept. As for the terms of future contracts, the form makes an
unambiguous reference to Clause 6.1 of the ETSI IPR Policy. That policy
expressly provides that a future licence will be available on FRAND terms. The
issue of what FRAND terms are is addressed below. At this stage the key point
is that (as I have found below) it is possible for a court to adjudicate
whether a licence is or is not FRAND. Whether terms are FRAND is an objective
matter for a given set of circumstances and therefore whether a FRAND
undertaking has been complied with can be determined as a matter of law. In
that sense the undertaking is legally enforceable. Knowing that the licence
will be on FRAND terms is all the parties need to know.
139.
I sympathise with Prof Libchaber’s observation that the doctrine is not
commonplace in French law. However that is no reason not to apply it to the
relatively new problem of how to facilitate the setting of standards in rapidly
developing areas of technology and balance the public benefit of access to the
latest and best technology for these standards with the appropriate incentives
for inventors and investors in technological innovation. The FRAND undertaking
sought by ETSI when a patentee declares its patents as essential to an ETSI
standard is an undertaking given in terms to confer a benefit on third
parties. I accept Prof Fauvarque-Cosson’s analysis and find that the doctrine
of “stipulation pour autrui” applies to the FRAND undertaking and
renders it enforceable by third parties.
(3) The nature
of any obligation which does arise
140.
This point is related to the previous one but is not the same. Prof
Libchaber expressed the view that it is not the usual practice for French
courts to compel a party to enter into a contract and that therefore the limit
of the terms of Clause 6.1 as interpreted by a French court would be to impose
an obligation owed by the declarant to third party implementers to make a good
faith attempt to negotiate a FRAND licence. So he explained this is another
reason why “stipulation pour autrui” does not apply, because for it to
apply the right must be capable of specific performance, and on this analysis
it is not. He explained that to form a licence contract French law would
require the parties to agree on both the IPR covered by the agreement and thle
royalties to be payable. If the royalty was not agreed, there can be no
contract and a French court would not set the applicable price. French law
(Art L613-8 §5 of the Intellectual Property Code) requires an intellectual
property licence to be in writing otherwise it is a nullity and so without a
specific form, there can be no contract. These points were in Prof Libchaber’s
final report to which Prof Fauvarque-Cosson did not respond.
141.
These are significant issues for which I have considerable sympathy. An
idea which has been canvassed and was in the pleadings at one stage in these
proceedings although it was subsequently dropped, is that a FRAND undertaking
could mean that an implementer is in effect already licensed. Just as in
English law a specifically enforceable contract to sell property can be treated
as an assignment in equity such that the buyer is, for some purposes, treated
as the owner of the property in all but name, so the FRAND undertaking may have
the same effect. On that basis an implementer could plead that it has a
complete defence to past infringements since it was, in substance, licensed.
142.
Neither side before me suggests that the FRAND undertaking is
specifically enforceable in the sense I have described. For my part I doubt
that the FRAND undertaking can be specifically enforced in such a way that
either party could legally be compelled to enter into a contract against their
will. Certainly the implementer could not be so compelled and I doubt the
patentee could be either. However a proper analysis of the full legal
situation needs to have regard to the intellectual property rights which the
FRAND undertaking relates to as well as the contractual position. It also
needs to take into account competition law.
143.
I do not believe it is necessary in order for the FRAND undertaking to
be legally effective, for it to be true that the undertaking is specifically
enforceable in such a way that the IPR holder could be compelled to enter into
a contract against their will. In other words, even if a patentee cannot be
compelled to enter into a contract by specific performance of the FRAND
undertaking, that undertaking can still have substantive legal effect. As
mentioned already FRAND is an objective standard. Courts concerned with patent
cases in a number of countries around the world have set FRAND rates and this
court will do so too. If a patentee refuses to enter into a licence which a
court has determined is FRAND then, subject to the Vringo
problem which I will consider below, a court can and in my judgment should
normally refuse to grant relief for patent infringement. The converse applies
to an implementer who refuses to accept a FRAND licence. In that case the
normal relief for patent infringement should normally follow. Thus there is no
need for contract law to go as far as creating a power to compel parties to
enter into FRAND licences against their will because patent law already has the
tools available to give legal effect to the FRAND undertaking.
144.
Therefore, while I recognise the force in Prof Libchaber’s concern, I do
not accept that the nature of the FRAND obligation itself, which is examined at
length below, means that the doctrine of “stipulation pour autrui”
cannot apply to it.
(4) The efficacy
of a unilateral commitment under Article 1100-1 of the French Civil Code.
145.
As a fall back Prof Fauvarque-Cosson stated that even if no contract was
formed between the IPR holder and ETSI, the FRAND undertaking could be regarded
as constituting an “acte juridique unilatéral”, meaning a manifestation
of a will intended to produce legal effects and thereby enforceable in French
law under Article 1100-1 of the Civil Code which codifies previous law. Prof
Libchaber did not agree but since I have already decided the issue on the basis
above there is no need to resolve that.
Enforceability
of the FRAND undertaking – looking overall.
146.
Standing back I recognise that the enforceability of the FRAND
undertaking in French law is not a clear cut question. Prof Libchaber stated
that there remains widespread uncertainty about the issue of whether the
doctrine of “stipulation pour autrui” can be applied to ETSI. In my
judgment it can be applied in that way and should be. The reason it should be
applied is because the FRAND undertaking is an important aspect of technology
standardisation. Holders of essential IPR are not compelled to give a FRAND
undertaking but it serves the public interest that they make it clear whether
or not they are doing so, and it serves the public interest that if they do,
the undertaking is public, irrevocable and enforceable. To avoid hold up,
implementers need to know that they can hold SEP owners to a FRAND obligation.
(iv) Can there be
more than one set of FRAND terms?
147.
A question which needs to be grappled with in order to resolve this
dispute is whether there can be two sets of rival licence terms which are both
FRAND. To put the matter another way, the question is whether there can be a
FRAND range rather than just a FRAND rate. This is not a theoretical problem,
it has real practical significance in this case.
148.
From the point of view of economists, the FRAND royalty rate is the rate
which the parties in a given set of circumstances would converge upon and agree
to. The circumstances are idealised in various ways – for example there is no
hold up and no hold out. The FRAND royalty rate arrived at in that way may not
be the same as the rate actually decided upon by a court or an arbitrator and
Prof Neven strikingly contemplated that the court’s judgment on a FRAND rate
would inevitably be incorrect at least to some degree since it would always be
an imperfect approximation to the “true” FRAND rate for a given circumstance
since it would inevitably be based on limited evidence. This illustrates an
important aspect of the economists’ approach to FRAND. For a given set of
circumstances there is only one FRAND rate and, by parity of reasoning
therefore, only one FRAND set of licence terms.
149.
In Vringo v ZTE (both [2013] EWHC 1591 (Pat) and
[2015] EWHC 214 (Pat)) and in earlier judgments in these proceedings I
considered what happens if each side in a patent dispute makes a FRAND offer.
As those judgments indicated, it may be that competition law, the contractual
basis of the ETSI FRAND undertaking and the English court’s equitable
discretion which relates to injunctions deal with these problems in different
ways. This problem (the Vringo problem), in which offers
presented by each party differ but are both FRAND, necessarily presupposes that
different terms can both be FRAND. If that is possible then competition law
and the contractual FRAND undertaking may be satisfied but the problem then may
have to be resolved by the grant or refusal of an injunction. In Vringo
I described as “international coercion” the effect which might arise if a court
granted an injunction in its territory on the basis that a putative licensee
had no licence when the reason the licensee had no licence was because the only
terms on offer were a global licence which the licensee did not want.
150.
The question is what to do once a court has decided that a given patent
is valid, essential and infringed by an implementer and in which both the
patentee and the implementer have offered licence terms but those terms
differ. That is this case. Even if the dispute is only about a royalty rate
then the problem still arises because if there can be a range of FRAND rates
then asking if a rate is FRAND does not provide the court with a basis for
resolving the dispute. If there can be a FRAND range then in order to
adjudicate that a particular rate is the “right” rate in the circumstances
either there needs to be some further principle to apply aside from FRAND or
the parties would have to agree to accept whatever rate the court chooses in
the exercise of its discretion. The equitable discretion relating to the
injunction does not solve this problem. All that can be achieved in effect is
enforcement of a determination made by the court as to what licence terms are
acceptable but that does not indicate which set of terms should be accepted.
151.
Before me the parties’ cases were diametrically opposed:
i)
Unwired Planet submitted that if each side made a FRAND offer then the
patentee’s offer wins in the sense that, all other things being equal and
assuming there is no defence to an injunction, the court should grant an
injunction against the defendant. That is because by making a FRAND offer the
patentee has discharged its obligations under the FRAND undertaking – which
obligations are said to be limited to making FRAND offers as distinct from
being obliged to accept FRAND terms offered by the putative licensee.
ii)
Huawei submitted that if each side made a FRAND offer then the
implementer should win and the injunction should be refused. That is because
the patentee in this circumstance would not be accepting the licensee’s FRAND
terms. The implementer’s terms are the ones which should be accepted because
the FRAND system is for the benefit of implementers in order to allow them
access to the technology.
152.
If, on the other hand, there is only one set of terms (including the
rate and all other terms) which are truly FRAND in a given set of circumstances
then a different problem arises. At first sight it seems uncontroversial to
state that the criterion which defines whether SEP licensing conduct does or
does not amount to an abuse of dominant position in EU competition law (Art 102
TFEU) is whether the licence terms are FRAND as defined by the ETSI
undertaking. However if only one set of terms in given circumstances can truly
be FRAND and if FRAND also represents the line between abusive and non-abusive
conduct then every agreed licence in the entire industry is at a serious risk
of being contrary to competition law and open to being unwound. Simply as an
illustration of the potential significance of this point, consider the impact
of Huawei’s submission that the global nature of a licence means it cannot be
FRAND because it amounts to illegal bundling. All the numerous comparable
licences in evidence are global.
153.
Although I deal with competition law below, I can address this issue
now. Focussing on rates, Art 102 TFEU only condemns excessive pricing. Both
economists agreed that for a royalty rate to amount to excessive pricing it
would have to be substantially more than FRAND. How much more that is will
depend on all the circumstances but whatever it is, the point demonstrates that
a royalty rate can be at least somewhat higher than the true FRAND rate and
still not be contrary to competition law. Therefore, as a matter of principle,
the boundary between what is and is not a true FRAND rate as defined by the
ETSI undertaking is not and cannot be necessarily co-extensive with competition
law. In other words the premise which I described above as at first sight
uncontroversial, is not correct. Competition law considerations may well
indicate why a rate is not FRAND but in general and as a matter of principle,
for competition law to be engaged, it will be necessary but not sufficient for
a rate not to be the true FRAND rate. Again, the logic applicable to royalty
rates is applicable to any licence term.
154.
In saying this I have well in mind that the CJEU in Huawei v
ZTE appears to equate an obligation to make a FRAND offer with
compliance with Art 102 TFEU. That
is addressed below.
155.
One possible objection to the idea that there is only one set of true
FRAND terms in a given set of circumstances is that it might create legal
uncertainty by allowing a party who had to agree licence terms to later contend
that the agreed terms were not FRAND because they differed from the sole “true”
FRAND terms. In my judgment the answer to this objection is that such an
agreement has different effects from the point of view of competition law and
the ETSI undertaking. In terms of competition law, the fact that terms have
been agreed does not and cannot mean that they avoid the scrutiny or effect of
that law. So, if the agreed terms are so far from FRAND as to contravene
competition law, then that would no doubt make the terms unenforceable and have
the other consequences of a breach of competition law. However in terms of the
ETSI FRAND undertaking, there is no reason why the undertaking should entitle
either party subsequently to challenge agreed terms as being non-FRAND absent
competition law considerations. If parties agree licence terms then their
rights and obligations under the ETSI FRAND undertaking will be discharged and
replaced by their contractual rights under the licence. Thus having only one
set of true FRAND terms for a given situation would not create a practical
problem for operators based on competition law nor would it undermine the
purpose and efficacy of the ETSI FRAND undertaking.
156.
Accordingly the concept that there exists only a single set of FRAND
terms for a given situation is workable. It will promote certainty and will
enhance the normative aspect of FRAND. It would make the enforcement of the
ETSI FRAND undertaking conceptually straightforward. If there is only one set
of true FRAND terms for a given situation then a court will be able to hold
parties to their obligations arising from the FRAND undertaking. Both parties
would be entitled to insist on FRAND terms and neither would be entitled to
insist on anything other than FRAND terms. By definition the FRAND terms are
the terms which are fair, reasonable and non-discriminatory. They are the
terms which a truly willing licensor and truly willing licensee would agree
upon in the relevant negotiation in the relevant circumstances absent
irrelevant factors such as hold up and hold out.
157.
The fact that the evidence of putative comparable licences might show a
range of rates and other terms as having been agreed between other parties does
not falsify the idea that for a given situation there is only one set of true
FRAND terms. Each real licence was arrived at between particular parties in
particular circumstances which may or may not be good evidence about what would
be FRAND in the case in issue. Furthermore the fact that the terms of a given
comparable licence, objectively speaking, may not represent the true FRAND
terms for the circumstances in which they were agreed does not mean those
contracts would all be vulnerable to being unwound, for the reasons already
addressed.
A single set of FRAND terms and the Vringo
problem
158.
The concept of a single set of FRAND terms also eliminates the Vringo
problem. That is a significant virtue. If more than one set of terms can be
FRAND then the Vringo problem of rival FRAND offers cannot
be solved in a fair way. I do not accept either party’s submission about what a
court should do if presented with rival terms both of which are FRAND. I
reject Unwired Planet’s submission that the patentee should win in that case
because the patentee’s obligation is simply to make a FRAND offer. This
argument derives from too narrow a view of the wording of the FRAND undertaking
and the reference to being “prepared to grant irrevocable licences” on FRAND
terms. These words are not apt to distinguish between Unwired Planet’s
interpretation, which sets the limit of a patentee’s obligations as being
merely to make offers, and a wider interpretation which would oblige a patentee
to enter into licences on FRAND terms.
159.
The wider interpretation is preferable for another reason too. It is
more consonant with the purpose of the FRAND undertaking itself. An obligation
focussed only on making FRAND offers (my emphasis) is unrealistic since
a process of fair negotiation will usually involve some compromise between the
parties’ rival offers. If the ETSI undertaking demands that offers made by a
patentee must themselves consist of FRAND terms, then that would condemn
patentees to always end up with negotiated rates below a FRAND rate. Therefore
it makes much more sense to interpret the ETSI FRAND obligation as applicable
primarily to the finally agreed terms rather than to the offers. In other
words, it is an obligation to enter into FRAND licences. The same logic also
applies to implementers: an obligation on implementers to make FRAND offers
as opposed to enter into FRAND licences would have them paying rates higher
than the FRAND rate.
160.
I have referred to an obligation on implementers because I believe the
ETSI FRAND undertaking does impose duties on them too. Although the ETSI FRAND
undertaking is an obligation imposed on the patentee, I agree with Unwired
Planet that it also has the effect of creating an obligation applicable to the
implementer, as follows. Although some implementers are themselves ETSI
members, the ETSI FRAND undertaking must work in the same way whether the
implementer is a member of ETSI or not. The implementer, as an implementer,
owes no contractual duties to ETSI at all and the implementer has no duty to
ETSI to offer FRAND terms to a patentee. However the logic of the FRAND
undertaking means that an implementer must negotiate fairly if it wishes to
take advantage of the constraint which the patentee’s FRAND undertaking places
on the patentee’s rights. Just as an implementer is entitled to demand FRAND
terms in a licence from a patentee subject to the ETSI FRAND undertaking, so a
patentee is entitled to demand FRAND terms in the same licence. In other
words, an implementer who does not negotiate fairly is not a willing licensee
and may ultimately be subject to an injunction.
161.
I also reject Huawei’s proposed solution to the Vringo
problem that the implementer’s offer is necessarily the one which must be
accepted. All the reasons which apply to the patentee’s terms apply just as
much to the implementer’s terms and it is not correct to say that the FRAND
undertaking is simply for the benefit of implementers. Its purpose is to
strike a balance between the respective rights of patentees and implementers.
FRAND as a process
162.
The considerations above illustrate that FRAND needs not only be a
description of a set of licence terms but is also apt to describe the process
by which a set of terms are agreed. In argument Huawei’s counsel used the
expression “a FRAND approach” to describe how negotiations ought to proceed.
That is accurate and it bears on the parties’ obligations arising as a result
of the FRAND undertaking. Prof Neven said in his second report that:
“…a FRAND commitment is not simply a commitment to abide by
the terms of a court-determined FRAND licence and / or FRAND rate, but requires
the SEP holder to behave in particular ways (and for instance to make (or at
least attempt to make) offers capable of being FRAND).”
(para 41)
163.
I agree with the sentiment expressed by Prof Neven. Both patentees and
implementers should take a FRAND approach to the negotiation of a licence under
a SEP or SEP portfolio governed by a FRAND undertaking. The patentee is
obliged by contract to take a FRAND approach to the negotiation and to grant a
licence on FRAND terms. The implementer must take a FRAND approach to the
negotiation and accept a licence on FRAND terms if it wishes to take advantage
of the constraint on the patentee’s rights imposed by the FRAND undertaking. A
FRAND approach to negotiation does not mean that parties cannot negotiate in
good faith and a FRAND approach will allow for starting offers which leave room
for negotiation. The fact an opening offered rate is higher than the true
FRAND rate does not mean of itself that a patentee has failed to take a FRAND
approach any more than the converse could be said about an implementer. On the
other hand, making extreme offers and taking an intransigent approach which
prejudice fair, reasonable and non-discriminatory negotiation is not a FRAND
approach.
A single set of FRAND terms - conclusions
164.
In my judgment the economist’s view of FRAND terms as a single thing for
a given set of circumstances is also applicable to the question of whether
terms are FRAND within the meaning of the ETSI FRAND undertaking. I find that
for a given set of circumstances there will only be one set of FRAND terms and
only one FRAND rate.
165.
Therefore the solution to the problem of parties presenting rival FRAND
terms to the court is simple enough. The court has to decide what terms would
be FRAND in the given circumstances and can grant a declaration to that
effect. Only one set of terms will be compliant with the FRAND undertaking.
166.
A patentee who refuses to accept those terms would be in breach of its
FRAND undertaking. Even if a court cannot go as far as directly enforcing the
FRAND undertaking by compelling a patentee to make an offer in those terms (see
the section on French law), I think an English court would at least refuse to
grant a patentee an injunction if it refused to accept FRAND terms. That would
be a proper exercise of the court’s equitable jurisdiction to grant or refuse
an injunction.
167.
A defendant who had already been found to infringe a valid patent cannot
be compelled to accept an offer of a licence but a defendant with no licence,
who had refused to accept terms on offer which had been found to be FRAND,
would not be entitled to the protection from injunctions provided for by the
patentee’s FRAND undertaking. An injunction would follow and to grant it would
be a proper exercise of the court’s equitable jurisdiction. The only coercion
in that case would be to enter into a licence on FRAND terms. It would apply
to both sides with equal force.
168.
Before finally concluding on this issue I will return to the factor
which concerned me most. That is the diversity of terms in the real agreements
in the industry. Does a conclusion that only one set of terms is FRAND mean
that most or all of these agreements are not FRAND? I have answered this
already but given the importance of the point I will repeat the answer I have
arrived at in a different way. For concluded agreements between patentees
subject to an ETSI FRAND undertaking and implementers, the importance of the
FRAND undertaking will be historic. The process aspect of FRAND was important
in requiring both sides to approach the negotiations appropriately and the
requirement that a royalty rate had to be FRAND would be something to be prayed
in aid during the negotiations. However once the agreement has been reached
the contract must be the thing which governs the rights and obligations of the
two parties with respect to each other while it is in force. Competition law
must leave latitude to the parties to agree and cannot draw the line between
acceptable and unacceptable contract terms in the same place as the line
between whether a term is ETSI FRAND or not.
(v) Can the
court set a FRAND rate or other FRAND terms?
169.
Having now heard this trial I remain of the view that the court cannot
craft a set of FRAND terms out of thin air. That is what I described in Vringo
as a Copyright Tribunal type exercise although it may be noted that even in the
Copyright Tribunal there must be a licensing scheme in order for the Tribunal’s
jurisdiction to be engaged. However courts all over the world have now set
FRAND rates. I am sure the English court can do that as well. I decided at
the CMC in March 2015 that the court could declare that a given set of terms were
FRAND and also, within that framework, can decide that certain terms need to be
adjusted in order to make a set of terms FRAND. I am sure this applies to a
royalty rate. After all, arriving at a FRAND royalty rate is not different
conceptually from assessing what a reasonable royalty would be in a patent
damages enquiry albeit the particular factors applicable in setting a FRAND
royalty for a licence to be FRAND and their application may differ from
assessing damages. So the court’s jurisdiction is not restricted to the binary
question of assessing a given set of terms but extends to deciding between
rival proposals and coming to a conclusion different from either side’s case on
such a proposal.
(vi) How to assess what is FRAND
170.
There was no real dispute of principle about how to work out what is and
is not FRAND. The question is what would be fair, reasonable and
non-discriminatory. Asking what a willing licensor and a willing licensee in
the relevant circumstances acting without holding out or holding up would agree
upon is likely to help decide that question. The evidence of the parties
themselves will be relevant, including evidence of how negotiations work in
practice in the industry. To the extent they are available other licences may
be deployed as comparables. Just as comparables may be useful in a damages
enquiry when considering a reasonable royalty and may be useful in determining
the terms of a licence of right or in a Copyright Tribunal, so comparables may
be useful in deciding what is FRAND. As always judgments will have to be made
about how closely comparable any given licence is to the relevant circumstances
in issue. The relevance of comparables is that they are evidence of what real
parties in real negotiations have agreed upon. But like any real situation
many factors may have been in play which make the licence less relevant. The
negotiations may have involved a greater or lesser degree of hold up or hold
out and it may be impossible to know that from the evidence available.
171.
The decisions of other courts, assuming they are not binding
authorities, may be useful as persuasive precedents. A point arises in this
case about a licence which was the product of an arbitration. A licence
agreement settled in an arbitration is more like terms set by a court than it
is like a licence produced by negotiation and agreement. Huawei submitted that
such a licence would be evidence of what a party was actually paying and as
such was relevant. Aside from certain aspects of non-discrimination which I
will address separately, I do not accept that evidence of what a party is
paying as a result of a binding arbitration will carry much weight. If the
licence is the product of an arbitration then the paying party has no choice.
A further difficulty with the particular licence in question is that the
arbitral award has not been produced. So although we know what the licence
terms are, we do not know what the reasoning was which led to them. As a
persuasive authority an arbitrated licence without the arbitral award is not
much use. There were a few references in the evidence to the way the
arbitrators decided the case but without seeing the award itself I will not
place weight on that.
172.
In relation to comparables generally Huawei submit that the approach to
be followed is that set out by Lloyd LJ in Smith Kline & French
Laboratories Ltds (Cimetidine) Patents [1990] RPC 203 as follows:
“The object of
the comparability exercise, in this as in any other branch of the law, is to
find the closest possible parallel. If there is an exact parallel, there is no
point in looking any further. If there are slight differences, an allowance may
be made. But once you have found your comparables, whether one or more, which
enable you to arrive at the appropriate figure, it would surely be erroneous to
modify that figure by reference to other cases which are not truly comparable
at all, so as to bring the case into line with a predetermined range. This
was, with great respect, the mistake which the hearing officer made.”
173.
Huawei argue that Mr Lasinski’s approach (which was to select the two or
three “best” comparables and rely on those) accords with these principles. On
the other hand, Huawei criticise Mr Bezant’s approach of including many more
licences. I do not accept that criticism. In my judgment, if a group of
comparables are at least potentially as relevant as each other and are not the
same, it is not right to elevate a small subset above the others. That is also
not what Lloyd LJ in Cimetidine said one must do; instead,
he said that, assuming there is no exact parallel, once true comparables have
been determined one should be careful not to dilute them by reference to other
cases which are not truly comparable at all. Mr Bezant’s general approach does
not do this.
174.
If a group of good comparables corroborate one another then no doubt
that is a factor to take into account but equally if apparently good
comparables, when properly understood, contain different rates that is also
relevant too.
175.
Huawei also submit that the comparables selected should include some, or
ideally all, of three criteria: (a) the licensor is Unwired Planet or Ericsson,
(b) the licensee is Huawei, or a similarly situated company such as Samsung and
(c) the licence is recent. I agree with (a) and subject to what “recent” means
I agree with (c). However I am not convinced that (b), the identity of the
licensee, should be a strong factor in determining what comparables are useful
for determining the FRAND rate aside from the hard edged non-discrimination
point addressed below. FRAND is supposed to eliminate hold up as well as hold
out. Different licensees will have differing levels of bargaining power. That
is another way of saying their ability to resist hold up and their ability to
hold out will vary. It would be unfair (and discriminatory) to assess what is
and is not FRAND by reference to this and other characteristics of specific
licensees. In my view, it would not be FRAND, for example, for a small new
entrant to the market to have to pay a higher royalty rate than an established
large entity. Limiting comparable licences to those where Huawei or a similar
company like Samsung is the licensee is therefore unjustified. In my judgment
the FRAND rate ought to be generally non-discriminatory in that it is
determined primarily by reference to the value of the patents being licensed
and has the result that all licensees who need the same kind of licence will be
charged the same kind of rate.
176.
In argument the rates on which both sides’ submissions were based were
derived from global rates for the whole SEP portfolio albeit that Huawei’s case
is that the licence should be a UK licence. This worked because both sides
agreed that the correct way to arrive at a UK portfolio rate was by starting
from a global rate in effect as a benchmark and then adjusting upwards.
Conceptually the approach was common ground although the level of the correct
adjustment was in dispute. This approach, in which a rate is determined as a
benchmark and then adjustments made as appropriate, is a useful way of
determining what a FRAND rate or rates should be. Arriving at a benchmark
FRAND rate is a neutral way of making appropriate findings. In this case it
caters for the parties’ rival cases about what the territorial scope of the
licence should be.
(vii) A hard-edged
non-discrimination aspect of FRAND
177.
Some arguments were addressed to the non-discrimination (“ND”) aspect of
FRAND as opposed to the “FR” aspect of FRAND as if they were distinct. However
it is not that simple. Most of the time the concepts of non-discrimination,
reasonableness and fairness relate to one another. In that sense it is useful
to characterise a royalty rate as FRAND rather than try to distinguish between
something which is merely fair and reasonable as opposed to fair, reasonable
and non-discriminatory. The argument about non-discrimination treated it as a
concept which would apply to reduce a royalty rate even if that rate was
otherwise “FR”. For want of a better expression, I will distinguish between a
“hard-edged” and a “general” non-discrimination obligation. The general
non-discrimination obligation is the aspect of non-discrimination which I have
mentioned already. It is part of an overall assessment of the inter-related concepts
making up FRAND by which one can derive a royalty rate applicable as a
benchmark. This rate is non-discriminatory because it is a measure of the
intrinsic value of the portfolio being licensed but it does not depend on the
licensee. The hard-edged non-discrimination obligation, to the extent it
exists, is a distinct factor capable of applying to reduce a royalty rate (or
adjust any licence term in any way) which would otherwise have been regarded as
FRAND. This will take into account the nature of the particular licensee
seeking to rely on it.
(viii) Concepts used to derive a FRAND rate with
telecoms standards
178.
The FRAND royalty rate reflects an assessment of the value of the
licensor’s patent portfolio under licence. Two approaches to this have been
taken both in this case and in other cases. One approach (referred to as “top
down”) starts with a number representing what the appropriate total aggregate
royalty burden should be for a given standard (call it T). One can take a view
about what the total royalty burden for all the intellectual property relating
to the standardised telecommunications technology in a handset should be and
indeed various companies have made public statements about this. Starting from
this figure T one can then share out the royalty across all licensors in
proportion to the value of each licensor’s patent portfolio based on assessing
that value as a share (call it S) of the total relevant patent portfolio
essential to that standard. The FRAND rate is the product of the two (TxS).
179.
The other approach is to use comparable licences. These are licences
which have already been entered into. The most directly comparable licences
will be licences the patentee has already entered into for the portfolio in
question. There are two in this case, the Unwired Planet-Lenovo 2014 licence
and the Unwired Planet-Samsung 2016 licence. One might assume directly
comparable licences would represent the best evidence of the value of the
portfolio in issue. However the rates in these two licences are very different
from each other and each side contends that one of them is not a useful
comparable at all. I will return to those licences below.
180.
Given that at one time Ericsson, Samsung and Huawei were all parties to
these proceedings and they are all major telecommunications companies, a large
number of further patent licences were in disclosure. (The disclosure had been
managed to keep the numbers under control but it was still substantial.) The
comparison with third party licences is indirect and the relationship between
those licences and the value of the portfolio in issue will depend on the
evidence. In order to use them a view has to be formed about the relative
value of the portfolios licensed in them as against Unwired Planet’s portfolio.
Since the relevant Unwired Planet patents all came from Ericsson, the Ericsson
licences at one time included all the SEPs in issue. That alone makes Ericsson
licences relevant. So if the rate for Ericsson’s portfolio is E and the
relative value of Unwired Planet’s portfolio to Ericsson’s portfolio is R, the
Unwired Planet rate is ExR.
181.
The factors S and R are measures of the value of a licensor’s patent
portfolio relative to the industry as a whole and to another licensor. It is
clear that in negotiating licences in this field the parties seek to make an
assessment of this value. Tools for doing this were sometimes called portfolio
strength metrics. One might think that in order to do this it would be
necessary to examine the value of the contribution made to the standard by the
invention claimed in each patent. Obviously as a portfolio increases in size
the burden of that increases too but one of the reasons this trial was docketed
to the same judge who heard the technical trials was because I would be
familiar with some of the patents chosen by Unwired Planet to litigate, which
one might expect would be the good ones. However the exercises conducted by
both Unwired Planet and Huawei for this trial, subject to a point on Ericsson,
have been based on categorising and counting patents. The techniques treat all
patents in a given category as of equal value.
182.
There was ample evidence before me that apart from Ericsson (see below),
parties negotiating SEP licences in fact use methods which are based on patent
counting. That is evidence which supports a finding that a FRAND approach to
assessing a royalty rate is to engage in some kind of patent counting. Indeed
when one thinks about it some sort of patent counting is the only practical
approach at least for a portfolio of any size. Trying to evaluate the
importance of individual inventions becomes disproportionate very quickly.
183.
It may be that other technology standards are different but I am not
surprised that patent counting is the approach taken for GSM, UMTS and LTE
telecommunications standards. Each standard defines a system with a large
number of different parts all of which have to interact with each other. The
interactions and interdependencies are complicated. To make a coherent system
which works at all, let alone one which delivers the performance demanded of
these systems, is difficult and demands insight and creativity on the part of
the engineers involved. It is unsurprising that many inventions (and therefore
many patents and SEPs) will be involved. Short of the disproportionate task of
evaluating every single patent thoroughly in order to compare each one with all
the others, one can only ever hope to analyse SEPs in broad categories and it
is not meaningful to attempt to weigh the value of individual patents within
these categories against one another.
184.
I suppose in some cases it may be possible to identify a patent as an
exceptional sort of keystone invention underpinning the entire technical
approach on which a standard is based but that is not this case. There was
unchallenged evidence that Unwired Planet’s patents made an “average”
contribution to the standards. I am satisfied that none of the Unwired Planet
patents are in the exceptional keystone category.
185.
The evidence is that Ericsson sought to deploy a different technique in
licensing negotiations based on evaluating a party’s technical contributions to
the standard setting process as a way of valuing their portfolio and Mr
Lasinski used this method for “unpacking” Ericsson’s licences (see below).
Using it as a technique to address Ericsson’s licences is logical since it is
an Ericsson technique, and Mr Bezant and Mr Lasinski were in agreement that it
made more sense to use a metric of strength for unpacking which was available
to the parties negotiating a licence at the time rather than one which was not
available. However the Ericsson technique has problems if applied more
generally and neither side suggested that it should be. For one thing it is
already at one remove from the legal rights, which derive from patents not
technical contributions. Also the technique cannot handle a portfolio of
patents acquired after the standards were set – e.g. the Unwired Planet
portfolio. Ericsson have been closely involved in the standard setting process
and that may be why they like this method, I do not know. In any case the fact
that Ericsson advanced arguments on this basis during negotiations does not
mean it is accepted as a method by the counterparty.
186.
The patent counting approach works in the following way. Starting from
a portfolio of declared SEPs the first task is to derive a number representing
the Relevant SEPs. “Relevant SEPs” is my term, coined after the trial had
finished and intended to avoid language used in the case which can be confusing
such as “truly essential patents” or “deemed”. Both sides’ approaches require
making an assessment of the Relevant SEPs somehow. The parties do not agree
how it should be done but one way or another a number is produced. Armed with
that information it is possible to scale one company’s rates relative to
another to derive the factor R or to find the share of the total and derive S.
“Unpacking” licences
187.
A significant dimension to the task to evaluating comparable licences is
the fact that many patent licences in this industry have terms which make the
comparison difficult. The two major problems are that they may be based on a
lump sum rather than a running royalty and they may be cross-licences with a
balancing figure which may be a rate or a lump sum. They may well also have
other complications such as multiple rates which are different for a variety of
reasons such as different standards or different regions, and royalty floors
etc. The overall agreement may also include aspects which are not patent
licences at all, such as patent sales or technology transfer.
188.
It was common ground as between Mr Bezant and Mr Lasinski that to
address the lump sum and the cross-licence problem a process of “unpacking” has
to be carried out. The unpacking can derive a notional royalty rate from a
lump sum by treating the lump sum as the net present value of an income stream
from running royalties analysed using a discounted cash flow based on some
appropriate estimate of sales figures. This introduces uncertainties since it
needs to have some estimate of sales figures which may be historic and/or
future estimates and which in any case may not represent what the negotiators
thought when they negotiated the licence.
189.
The unpacking of a cross-licence can resolve two one-way royalty rates
from a single balancing figure based on the notion that the single figure
represents the effect of balancing the value in royalty terms of each party’s
patent portfolio. If the balancing figure is a lump sum then unpacking will
involve net present value assessments for each party with the attendant
uncertainties. In any event there also needs to be some means for assessing
the relative value of each party’s portfolio unless one has a figure for one or
other party directly. To achieve this takes one back to the Ericsson
contributions technique and/or counting patents. For a cross-licence between A
and B, if A has 100 Relevant SEPs and B has 200 then the ratio is 1:2 and that
allows one mathematically to derive figures for the underlying one way rates.
Inevitably this introduces yet more uncertainty.
190.
Cross-licences will generally be entered into by companies who are both
implementers and licensors at the same time. There is a risk that the rates
agreed in a cross-licence understate the inherent value of the rights being
licensed because the revenue the parties earn from licensing itself will be
much less than it would be if the licence was not a cross-licence but it is
impossible to evaluate how significant a difference this might make.
191.
For a given comparable licence to which at least one party to the
litigation was a party, an issue arose at the case management stage as to
whether additional disclosure should be given of the documents and
circumstances surrounding the negotiation of that licence in order to enhance
its utility as a comparable. I refused that disclosure across the board
because I did not think conducting a post mortem examination of the
negotiations would be proportionate. Although in theory it might have obviated
the need for unpacking, having now heard the trial I am sure that this
disclosure would not have helped with unpacking and would just have generated
further argument without advancing the issues. Although unpacking involves
significant uncertainties, in fact the arguments about unpacking itself were
quite minor. As Huawei pointed out in closing about the 2014 Ericsson-Samsung
licence:
“the details of the unpacking process make little significant
difference to the implied Ericsson rates: the rates ascertained by Mr Bezant,
Mr Lasinski or Dr Leonard were all in a relatively close range ([…]),
whichever unpacking method was used {U1/6/1}. As Mr Lasinski explained, the
portfolio strength metrics employed by the three valuation experts have a
minimal effect on the effective rates they derive from the 2014
Ericsson-Samsung Licence because Samsung’s business is so large as against
Ericsson’s that this factor swamps almost everything else.” [closing paragraph
77]
192.
A number of points emerge from this. The parties’ experts (Dr Leonard
was to have been Samsung’s expert) had analysed this licence in order to derive
an implied 4G/LTE royalty rate charged by Ericsson as licensor and accepted by
Samsung as licensee for Ericsson’s portfolio of SEPs. The parties have come to
figures for the effective implied royalty rate for Ericsson’s portfolio using
very different techniques but the answers all came to a number which Huawei
characterise as a relatively close range. The only aspect of the submission I
do not accept is the qualification “relatively”. In my judgment bearing in
mind all the uncertainties and assumptions which go into these unpacking exercises,
the spread of these figures is remarkably close. The spread is about ±20%
around the midpoint ([…]).
193.
In the particular example of the 2014 Ericsson-Samsung licence another
factor relevant to the unpacking exercise was a key assumption which had to be
made about a different aspect of the agreement. This is about sales of a so-
called Thin Modem. Notably the assumptions tested for Thin Modem vary
enormously […] but the implied Ericsson rates still fall in the range.
194.
Absent the figures from Dr Leonard (which make no difference) this range
at {U1/6/1} was put to Mr Bezant in cross-examination who explained (T11
p81-82) that:
“The differences are not that great on the unpacking, in the
context of the exercise. […] And, indeed, given the uncertainty of unpacking
cross licences. It's not as if one number is strong and another it is weak.
They are -- they are all somewhat fragile when you're unpacking a cross
licence.”
and
“But I'm just signalling that when I say not sensitive that's
partly the numbers don't move very much, but it's also partly a recognition
that the numbers themselves are inherently uncertain.”
195.
Part of the point Mr Bezant was making was that the rival patent
counting methods do not have a major impact on unpacking. That is because in
the unpacking process the experts use the methodologies consistently. One also
needs to bear in mind that the numbers themselves are inherently uncertain. I
accept Mr Bezant’s evidence about that (which was not in dispute). There is
an exception on unpacking methodology which relates to the two Ericsson/Huawei
licences but for reasons addressed below, in the end that does not matter.
196.
There are further complications in the analyses which I have not
mentioned so far such as handling the effect of discounts, royalty floors,
royalty cap, release periods and pass-through licences. Mr Bezant and Mr
Lasinski did not agree how best to deal with these but I am not satisfied it is
necessary to delve into the minutiae to the degree necessary to resolve those
arguments. The relevant point is that they are all sources of uncertainty
rather than automatic reasons for completely ignoring a licence. That was Mr
Bezant’s approach and if it is necessary to resolve a debate on that score at a
methodological level then I prefer Mr Bezant’s approach to Mr Lasinski’s.
FRAND on the
facts of this case
197.
In order to determine what the values E, R and S are in this case two
tasks need to be performed. To determine S (Unwired Planet’s share of the
total) and R (the relative value of Unwired Planet’s portfolio to Ericsson’s)
it is necessary to count Relevant SEPs. To determine E (the rate for
Ericsson’s portfolio) it is necessary to consider the comparable licences. At
the same time the Unwired Planet comparables and other evidence on rates can be
addressed.
(i) Relevant
SEPs – shares and ratios
198.
An area of dispute which makes a major difference to the final royalty
rate is how to count Relevant SEPs. As I have explained, R and S are ratios
which come from dividing Unwired Planet’s number of Relevant SEPs by a number
for another licensor such as Ericsson or the industry as a whole.
199.
For Huawei’s case both the numerators and the denominators in these
ratios are derived using the same patent counting technique called the Huawei
Patent Analysis (HPA). Unwired Planet’s patent counting method is called the
Modified Numeric Proportionality Approach (MNPA). The MNPA was revised during
the proceedings and so there are references to the Original and Revised MNPA.
Another aspect of Unwired Planet’s case employs what was referred to in
argument as the 80:20 rule. It is an adjustment which Unwired Planet contend
gives some value to patents in a category which would otherwise be disregarded.
200.
It is common ground that some kind of appropriate methodology is needed
beyond simply adding up patents on the register or the ETSI database. One
needs to cater for the different jurisdictions, divisionals and other things.
Some of this can be dealt with by focussing on families rather than patents
(but that is not perfect either) however a very significant reason why one cannot
just count up declared patent families is recognition of the problem of over
declaration. There was no dispute this exists. The debate is as to its
extent.
201.
The over declaration problem is the following. Very many more patents
are declared to be essential than in fact are essential. This can be for many
reasons. For ETSI members Art 4.1 of the IPR Policy requires members to
declare essential patents in a timely fashion and creates an incentive to err
on the safe side and so, if in doubt, declare. Also determining essentiality
for certain is not easy. The technology can be difficult and the patents and
the standards can be hard to interpret. Patent claims are also amended over
time and in a single family the different national patents will vary in scope
around the world; standards themselves can also vary over time. Keeping track
of all this would be time consuming and costly, and if reasonable royalty rates
can be agreed without determining essentiality for certain, it is a
disproportionate task. Notably also no-one tries to take account of validity.
Various studies have been done on over-declaration and rates of
over-declaration quoted in the literature. Each side criticises the other’s
counting techniques and specifics over over-declaration are addressed in the
sections below dealing with the alleged flaws in the techniques. It is just
too difficult.
202.
Nevertheless it must also be recognised that the fact that rates are
negotiated by counting patents creates a perverse incentive to declare as many
patents as possible, making over-declaration worse.
203.
A further point is that Unwired Planet’s approach only uses patent
counting for the denominators. The numerators, in other words the numbers
representing Unwired Planet’s own Relevant SEPs for a given type of technology,
are the result of a detailed assessment of the individual patent families.
Unwired Planet say that is the appropriate thing to do and it is inappropriate
to take the approach advanced by Huawei by using the same counting technique for
both numerator and denominator. Huawei say the opposite and Unwired Planet’s
approach is inconsistent whereas their approach is the correct thing to do. I
will deal with that at the same time as other criticisms, below.
204.
The parties are very close on the numerators and far apart on the
denominators. In other words, at least superficially, they are close on the
number of Relevant SEPs in Unwired Planet’s portfolio. In any event they are
far apart on the number of Relevant SEPs in other companies’ patent portfolios
or as a whole.
The numerator
205.
For example each side contends Unwired Planet have 6 relevant LTE SEP
families for handsets. They arrive at this number in different ways but they
both arrive at 6. The complete set of relevant numbers for Unwired Planet’s
patents are shown in these tables:
Huawei’s
case:
|
Handsets
|
RAN infrastructure
|
Total
|
2G/GSM
|
1
|
1
|
2
|
3G/UMTS
|
2
|
4
|
4
|
4G/LTE
|
6
|
5
|
7
|
Unwired Planet’s case:
|
Handsets
|
RAN infrastructure
|
2G/GSM
|
2
|
1
|
3G/UMTS
|
1
|
2
|
4G/LTE
|
6
|
7
|
206.
RAN stands for Radio Access Network. It is a major part of the
infrastructure of these systems. There is another kind of infrastructure which
relates to the core network but it is common ground that this is a totally
different market. Note that in the Huawei table the total column is not a
simple sum of the numbers for handsets plus RAN infrastructure because one
patent can cover both.
207.
Two detailed assessments have been made of Unwired Planet’s patents.
First, as part of their licensing efforts Mr Saru explained that they (Unwired
Planet) carried out their own detailed assessment of the patents in their LTE
portfolio (Mr Saru I para 51). There were 19 LTE families to start with and
Unwired Planet decided they held 9 of what they called the True LTE families.
Second, in these proceedings Dr Cooper carried out a detailed assessment of
some Unwired Planet patents. For LTE the patents assessed were 7 of the 9
(because the other 2 had been litigated in trials A and B and found to be
essential). The detailed assessment Dr Cooper carried out was the same as he
carried out on certain Samsung and Huawei patents which come up below in the
context of the MNPA. I accept Dr Cooper’s assessment. As for the two
litigated patents, Huawei submitted the Trial B patent should have been classed
as optional rather than mandatory because it relates to ANR (Automatic
Neighbour Relations). The ANR point is not simple. I accept ANR is optional
at the network level but it was not established that it is optional for handsets,
because handsets ought to be able to function with all kinds of network.
Accordingly, ignoring validity, I find that for the purposes of assessing a
FRAND licence Unwired Planet have 6 LTE handset patent families and 7 LTE
infrastructure patent families which are essential to mandatory aspects of the
LTE standards used in the MNPA.
208.
For 2G/ GSM and 3G/UMTS the position is more complicated. I find that
for the purposes of assessing a FRAND rate for 3G UMTS in these proceedings,
Unwired Planet have 1 handset and 2 infrastructure patent families which are
essential. The corresponding numbers for 2G/GSM are 2 handset patent families
and 1 infrastructure patent family. There is an issue about the way Unwired
Planet deal with 2G/GSM and 3G/UMTS in relation to the Original MNPA because
Unwired Planet included as essential patents which did not meet the MNPA cut
offs. That may make a difference with regard to the FRAND status of the 2014
offers and I will address that in context if necessary.
The denominators and the resulting fractions
209.
The following tables are the same as the previous ones but incorporating
the parties’ rival denominators for the industry as a whole and the resulting
fractions which are produced. These tables show the values for S, Unwired Planet’s
share of Relevant SEPs:
Huawei’s
case:
|
Handsets
|
RAN infrastructure
|
Total
|
2G/GSM
|
1/350 = 0.29%
|
1/305 = 0.33%
|
2/389 = 0.51%
|
3G/UMTS
|
2/1089 = 0.18%
|
44/886 = 0.45%
|
4/1215 = 0.33%
|
4G/LTE
|
6/1812 = 0.33%
|
5/1554 = 0.32%
|
7/2054 = 0.34%
|
Unwired Planet’s case:
|
Handsets
(revised MNPA)
|
RAN infrastructure
(original MNPA)
|
2G/GSM
|
2/102 = 1.96%
|
1/85 = 1.18%
|
3G/UMTS
|
1/324 = 0.31%
|
2/274 = 0.73%
|
4G/LTE
|
6/355 = 1.69%
|
7/306 = 2.29%
|
210.
Now the major differences between the parties can be seen. Unwired
Planet contend their patents represent 1.69% of the Relevant SEPs for handsets
in LTE, in other words S = 1.69% whereas Huawei say the portfolio only contains
0.33% of those SEPs and so S= 0.33%. In other words, on Unwired Planet’s case,
the value of their patents for handsets in LTE is five times the value
contended for by Huawei. A dimension which I have not mentioned yet is how to
deal with multimode devices, that comes in the next section.
211.
Similar differences between the parties’ contentions arise when looking
at the ratio R between Unwired Planet’s SEPs and Ericsson. They arise for the
same reasons because each side uses the same methods to count for the industry
as a whole and for individual companies.
212.
What accounts for the difference here is the degree to which the rival
techniques reduce the number of relevant patents. The starting points are
similar but the end points are different. Huawei suggest that the total number
of patent families declared essential to 4G/LTE, making certain assumptions, is
6027. Unwired Planet used a corresponding figure of 5917, produced in a
different way. However the outcome of the HPA, for the number of Relevant SEP
families for 4G/LTE handsets is 1812 while Unwired Planet’s equivalent is 355.
213.
It will be recalled that by numbers Unwired Planet’s patents represented
about 5% of Ericsson’s portfolio when they were assigned. Huawei contend this
5% size ratio acts as an anchor point for testing the credibility of each
side’s case on relative E:UP portfolio strength R. Conceptually Huawei is
correct although one needs to take care with inherent uncertainties in many of
these numbers and with the fact that a small sample size from a large population
may not be representative.
214.
Huawei derived values for R at different points in time – pre-MSA;
post-MSA pre-Lenovo; and post-MSA post Lenovo. The pre-MSA data is in the
following table.
Huawei’s
case:
|
2G/GSM
|
3G/UMTS
|
4G/LTE
|
UWP
[A]
|
2
|
4
|
7
|
Ericsson
[B]
|
34
|
69
|
112
|
Strength
Ratio R (=[A]/[B])
|
5.88%
|
5.80%
|
6.25%
|
215.
The [A] figures for Unwired Planet are the numbers in the totals column
for Huawei’s case on the numerators, as before. The [B] figures for Ericsson
are the numbers of relevant SEP families in Ericsson’s portfolio before the
MSA. All the figures in the table are produced by the HPA. Huawei point out
that they produce strength ratios R which are somewhat more favourable to
Unwired Planet than the about 5% size ratio derived from the details of the
transfer process itself.
216.
The figures for the two later points in time (based on corrections made
in chief and in a Powell Gilbert letter) are:
i)
post-MSA, pre-Lenovo: GSM 6.25%, UMTS 6.35%, LTE 6.86%
ii)
post-MSA, post-Lenovo: GSM 6.25%, UMTS 6.35%, LTE 6.93%
217.
Huawei also produce a similar set of values for R using numbers of
declared patents (making certain assumptions). Huawei submit these numbers are
not irrelevant but are not the ones to place much weight on. I include them in
the judgment to illustrate the differences which can arise when declared
numbers are used. The table for pre-MSA is:
Huawei’s
case:
Declared
basis
|
2G/GSM
|
3G/UMTS
|
4G/LTE
|
UWP
[A]
|
2
|
17
|
17
|
Ericsson
[B]
|
134
|
454
|
398
|
Strength
Ratio R (=[A]/[B])
|
1.49%
|
3.74%
|
4.27%
|
218.
Unwired Planet’s rival strength ratios R are presented in a slightly
different way whereby the numbers [A] and [B] are presented as the % ratios of
either company’s Relevant SEPs to the total number of Relevant SEPs, but the
result comes to the same thing as Huawei’s strength ratio. This time the
numbers are (I think) for handsets and are pre-MSA:
Unwired
Planet’s case:
|
2G/GSM
|
3G/UMTS
|
4G/LTE
|
UWP
% of standard [A]
|
1.96%
|
0.31%
|
1.69%
|
Ericsson
% of standard [B]
|
19.62%
|
18.71%
|
9.58%
|
Strength
Ratio R (=[A]/[B])
|
9.99%
|
1.65%
|
17.65%
|
219.
The figure for 4G is about three times higher than the numerical size
ratio of 5% while the figure for 3G is three times lower. This is the sort of
variability which Unwired Planet submit indicates the caution which must be
exercised when comparison is made to the 5% figure. Unwired Planet also
contend that they do not rely on these individual strength ratios but submit
that the right strength ratio to use, if one takes this approach, is a blended
ratio taking into account multimode, which is dealt with in the next section.
Huawei contend that the idea that Unwired Planet acquired 17% of Ericsson’s
relevant SEPs for LTE is fanciful and this is evidence which shows the flaws in
Unwired Planet’s approach to patent counting.
Multimode weighting
220.
It is common ground that one needs some weighting method in order to
deal with multimode devices and both sides used the same basic approach, which
for multimode LTE devices is to weight the numbers LTE/UMTS/GSM in proportions
70:20:10. For a UMTS multimode (i.e. UMTS/GSM) device both sides used 67:33
UMTS/GSM.
221.
Multimode is a concept which really applies to handsets rather than
infrastructure although Huawei did provide figures for weighting the
infrastructure numbers. I am satisfied that the FRAND approach would be to
weight handset rates but not infrastructure rates because while multimode
handsets are very common (subject to a point on China) multimode infrastructure
is not.
222.
Applying the multimode weighting factors produces the following results
for S, that is Unwired Planet’s share of Relevant SEPs overall:
Huawei’s case:
|
Handsets
|
RAN infrastructure
|
Total
|
UMTS/GSM
3G/2G
|
0.22%
|
0.41%
|
0.36%
|
LTE/UMTS/GSM
4G/3G/2G
|
0.30%
|
0.35%
|
0.36%
|
Unwired Planet’s case:
|
Handsets
|
Handsets
(80:20)
|
RAN infrastructure
(no 80:20)
|
UMTS/GSM
3G/2G
|
0.86%
|
0.83%
|
[0.88%]
|
LTE/UMTS/GSM
4G/3G/2G
|
1.44%
|
1.25%
|
[1.88%]
|
223.
The multimode tables above also include references to Unwired Planet’s
80:20 approach. That is addressed in the next paragraph. In the course of
writing this judgment a small point arose on the RAN infrastructure figures
shown in italics in the table above on Unwired Planet’s case. Huawei’s
Databook produced in closing showed the 0.88% figure in the LTE/UMTS/GSM row
and “not given” in the row for UMTS/GSM. Although infrastructure weighting is
not important, even bearing that in mind this did not make sense and after
considering the written materials it seemed that there had been a muddle about
numbers and about LTE/UMTS/GSM and UMTS/GSM. I worked out that 1.88% would be
the number for LTE/UMTS/GSM while 0.88% was what the number for UMTS/GSM would
be. I wrote to the parties. 0.88% is the right number for UMTS/GSM. 1.88% is
what the LTE/UMTS/GSM number would be although Huawei rightly pointed out that
Unwired Planet had not derived it before. I will include 1.88% because it is
simple maths, there was a muddle in Unwired Planet’s FRAND Statement of Case
and because it cannot prejudice Huawei.
224.
The 80:20 approach derives a ratio which consists of 80% of Unwired
Planet’s share of Relevant SEPs and 20% of Unwired Planet’s share of the
residue of patents in the starting pool which had not been identified as
relevant. Unwired Planet say this is an application of the “Pareto principle”
from general economics. The table below shows how the values for S for
handsets are derived on Unwired Planet’s case in this way [C2/13/9]. It
repeats some of the figures set out already:
Unwired Planet’s 80:20 approach
|
|
2G/GSM
|
3G/UMTS
|
4G/LTE
|
Multimode
|
Relevant
SEPs – whole
|
102
|
324
|
355
|
|
Relevant
SEPs – UP
|
2
|
1
|
6
|
|
UP
share S
|
1.96%
|
0.31%
|
1.69%
|
|
4G
Multimode S
|
|
|
|
1.44%
|
3G
Multimode S
|
|
|
|
0.86%
|
|
|
|
|
|
Residue
SEPs – whole
|
260
|
833
|
2983
|
|
Residue
SEPs – UP
|
1
|
7
|
12
|
|
UP
share S
|
0.38%
|
0.84%
|
0.40%
|
|
4G
Multimode S
|
|
|
|
0.49%
|
3G
Multimode S
|
|
|
|
0.69%
|
|
|
|
|
|
80/20
approach
|
|
|
|
|
Single
mode UP S
|
1.65%
|
0.41%
|
1.43%
|
|
4G
Multimode S
|
|
|
|
1.25%
|
3G
Mulitmode S
|
|
|
|
0.83%
|
(for example
1.25% = 80% x 1.44% + 20% x 0.49%)
225.
Applying the multimode weighting produces the following results for R,
that is Unwired Planet’s strength ratio to Ericsson (pre-MSA) on the same bases
as before:
Huawei’s case (C13/3/2, in part
in databook p8)
|
Pre-MSA
|
Post-MSA
Pre-Lenovo
|
Post-MSA
Post-Lenovo
|
UMTS/GSM
3G/2G
|
5.83%
|
6.32%
|
6.32%
|
LTE/UMTS/GSM
4G/3G/2G
|
6.12%
|
6.70%
|
6.75%
|
Unwired Planet’s case:
|
Multimode
(no 80:20)
|
Multimode
(80:20)
|
UMTS/GSM
3G/2G
|
Not given
|
Not given
|
LTE/UMTS/GSM
4G/3G/2G
|
11.61%
|
10.50%
|
226.
Unwired Planet say that the 10.50% figure for the strength ratio R
between their portfolio and Ericsson’s is the right one to use if one is going
to draw a comparison with the 5% numerical size ratio and the two are not so
far apart as to be out of line. Huawei contend the opposite, 10% is too far
from 5% to be realistic.
The numerical
evidence generally and rounding
227.
Having started to set out each side’s case I will mention a problem
inherent in that and in grappling with the cases. Both via the valuation
experts and in their submissions both sides presented the court with a blizzard
of figures. The summaries in this judgment represent a small fraction of the
numbers presented. There was a somewhat larger blizzard from Unwired Planet
than from Huawei but the difference was not significant enough to make a
difference. A frequent problem is in keeping track of the bases on which
numbers are presented so as to try and make sure one is comparing like with
like. In practice, for example, it is impossible to ensure that on every
occasion two rival figures are both based on the state of the Ericsson
portfolio (pre- or post-MSA etc.), and multimode weighted or not, as well as
many other more subtle factors.
228.
From now on I intend to put most weight on figures derived from the
post-MSA post-Lenovo portfolio. The effect of the differences between the
three versions of the Ericsson portfolio is smaller than the effect of other
uncertainties inherent in the various exercises. While I have aimed to be
consistent, striving for perfect consistency with the numbers in this case is
not productive.
229.
In the discussion below the terms HWLTER and UPLTER refer to the
parties’ rival values for the relative strength ratio R between Unwired Planet
and Ericsson for 4G/LTE multimode. HWLTER is 6.75% and UPLTER is 10.50%.
230.
I will mention rounding briefly. Obviously 0.36 and 0.37 both differ
from 0.40 and can all be rounded appropriately to 0.4. It is not
mathematically correct to say that 0.36 can be rounded to 0.40. Nor is it
mathematically accurate to say that 0.36 is less than 0.4. However the
assessment is not a purely mathematical one and the inherent uncertainties in
the evidence are much greater than the difference between 0.36 and 0.40. So I
will try (a) to state numbers in the evidence in the form they appear, but also
(b) to use two significant figures in giving my reasons but (c) not to get too
hung up on it all. This will involve heresies like “0.36% can be rounded to
0.40%”.
231.
Related to this is the point that many of the numbers written in the
comparable licences are obviously round numbers (such as a royalty in dollars
of 1$ for 2G, 2$ for 3G and 4$ for 4G). It is not wrong to unpack these into
rates expressed as percentages like 0.36%, 0.72% and 1.44% but one needs to
take care not to assume from numbers like 0.72% that the parties negotiating
that licence were really choosing 0.72% as opposed to (say) 0.70% or even
0.50%. They were probably thinking in terms of whole numbers of dollars and
that was all.
(ii) The parties’ rival submissions on royalty rates
232.
To arrive at an equivalent benchmark rate on Huawei’s case one needs to
know that the UK uplift applied by Huawei is 48.51% based on Mr Lasinski’s evidence
(derived from the […] agreement). Stripping out this uplift from
Huawei’s October 2016 proposals and rounding to two significant figures comes
to:
i)
for 4G/LTE: infrastructure 0.041%; mobile devices 0.040%;
ii)
for 3G/UMTS: infrastructure 0.031%; mobile devices 0.031%;
iii)
for 2G/GSM single mode: infrastructure 0.030%; mobile devices 0.030%.
233.
Mobile devices and handsets are the same thing. Infrastructure refers
to RAN infrastructure. In argument the parties focussed on the rates for
4G/LTE multimode handsets and I will do the same. To recap, Unwired Planet’s
case is that the FRAND rate for its global SEP portfolio for 4G/LTE is 0.13%
whereas for 2G/GSM and 3G/UMTS the rate is 0.065%.
234.
Of course a rate of 0.13% is just over triple 0.040% but all the same these
numbers demonstrate that the parties are not now so far apart as some of the
rhetoric at trial might have led one to believe. At the start the rival
benchmark rates differed by an order of magnitude (0.2% for 4G/LTE from Unwired
Planet and 0.022% for Huawei (based on the 0.034% UK offer and stripping out a
48.51% uplift). Nevertheless the difference is still substantial when one
bears in mind that as a royalty it is to be applied to very large revenues.
Huawei’s case on
rates
235.
Huawei’s opening case was encapsulated by the following chart (best seen
in colour) which was figure 4 of Mr Lasinski’s 3rd report and was
presented in Huawei’s written opening submissions:
[chart redacted]
236.
The dashed grey and red solid lines are Unwired Planet’s proposals (the
October 2016 rates are the same as in July). The directly comparable Unwired
Planet-Samsung 2016 rate is shown as a green block, three comparable Ericsson
licences are shown as blue blocks and the top-down aggregate royalty burden
rate is yellow. It is marked “Patent Analysis” or “Huawei Patent Analysis”.
237.
The three Ericsson licences Huawei contend are most probative are the
2014 Ericsson-Samsung licence, the 2016 Ericsson-Huawei licence, and the 2009
Ericsson-Huawei licence. The last one is treated as a 2G/3G licence.
238.
The rates for 4G/LTE in the chart are derived in the following way. From
the 2014 Ericsson-Samsung one starts with Mr Lasinski’s preferred rate of [X]
as representative of Ericsson’s royalty rate for 4G, in other words value E.
Then a relative strength ratio R of 6.52% is applied to produce an effective
Unwired Planet rate of [Y] (i.e. [Y] = [X] x 6.52%) [C13/2/3
and databook p13]. Rounded up […]. Note that the 6.52% was taken
as R based on the portfolio post-MSA, before Lenovo and using multimode
weightings but that figure had been corrected in chief to 6.70%, see a letter
from Powell Gilbert dated 18th November 2016 which also explained
the change made no difference, as indeed it does not. Mathematically the
number ends up as […] as the effective rate for Unwired Planet, which is
still rounded to […]. Using the HWLTER of 6.75% makes no difference
either. Of course using the UPLTER of 10.50% produces a rate of […] rounded.
239.
Unwired Planet do not deny that the 2014 Ericsson-Samsung licence is one
relevant comparable but contend it should be seen as one of many. In addition,
Unwired Planet point out that the Ericsson rate E used by Mr Lasinski is based
on […]. Using the HWLTEM or UPLTER gives slightly different numbers but
nothing turns on the difference. They are: […] respectively
240.
The 2016 Unwired Planet-Samsung licence involves a […] and, like
the […], it has other complications too. One complication it does not have
is scaling by strength ratio since it is an Unwired Planet licence not an
Ericsson licence. Mr Lasinski’s evidence is that making many allowances in
Unwired Planet’s favour to increase the effective rate […]. This, say
Huawei, indicates that […] for Unwired Planet is generous.
241.
Unwired Planet do not agree with this. First they say that the Unwired
Planet-Samsung licence is not a useful comparable at all because it must be
seen in a wider context of a developing relationship between PanOptis and
Samsung. Second, they say that in truth the rates in this licence are
pitifully small, much smaller than those derived by Mr Lasinski, which is said
to be a reflection of the first point.
242.
The […] licence has an Ericsson royalty rate which […]. […]
for 4G multimode handsets. Therefore using a HWLTER of 6.75% (as for […])
produces an effective Unwired Planet rate of […].
243.
The key terms of the 2016 Ericsson-Huawei licence, at least the royalty
rates, were decided in an arbitration rather than being negotiated between the
parties. Unwired Planet say this completely undermines the utility of this
licence as a comparable. Huawei do not agree.
244.
Huawei’s top down case on aggregate royalty burden derives a 4G
benchmark handset rate of 0.028%. This was based on starting from a total
burden T of 8% (based on a figure stated publicly by Ericsson as the maximum
aggregate royalty range) and taking the appropriate share of the whole industry
S as 0.36% for multimode. (I wondered if 0.30% should have been used for
handsets but nothing turns on the difference.)
245.
So for 4G/LTE Huawei contend the two Ericsson comparable licences have […]
and based on Huawei’s case for the strength ratio (R = 6.70%) that gives a rate
for Unwired Planet of […]. Huawei contend that the 2016 Unwired
Planet-Samsung rate is lower at […] and so is the top down case at
0.028% but all this goes to show is that […] is generous to Unwired
Planet.
246.
There is an issue on “hard-edged” non-discrimination arising from the
2016 Unwired Planet-Samsung licence. If it is accepted then Huawei contend the
rates applied to them should be same ([…] for 4G) as the rates in that
licence. I will treat this as a distinct issue.
Unwired Planet’s
case on rates
247.
Unwired Planet’s opening case cannot be encapsulated with a single chart
in quite the same way as Huawei’s largely because Mr Bezant produced so many
charts. The charts are best seen in colour. This is one from Bezant 6,
Appendix 2 (U/10/p1):
2G/3G/4G multi-mode royalty rates based on the comparables that Mr
Bezant considers to be most relevant, based on UP’s Updated MNP and adjusted
for the 80/20 Rule
[Chart redacted]
248.
The blue “offer line” is 0.13%. The various bars are rates derived
from different sources. Although the key contemplates one source was one way
lump sum rates, in fact there are none in this chart. The ARR comes from the
MSA and […] refers to a rate from the Lenovo licence with an
adjustment. All the other bars come from Ericsson licences. For each Ericsson
licence the bar is an example of ExR in which the value E is different. There
are more bars than licences because Mr Bezant has derived multiple rates from
the same licence in various cases.
249.
Unwired Planet argue that no individual comparable, particularly the
ones singled out by Huawei, can bear the weight Huawei place on it. Unwired
Planet also argue that this chart indicates the existence of a wide spread of
rates in practice.
250.
The key thing about some of the Ericsson licences that Unwired Planet
rely on in addition to the licences relied on by Huawei is that […].
Three to mention first are the 2013 Ericsson-Yulong licence, the 2011
Ericsson-ZTE licence and the 2011 Ericsson-RIM licence. Further licences
relied on by Unwired Planet and in the chart are Ericsson licences with:
Samsung 2001, Sony, […] and Apple.
251.
[…] This converts to an Unwired Planet rate of […] using
the UPLTER of 10.50%. It is represented second from the right on the chart […].
Unwired Planet make the point that […].
252.
Huawei say the 2013 Ericsson-Yulong licence is not a good comparable.
Yulong as an organisation are not in the same position in the market as Huawei,
Yulong’s sales are 99% in China […] and Yulong has brought an anti-trust
lawsuit against Ericsson on this licence in China. Huawei say the reliance on
2G and 3G rates to support 4G is misplaced.
253.
The 2011 Ericsson-ZTE licence is a 2G/3G licence. Nevertheless Unwired
Planet rely on it for 4G. It includes […]. Using the UPLTER of 10.50%
produces an Unwired Planet rate of […]. Using the HWLTER of 6.75% would
give […].
254.
Huawei accept ZTE is more similar to Huawei than Yulong but contend that
this is not a good comparable for a number of other reasons. It is a 2G/3G
licence so not helpful for LTE (4G). Its date means it was entered into before
important developments in FRAND case law and other factors led to a reduction
in rates. It resulted from hold up by Ericsson because of lawsuits in which
injunctions were sought. […]
255.
The 2011 Ericsson-RIM licence […]. Unwired Planet say the
complications can be unpacked to a rate of […] for 4G. These values of
E correspond to Unwired Planet’s rates of […] using the UPLTER of
10.50%. Huawei say this licence is difficult to interpret, its date means it
predates the reduction in rates and it was concluded at a time when RIM’s sales
mix was very focussed on high-end devices in the USA and Europe.
256.
That is sufficient to understand how Unwired Planet put their case.
There is no need at this stage to address the other Ericsson licences in the
chart. The further evidence Unwired Planet rely on can be put into four
groups: the ARR from the MSA, publicly stated rates, the 2014 Unwired
Planet-Lenovo licence, and licences from other licensors.
257.
The term of the MSA which Unwired Planet rely on as a comparable is the
ARR, which is 0.15% for 4G/LTE and 0.1% for 3G/WCDMA. Huawei make the point
that this is self-serving given that Ericsson benefit from royalties paid to
Unwired Planet. As a tool for assessing a benchmark FRAND rate today the ARR
has no value.
258.
The public statements about rates are addressed below. In terms of top
down aggregate royalties generally, Unwired Planet contend that while it may be
useful as a cross-check in certain circumstances, it is based on a false
premise that manufacturers in fact pay everyone who owns any portion of the
relevant pool whereas in practice they do not. Nevertheless they also point
out that using their case for their share S of the Relevant SEPs (say 1.25%)
and applying it to a total aggregate royalty burden T of 8% or 10% produces
rates close to their preferred rate.
259.
Turning to the 2014 Unwired Planet-Lenovo licence, on its face it
contains a lump sum licence payment of […] and running royalties
creditable against that lump sum of […] per product in defined “Major
Markets” (the MM rate) and […] per product in other territory (the OT
rate). In percentage terms […] compares favourably with the 0.2%
demanded by Unwired Planet in 2014 and maintained until July 2016. Huawei
contend that to rely on the stated rates is to ignore the true economics of
this agreement. Huawei also point out that […].
260.
The licences from other licensors which Unwired Planet addressed, at
least at the start of the trial (see opening p103), are licences from Qualcomm
(to Huawei (two) and Samsung), licences from InterDigital (again to Huawei and
Samsung) and two licences in which Samsung were licensee (from […] and
Nokia). To the extent they are significant they can be addressed in context.
A striking
correlation – aggregate royalty
261.
In closing I pointed out to the parties that there seemed to be a broad
equivalence about their rival cases at least in one respect. It can be seen in
the implied aggregate royalty rate. Huawei contend the benchmark multimode
4G/LTE handset Unwired Planet rate should be 0.040% and Huawei contend that
Unwired Planet’s share S of multimode LTE handset patents overall is 0.30%.
Conversely Unwired Planet contend the final royalty rate should be 0.13% and
contend their share S overall is 1.25%. The ratios of these two pairs of
figures are close and the similarity can be expressed in terms of the implied
total aggregate royalty burden T. On Huawei’s figures the implied total
aggregate royalty burden T would be 13.3% while for Unwired Planet it would be
10.4%.
262.
Huawei resisted this characterisation of the arguments. Their top down
approach starts from a value of T of 8% and works the other way to a royalty
rate of 0.028% to support, as generous, a conclusion that the royalty should be
0.040%.
263.
This has caused me to address the question of whether the total
aggregate royalty approach is better used as a top down method or as a
cross-check. To apply a top down approach one needs to decide on the total
royalty burden T as a starting point. The evidence from which Huawei submit an
inference should be drawn is evidence of statements by patent owners about what
they say the aggregate royalty burden for a given standard should be.
264.
A variety of statements about the total aggregate royalty and statements
about individual companies are in evidence. The most significant for 4G/LTE
are the following. Some are undated but they are most probably all from the
same era 2008-2010:
i)
An Ericsson press release in April 2008 referred to a public statement
by “wireless industry leaders” (Ericsson, Alcatel-Lucent, NEC Corporation,
NextWave Wireless, Nokia, Nokia Siemens Networks and Sony Ericsson) that they
had “agreed a mutual commitment to a framework for licensing IPR” relating to
LTE and supported the idea that a reasonable maximum aggregate royalty level
for essential IPR in handsets is a “single-digit percentage of the sales price”.
ii)
Another Ericsson press release in 2008 states that they expect to hold a
relative patent strength of 20-25% of all standard essential IPR for LTE and
that Ericsson believes the market will drive all players to act in accordance
with these principles and to a reasonable maximum aggregate royalty level of
6-8% for handsets. Ericsson’s fair royalty rate for LTE is therefore expected to
be around 1.5% for handsets.
iii)
A Huawei press release in 2009 states that Huawei “anticipates and
supports a low single-digit percentage of sales prices as a reasonable maximum
aggregate royalty rate applicable to end-user devices”. Huawei believe they will
hold 15-20% of all essential patents relating to LTE standards therefore a
royalty rate with some flexibility, but not to exceed 1.5%, is expected.
iv)
In 2009 Alcatel-Lucent said it expects to license its LTE SEPs for
handsets at a discounted royalty of no greater than 2%.
v)
In an undated press release Nokia stated that it believes it will have
20-30% of all LTE standards-essential IPR and that it expects its single-mode
and multi-mode LTE rates to be in a range of 1.5% and 2.0% of the sales price
of an end-user device, respectively.
vi)
In an undated press release Nokia Siemens Networks believes it will hold
approximately 10 to 15% of all LTE standards-essential patents and that it
anticipates its LTE royalty rate for end-use terminal devices will be in the region
of 0.8% of the selling price.
vii)
In a December 2008 press release Qualcomm states that it does not agree
with cumulative royalty caps or proportional allocations of such royalty caps.
viii)
In an undated press release Motorola states that it expects that its essential
royalty rate for LTE systems and equipment (e.g. infrastructure and subscriber
handsets) will be approximately 2.25%.
265.
For 4G/LTE Huawei contend that the total royalty burden T should be 8%
based on the first three statements (the two from Ericsson in 2008 and the one
from Huawei). For 3G Huawei rely on a further statement by Ericsson, Nokia,
Siemens and NTT DoCoMo that they had, as the owners of “the clear majority” of
SEPs for W-CDMA reached a “mutual understanding” to license “…at rates that are
proportional to the number of essential patents owned by each company”, which
would “…enable the cumulative royalty rate for W-CDMA to be at a modest single
digit level”, meaning 5% or less.
266.
Huawei point out that the April and July 2008 statements by Ericsson
were regarded as so important that they were formally scheduled as encumbrances
on the Cluster patent portfolio when it was transferred to Unwired Planet and
also point out that Mr Robbins accepted that Ericsson’s statements about
aggregate royalty were obligations Unwired Planet was obliged not to violate.
267.
Huawei submit that the court should attach particular weight to early
declarations by major patent owners who were predicting what their ownership
would be and what the total stack should be. Huawei refer to the evidence of
Prof Neven on this (paragraph 14 of his 2nd report) however the
Professor’s evidence does not align completely with the submission. Prof Neven
recognised a top down royalty stack approach as one way of implementing an ex
ante benchmark. He contemplates various ways of arriving at a total stack
(which I call T) including using comparable agreements. Prof Neven then
expresses the view that early declarations by patent owners about what the
total royalty stack should look like are highly relevant because they determine
potential users’ expectations and hence their decision to choose among the
alternative technologies. He goes on to recognise that for a stack determined ex
ante (i.e. before adoption of the standard by implementers) one needs a
method for sharing out the stack ex post. A virtue of a total stack
method is that in such a system there is no incentive for patent holders to
divest their patents ex post to achieve a higher return since the total
stack remains fixed.
268.
Prof Neven’s explanation is compelling as long as one is confident what
the total stack should be in the first place and provided some means for
enforcing it against all parties exists. However the main conceptual
difficulty I have with the using a total stack in a top down approach as
opposed to using it as a cross-check is in the selection of the total royalty
burden T to start with.
269.
In my judgment the statements set out above have little value in
arriving at a benchmark rate today for a number of reasons. The claims are
obviously self-serving. The statements about aggregate royalties in particular
are statements about other people’s money on the footing that the person making
the statement says at the same time that the cake is quite small but they are
entitled to a large piece of it. As an illustration, if one assumes Alcatel’s
2% royalty claim means they claim at least 20% of the Relevant SEPs (because in
April 2008 Alcatel put their name to a “single digit percentage aggregate” and
2% is 20% of 10% (10% being just higher than the highest single digit
percentage)) then the total shares of Relevant SEPs just mentioned in these
statements add up to about 100% without including other major industry players
such as Motorola, Qualcomm, and Samsung. The figures in Huawei’s own claim are
not closely internally consistent either. A low single digit percentage
aggregate sounds like a figure of no more than 5% but to produce that with a
15-20% share of Relevant SEPs represents a royalty of 0.75%-1%. To produce a
royalty close to the 1.5% limit referred to requires an aggregate of 7.5%-10%.
270.
Furthermore, putting weight in these statements do not take into account
what implementers and SEP holders have actually been content to agree in the
intervening years. Compared to public statements, comparable licences are
concrete data points, albeit their interpretation can be uncertain and the
factors derived from them even more so. One could use comparable licences to
try and derive a figure for the total royalty burden T but to achieve that
requires one to have done all the same work which is needed to apply
comparables directly anyway, so back calculating T will not add anything.
271.
Moreover the combination of Huawei’s submissions on rates and Huawei’s
submissions on what Unwired Planet’s share of the Relevant SEPs is, shows that
in truth Huawei’s case does not support an aggregate royalty burden of 8%. It
supports a higher total burden than that.
272.
Where Huawei undoubtedly have a point is that the cross-check shows that
if Huawei’s case on Unwired Planet’s share S of SEPs overall (0.30%) is right,
the benchmark rate claimed by Unwired Planet of 0.13% cannot be supported. It
would imply a total burden T of 43%. That is far too much. Conversely if
Unwired Planet are right about their share S of SEPs overall (1.25%), a
benchmark of 0.040% implies a total burden of 3.2%. That is much less than
Huawei themselves are prepared to countenance in these proceedings.
(iii) The MNPA
and HPA techniques
273.
I will now address each party’s patent counting techniques (the MNPA and
HPA), explain the criticisms which are made and then address them. Rather than
focus on one technique completely and then the other, the two methods need to
be explained and evaluated side by side so that the assessments of each can be
understood in context.
The MNPA technique
274.
The MNPA was devised by Unwired Planet as a technique to use in
licensing negotiations. It is applied to 4G/LTE and in the original method
consisted of the following steps:
(1) Identifying all
declarations using a list of declared SEPs from the ETSI IPR database as of 12
March 2014.
(2) Defining LTE and then
limiting the declarations to LTE-specific declarations.
(3) Grouping patents into
families and removing duplication.
(4) Filtering down to
“Live” families. This removes patents and applications that have been
abandoned or expired and filters out families which do not have a pending or
issued US or EP patent.
(5) Separating out what
Unwired Planet called “Core” LTE. Here the word core connoted importance. It
is not drawing the distinction drawn elsewhere between different kinds of
infrastructure (RAN and Core network). Core in this sense is identified using
a simple pre-2009 cut off. Any patent with a priority date after 31st
December 2008 was non-Core.
(6) Separating out handset
families from infrastructure only families. If a patent has a handset claim it
is in the handset family even if it also has infrastructure claims. The
resulting sets were called “Handset Candidate Families” and “Infrastructure
Only Candidate Families”.
(7) Applying essentiality
filters, which in the original MNPA involved three percentages:
a. 28%
to represent over-declaration (i.e. on the basis of published studies by
Fairfield/ Goodman and Myers (mentioned below) which indicate that only 28% of
declared SEPs are truly essential);
b. 90%
to take account of patents which are essential to options in the standard;
c. 80%
to take account of patents essential to features in the standard which are not
deployed.
275.
The Revised MNPA was produced in 2016 in response to points made in the
litigation. It differed from the original MNPA in two major respects. At step
(2) the way the standards are identified was changed in such a way as to
incorporate more standards. At step (7) a different approach entirely is taken
to what Unwired Planet call applying essentiality filters. In the Revised
MNPA, instead of the three percentages at step (7), a figure derived by Dr
Cooper was used based on a detailed analysis he carried out on a sample of
Samsung SEPs. The figure used is 16.6%.
276.
The numbers produced by the original MNPA are the following:
Step
|
Original MNPA
|
1
– 3
|
5915
|
4
Live LTE families
|
4941
|
5
Core LTE
|
Core
3280
|
Non-Core
1661
|
6
Handset
|
2071
|
1049
|
7
Apply 28%
|
Essential
580
|
Non-essential
1491
|
|
7(b)
Apply 90%
|
Mandatory
522
|
Options
58
|
|
|
7
(c) Apply 80%
|
Deployed
418
|
Non- deployed
104
|
|
|
|
Final
TOTALS:
|
“True LTE handset families”
418
|
Residue
2702
|
|
|
|
|
|
|
277.
On this basis a starting list of 5915 patents is reduced to 418 Relevant
SEPs for the LTE standard and for handsets and a residue of 2702 other patents
relevant to handsets which were declared as essential.
278.
The numbers produced by the Revised MNPA (in Mr Bezant’s appendices to
his third report) are as follows
Step
|
Revised MNPA
|
1
– 3
|
6619
|
4
Live LTE families
|
5296
|
5
Core LTE
|
Core
3377
|
Non-Core
1919
|
6
Handset
|
2128
|
1209
|
7
Apply 16.6%
|
355
|
Core non-true LTE handset
1773
|
|
Final
TOTALS:
|
Core True LTE handset
355
|
Residue
2983
|
|
|
|
|
279.
On this basis a starting list of 6619 patents is reduced to 355 Relevant
SEPs for handsets and a residue of 2983 other patents relevant to handsets
which were declared as essential. Note that the number of Relevant SEPs (355)
is not exactly 16.6% of 2128. That number would be 353. The difference is
explained in a footnote to Mr Bezant’s third report. I am satisfied 355 is the
appropriate number to use.
280.
Both the Original and Revised MNPA produce numbers for the industry as a
whole. The way Unwired Planet derive figures for individual companies (apart
from Unwired Planet itself) is by identifying the patents at step 6 by company
and then applying the relevant fractions to those totals. This gives figures
for individual companies.
281.
The 80/20 approach seeks to attribute some value to the other handset
patents in the residue. It does so in a mathematically simple way by
attributing 80% of the royalty to a company’s Relevant SEPs in these tables and
20% of the royalty to a company’s figure for the residue.
The MNPA and
infrastructure
282.
Unwired Planet use the same MNPA approach to derive a total number of
Relevant SEPs for infrastructure (by which they mean the air interface and
eNode Bs rather than core network). The original produces a total of 3280
which Unwired Planet confusingly call the “Core LTE” (see step 5 of the
Original MNPA table above). From this 2071 were identified as having handset
claims (see step 6) which leaves 1209 families as infrastructure only (3280 =
1209 + 2071). From the 1209 Unwired Planet estimate most will be core network
(i.e. not air interface or eNode Bs) and only 15% will be relevant
infrastructure. 15% of 1209 is 181. To this 181 has to be added the share of
the handset families which also includes relevant infrastructure. That is 1337
giving a total of 1518. That figure is treated in the same way as the handset
figure at step 7 to produce 306 as the number of Relevant SEPs for
infrastructure. As I understand it when Unwired Planet revised their approach
to counting patents they did not revisit the numbers for infrastructure but
simply reduced the infrastructure offer in the same proportion as the handset
offer.
Unwired Planet’s
approach to 2G and 3G
283.
The way Unwired Planet deal with 2G and 3G is simpler than the MNPA
technique. They start with a figure for the total pool of Relevant SEP
families for 2G or 3G based on a published report. For 2G Unwired Planet use
the report “Analysis of Patents Declared as Essential to GSM as of June 6,
2007” by Goodman and Myers of Fairfield Resources International published
on 31st December 2008. For 3G Unwired Planet use a similar paper
published by the same group on 6th January 2009 entitled “Review
of Patents Declared Essential to WCDMA Through December, 2008”. In these
papers the authors report the outcome of detailed reviews by a team of
experienced engineers of the patents declared essential to wireless standards
with a view to determining how many are actually essential.
284.
The figure from the Fairfield report for the total number of truly
essential 2G patent families is 158 while the Fairfield report for 3G reports
the equivalent number as 529. Unwired Planet then subtract from these totals a
number for the patent families which solely relate to infrastructure. That
produces a total for handsets which is 102 for 2G and 324 for 3G.
285.
For infrastructure Unwired Planet used the figures from the reports,
identified patents relating to infrastructure both alone and with handsets in
the same way as for the approach to infrastructure with the MNPA and came up
with figures for the total Relevant SEPs for 2G and 3G. Those numbers are 85
for 2G and 274 for 3G.
The HPA technique
286.
The HPA was carried out by a team including Dr Kakaes and consultants at
Thomson Reuters in India. The consultants at Thomson Reuters (the
“Evaluators”) have technical expertise. The HPA consisted of the following
steps:
(1) “Identification and
De-duplication”: a list of declared essential patents and patent applications
was created using the ETSI database and also making reference to the Korean
Telecommunications Technology Association database. The list was
de-duplicated.
(2) “Family members not
expressly declared to ETSI”: Since the ETSI IPR Policy a declaration applies to
a patent family as a whole, additional family members not expressly declared to
ETSI were identified. This was done using the public INPADOC database.
(3) “Grouping families in
five categories”: the patents and applications were collected into families.
The families were collected into five groups. Only group 1 was selected for
further analysis. The five groups were:
Group 1 – at
least one issued and non-expired patent and an English or Chinese language
member;
Group 2 – at
least one issued and non-expired patent but no English or Chinese language member;
Group 3 – only
expired members
Group 4 – no
issued patents (“issued” means granted)
Group 5 – family
information not available on INPADOC
(4) “Grouping families
into standards”: the families were classified into three classes: LTE/4G,
UMTS/3G, GSM/2G by reference to the standards to which they were declared on
the ETSI website. The families were also classified as relevant either to RAN
(which in this study includes handsets) or core network (“CN”). This was also
based on the standards to which they were declared.
(5) “Essentiality analysis
of Group 1 families”: The Evaluators reviewed the essentiality of a patent in
each Group 1 family. The review took about 30 minutes per family. The patent
and relevant standard were selected in accordance with given rules. The claims
of the patent were compared to the relevant standard specification to determine
if the standard required all the elements of the claims. If the Evaluator
determines that the specification does not provide a clear reason to rule out
the patent as being essential, then the family is deemed essential. If the
family provides a clear reason to rule out the patent being essential, the
family is deemed not essential. The given rules are:
a. Patents
in the family are reviewed in the following order until a patent is deemed
essential or the categories are exhausted. If multiple patents are in the
categories then the earliest is looked at first. The categories are:
i.
US issued patent
ii.
EP issued patent
iii.
Any other English language issued patent
iv.
Chinese issued patent
v.
English-language expired patent or subsequently English language
application (where there is no English language or Chinese language issued
non-expired member but there are members from other jurisdictions that are
issued and not expired).
b. For
each family both representative handset and infrastructure claims are
identified.
c. If
the family is declared to more than one of LTE/4G, UMTS/3G, and GSM/2G then the
family analysis is continued until a patent or application is found essential
to each of these three standards or the categories are exhausted.
287.
Once these five steps were completed one could derive numbers
representing Unwired Planet’s “deemed” essential patents identified this way.
They are the basis for Huawei’s case on how many Relevant SEPs are held by
Unwired Planet. One could also derive numbers for the industry as a whole and
for other companies such as Ericsson and Huawei. They are the basis for the
figures set out above. There are various different ways of deriving these
figures but there is no need to get into that detail.
288.
The totals produced by the HPA are the following:
Step
|
HPA
|
1
Extraction and de-duplication
|
109,662
|
2
non-ETSI family members
|
141,666 patents processed into 18,938
families
|
3
Grouping
|
1
11,384
|
2
545
|
3
3,035
|
4
2,899
|
5
1,075
|
4
Standards
|
LTE
7,077
|
UMTS
5,158
|
GSM
1525
|
|
|
|
|
5
Essentiality:
|
2535
|
1639
|
629
|
|
|
|
|
RAN
|
1585
|
937
|
312
|
|
|
|
|
Total
UE
|
1862
|
1154
|
362
|
|
|
|
|
Total UE (UE means user equipment,
i.e. handsets).
289.
These are the numbers presented in Huawei’s FRAND Statement of Case.
They differ slightly from the numbers used in the figures set out in this
judgment above for the denominators because adjustments were made during the
proceedings but the changes are small and do not alter the substance.
Summary of the
criticisms of the rival methods
290.
Huawei level a sustained attack on Unwired Planet’s MNPA both internally
(i.e. relating to the method itself) and externally (i.e. the way the method
was created and by comparing the results of the MNPA to other evidence).
Huawei’s major internal criticisms are: step (2) (the limitation to certain
standards), step (4) (the US/EP filter), step (5) (the pre-2009 cut off), step
(6) (handset filter), step (7) (the essentiality % filters).
291.
Huawei’s external attacks on the MNPA characterise it as “patently
unreliable and self-serving”. They submit that in cross-examination Mr Saru
accepted that it was never designed for the purposes for which it has been
pressed into service in this trial. They submit the results it produces are
counterintuitive and contrary to both Unwired Planet’s own fact evidence and
the available third party studies. They contend that the relevant experts for Unwired
Planet, Dr Cooper and Mr Bezant, were both keen to emphasise that they had no
hand in its creation and that “neither sought with any conviction to defend its
results”.
292.
In summary Huawei contended that the evidence points clearly to Unwired
Planet having around 6% of Ericsson’s portfolio (the strength ratio). They
also submitted that the MNPA was the only method which came close to giving
Unwired Planet a 1.5% plus share of the industry’s Relevant SEPs and that all
the other methods gave figures of less than 0.5%; and that the figures differ
by “a long way”.
293.
Unwired Planet mounted a significant attack on the HPA and its status in
these proceedings. In its FRAND Statement of Case (para 132) Huawei had
presented the HPA as something which was undertaken given the flaws in Unwired
Planet’s methodology. However during the trial it emerged that this was not
true, as Huawei now accept. The HPA was in fact carried out for the
arbitration between Ericsson and Huawei which led to the 2016 Ericsson-Huawei
licence and in which Dr Kakaes and Mr Lasinski were both witnesses. Unwired
Planet also submitted that the HPA depends on an extremely cursory 30 minute
analysis and contains an inbuilt presumption of essentiality. Unwired Planet
ties this in to the arbitration point because, they submit, what also emerged
was that in the arbitration the HPA was no more than a filter to identify
patents that Dr Kakaes should look at properly. They argued that for Huawei to
put the HPA forward as the actual assessment of analysis was regrettably
misleading.
294.
As an outcome, Unwired Planet maintain that a strength ratio of 10.50%
for LTE multimode between Unwired Planet and Ericsson is not inconsistent with
the evidence nor is a percentage of about 1.5% for Unwired Planet’s share of
all the Relevant SEPs. They maintain Huawei’s figures are too low.
295.
Some of the criticisms made relate to the utility of these methods for
unpacking. I will not address them because I am not satisfied that the
differences between the counting techniques make enough of a difference to unpacking
to be worth it.
The external
criticisms of the MNPA
296.
I have no doubt that the exercise of devising the original MNPA involved
a degree of self-interest on the part of Unwired Planet. The idea that it was
devised in an entirely objective fashion is fanciful and if Mr Saru’s evidence
was intended to persuade me that is was, then it did not succeed. That said I
also reject the idea that the whole thing was a cynical exercise designed
purely to attempt to justify Unwired Planet’s pre-ordained licensing policy.
Unwired Planet knew they needed to come up with some method of assessing the
value of their patent portfolio by reference to the industry as a whole. The
original MNPA was devised with that in mind but as an exercise, its utility
depends on its objective characteristics which are addressed below. If it is
objectively reasonable then the fact it was devised with a degree of
self-service does not justify rejecting it as relevant evidence.
297.
Huawei are correct that the MNPA was not devised to compare Unwired
Planet’s portfolio with other companies’ individual portfolios but the fact
that Unwired Planet now seeks to use it in this way too does not matter. What
matters in that respect are detailed issues.
298.
Huawei are right to criticise Unwired Planet for suggesting (or aiming
to leave one with the impression) that Dr Cooper was responsible for the MNPA
or parts of it as a method. Aside from his work on the sample from the HPA, he
was not. Neither was Mr Bezant. On the other hand, apart from specifics dealt
with later such as the 10%/20% optional/mandatory point I do not recognise the
suggestion that somehow Dr Cooper or Mr Bezant thought the MNPA was so flawed
that they were “keen” to emphasise they had no hand in its creation or that,
overall, they did not seek to defend its results “with any conviction”.
299.
The more significant external criticism made by Huawei is that it
produces results which are counterintuitive and contrary to other, reliable,
evidence. The highpoint of this is the comparison of what Huawei call “implied
essentiality rates”. These rates represent the application of the MNPA to a
particular company’s patents. For reasons explained below I will not use the
label “implied essentiality rate”. I will call these rates the “MNPA Relevant
SEP ratio” for a given company. Huawei produce a table for all the patent
families in the original 6619 pool used by the Revised MNPA. For example,
Ericsson has 392 patent families in that pool and applying the Revised MNPA to
those patents produces the number 28 for Ericsson. Therefore, the MNPA
Relevant SEP ratio for Ericsson is 8.00% (28/392) and so on. The figures are
derived for the whole industry but it is only necessary to mention the MNPA
Relevant SEP ratios for Samsung (6.72%), Qualcomm (7.41%), Huawei (3.24%) and
Nokia (8.07%). Using the same approach, the MNPA Relevant SEP ratio for
Unwired Planet is 12.00%. That is different from the ratios for Unwired
Planet’s portfolio deployed by Unwired Planet in argument because the 12% comes
from applying the MNPA to both the numerator and the denominator (the numbers
are 3/25).
300.
Huawei submit that this shows that the MNPA assesses Unwired Planet’s portfolio
as being far stronger than the portfolios such as Ericsson (of which Huawei
contend the Unwired Planet portfolio was intended to be a representative
cross-section), Nokia (which Huawei point out Mr Saru explained was “careful in
declaring”) and Qualcomm (which Mr Bezant said in his report had a “strong
portfolio”). Huawei argue that these differences are systematic, very
substantial and irreconcilable with the fact evidence or indeed any reasonable
experience of the industry.
301.
In argument for comparison with the MNPA Relevant SEP ratios for third
parties Huawei used a ratio for Unwired Planet which would be produced using
Unwired Planet’s preferred numerator (the ratio is 24%) but I do not accept
that is a fair test. It is the same point which I will address in another
context below about whether it is fair to use a different method for deriving
the numerator and the denominator. However Huawei’s submission still has force
since 12% is much higher than the ratios for Ericsson, Nokia, Qualcomm and
Samsung (and indeed is higher than any company with at least 100 patents in the
MNPA starting pool (see U1/6/4)).
302.
Mr Bezant’s view was that this could be explained as an artefact of
Unwired Planet’s small portfolio size. There is something in this. One would
expect that as portfolios get smaller the relative effect on the ratios of
small changes in absolute numbers will increase. That is borne out by Huawei’s
analysis as a whole. All the MNPA Relevant SEP ratios over 10.00% are in the
smaller portfolios (below 100 in size). The same point can be made another way
– if the numerator for Unwired Planet had ended up at 2 instead of 3 the MNPA
Relevant SEP ratio would have been 8.00% (identical to Ericsson) rather than
12.00%. So I accept that one cannot place much weight on the fact that a
company with a small portfolio like Unwired Planet has an MNPA Relevant SEP
ratio which is larger than the company from whom their patents were selected.
303.
Nevertheless this still does not mean Huawei do not have a real point.
They do. These numbers expose a fallacy in the way Unwired Planet present the
results of the MNPA both in argument and in evidence. Huawei’s name for this
ratio (“essentiality rate”) was reasonable because Unwired Planet use similar
language to describe the same thing. Unwired Planet have presented the number
produced by the MNPA which is used as a denominator as if it represents the
number of “truly essential LTE patents” or words to that effect. Unwired
Planet’s FRAND Statement of Case calls this number the “True LTE handset
pool”. These descriptions are wrong and misleading. The MNPA includes rates
for the essentiality rate (28% in the original method and 16.6% in the revised)
but it also has other features. The justification for the cut offs in the
method apart from the essentiality rate, such as the pre-2009 cut-off, is not
essentiality. It is an attempt to differentiate between the value to a
licensee of two different categories of patents even though both may be truly
ESSENTIAL within the meaning of the ETSI IPR policy. That is a key conceptual
difference between the MNPA and the HPA. The reason different companies have
different MNPA Relevant SEP ratios is not because their implied essentiality
rates differ, it is because of the kinds of patents they have relative to
things like the particular LTE standards to which they are declared, the
priority date, and the presence of handset claims, differ. So the low rate
for Huawei relative to Samsung and Ericsson is explicable by the combined
effect of steps (4) and (5) whereby families with no EP/US member and the
pre-2009 cut off has more impact on Huawei than Samsung or Ericsson, which in
turn is consistent with the phenomenon that Chinese companies have increased
their patent filings outside China only in recent years.
304.
In my judgment the external criticisms do not undermine the utility of
the revised MNPA as such but they have exposed the need to be clear about what
the results mean. In that sense Huawei are right that the difference between
companies is systematic. Whether it is reconcilable depends on the legitimacy
of the other filters and turns the focus onto the internal criticisms.
The internal
criticisms of the MNPA
Step (2)
305.
The first point is about step (2). The MNPA does not look at all
patents declared to LTE in general, rather the MNPA takes a defined list of
particular standards and deals with patents declared to those. Unwired Planet
started with a list of 49 standards from a licensing pool called VIA known as
the VIA 49. The VIA pool includes industry giants AT&T and NTTDoCoMo. Mr
Saru was cross-examined about the decision to use it. While I agree the choice
had an element of being self-serving, I was not persuaded it was an
unreasonable choice to make. The list had been made by a third party. Later
in the proceedings following criticism Unwired Planet used a much longer list
of standards but this did not make a major difference to the end result in the
light of the other filters which were used. By the closing there was less to
this issue than at earlier stages in the litigation. It is not in dispute that
there is no generally accepted view of what constituted a correct list of LTE
standards. Part of Unwired Planet’s rationale for doing something along these
lines was to focus on the parts of LTE which they thought licensees would be
interested in. That was not unreasonable. I reject the point on step (2).
The other criticisms are lesser points in any event nor do they make enough of
a difference to matter.
Step (4)
306.
The point on step (4) is that the patents chosen were restricted only to
families containing a US or EP member. This was justified by Mr Saru on the
basis that serious industry players would seek patents in Europe and the USA as
major markets if they thought the patents were essential. Huawei disputed
this, submitting that Dr Kakaes was obviously right not to agree in
cross-examination that other markets such as China are not valuable and
important. Huawei pointed out that the MNPA excluded around 709 patents for
having no US or EP member.
307.
Dr Kakaes was correct in cross-examination, all the same the evidence
was clear that the licensing rates in the US and Europe are higher than
elsewhere. Both the MNPA and HPA have a step like step (4) because it is a
sensible thing to do. The difference is that the HPA includes a family if it
has a Chinese member even if there is no US or EP. One can understand why that
might be done given that Huawei is Chinese and also given the evidence that
many Chinese companies will only file in China for many applications. Based on
Mr Cheng’s evidence I would expect Huawei today to file SEPs internationally
once the first application was made in China, given their importance. In the
end I am not satisfied that this difference between the MNPA and the HPA makes
any material difference to the issues I have to decide. A serious player in
the telecommunications market, including a major Chinese company, would likely
file SEPs in the US and/or Europe. A method which included Chinese patents
when the family had no US or EP member at this stage would present a more complete
picture of the landscape but the differences overall are modest. In my
judgment no significant systematic error is introduced by not doing so. The
nature of Huawei’s portfolio means that it will have an effect on that
portfolio but I am not satisfied this matters. If the differences between
unpacking methods mattered, this would be important, but they do not.
Step (5)
308.
The debate about step (5) of the MNPA is important. At this step
Unwired Planet select only patents with a pre-2009 priority date to take
forward. Unwired Planet’s rationale is that there is an inevitable time-lag
between the priority date of a patent, the invention making its way into a
frozen release of a standard and then that standard being implemented. Unwired
Planet say the fundamentals of LTE as a system were determined in LTE Release 8
and that was fixed at the end of 2008. So only patents with pre-2009 priority
can be part of it. A later dated patent could not be valid and essential to
this “core” system. Huawei point out that this step excludes well over 1,500
LTE families from the pool and argue it is completely unjustified.
309.
Unwired Planet do have a point in that LTE Release 8 was the first and
fundamental release of LTE however Huawei contend that this approach gives no
value for later releases and is flawed.
310.
The relevant releases after LTE Release 8 are Releases 9, 10 and 11.
The term “LTE-A” for LTE-Advanced sometimes appears. It can be taken as the
same as releases after and including Release 10 of LTE. Release 10 was
released in 2011 and enables downloads and uploads ten times faster than
Release 8. In the UK the network operator EE began implementing LTE-A in
2013. The implementation was across the whole network. On the evidence I find
that the really important aspect of the releases after release 8 is a feature
called carrier aggregation. It is clearly significant, particularly relating
to infrastructure and to network operators.
311.
Mr Saru explained that the cut-off was justified in a licensing context
because technology in later releases was not as critical to LTE as implemented
in the products on the market at the time (by which he meant 2013/14 but the
point is general, that there is a lag). In his oral evidence Mr Saru
distinguished between what technology has been released in a standard and what
drives the market. Huawei pointed out that Mr Saru accepted that this filter
had been chosen by Unwired Planet knowing that it would have a relatively
minimal effect on the Unwired Planet portfolio. Unwired Planet sought to
mitigate this on the basis that Mr Saru’s view was that it was simply a
reflection of the fact that Unwired Planet had deliberately selected good
patents which would be strong from a licensing perspective. However I do not
accept that that would justify the step even if it is really what Unwired
Planet thought.
312.
Mr Yang gave evidence on this for Huawei. He said that in technical
terms Releases 9 to 11 involve significant developments many of which have been
deployed, while in commercial terms Releases 9 to 11 are highly valuable to
Huawei. Unwired Planet submitted Mr Yang was a fact witness but gave opinion
evidence. So he did but Mr Yang was a good witness, generally qualified to
discuss the topics he covered, and was simply seeking to explain his companies’
point of view.
313.
Mr Yang supported his evidence with material extracted from three papers
said to show the widespread deployment of LTE-A networks over time. (There is a
point that figures for networks, i.e. infrastructure, will not directly relate
to handsets and that Mr Yang was more a network man than a handset man. I will
take that into account). The papers had been produced by the lawyers and Mr
Yang did not know much about the origin of the papers themselves or the groups
which produced them. A graph from one of the three papers which Mr Yang relied
on is this:
From an August 2015
paper by consultants Analysys Mason.
314.
As it states, this is a graph of incremental deployments of LTE-A
Release 10 networks as compared to incremental deployments of Release 8 and 9
networks. In the same paper is another graph as follows:
315.
These two graphs are best understood in colour. To be precise the second
graph distinguishes between the two LTE duplex modes: FDD – which is used e.g.
in the UK and TDD – which is mostly just in China. In any event Unwired Planet
say this second graph shows the very slow projected adoption of LTE-A.
316.
Taking Mr Yang’s evidence as a whole I find the position is as follows.
In general different features are adopted by the industry at different rates.
Carrier aggregation has been adopted much faster in Asia than in Europe. At a
technical level features commercially deployable in later releases may well
have their technical roots in Release 8 (e.g. Voice over LTE).
317.
Dr Kakaes’ view about the pre-2009 filter was that it unreasonably
excluded things which by 2013/14 were being frozen into the standards and implemented.
Nevertheless he also accepted that there are features in standards which are
not commercially implemented, for a range of reasons, and implementers commonly
will decline to license patents relating to features they do not implement.
Unwired Planet submitted that Dr Kakaes accepted that if it was possible to
take account of these commercial realities then it was better to do so, and he
accepted that the HPA did not try to do this at all. The latter submission is
correct. The former submission does not precisely reflect what Dr Kakaes said
in the cross-examination relied on but taking his evidence as a whole, a fair
reflection of Dr Kakaes’ position was that it was reasonable to take account of
the reality that there are features in standards which are not implemented.
318.
Dr Cooper supported the existence of a time lag in terms of
implementation of features and explained that features in Release 8, in
contrast to later releases, were required to be used if one is implementing
LTE, whereas it would be up to implementers to what extent they would implement
features in a later release. However he also made clear that he “did not
necessarily accept that simply post Release 8 developments should be dismissed
since they can and often do add ‘value’”. That supports Huawei. There was a
point about early R&D investments being higher risk and deserving higher
reward but it was nebulous and I do not accept it.
319.
There is more to these arguments than this summary but I have dealt with
the major points. In my judgment LTE Release 8 does represent the fundamental
technology on which LTE is based and FRAND licence negotiators would take that
into account in assessing the value of patents. Later Releases of LTE are
still based on the fundamentals of what is in that first working Release.
Taking a cut-off of patents with a pre-2009 priority date is a FRAND approach
to licensing Release 8.
320.
On the other hand once later releases exist and are licensed, a method
which gives no value at all for the technology in later releases is flawed and
does not reflect FRAND. The impact of this problem changes as time goes on. It
is an inherent difficulty arising from the fact that standards develop over
time.
321.
For LTE, assessed as at 2014, I find that the absence of value for post-2009
patents is not significant (either in Europe or anywhere else). However
assessed today (2016/2017) the absence is significant given the way LTE-A has
been implemented over time. For LTE some value has to be given in assessing
the FRAND value of a portfolio for patents essential to later releases (and
which therefore may have been excluded by a pre-2009 cut off). On the other
hand, a method which gives equal value to any patent essential to anything in
Releases 9 to 11 will inevitably overstate that value. Release 8 is still the
fundamental technology in LTE and while carrier aggregation is important in the
later releases, other aspects are not.
322.
There are a limited number of ways in which one can deal with this.
Unless one is going to make a list of Releases 9 to 11 features and identify
each patent relevant to that feature, which would be impractical, the only
alternatives are broad brush. One can include all patents knowing that this
overstates the value of post-2009 patents, which is the HPA method, or exclude
them all knowing this understates the same value, which is the MNPA. The 80:20
approach by Unwired Planet is an attempt to mitigate this problem, among
others, because it gives some value for patents put to one side by the pre-2009
cut-off. In that sense the intention behind the 80:20 approach is sensible but
I am concerned that it is so crude as to be arbitrary.
Step (6)
323.
The points on step (6), the handset and infrastructure filter, were
mostly concerned with unpacking and Huawei’s portfolio. There is no need to
engage with that. Unwired Planet’s detailed approach to handsets and
infrastructure involves an assumption that 15% of the families with no handset
claim are RAN rather than core network. Having listened to Dr Kakaes’ oral
evidence on this I find that Unwired Planet’s approach was reasonable. The
MNPA figure for handsets will be a lower bound but I doubt it is all that far
from the true figure.
Step (7)
324.
The next step is step (7), the essentiality filter. Here the Revised and
the Original MNPAs differ. In the Original MNPA three fractions are used. The
first is the 28% essentiality ratio. This was used to deal with
over-declaration. There is no question that over-declaration is a major
problem. The question is - how big? 28% was derived from studies reported in
papers by Fairfield/Goodman & Myers on 2G and 3G. Dr Kakaes criticised
this because there were also similar studies from the same group (Fairfield)
and other groups for 4G which gave higher essentiality ratios. Mr Saru thought
28% was likely to be a ceiling and a lower percentage might be more accurate.
Two 4G papers were put to Mr Saru (from Cyber Creative and FRI) in which
essentiality rates of 50% or more are given.
325.
In an annex to Huawei’s opening skeleton is a summary of third party
essentiality studies on 4G. There are four: iRunway at 8.2%, Fairfield at 50%
and two Cyber Creative studies at 53.8% and 56.0%. Huawei submitted the
iRunway study was not representative.
326.
However as Unwired Planet point out, Huawei’s own HPA produces a lower
overall essentiality ratio than the 50%+ rates from Cyber Creative and
Fairfield. Dr Kakaes reported overall essentiality ratios for 4G of 35.8% and
34.1% from the HPA on slightly different bases (the differences do not
matter). In his third report Dr Kakaes set out a table for sixteen individual
companies’ 4G essentiality ratios derived from the HPA. They range from 18.6%
for Google’s patents (338 declared, 63 deemed essential by the HPA) to 82.3%
for Sharp’s patents (79 declared, 65 deemed essential by the HPA). Most of the
companies in the table (13) have ratios within 22%-50%. The portfolios range
from 64 to 771 declared and 14 to 228 deemed. The ratio for Huawei is 43.5%
and the ratio for Samsung is 23.5%.
327.
In cross-examination Dr Kakaes did not accept it was reasonable to use a
2G/3G study for the purposes of considering a 4G rate although he accepted that
there was no technical reason why essentiality ratios for 2G, 3G and 4G should
differ and indeed had made that point in his third report. Unusually for Dr
Kakaes, who was a good witness, on this particular point he had lost some
objectivity.
328.
Dr Cooper addressed the papers which reported essentiality ratios. He
thought they all had problems and weaknesses and he thought the 4G Fairfield
paper produced a ratio which was too high. In his opinion there was no reason
to think the essentiality ratio for 4G was likely to be different from 2G and
3G. He thought 28% for 4G was generous and this was a view formed before he had
conducted a review of Huawei’s and Samsung’s portfolios. He thought the true
essentiality ratio was likely to be between 10% and 20%.
329.
In my judgment adopting 28% as an overall essentiality ratio for 4G
cannot be criticised. It was reasonable both when Unwired Planet adopted it in
2013/14 and later on.
330.
A further point which relates to this but is convenient to address now
is Dr Kakaes’ opinion that using a different method to assess the numerator and
the denominator in the strength ratios is not appropriate. It will be recalled
that Unwired Planet do this whereas Huawei do not. Although superficially it
might appear to be a sound criticism, in my judgment it is not a valid point in
these proceedings. Of course in general one usually seeks to compare like with
like. Therefore it is meaningful to present a ratio for Unwired Planet against
another company or the pool as a whole based entirely on figures provided by
the same technique – as in the HPA. This is particularly so when the technique
does involve some consideration of each patent rather than figures applied
across the board as in the MNPA. However it is also meaningful when one wants
to make a comparison between an identified collection of patents and the pool
overall to do what Unwired Planet did and analyse the identified collection
individually while applying a broader brush technique like the MNPA to the
wider pool, since after all it is entirely impractical to analyse the whole
pool with that same rigour. Moreover this is all the more legitimate when the
identified portfolio is small, since an average is less likely to be accurate
when applied to a small pool than a large one.
331.
The other two percentages used by Unwired Planet (10% optional and 20%
mandatory non-deployed) were criticised as arbitrary. The problem is not with
the concept that there are optional features to which SEPs are essential and
mandatory features in a standard which are not deployed. I have no doubt both
exist (as Dr Cooper explained), albeit it is also true that some strictly
optional parts of LTE are really important (e.g. MIMO as Dr Kakaes explained).
The problem is justifying deductions of this magnitude. Combined together
these two fractions reduce the denominator by over a quarter and therefore correspondingly
could increase Unwired Planet’s royalty rate by a third (1/100 = 1%, 1/75 =
1.33%). And in my judgment the problem is made much worse given the pre-2009
cut off and a limit on the number of standards considered at step (2). Dr
Kakaes was right that there was no reliable empirical basis for either
fraction. Mr Saru’s attempt to justify them in his oral evidence referred to
his experience in a vague way and to informal calls to old friends. That was
hopeless.
332.
In my judgment the 10% and 20% fractions cannot be supported alongside
the pre-2009 cut-off at step (5) and the limit on standards at step (2).
Combining the fractions with steps (2) and (5) is not FRAND.
333.
The Revised MNPA was devised with the criticisms of the original MNPA in
mind. At step (7) the Revised MNPA uses a single fraction of 16.6% derived by
Dr Cooper. It arose as follows. Dr Cooper was asked to review the findings of
a sample of the patents which the HPA deemed to be essential to an LTE handset
that had a pre-2009 priority date. Dr Cooper randomly selected a sample of
patents of a size that would allow him to draw conclusions with at least 90%
confidence about the pool from which the sample was drawn. This resulted in Dr
Cooper reviewing 38 Samsung and 30 Huawei patents and he spent 5-6 hours per
patent family. He concluded that the essentiality rate of the Samsung patents
(excluding optional features) was at most 16.6% and then revised that further
to 15.9%. For the Huawei patents he concluded that the essentiality rate (excluding
optional features) was at most 9.4%. Unwired Planet used that 16.6% figure at
step (7) of the revised MNPA.
334.
Unwired Planet point out that in his second statement Dr Kakaes was not
surprised that having spent 5-6 hours per patent family, Dr Cooper had found a
number of patents not essential which the HPA had deemed to be essential. They
point out that Dr Kakaes went on to agree with Dr Cooper about a substantial
number of the patents in his study. The major criticism made by Dr Kakaes was
about the sampling process. I will deal with that after the other points.
335.
The detailed points were these. First, there were patents excluded based
on Dr Cooper’s definition of LTE. However I am satisfied that at best this
would make little difference to the end result. At best the point changes the
result for two patents. The impact of that can be seen from the fact that
changing the result for one patent moves the answer from 15.9% to 16.6%. The
point does not undermine Dr Cooper’s position as a witness. Second, there are
patents which Dr Cooper found were not essential because they were not
implemented (optional). As Dr Kakaes explained that was not part of his
approach. If Unwired Planet had then tried to use the crude fractions for
options applied in the Original MNPA as well there would be more to this
point. I find Dr Cooper was justified in doing this although one needs to keep
in mind that excluded this way are LTE TDD, which is used in China, MIMO and
carrier aggregation. Third, there were cases in which Dr Cooper and Dr Kakaes
maintained their disagreement about particular patents. I am not asked to
resolve technical disagreements at the level of individual patents. Based on
my assessment of both experts, I am sure the disagreement represents cases in
which reasonable people can differ.
336.
A question was whether it was right to use a rate for Samsung as in
effect an industry average. Huawei submitted there was no empirical evidence
that a rate for Samsung was representative of the industry as a whole. The
choice was Unwired Planet’s rather than Dr Cooper’s. He explained that he
would not expect the rates for different companies to be identical but he could
not see an a priori reason why there should be big variations between
companies. In my judgment the evidence, as best it is, is that the rates for
different companies can differ considerably (see the table above from the HPA)
but there is no systematic reason why one company’s rate should be different
from another. In my judgment using a rate for Samsung as representative of the
industry is not illegitimate given that Samsung is a major player. I doubt
Samsung has an essentiality rate which is significantly below average. There
are significant uncertainties in all these exercises and this is another but it
does not render the technique meaningless. Choosing to use the number derived
by Dr Cooper for Samsung rather than Huawei was the conservative choice.
337.
Huawei also submitted that it was inappropriate to use a figure derived
from the HPA in the MNPA. This was for three reasons. First because the
filters in the MNPA produce a different starting pool of patents from that in
the HPA. Second because the different approach to LTE means many Samsung
families found essential in the HPA would not have made it through the filters
in the MNPA but were then chalked up as inessential. Third because the way of
identifying a family as a handset family differs. In substance these are
either another way of putting the detailed points I have already considered or
they relate to the major sampling issue which comes next.
338.
For Dr Kakaes the key problem with Dr Cooper’s approach was that while a
random sample had been taken from the pool which was sampled, the pool which
was sampled was skewed. This was in two respects: first the pool from which
the sample was taken consisted of the patents deemed essential (and held by
Huawei or Samsung); and second the pool was actually only a subset of that
because it was also limited to patents which met certain MNPA filters such as
the pre-2009 cut-off. I have already dealt with the second point above but
that does not address the first point. As to this, Dr Kakaes acknowledged that
there will inevitably be errors in the evaluation process in the HPA but he
said those errors would point in both directions, i.e. essential patents could
be deemed not essential as well as not essential patents deemed essential.
Therefore sampling only from the pool deemed to be essential was skewed. To do
something like this sort of sampling appropriately, a random sample should have
been selected from the pool as a whole, before evaluation. For Dr Kakaes this
undermined the exercise entirely. Dr Cooper had sampled from what Dr Kakaes
called a very, very, very biased universe.
339.
The strength of Dr Kakaes’ view about this point came across in his oral
evidence. However to resolve this issue I need to address the most important
aspect of Unwired Planet’s attack on the HPA. That is because Unwired Planet’s
answer depends on its case that the essentiality evaluation in the HPA was a
coarse filter designed to screen out non-essential patents and had a tendency
built into it in favour of increasing the number of patents in the pool deemed
to be essential. Huawei disagrees.
340.
Without resolving this argument about the HPA I cannot complete my
consideration of the Revised MNPA. In order to decide issues as much as
possible in their proper context I will therefore suspend consideration of the
Revised MNPA, this being the last major issue, and turn to the HPA. Once I
have dealt with the HPA I will consider the implications of those decisions on
this aspect of the Revised MNPA and reach my conclusions on both the Original
and Revised MNPA.
The
criticisms of the HPA
341.
The HPA was run as an exercise as part of the Ericsson – Huawei
arbitration. That is not in dispute. The way the HPA was presented by Huawei
in these proceedings in the FRAND Statement of Case was wrong and should not
have happened. Huawei cannot simply blame Ericsson for demanding secrecy about
the arbitration. Huawei have an excellent UK legal team and the matter could
have been raised with the court (or even conceivably with another judge
although I cannot see that that would have been necessary). What has happened
is that the truth about how the HPA was devised and the reasons for it were not
presented properly from the outset. Although more came out at trial I am not
satisfied the full picture has been presented to the court.
342.
Huawei maintained in closing that:
“The exercise was overseen by Dr Kakaes and a team of
engineers from Thomson Reuters. The evaluators were not informed of the
identity of the ultimate client (i.e. Huawei) or of the opposing party in the
dispute for which the analysis was originally prepared (i.e. Ericsson), so as
to preserve neutrality.”
343.
I accept that the engineers who undertook the evaluation exercise at
step (5) of the HPA did not know that the client was Huawei when they carried
out their work. That is a virtue and in that sense the exercise was neutral.
However it was clear from Dr Kakaes’ answers in his oral evidence that Huawei’s
US lawyers, Sidley Austin LLP, were involved at various stages in the decision
making and possibly drafting of documents and I am not satisfied that the HPA
can be regarded as something set up independently of Huawei’s interests. It is
not possible to say. However just like the MNPA, what matters most is the
objective reasonableness of the steps, not the motives of the devisers.
344.
Unwired Planet take a number of points about the HPA but in my judgment
none of them matter except one, which is the submission that the evaluation
step (5) was in fact no more than a coarse filter to identify patents that Dr
Kakaes should look at properly later and has a tendency built into it in favour
of increasing the number of patents in the pool deemed to be essential. The
other points taken by Unwired Planet (about the initial dataset and technology
categories) are similar to the points I have rejected which Huawei took against
the MNPA. If the coarse filter point succeeds Unwired Planet do not need to
place further emphasis on the other issues and if it fails, they are not
significant enough to undermine the HPA outright. Just as they do for the
MNPA, the extra points serve to emphasise the inherent uncertainties in the
exercise.
345.
The evaluation exercise which was carried out was a huge undertaking.
Even then the average time per family was ½ hr. In a much smaller exercise on
a small subset of patents which Dr Cooper conducted he spent 5-6 hours per
family. He was not wasting time. Unwired Planet detected that in
cross-examination Dr Kakaes tried to resile from the onerous nature of the
task. I do not believe that is what he was doing. He was simply emphasising
that in parts some of the elements of the task may not be that difficult. In
his reports Dr Kakaes had emphasised that the analysis was not a rigorous and
thorough assessment of essentiality of all declared SEP families in the
relevant group, since carrying that out was not plausible without employing
vast resources. The exercise was based on what he called a “relatively quick
assessment”. In my judgment, given the number of families to deal with, and
the inherent complexities of the patents, standards and the task itself, it would
not be possible to make a definitive assessment of essentiality for the number
of patents in issue in the time available. I do not believe Dr Kakaes
suggested otherwise.
346.
In his written fact evidence Dr Kakaes addressed the Essentiality Review
Protocol. In paragraph 31 of his first witness statement Dr Kakaes described
the evaluation as follows:
“31. Accordingly, the second stage of the study was to
analyse the 11,384 Group 1 patent families to seek to determine whether or not
a patent that was declared essential to ETSI is, in fact, “essential”.
Conclusively confirming actual essentiality is a complicated and involved legal
and technical task. In this document, I use the term “is essential” (and
similar terms) to mean that, after evaluation, we have determined that there is
a reasonable basis for treating a patent as essential. In each such instance,
we reviewed the patent specification and claims and did not identify an
apparent reason to exclude the patent from being essential. Thus, a more precise
interpretation of this phrase is that such a patent has passed a screen to
exclude non-essential patents.”
347.
Unwired Planet say this shows that patents were deemed essential as long
as there was a reasonable basis to treat it as such and only excluded if an
apparent reason to exclude it had not been identified. The method was in Dr
Kakaes’ words a screen to exclude non-essential patents. On its face this
description accords with Unwired Planet’s submissions.
348.
In paragraph 41 of the same statement Dr Kakaes explained that if the
standard being considered required all the elements of one of the claims being
considered, then the patent family was deemed essential. Expressed that way
there is no tendency either way but in a footnote to this paragraph Dr Kakaes
then said: “To be more precise, the reviewers determined that the declared
standard specification(s) did not provide a clear reason to rule out the patent
as being essential.” Unwired Planet say this reflects the same tendency they
contend can be seen in paragraph 31.
349.
Unwired Planet also pointed to the protocol document exhibited by Dr
Kakaes which provided that the evaluators in which the word “substantially”
appeared in a context which expanded the scope of what would pass as
essential. The text is:
“Compare the selected claims with the declared standard
specifications and determine whether the standard specifications substantially
require all the elements of the claim.”
(my emphasis)
350.
These points were all put to Dr Kakaes in cross-examination. He did not
accept Unwired Planet’s characterisation of the effect of these passages. One
suggestion he made in cross-examination and repeated in re-examination was that
the explanation related to a detail of ETSI IPR Policy which is involved in
considering whether it is not possible on technical grounds to do otherwise. I
accept Dr Kakaes’ evidence that this detail of the IPR Policy, which would
involve proving a negative, did not form part of the assessment of essentiality
but I do not accept that it is what passages in the written evidence were
talking about.
351.
I accept Dr Kakaes’ testimony that he checked numerous entries and found
errors going both ways, including patents the evaluators should have placed in
the deemed essential collection but had not done so, perhaps because they read
the claims too narrowly or missed additional standards. I also accept that he
spent hundreds of hours checking results and answering queries from the
evaluators. This supports Huawei’s submission that the aim of the HPA was to
apply a consistent approach to all the patents considered. I am sure a
consistent approach was applied. The debate is to properly characterise what
the approach was.
352.
Unwired Planet also put to Dr Kakaes something he said about Dr Cooper’s
detailed analysis of the sample deemed essential by the HPA. Dr Kakaes had
said he was not surprised that Dr Cooper’s more detailed studies had found that
a number of patents deemed essential in the HPA were not in fact essential.
That lack of surprise supports Unwired Planet’s point but when asked about it
Dr Kakaes said he just meant that he was not surprised Dr Cooper had reached
different views. I do not accept that explanation. The point was not simply
that Dr Cooper had reached different views, the point was that for patents
deemed essential, Dr Cooper had found quite a number of them not to be.
353.
Some of Dr Kakaes’ answers on this topic were rather difficult to
follow. I think a partial explanation for this was that in all his evidence
about the HPA as a methodology, particularly before the point at which the
arbitration point emerged fully but also afterwards, in the back of his mind Dr
Kakaes was worried about the arbitration and about what he thought he was and
was not allowed to say. This did not help but even taking that into account I
am left with one characterisation of the HPA in Dr Kakaes’ written evidence and
a different one in his cross-examination and re-examination.
354.
Weighing up the evidence I prefer to place weight on Dr Kakaes’ written
evidence. It was clearly written taking care to present a balanced explanation
of the exercise and its limitations. It is also inherently credible that an
exercise of this scale, which could only ever be a “relatively quick
assessment”, would err on the side of placing a patent family in the deemed
essential collection unless there was a sufficient basis not to. There is
nothing wrong with that provided it is understood that that is what is
happening. It is a sensible way of proceeding. Dr Kakaes felt a personal
ownership of the HPA and I think in the cross-examination he regarded the
questions on this topic as implying that the HPA was flawed. Therefore he
sought to defend it.
355.
I find that it is accurate to describe the evaluation step in the HPA as
a step which errs on the side of including a patent in the deemed essential
pool.
356.
I turn to consider the significance of Unwired Planet’s case about the
HPA’s role in the arbitration. The submission is that in truth the HPA was
designed to be just a coarse filter to identify patents that Dr Kakaes should
then look at properly, or in other words a screen to exclude clearly
non-essential patents. If that is right then it enhances Unwired Planet’s case
on the nature of the evaluation step.
357.
In cross-examination it was put to Dr Kakaes that Huawei needed to make
the process of assessing essentiality manageable by curtailing how long a
single family was to be considered. Dr Kakaes did not agree and wanted to
explain why but to give a complete answer required him to explain how the
results of the HPA were used. At this point it emerged that he felt unable to
give a full answer because of non-disclosure obligations he felt he owed
Ericsson as a result of the arbitration. Once in private and reassured that he
could speak freely Dr Kakaes explained that the HPA, which he called the
“study” was “just to figure out what the landscape is”. The study had two
steps, the census (i.e. steps (1) to (4) as described in this judgment) and the
essentiality study (step (5)). The information was passed on to Mr Lasinski
but Dr Kakaes said his (Mr Lasinski’s) usage of it was minimal. What Dr Kakaes
also did was analyse a subset of patents that were deemed essential in the
HPA. They were patents held by the parties to the arbitration - Ericsson and
Huawei. He said “I looked in detail, and in the subset of Ericsson essential
patents, and identified their importance and so on.” and added “a big part of
what happened next is this question of importance of Huawei and Ericsson
patents”. Finally, there was the following exchange:
60:13 MR SPECK: So
that's why you couldn't take an
14 industry average?
15 A. No, no. The
-- the usage of the -- of the study
16 that we've been
talking about, the study referring to the
17 census and
essentiality, was very limited because -- and the
18 reason for doing that,
at least one of the reasons, was to
19 flesh out what's
Ericsson and what's Huawei, without ever
20 telling the team in
India who the players are.
21 MR JUSTICE
BIRSS: I see.
22 A. So the
players were ignorant. They said: here is
23 the census. Here is
the essentiality results for all the
24 companies. And then
we looked at the Ericsson universe and
25 the Huawei universe,
to do further study and analysis, which
61: 1 is -- as my Lord
observed -- irrelevant.
358.
Unwired Planet say this proves their point. Huawei do not agree. In closing
counsel for Huawei placed emphasis on the word “importance” in these passages
and submitted that the further detailed study which Dr Kakaes was talking about
was not a study of essentiality, it was a study of “importance”. That is a
term he had used elsewhere in his report as relating to the value of an
invention, i.e. the importance to the standard of the technology covered by the
patent. In other words it is accepted (plainly rightly) that Dr Kakaes here
was explaining that there was further detailed study and analysis of patents
placed into the deemed essential pool by the HPA, but Huawei argues that the
nature of that further study was about importance and so does not support the
idea that the HPA was a coarse filter on essentiality on the footing that
patents could always be weeded out later on more careful consideration of that
aspect.
359.
I readily accept that although it was not apparent at the time he was
speaking, Dr Kakaes was using the word “importance” there in the same sense as
elsewhere in his report. But I am not persuaded that this takes one as far as
Huawei seek to go. First of all, if it matters, Dr Kakaes did not say in these
passages that “importance” was the only thing considered in the further study.
Secondly, “importance” is concerned with evaluating the importance of the
patent’s technology to the standard and therefore cannot help but traverse the
same ground as essentiality. The idea of undertaking a further study of
importance without noticing whether a patent is essential is unreal.
360.
The HPA was devised for and used in the arbitration and regrettably the
court has not been presented with a full picture of the HPA. I find that what
we call the HPA was devised not simply as a scheme to produce an end result in
itself, but as a form of filter or screen to produce a pool for further study.
That is consistent with all of what I know now. On that basis there is nothing
surprising about the idea that the evaluation would err on the side of
essentiality since there was going to be a further detailed study which
involved considering the patented technology and the standard. Given that,
there was no harm in including more patents in the deemed pool than would turn
out to be essential on detailed study. What one would seek to minimise was
missing patents from the deemed pool which might be essential. Unwired
Planet’s characterisation of the nature of the evaluation step in the HPA is
correct.
The HPA –
conclusions
361.
The task the HPA performs is an inherently difficult one. The answers
can only ever be approximate. In the HPA the essentiality evaluation step is
and was intended to be a coarse filter to screen out non-essential patents and
to err on the side of including a patent in the deemed essential pool. This
does not mean the method is flawed or unreliable. I am satisfied that the HPA
has applied a consistent yardstick and produces meaningful results. It is a
reasonable attempt to deal with over-declaration and derive information about
how many essential patents there really are. When comparing large numbers on a
like with like basis, the tendency built into the evaluation step matters much
less. However as an absolute value, the numbers from the HPA over-estimate the
true number of essential patents. In other words, if a number derived from the
HPA is used as the denominator in a fraction in which the numerator is a number
derived by considering the patents in more detail, the result will understate
the significance of Unwired Planet’s patents. Furthermore for smaller pools
the coarse nature of the filter is likely to matter more and produce a greater
uncertainty in the numbers.
362.
Huawei derive the HWLTER of 6.75% using the HPA on its own and so they
can fairly submit it is the result of applying the HPA consistently. However
that number is based on a numerator which gives the same number of Relevant
SEPs in Unwired Planet’s portfolio as Dr Cooper’s more careful analysis. I
find that Dr Cooper’s analysis is likely to be closer to the true figure.
Compared with this, raw figures from the HPA tend to be overestimates. The
impact of that will apply to the denominator. I find the true strength ratio
R should be somewhat higher than 6.75%.
The implications
of the decisions on the HPA for the MNPA
363.
I can now return to the Revised MNPA. To recap the point is that Dr
Cooper performed a more detailed study of a sample of patents belonging to
Huawei and Samsung which were in the deemed essential pool of the HPA. Huawei
submitted I should place no weight on Dr Cooper’s assessment because by
sampling only from the deemed essential pool, the exercise was badly skewed.
Unwired Planet’s answer was that the nature of the evaluation step in the HPA
meant it was reasonable to focus on patents which passed the filter and assume
that those patents which were discarded as not passing the filter would not
have been found essential by Dr Cooper. I have accepted that this step of the
HPA does increase the pool of essential patents and errs on the side of putting
a patent in the deemed pool. Accordingly, one would not expect there to be as
many patents in the discard pool which would in fact turn out to be essential
after a detailed 5-6 hour analysis, as there would be patents in the deemed
essential pool which turn out not to be essential. There will be errors going
both ways, as the evidence established, but the inherent tendency built into
the evaluation exercise means that it is reasonable to expect many fewer
patents in the discard pool as having been wrongly rejected, than there are
patents in the deemed essential pool which turn out not to be essential. So
while selecting only from the deemed essential pool will inevitably skew the
result a bit, I am not satisfied that the skewing will be anything other than
small. It is a point to keep in mind when placing weight on the result but it
is not strong enough to justify rejecting the approach.
364.
Obviously more effort would lead to more statistical rigour, but the
effort of evaluating the number of patents Dr Cooper’s exercise did with 5-6
hours per patent family is already considerable. Even within the limits of the
enormous sums spent in costs by the parties in these proceedings, there is
force in Unwired Planet’s point that the approach taken kept the exercise
proportionate.
365.
In my judgment Dr Cooper’s study was a reasonable effort to assess the
essentiality rates of Samsung and Huawei.
The MNPA
–overall conclusions
366.
Having now been through all the points in detail I will stand back and
consider the MNPA as a whole. Broadly the HPA and MNPA are aimed at the same
difficult task. The MNPA has flaws but, apart from one aspect of the Original
MNPA, overall in my judgment the Original MNPA was and the Revised MNPA is a
reasonable attempt to derive information which allows one to assess the
strength of a portfolio of patents declared essential to LTE as against the
industry as a whole, from the point of view of what licensees would be
interested in. There are two critical caveats.
367.
First, as with the HPA, one needs to take care with the results because
the error bars are wide. However the results of the MNPA are not meaningless
and do not systematically favour Unwired Planet, as long as one does not think
the results are the true essentiality rates. The MNPA has a tendency to
understate the value of patents in China because of step (2) but for a global
benchmark the MNPA has utility.
368.
Second, with the MNPA, something like the 80:20 approach is necessary.
Unwired Planet’s description of the final number as the “True LTE handset pool”
is wrong. To use the Revised MNPA fairly demands the incorporation of some
step which gives some value for the patents which fall outside the so called
“True LTE handset pool”. That is a serious weakness.
369.
Huawei pointed out correctly that when the 80:20 approach was applied in
the Original MNPA it was applied differently, not to calculate a number
representing Unwired Planet’s patent share but rather to apply to the imputed
royalty stack. That is true but this way of putting Unwired Planet’s case was
advanced at the trial and it is right to consider it.
370.
Whether another ratio apart from 80:20 is a better reflection of the
different value of patents in the two pools is not something addressed in the
evidence. A majority of the residue patents will not be essential at all but a
good number will be essential to options and later developments of significance
to LTE (e.g. carrier aggregation, TDD and later MIMO patents). In terms of
individual patents, given the different sizes of the two LTE pools using
Unwired Planet’s figures, 80:20 makes an individual patent in the Relevant SEPs
pool about 34 times more valuable than residue. I think that is much too
high. That may be because the pool of Relevant SEPs is too small relative to
the residue pool or because the 80:20 ratio is too generous to Unwired Planet
or some combination of the two.
371.
The focus of the debate on the MNPA has been on 4G handsets but the
weaknesses exposed in it also apply to the numbers Unwired Planet contend for
in relation to infrastructure on 4G. The points made do not apply to the same
extent to Unwired Planet’s case on 2G and 3G.
(iv) Findings
about the strength of Unwired Planet’s portfolio
372.
The strength of Unwired Planet’s portfolio for multimode 4G handset
licensing is represented by two numbers: S (the share of the total Relevant
SEPs) and R (the ratio of Unwired Planet to Ericsson). For 4G multimode
handsets Unwired Planet’s number for S is 1.25% and for R is 10.50% (the
UPLTER). These are based on the MNPA and 80:20 approach. Given my findings
the true values are lower than this. Correspondingly Huawei’s number for S is
0.30% and for R is 6.75% (the HWLTER). These are based on the HPA. Given my
findings the true values are higher than this.
373.
A further aspect to keep in mind is that these numbers are supposed to
reflect various ratios of numbers of patents in different categories to one
another and they are linked in complicated ways. A simple illustration that
the differences between the parties are not simply in the magnitudes of S and R
is that Unwired Planet’s R is about 8 times bigger than its S whereas Huawei’s
R is about 20 times bigger than its S. I do not mean to say that that
relationship means anything in particular, the point is a reflection of
underlying differences.
374.
I am satisfied that both methods produce the wrong answer. The problem
is whether there is a better way to arrive at the right answer than doing my
best to choose values for S and R somewhere between the parties’ extremes.
375.
I thought initially that a virtue of what one might call the Revised
MNPA + 80:20 approach, based as it is on percentages such as the 16.6% at step
(7), would be that the method itself was more readily adjustable than the HPA.
For instance one could for example decide as a matter of judgment that 16.6%
ought to be 28% (the figure used in the Original MNPA). However the complexity
of the 80:20 adjustment, layered on top of the multimode adjustment and, if one
is considering R, also taking into account figures for Ericsson too, makes the
Revised MNPA + 80:20 approach impossible to adjust in a credible manner. The
only way it can be adjusted would be so broad brush that it would be mere
pretence to suggest it was more meaningful than doing my best to just choose
values for S and R somewhere between the parties’ extremes.
376.
The problem posed by the HPA is different. At its heart is the
evaluation of the team of evaluators which is not adjustable at all.
Nevertheless the way in which the key numbers are produced using the HPA as a
method is simpler and more transparent than the Revised MNPA + 80:20 approach.
I have concluded that the right way to reach a conclusion is to apply
adjustments to the figures derived from the HPA. The basis for the adjustments
is my qualitative evaluation of the evidence as a whole, primarily Dr Kakaes
and Dr Cooper, and including the indications given by the Revised MNPA + 80:20
approach. Since this is the approach I will take to 4G, I will take the same
approach to 2G and 3G.
377.
The significant overstatement in the HPA is the number produced for the
total pool of Relevant SEPs. The number for 4G handsets is 1812 and is much
too high. The corresponding number in the Revised MNPA is 355 but that number
is much too low if it is to represent all Relevant SEPs. I think both values
are out by about a factor of two. Half of 1812 is 906 while twice 355 is 710.
Splitting the difference takes one to 800. Standing back, about 800 is fair
and in my judgment an appropriate figure for the pool of 4G/LTE patents.
Applying that as the denominator in a fraction to determine the share S which
Unwired Planet’s patents represent from the pool gives 6/800 = 0.75%. I
appreciate that Unwired Planet’s 2G and 3G denominators derive from the
Fairfield/Goodman and Myers reports but it is reasonable to apply the approach
I am taking consistently and make an adjustment in the same proportion to the
numbers for the total pool of 4G infrastructure and for 2G and 3G patents. The
proportion will be 44% (=800/1812). I will include a multimode figure for
handsets but not infrastructure.
378.
This all produces the following tables:
Unwired Planet Share S for handsets
|
|
UP patents
|
HPA denominator
|
Adjusted denominator
|
S
|
2G
|
2
|
350
|
154
|
1.30%
|
3G
|
1
|
1089
|
479
|
0.21%
|
4G
|
6
|
1812
|
800
|
0.75%
|
Multimode
|
2G/3G
|
|
|
|
0.57%
|
2G/3G/4G
|
|
|
|
0.70%
|
Unwired Planet Share S for
infrastructure
|
|
UP patents
|
HPA denominator
|
Adjusted denominator
|
S
|
2G
|
1
|
305
|
134
|
0.75%
|
3G
|
2
|
886
|
390
|
0.51%
|
4G
|
7
|
1554
|
684
|
1.02%
|
379.
Turning to the ratio R between Unwired Planet and Ericsson and taking
the numerators as a given, the critical numbers are the numbers of relevant
Ericsson patents. For this exercise I will not try to distinguish between
handsets and infrastructure but just use Unwired Planet’s handset numerators.
It is simpler and fair. For 4G the Ericsson number given by the HPA is 101.
Here another adjustment has to be made but in my judgment a smaller
proportionate adjustment is needed here than the previous one. Unwired
Planet’s equivalent for the number of Relevant SEPs held by Ericsson is 34.
Unwired Planet’s denominator here (34) produces a figure for R for 4G alone of
17.65% which I find is an odd result even bearing in mind the small sample
sizes. Doing my best I think the right proportion is two thirds. Applying the
same proportionate adjustment to 2G and 3G produces the following table:
Unwired Planet:Ericsson ratio R
|
|
UP patents
|
HPA: Ericsson patents
|
Adjusted Ericsson patents
|
R
|
2G
|
2
|
32
|
21
|
9.52%
|
3G
|
1
|
63
|
42
|
2.38%
|
4G
|
6
|
101
|
67
|
8.95%
|
Multimode
|
2G/3G
|
|
|
|
4.76%
|
2G/3G/4G
|
|
|
|
7.69%
|
380.
All of these numbers are close enough to 5% so as not to be out of line
with the number of patents transferred to Unwired Planet from Ericsson’s
portfolio. The small sample sizes involved mean that reasonable deviations
from 5% are unsurprising.
381.
So for 4G multimode handsets I have concluded that Unwired Planet’s
share S of the total pool is 0.70% while Unwired Planet’s ratio to Ericsson R
is 7.69%. In principle these numbers ought to be linked by Ericsson’s share of
Relevant SEPs but the uncertainties mean that perfect consistency is not
realistic and I will not strive to find it.
(v) The
comparables in this case
382.
Having considered how the Unwired Planet patents stand as compared to
the industry and to Ericsson, the next step is to evaluate the various comparable
licences in evidence. The Unwired Planet licences may also allow me to arrive
at a rate directly. The bulk of the licences are Ericsson licences and the
ultimate objective with those is to arrive at a figure for the value E in order
to do the sum E x R.
(a)
2014 Unwired Planet - Lenovo
383.
The 2014 Unwired Planet-Lenovo was introduced in the section on Unwired
Planet’s case on rates above. The major debate about this licence is whether
any weight should be placed on the running royalty rates on the face of the
licence. Mr Lasinski said they were cosmetic. The rates are expressed in
cents per product but making sensible assumptions they compare favourably to a
royalty rate of 0.2%. The point is that the licence contains two lump sums
adding up to $100 million. On the face of the agreement […] is defined
as a prepayment of royalty while the […] balance is attributed to the
sale to Lenovo by Unwired Planet of certain patents. On its own terms
therefore no further running royalties will be due until the […] is
exhausted. Huawei contend that Lenovo wanted to attribute the whole $100
million to royalty pre-payment but accepted the […] split because they
thought they were safe that […] would not be exhausted during the term
(5 years plus an additional possible 2 years). Other factors which bear on
this are these: […]. Also there is a dispute about the attribution of
the […] licence element.
384.
A factor which does not have much significance is the difference between
the higher MM rate […] applied in […] and the lower […] OT
rate applied elsewhere (save for […]). Within the limits of the
uncertainties in this exercise these two come to a similar percentage rate when
the difference in product prices in these two markets is taken into account.
385.
The oral evidence about the Lenovo licence was given by Mr Robbins, who
had been personally involved in the negotiations on the Unwired Planet side.
There are also some Unwired Planet documents. The import of the evidence is
fairly clear. I find that both Lenovo and Unwired Planet thought it was highly
unlikely that the prepayment would be exhausted. (Mr Robbins in
cross-examination said “certainly unlikely”.) […]. Nevertheless it
does not follow from this that Lenovo did not care what the running rate was.
That is for three main reasons. First, it was not inconceivable that Lenovo’s
sales would be large enough over the term to exhaust the royalty. It was
possible that they would be that large if Lenovo enjoyed a very high rate of
growth, comparable to that of Samsung. The running royalty will determine the
rate at which the lump sum is used up. Second, […]. Third, […].
For these reasons I find that the running rate was the product of genuine
negotiation. The […] and, of course, the lump sum pre-payment itself,
meant that Lenovo’s interests were protected to a high degree in any case but I
find that Lenovo still had an interest in negotiating a lower rate. Their
interest was modest compared to the negotiation of the lump sums and other
terms, but it was tangible.
386.
The allocation of the lump sums between the patent purchase and the
licence as it appears on the face of the documents is not reliable. Mr Bezant
and Mr Lasinski were agreed about that. As I understand the case presented by
each side, neither party seeks to unpack a lump sum notionally attributable to
the licence in order to generate a comparable royalty rate nor does either
party seek to use a sum attributed to the value of the patents sold to generate
useful evidence for the value of Unwired Planet’s patents. Therefore it is not
necessary to reach a view about what the proper attribution would be. If I had
to do so I would find the large majority of the value should be attributed to
the patent purchase.
387.
Focussing on the licence itself, it is a licence for SEPs and
implementation patents but as drafted there is no information to allow one to
make an attribution between these two.
388.
In his Sixth report Mr Bezant plotted what the comparable Lenovo rate
might look like if one assumes […]. To do this also involved taking
Huawei’s sales profile as a royalty base. This is not a reliable comparable at
all. I will not place weight on it.
389.
I conclude that the Lenovo licence is not a useful comparable from the
point of view of setting a FRAND rate today given the other evidence now
available. However its utility depends on the other evidence available and so,
from the point of view of Unwired Planet in 2014, who were not privy to the
terms of any licences to which they were not a party, it may bear more weight.
I will address that in context if necessary.
(b)
Unwired Planet-Samsung 2016
390.
As part of a settlement of these proceedings and after PanOptis acquired
Unwired Planet, the Unwired Planet-Samsung licence was entered into on 28th
July 2016. Huawei contend it is in principle the best comparable in the case
while Unwired Planet contend it is a poor comparable.
391.
As Huawei put it, they rely on the licence for both the FR and ND
elements of FRAND. At this stage I will focus on the weight and significance
to be attached to this licence as evidence of the fair and reasonable value of
the Unwired Planet portfolio in 2016. Hard edged non-discrimination will be
dealt with later.
392.
Under the licence Samsung paid Unwired Planet […] in cash and
assigned a portfolio of 20 patent families in return for a worldwide licence
under Unwired Planet’s SEP and non-SEP portfolio until […] together with
a release of any past damages. Before one decides how much weight to place on
any royalty rate information derived from the licence, Unwired Planet contend
that this licence cannot be seen in isolation and needs to be considered in the
context of a wider arrangement between PanOptis and Samsung and the distressed
financial position Unwired Planet was in when acquired by PanOptis. This depends
on Mr Ware’s evidence. Huawei’s case is that the facts of what went on are now
sufficiently clear to show that the wider factors make no material difference.
Unwired Planet disagree and contend that the two issues of rate and context
interact directly because any royalty rate derived from this licence is truly
much lower than the rates which Huawei put at the forefront of their argument
on this licence and that this is a reflection of context.
393.
So in order to derive a royalty rate from this one needs […],
ascribe a value to the Samsung patents assigned to Unwired Planet, take into
account the value of the non-SEPs and work out a way of assigning value as
between 2G, 3G and 4G. The way Mr Lasinski assigned value between 2G/3G and 4G
is not in dispute.
394.
Mr Lasinski derived a range of possible rates and presented them in two
tables, one for […] and the other assuming […]. The provisions […]
in the licence are complicated but do not need to be explained. Each table
then shows the implied royalty rate depending on the value attributed to the
assigned patents – from […] to […], and the percentage of royalty
attributable to SEPs rather than non-SEPs from 25% to 100%. As the value of
the assigned patents rises the royalty goes up because in effect Samsung have given
more value for the licence. Also as the percentage rises the rate rises too,
because it is a rate for the SEPs rather than the non-SEPs. The 4G rates range
from […]. The 2G/3G rates vary accordingly from […] to […]
on the same basis.
395.
Mr Lasinski made a point relating to the similarity of rates implied by
the […] licence and the […] licence. Similarly in figure 4 of
his third report which is set out above Mr Lasinski plotted rates derived from
the Unwired Planet-Samsung 2016 licence on the chart together with rates from
those two Ericsson licences and two other data points. Unwired Planet
criticised this and submitted its effect was to make the rates derived from the
Unwired Planet-Samsung 2016 licence look closer to the other three Ericsson
licences than they really are. That is because the rates used were the highest
rates Mr Lasinski derived from the Unwired Planet-Samsung 2016 licence and
while the difference is still a factor of […], if more realistic rates
were used for the Unwired Planet-Samsung 2016 licence it would be shown to be
an outlier. Mr Lasinski did not accept that was why he had chosen to plot
those rates in Figure 4 and since the idea that Mr Lasinski was setting out to
mislead was not put squarely to him in this context, it would not be fair to
him to make a finding on that.
396.
However, objectively speaking, by including only the highest rates from
Mr Lasinski’s tables for the Unwired Planet-Samsung 2016, Figure 4 is capable
of misleading. The assumptions on which the highest rates are based […].
However, Mr Lasinski accepted that […] was more realistic and accepted
he had used a much lower SEP percentage (about 30%) when performing a similar
calculation on the Lenovo licence. His explanation that this was because he
did not regard Lenovo as a good comparable does not justify this difference.
On the assigned value Mr Lasinski took Mr Ware’s acceptance of a figure of […]
despite having earlier expressed the view that […] and despite generally
not accepting Mr Ware’s evidence. On that Unwired Planet submitted Mr Lasinski
was being inconsistent and selective. There is some force in that but given Mr
Ware’s evidence I will use the […] figure. Mr Ware said they included
some SEPs which PanOptis considered to be essential to LTE, and some
implementation patents which PanOptis considered related to popular features of
the best-selling handsets.
397.
There are major uncertainties deriving implied rates from this licence
but the figures used in Mr Lasinski’s figure 4 are too high. […]. On
these assumptions the 4G rate ranges from […] to […] and the
2G/3G rate ranges from […] to […]. These are all far lower than
the other rates in Figure 4 and relied on by Huawei as best comparables. It
supports Unwired Planet’s case that the Unwired Planet-Samsung 2016 licence is
an outlier and that Unwired Planet are right that Mr Lasinski’s purported
generosity to Unwired Planet in his calculations is a wolf in sheep’s clothing.
398.
Mr Bezant’s view of this licence was that there were a number of factors
which significantly reduced its reliability for the purposes of assessing FRAND
offers in 2016. He addressed the implied aggregate royalty burden produced by
using Mr Lasinski’s figures for this licence combined with the HPA and also
with the MNPA. While I can see Mr Bezant’s point, it does not add anything to
the analysis because it is just another way of explaining that the rates are
low.
399.
In principle, it is obvious that one would expect a licence granted
under the same portfolio, to one of the parties in the proceedings, would be an
excellent comparable. Huawei pointed out that in British Phonographic
Society v MCPS [2008] EMLR 5, the Copyright Tribunal held that a
settlement by a co-defendant can be an “outstanding” comparator. There is no
doubt it can be, the question is whether it is. Before turning to the context
in which the licence was entered into, having now analysed the licence itself,
it can be said that the terms on their face raise a question mark over this
licence as evidence of the fair and reasonable value of the Unwired Planet
portfolio in 2016. Even taking into account the uncertainties, the rates are
significantly lower than the rates Huawei contend for in these proceedings and
are significantly lower than the rate implied by […].
400.
Unwired Planet’s version of the context relevant to understanding this
licence is the following. PanOptis is a licensing company. It has an existing
relationship with Ericsson. It had considered buying the Unwired Planet
portfolio in 2014 but did not. In March 2015 PanOptis offered $75 million for
the portfolio but Unwired Planet wanted $100 million and no deal was done.
From about July 2014 PanOptis started having commercial discussions with
Samsung. They included the possibility of Samsung taking a licence under other
PanOptis telecoms patent portfolios and by the summer of 2015 they included the
possibility of a wider strategic partnership. In July 2015 Unwired Planet
approached PanOptis again, this time about purchasing the licensing companies
themselves. In September 2015 PanOptis offered to buy Unwired Planet for $35
million. […].
401.
Mr Ware’s evidence was that the reason that PanOptis were interested in
this deal was because it would be “solving a problem for Samsung that would
significantly assist the development of the wider strategic relationship we
were in the process of negotiating and that could ultimately be of enormous
commercial value to us”. He also said that without this the acquisition of the Unwired
Planet portfolio in late 2015 did not fit with his strategic vision.
402.
At about the same time that Samsung had approached PanOptis with this
idea, Ericsson also approached PanOptis encouraging it to purchase Unwired
Planet. Ericsson was keen for PanOptis to purchase the portfolio as it
considered PanOptis to be a safe pair of hands. The fact that Ericsson wanted
PanOptis to purchase the portfolio was an additional reason why PanOptis were
interested in doing the deal because it would strengthen PanOptis’ existing
strategic partnership with Ericsson. Ericsson also indicated that it would be
prepared to waive the revenue sharing arrangements, which would allow PanOptis
to license the Unwired Planet portfolio as it saw fit and which would avoid
Ericsson needing to be part of any litigation with prospective licensees.
403.
There were various negotiations and by March 2016 PanOptis dropped its
offer price from $50 million to $40 million due to Unwired Planet’s worsening
financial position.
404.
Mr Ware said that PanOptis was able to purchase Unwired Planet for a
price which did not represent the value of Unwired Planet’s patents. In his
view that was because Unwired Planet was on the verge of insolvency. It had
told shareholders that it would run out of cash reserves in July 2016 and was
desperate to get out of the licensing business, to a significant degree as a
result of the difficulties Unwired Planet had encountered in trying to license
the portfolio and the cost of litigation. Unwired Planet characterise this as
a fire sale. […]
405.
Once PanOptis had purchased Unwired Planet it approached Samsung and the
licence was concluded in very short order. Under that licence Samsung agreed
to pay […] in cash and transfer the patents mentioned already for which
I have used a value of […]. Mr Ware emphasised what he called other
considerable benefits that PanOptis gained from concluding the licence with
Samsung in addition to the cash and transferred patents. These were: the fact
that it […], the fact that it […] and strengthening the
foundations for a far wider commercial relationship with Samsung in the future.
406.
Huawei do not agree with the way the transaction is characterised by
Unwired Planet. They say in response:
i)
PanOptis had been attempting to buy Unwired Planet well before Samsung
even came into the picture and clearly had enough money to do so at all
material times.
ii)
In March 2015, having done extensive due diligence, and knowing Unwired
Planet was embroiled in major litigation in numerous jurisdictions, PanOptis
offered $75 million to purchase the portfolio because they had concluded it was
a good fit.
iii)
When the September 2015 offer was made all Mr Ware had was a strong
feeling that Samsung would take a licence at […] but he accepted in
cross-examination that PanOptis was “flying a bit blind” and “taking
a risk”.
iv)
In terms of its wherewithal, PanOptis has 60-70 shareholders including
pension funds, hedge funds, and Yale University. In terms of cash available to
buy Unwired Planet, on 19 December 2015, Ericsson extended a convertible loan
of $100 million to PanOptis and in December 2015, PanOptis received a further
$160 million of licensing revenue. PanOptis was certainly not in any state of
distress when it committed to buy Unwired Planet in April 2016.
v)
There was no commitment of any kind by Samsung, at any stage, to take a
licence at […]. It was simply a feeling acquired by Mr Ware in meetings
conducted “over a very long dinner and drinks” with no written records
at which it was conveyed to him that he would be doing a “great favour to
Samsung”.
vi)
When Samsung ultimately did take a licence it paid […], since in
addition to the […] Samsung transferred patents which Mr Ware accepted
were worth […].
407.
Huawei submit that the suggestion that PanOptis accepted a […] price
from Samsung because of the […] element to the acquisition does not sit
with the facts of the case. Whether or not Unwired Planet was in financial
distress is irrelevant. The licence was granted months after the purchase by PanOptis,
who were certainly not in any financial distress. The benefits to PanOptis
which are relied on were simply ordinary commercial aspirations and no more.
Mr Ware accepted that discussions with Samsung on other PanOptis portfolios had
pre-dated anything to do with Unwired Planet and accepted that the first time
any written link between the licence and other PanOptis licences was recorded
was in his witness statement. He likewise accepted that there was no link
between […] and the acquisition nor was there any suggestion of a link
with […]. Huawei contend that Mr Ware accepted that these areas were
simply aspects in which he hoped his relationship with Samsung would develop
and more business would be done. Huawei submit that no link between the licence
and any of these other issues was ever made or suggested to Samsung and none of
the other alleged “benefits” was an actual additional cost to Samsung in any
event.
408.
I have set out the parties’ rival cases on this licence at length
because it plays an important role in this case. If it is sound evidence of
the value of the Unwired Planet portfolio then that would reduce the fair,
reasonable and generally non-discriminatory royalty rate. My findings on the
context in which the 2016 Unwired Planet-Samsung licence arose are as follows.
By the time it was purchased Unwired Planet was in serious financial trouble.
The only licence Unwired Planet had been able to agree was with Lenovo and
Unwired Planet was engaged in very expensive multinational patent litigation in
an effort to establish its rights. By late 2015 – early 2016 Unwired Planet was
close to insolvency. I accept Mr Ware’s evidence about what happened. The
price PanOptis paid for Unwired Planet was lower than the market value of the
patent portfolio because of the serious financial difficulties Unwired Planet
were in at the time. As regards his discussions with Samsung, the picture Mr
Ware painted of the reality of high level negotiations with that major
multinational organisation was convincing and credible. PanOptis had the
ability and the means to buy Unwired Planet in any event but I find that the
key reason why PanOptis did buy Unwired Planet when they did and for the price
they paid was in order to build trust with Samsung and because Samsung were
prepared to take a licence under the portfolio in a deal in which the cash
component […]. The purchase was being “de-risked”, as Mr Ware put it.
The long term benefits to PanOptis which would derive from this were regarded
by PanOptis as important and are in fact potentially very valuable. The
arrangements did not give PanOptis a contractually enforceable right to the
benefits derived from building trust with Samsung but that does not mean it was
not well worth doing.
409.
These findings about the context of the licence together with the
findings about low rates in the licence itself support one another. I conclude
that the licence does not represent useful evidence of the market value of the
Unwired Planet patent portfolio.
(c)
Ericsson-Huawei 2016
410.
This is the current licence between Ericsson and Huawei. It was signed
on 13th January 2016 with effect from 20th November
2014. […]. It is a cross-licence and covers 2G, 3G and 4G SEP
portfolios as well as some other standards. Huawei receive a worldwide licence
on infrastructure and handsets. The definition of what products are licensed
is broader but the details do not matter. Ericsson receives a worldwide
licence on sales of infrastructure.
411.
The issue to resolve concerning the Ericsson-Huawei 2016 licence is the
significance of the fact that its key terms were the product of an
arbitration. I can deal with this shortly because I believe the answer is
clear. Terms which were settled by an arbitrator are not evidence of what
willing, reasonable business people would agree in a negotiation. In that
sense a royalty in the licence is not probative of the market value of the
portfolio under licence at all. Decisions of other courts may have persuasive
value but that will largely depend on the reasoning that court has given to
reach its conclusion. An arbitral award is at least capable of having a
similar persuasive value, but reasoning supporting the terms in this licence is
not available. I know that the arbitrators […] and I also know that this
is not far above […] rate from […] licence ([…]). It is […].
Dr Kakaes and Mr Lasinski were witnesses in the arbitration and they have given
some very brief evidence about what the arbitrators did or did not rely on. Mr
Lasinski said that the arbitrators […]. I am not prepared to place
weight on this evidence in relation to the value of Ericsson’s portfolio.
There is no good evidence of […]. Moreover without seeing the reasoning
of the arbitrators one cannot see how they arrive at the conclusion they did.
412.
Huawei submitted the licence was relevant because it was a rate someone
(Huawei) was paying. So they are, but since the arbitrators imposed the rate,
the fact they are doing so is not evidence of the value of the portfolio.
413.
There was also a dispute about the significance of the fact that […].
Huawei’s case as put in cross-examination to Mr Bezant was that […].
Without sight of the arbitrators’ reasons I cannot accept that submission.
(d)
Ericsson-Samsung 2014
414.
This is the current licence between Ericsson and Samsung. It was signed
on 1st February 2014 with effect from 25th January 2014.
[…]. It is a cross-licence and covers 2G, 3G and 4G SEP and
implementation patent portfolios as well as some other standards. It covers
user equipment and infrastructure.
415.
There are complications relevant to deriving a simple rate or rates from
this licence. First it includes other elements: in particular Samsung
committed to buy […] thin modem products from Ericsson. Second it
includes non-SEPs, is a cross-licence, and […]. These all need
unpacking. However as has been addressed at earlier points in this judgment,
in fact the unpacking process and the first element (thin modem), produce
reasonably consistent results with a range of a 4G rate of […]. Mr
Lasinski’s unpacked 2G-3G rate is […] and I accept his evidence in that
I will take the unpacked 2G-3G rate to be […] if the 4G rate is his […]
figure and to scale accordingly.
416.
The third complication is that the licence also contains […]
417.
Mr Lasinski referred to a witness statement of Mr Kim of Samsung. Mr
Kim was going to attend trial but following the settlement he did not. In the
relevant paragraph Mr Kim said that Samsung had agreed […]. Unwired
Planet criticised Mr Lasinski for this but I do not see the force in that
criticism since Mr Lasinski’s report makes his approach transparent so that the
court can understand the basis on which he approached it.
418.
Unwired Planet contended that little weight should be placed on Mr Kim’s
evidence because (i) he did not in the end attend trial, (ii) there is an
obvious reason why Samsung would wish to say the rates were cosmetic because
they had an interest in this action to keep comparable rates low, (iii) as with
Lenovo, there are good reasons why Samsung would not want a licence to contain
rates they thought were unreasonably high since those rates could be used in
later negotiations or in court, and (iv) although Ericsson was also a party to
this proceeding Ericsson’s fact witnesses had not been permitted to see this
part of Mr Kim’s evidence and so were unable to comment on it. The fourth
point came as a surprise to me during the trial (I had assumed Ericsson had had
a full opportunity to answer this evidence) and it seemed that Mr Lasinski had
made the same assumption.
419.
[…]. However I reject the idea that the [rates] can be
dismissed as “cosmetic”. The sums at stake in this licence are measured in the
billions of US dollars […]. At least without hearing the witness give
evidence, I would be reluctant to accept the idea that any terms in such a
licence would be entered into as lightly as Mr Kim’s statement would suggest.
As with Lenovo, in this case the putative licensee (Samsung) had a real
interest in negotiating these rates and a real interest in having lower rates
rather than higher rates. I will assume Samsung’s expectations were that […]
it was not likely to have to pay the rates. All the same it would always
have been possible that sales could be such that the rates were paid and in any
event the rates could be used in later negotiations or in court.
420.
Standing back, this licence represents a solid piece of evidence of what
reasonable people in the industry would do. The two parties have broadly
equivalent economic strength. It has been freely negotiated rather than set by
an arbitrator. There was litigation between Ericsson and Samsung before it was
agreed but I doubt parties of the size and sophistication of these two were troubled
by that. This licence is solid evidence from which one can infer what a fair
and reasonable value of the portfolio under licence might be. All the same
that inference is not as simple as a statement that the implied 4G rate for
Ericsson’s portfolio is in the range of […]. The parties also
negotiated and agreed […].
(e)
Ericsson-Huawei 2009
421.
This is the previous licence between Ericsson and Huawei. It was signed
on 21st April 2009 with effect from 1st January 2009. It
included a release, the details of which do not matter. It expired on 31st
December 2012. It is a cross-licence and covers 2G, 3G and 4G SEP portfolios
as well as some other standards. Huawei received a worldwide licence on
infrastructure and handsets. The definition of what products are licensed is
broader but the details do not matter. There were other related cross-licences
covering sales by affiliates including the handset sales by Sony-Ericsson. […]
422.
The Ericsson portfolio licensed under this agreement is defined in such
a way that it includes Ericsson’s 4G SEPs but Mr Lasinski’s approach was to
regard it as a 2G/3G licence given the timing and limited deployment of LTE
during the term. That is a reasonable approach and I accept it. In other
words insofar as the rate represents the value of a portfolio, the relevant
portfolio here is the 2G/3G portfolio rather than the 4G portfolio.
423.
[…].
424.
To produce a rate therefore involves unpacking. Unwired Planet point
out that unpacking this licence using the HPA produces a spurious result. I do
not think this was contested. Consistent with his approach for other Ericsson
licences Mr Lasinski used Ericsson’s approved contribution approach to unpack
the lump sums. Mr Bezant used the MNPA along with the 80:20 approach. The raw
rates arrived at by the two experts are […] and […] respectively.
Mr Lasinski explained he regarded the […] rate as “conservative” (in
other words high and therefore favourable to Unwired Planet) for a number of
reasons. They were two major points, first that further standards were
licensed as well as 2G/3G (CDMA and TD-SCDMA) and second how to treat the
Sony-Ericsson sales.
425.
Unwired Planet submitted that Mr Lasinski’s approach to this licence was
another wolf in sheep’s clothing in that the assumptions he had made were not
really in Unwired Planet’s favour at all. That was because the resulting rates
derived from this process were presented as corroborative of the rates derived
from the other major comparables relied on, whereas in fact the rates in this
licence are low and do not corroborate Huawei’s case. Another symptom of this,
submitted Unwired Planet, was that while Mr Lasinski had applied a 50%
adjustment to raw rates from other pre-2013 licences such as Ericsson-Yulong,
because he said the legal landscape changed around 2013 and licence rates after
that reduced, he had not applied that adjustment to the rate derived from this
2009 licence when it was presented in Mr Lasinski’s figure 4 (3rd
Report) which Huawei put at the forefront of their opening submissions.
426.
It is not right to say that Mr Lasinski did not apply the 50% adjustment
to the rates from this licence at all. They are in his reports. However it is
fair to point out that the derived rate which was given prominence was derived
using the unadjusted figure. Mr Lasinski’s second report suggested his
approach was justified because the 2009 licence was not entered into under the
direct threat of an injunction but that would apply to other licences for which
he did apply the adjustment.
427.
In cross-examination Mr Lasinski explained that the rates in the 2009
licence are low even for its age, which he thought was because of the unique
characteristics of Huawei at that time. At that time Huawei were primarily a
Chinese company, in other words primarily selling in China, and so the rate
reflects the lower rates for China even though formally the licensed territory
was the world.
428.
I accept Mr Lasinski’s explanation. The rates in the 2009 licence are
low relative to other licences which were concerned with sales outside China.
429.
Turning to the raw rates themselves, the difference between the numbers
produced by Mr Lasinski and Mr Bezant is about the same as the range of
unpacked rates from the Ericsson-Samsung 2014, so it is not such a big
difference in the context of the inherent uncertainties in this case.
Nevertheless I think Mr Lasinski’s number is likely to be too high given the
assumptions about other standards and Sony-Ericsson. I find that the
appropriate raw rate to use to represent the value of Ericsson’s 2G/3G
portfolio which was licensed here is […].
It is lower than other rates from a similar period but that is explained by Mr
Lasinski’s evidence about Huawei’s unique position in 2009.
430.
In order to apply that raw rate to 2014 or 2016 I need to address two
further points. First Mr Lasinski’s opinion about a reduction in rates after
2013 due to the change in legal landscape and second the use of a 2G/3G rate as
a comparator for 4G.
431.
Mr Lasinski said he had observed a general decline in rates since 2013 and
he referred to evidence from Ericsson that its internal reference rates for 4G
multimode handsets had halved from 2011 to 2015. Mr Lasinski attributed this
to the evolution of FRAND case law and the fact that there was limited guidance
about FRAND before 2013. Mr Lasinski referred to four US decisions cited above
(Microsoft v Motorola, In re Innovatio IP
Ventures, Realtek v LSI and Ericsson
v D-Link) which he described as “seminal”. He did not mean this as
a legal opinion, rather it was based on his experience of the impact of the
decisions in the licensing industry of which he was familiar. They span a
short time frame from April 2013 to December 2014. He also referred to
decisions outside the US, referring to Huawei v Interdigital
in China in 2013, Samsung v Apple in Japan in May 2014, Huawei
v ZTE in the CJEU in July 2015 and St Lawrence v Vodafone
on 31st March 2016 in the Düsseldorf District Court.
432.
I accept Mr Lasinski’s view that there is some evidence of a decline in
some rates over time and I am sure that at least part of the explanation is the
emergence by 2013 of decisions in which courts were prepared to set FRAND
rates, which in turn strengthened the bargaining position of licensees by
reducing the power of the threat of an injunction. However the trend is not
simple since the rate in the 2009 Ericsson-Huawei licence is, on any view, no
larger than […]. No doubt […] is part of the explanation. In
any event I am not convinced that one simply adjusts for all this by taking any
rate derived before 2013 and halving it. The evidence does not justify such a
simplistic approach.
(f)
Ericsson – Yulong 2013
433.
This licence was signed on 1st February 2013 with effect from
1st January 2013. […]
434.
The licence contains a […]
435.
[…]
436.
[…]
437.
An issue was whether it was legitimate to use numbers derived from 2G/3G
licences to compare to 4G rates. If a 4G rate is available there is no reason
to use rates for 2G or 3G. On the other hand there is evidence in this case
which puts Ericsson’s rates for their 2G, 3G and 4G portfolios side by side.
Therefore one can draw some inference to gauge what an equivalent 4G rate might
be from evidence of the 2G/3G rate, albeit that comparison is indirect.
438.
[…]
439.
[…]
440.
[…]
441.
Yulong have challenged this licence in antitrust litigation in China.
That is clear evidence they think the rates are too high (and is rather
inconsistent with the thrust of other parts of Huawei’s case that Yulong are
unconcerned by the rates).
442.
Mr Lasinski applied his 50% adjustment to the rates in this licence for
the developments in FRAND case law given that it was signed in 2013. I have
rejected such an approach as too simplistic.
(g)
Ericsson: […]
443.
These are three […] licences with […] with royalty rates
which can be read off the agreements. The licensees are all small and the
geographic spread of their sales is modest, albeit […] that could be
said to enhance their utility. […]. Brief details of the three
licences are:
i)
The […] licence and the […] licence are both dated 2012
and are 2G and 3G only. The rates are […] respectively.
ii)
The […] licence is dated 2011 and covers 2G, 3G and 4G. The
rates are […] respectively.
444.
There was a suggestion that Unwired Planet or Mr Bezant singled out
these licences as opposed to licences with larger licensees such as ZTE, RIM,
Huawei or Samsung but Unwired Planet explained that that is not what happened.
The case management directions included provision for parties to choose certain
licences to inspect. The choices were sequential and Unwired Planet’s choice
was made after licences from bigger players had already been chosen.
445.
Mr Bezant plotted rates from these licences on his charts and in doing
so recognised their limitations. In cross-examination Mr Lasinski explained
that he thought it was unlikely parties of this size would conduct the sort of
detailed negotiations one saw as between the bigger players. I accept that up
to a point. It is a factor to bear in mind when placing weight on rates in
these licences but looked at another way it is a reflection of the inability of
smaller licensees to resist hold up.
(h)
Ericsson – ZTE 2011
446.
ZTE is a very large Chinese company with worldwide reach. Huawei
accepted that ZTE was more similar to them than Yulong or RIM.
447.
This licence runs from 1st July 2011 […]. There is […].
It is a cross-licence for 2G and 3G handsets and infrastructure.
448.
The royalty structure is complicated. […] Mr Lasinski pointed
out that the table includes some anomalies such as a […] rate for a […]
whereas it is unlikely such things existed in 2011. He pointed out that Mr
Bezant had nevertheless used that rate. I agree it is not a sensible rate to
use. However I doubt that example makes an enormous difference since the
licence includes similar rates for […].
449.
Other factors to take into account are these: first, as a 2011 licence
Mr Lasinski’s point on FRAND case law is relevant; second, Mr Lasinski
explained this licence followed lawsuits in Europe; third, the licence is only
for 2G and 3G; and fourth […].
450.
Mr Bezant plots three figures derived from this licence in the chart
above. That is unwarranted.
451.
[…]
(i)
Ericsson-RIM
452.
The Ericsson-RIM licence was entered into on 21st December
2010 and ran from 1st January 2011 to […]. There is […].
It is a cross-licence under 2G, 3G and 4G SEPs as well as other standards. RIM
received a worldwide licence for handsets and other things. […].
453.
Mr Bezant accepted this licence was more difficult to interpret than
Yulong or ZTE. The major issues are (i) complications […] mentioned
already and (ii) the “high end” nature of RIM’s products. RIM make or made the
Blackberry handsets which in their time were popular, successful and expensive
devices in the USA and Europe. Huawei made an additional point in closing that
this licence was concluded before a general decline in selling prices of
handsets experienced from 2013 onwards but in his oral evidence when the point
was put Mr Bezant accepted there was pressure on prices because of new products
but did not think it was as absolute as was suggested.
454.
Mr Bezant plotted three rates from this licence in the chart based on […].
As before, plotting three figures in this way is capable of misleading. The
licence bears comparison with the […] rates in the ZTE licence because
RIM and ZTE are (or were at the time) large companies able to look after
themselves. Looking at the licence as a whole, what one sees are rates broadly
comparable to the […] ZTE rates.
455.
Mr Lasinski’s response to Mr Bezant’s reliance on this licence was with
a rate of […] arrived at by applying his 50% adjustment to Mr Bezant’s […]
rate.
(j)
Ericsson – Apple 2008
456.
This licence was entered into on 14th January 2008 […].
It is a 2G and 3G SEP cross-licence with […]. Apple’s licensed products
are handsets whereas Ericsson’s include handsets and infrastructure. […].
Mr Bezant derived two benchmark 3G rates from this licence, […], and
plotted implied Unwired Planet rates derived from each on the chart.
457.
A point on this licence is that Apple’s selling prices per unit are very
high and so a low rate expressed as a percentage of selling price may not
readily equate to a percentage of another company’s selling price. Mr Bezant
aimed to take this into account when deriving a benchmark rate […] by
using an industrial average selling price but I was not convinced the process
produced results on which any weight can be placed. The exercise adds a
further level of significant uncertainty onto an already uncertain exercise. Apple’s
interest was to negotiate how much they had to pay, not to negotiate what the
benchmark rate would be.
(k)
Ericsson-Sony 2012
458.
This licence arose from the divestment of Sony-Ericsson by Ericsson.
Its effective date is 15th February 2012. It is a licence under 2G,
3G and 4G standards and other standards and covers SEPs and non-SEPs. […]
459.
This licence is difficult to interpret because there are interrelated
transactions concerning the Sony-Ericsson divestment. Mr Bezant was prepared
to place some weight on the rates in this licence (implied rates from the two
mentioned are plotted on the chart) but recognised that the related
transactions and other factors reduced the reliability of the rates.
460.
Mr Lasinski’s view was that this licence should not be included in the
assessment, mainly because it is a related party transaction and also owing to
the other uncertainties. Unwired Planet pointed out that this stance was
inconsistent with the stance taken on the Unwired Planet-Samsung 2016. I
agree. They are not identical situations but the impact of the wider context
in which each transaction exists reduces the weight one can put on it. The […]
and the fact the […] also act to reduce the weight to be placed on this
licence
(l)
The Ericsson licences as a whole
461.
The only licence on Mr Bezant’s chart which has not been dealt with so
far is the 2001 Ericsson-Samsung licence. It has 2G and 3G rates of […]
respectively but it is so old that I will not rely on it.
462.
Having now reviewed all the relevant Ericsson licences, looking at them
as a whole is a useful exercise. The ones on which I am prepared to place any
weight are:
i)
Ericsson-Samsung 2014: […];
ii)
Ericsson-Huawei 2009: a 2G/3G licence with low […] rate which may
be regarded as a rate for China;
iii)
Ericsson-Yulong 2013: […];
iv)
Ericsson-[…]: […];
v)
Ericsson-ZTE 2011: […];
vi)
Ericsson-RIM 2010: […].
463.
The range of rates and the other uncertainties shows that there is no
point in worrying about the precise state of Ericsson’s patent portfolio in
considering them. Whether the portfolio is pre- or post-MSA, the divestment
for the Lenovo deal and other changes to the portfolio do not matter. The
uncertainty in these rates swamps those factors.
464.
I find that an appropriate rate to use as representative of the value of
E of Ericsson’s 4G SEP portfolio in licensing a multimode handset is 0.80%.
That is arrived at by looking at the range of unpacked rates in the [Q] licence,
starting from the top of that range, and adjusting upwards by a factor which is
[…]. I have arrived at this number and approach after considering all
the material. The main reasons for this are as follows. The [Q]
licence is the best place to start. The […] range represents the
payments [the licensee] will have been most concerned about and it makes
sense to start there. Taking the upper end of that range ([…]) is
appropriate because Mr Lasinski’s preferred figure is […] anyway and
because of the existence of […]. So I derive […] as the rate on
which to place weight from the [Q] licence. A further increase it is
appropriate to take into account is in the other Ericsson licences and in
particular the fact that all the […] rates are much higher than […]
including the […] rate which one would expect to be relatively low. But
it would not be appropriate to raise the […] rate up to the level of
these other rates because of Mr Lasinski’s point about FRAND case law. The
figure for E for multimode 4G of 0.80% is more than […] but less than […].
The final number was also derived as a number expressed to one decimal place
(0.8%) to recognise the uncertainties but in keeping with the convention used
in this case I have written it as 0.80%.
465.
For 2G and 3G I derive a single rate for E of 0.67%. That is arrived at
by scaling 0.80% with the ratio of Mr Lasinski’s 2G/3G rate to his 4G rate in
the […] licence. It is appropriate to do this because […].
466.
Turning to infrastructure, […] Taking all this into account I
conclude that there is no sufficient evidence of a consistent difference
between rates for single mode infrastructure and for multimode handsets which
is of sufficient magnitude to justify arriving at a different rate for
infrastructure. I find that the value for E for infrastructure should be the
same as the multimode 4G and 2G/3G handset rates, i.e. 0.80% for 4G
infrastructure and 0.67% for 2G or 3G infrastructure.
467.
The other inference to draw from standing back and considering […]
is that based on […] the rate for China should be half the rate for the
rest of the world. […]
(m)
Other licences
468.
The only other licences worth mentioning at all are by Qualcomm. The
rates are much higher […]. […]. I will not place weight on the
absolute levels of Qualcomm’s rates in assessing the level of a benchmark
rate.
(vi) Other indications relating to rates
469.
Mr Bezant’s charts often include the ARR, that is the royalty floor rate
in the MSA. I have already rejected its use in this way.
470.
Rates have been set in some of the decisions of foreign courts cited by
the parties.
471.
The Microsoft v Motorola, Innovatio,
and Ericsson v D-Link judgments are not concerned with 2G,
3G or 4G technology, they were mostly about the IEEE 802.11 standard (Microsoft
v Motorola was also about the ITU H.264 video standard). Therefore
the rates set in these are not readily comparable. The German FRAND decisions
do not set or approve rates.
472.
The IP High Court in Japan in the Samsung v Apple
case [R6/1] used the top down approach by deciding that the aggregate royalty
burden for 3G should be 5% and deciding that from families declared essential
there were 529 patents that are or are likely to be essential, I think based on
the Fairfield/Goodman & Myers study.
473.
In China in the Huawei v InterDigital case the
Guangdong High People’s Court upheld the FRAND rate of 0.019% for
InterDigital’s portfolio. This was arrived at by comparison with two rates
derived by unpacking other InterDigital licences. They were an
InterDigital-Apple licence with an unpacked effective rate of 0.0187% and an
InterDigital-Samsung licence with an unpacked effective rate of […].
These rates cannot be converted into rates relevant to this case without
carrying out another portfolio comparison which it not necessary. What this
decision does do is support Huawei’s case that rates in China are low.
474.
None of these other sources provide any reason to adjust the benchmark
rate I am seeking to derive. It is notable that the Japanese court and the
Chinese court have approached the determination of FRAND rates using the same
techniques as have been addressed in this case.
(vii) What is
the benchmark FRAND rate for Unwired Planet?
475.
The outcome of considering the comparables is that I have benchmark
rates for Ericsson of 0.80% for 4G and 0.67% for 2G and 3G and no other
reliable comparables. Given the previous conclusion for the strength ratio R of
Unwired Planet to Ericsson for 4G multimode handsets as 7.69%, that indicates a
benchmark royalty rate for Unwired Planet for a 4G multimode handset in 2016 is
0.062%.
476.
Applying the total royalty burden as a cross-check produces the
following. A benchmark royalty rate for Unwired Planet for a 4G multimode
handset of 0.062% coupled with a figure of 0.70% for Unwired Planet’s share S
of the Relevant SEPs for 4G multimode handsets produces a total royalty burden
T of 8.8%. That is lower than the aggregate implied by either party’s case
(Huawei’s 13% and Unwired Planet’s 10.4%). It is higher than the specific
numbers mentioned by patent holders in 2008 but not so far as to be out of
line. I conclude that the cross-check supports a benchmark royalty of 0.062%
for 4G multimode handsets. It is the appropriate rate.
477.
The figure for 4G infrastructure will be 0.072% using R = 8.95% for 4G
infrastructure (0.072%=0.80% x 8.95%). The cross-check T comes to 7.0% (using
S for 4G infrastructure of 1.02%) which is appropriate.
478.
The 4G figures as well as the corresponding figures for 2G and 3G are in
this table:
Unwired Planet benchmark FRAND rates
|
Handsets
(3G and 4G are multimode)
|
|
Ericsson
rate
|
Strength
ratio
|
Benchmark
rate
|
Share
|
Implied
total burden
|
|
E
|
R
|
ExR
|
S
|
T
|
2G
|
0.67%
|
9.52%
|
0.064%
|
1.30%
|
4.9%
|
2G/3G
|
0.67%
|
4.76%
|
0.032%
|
0.57%
|
5.6%
|
2G/3G/4G
|
0.80%
|
7.69%
|
0.062%
|
0.70%
|
8.8%
|
|
Infrastructure
(not multimode)
|
|
Ericsson
rate
|
Strength
ratio
|
Benchmark
rate
|
Share
|
Implied
total burden
|
|
E
|
R
|
ExR
|
S
|
T
|
2G
|
0.67%
|
9.52%
|
0.064%
|
0.75%
|
8.5%
|
3G
|
0.67%
|
2.38%
|
0.016%
|
0.51%
|
3.1%
|
4G
|
0.80%
|
8.95%
|
0.072%
|
1.02%
|
7.0%
|
479.
The total royalty burden T implied by each of these rates falls within
an appropriate range. The value of T for 3G multimode handsets at 5.6% is not
far out of line with the judgment of the internationally respected IP High
Court of Japan. The 3.1% value for 3G infrastructure is somewhat lower than 5%
but not far away.
480.
Subject to the hard-edged non-discrimination issue I conclude that these
benchmark rates are FRAND. They are fair, reasonable and generally
non-discriminatory.
(viii) The
impact of hard edged non-discrimination on the FRAND rate
481.
Huawei submit that pursuant to the non-discrimination limb of FRAND Unwired
Planet are obliged to offer the same or similar rates to Huawei as they have
extended to Samsung in the 2016 Unwired Planet-Samsung licence. In closing
Huawei called this a “hard-edged point” (Closing para 210) and I have adopted
that expression for the sake of clarity. This is the place in the analysis to
consider Huawei’s hard-edged point. To recap, whereas general
non-discrimination was taken into account in setting a benchmark rate for the
portfolio, general non-discrimination did not discriminate between licensees.
The benchmark would be equally applicable to a major player like Huawei as to a
new market entrant. The hard-edged non-discrimination argument includes
consideration of the position of particular licensees, in this case licensees
who are major players like Huawei and Samsung.
482.
At times it was not completely clear whether Huawei were running this
hard-edged point as an aspect of their case that 0.041% was the right rate for
4G, albeit a generous one, or whether this was a distinct issue in the sense
that even if 0.041% would otherwise be the right rate, the Samsung licence
means that a lower rate corresponding to that should apply. In closing Huawei
clarified that this is a distinct issue (Day 19 p194-195) such that if I accept
Huawei’s non-discrimination case I should set the rate as the same as the
Samsung rate.
483.
On Huawei’s case in closing the difference between Samsung’s rate and
the benchmark was a substantial, […] ([…] for Samsung vs a
benchmark of 0.041%). Given the findings I have made the difference is even
greater. A fair assessment of the 4G rate in the Samsung licence is between […]
to […]; whereas the 4G benchmark FRAND rates arrived at above are 0.062%
for handsets or 0.072% for infrastructure. Therefore this hard-edged point is
important and is capable of making a significant difference to the outcome.
484.
A significant aspect is an issue of principle which, so far as the
parties have been able to discern, no other court has had to face. The issue
is about how closely aligned the requirements of the non-discrimination limb of
FRAND pursuant to the ETSI FRAND undertaking are relative to the corresponding
requirements of competition law. It is common ground that competition law (Art
102(c)) only prohibits discriminatory behaviour to the extent that behaviour is
capable of distorting competition. The question is whether that condition or
something akin to it, which is not mentioned expressly in the ETSI FRAND
undertaking, is nevertheless a relevant aspect of ETSI FRAND. But in order to
get to this there is some ground to be cleared.
485.
Obviously FRAND has a non-discrimination limb, as I have already
explained. Huawei pointed out that both Mr Bezant and Mr Lasinski agreed that
that non-discrimination obligation “means that licensors should treat similarly
situated licensees similarly”. Huawei submit that in the jargon of
non-discrimination, Samsung are “similarly situated” to Huawei and so Unwired
Planet are obliged to offer the same or similar rates to Huawei as they have
extended to Samsung in the 2016 Unwired Planet-Samsung licence. Unwired Planet
do not accept the hard-edged point put by Huawei. Their case is that Unwired
Planet are not obliged to offer Huawei the same rate as the Samsung rate. That
is because Huawei are not “similarly situated” to Samsung; the Samsung licence
is not an equivalent or comparable licence to the Huawei licence being
considered; and, even if those two points are wrong, the non-discrimination
limb of FRAND contains the same or an analogous aspect as the requirement in
competition law only prohibits conduct which is capable of distorting
competition. Unwired Planet point out that Huawei have disavowed any attempt
to conduct the economic analysis necessary to establish that in this case. In
reply Huawei submit that no such analysis is necessary, citing British
Airways v Commission Case C-95/04 [2007] ECR I-2331.
486.
Competition law non-discrimination forms part of abuse of dominance. As
it relates to prices it can be summarised as follows. First the underlying principle
is that comparable situations must not be treated differently and different
situations must not be treated alike unless such treatment is objectively
justified (relying on Franz Egenberger C-313/04, EU:C:2006:454
at [33]). Second, Article 102(c) TFEU prohibits “applying dissimilar
conditions to equivalent transactions with other trading parties, thereby
placing them at a competitive disadvantage.” Dissimilar conditions will only
be unlawful where it is shown that there are (a) equivalent/comparable
transactions; (b) resulting in an actual or potential distortion of
competition; and (c) absence of objective justification. Third, transactions
are comparable if “(a) they are concluded with purchasers who compete with one
another, or who produce the same or similar goods, or who carry out similar
functions in distribution, (b) they involve the same or similar products, (c)
in addition their other relevant commercial features do not essentially differ”
(relying on Article 2 of Decision 30-53 of the High Authority of the
ECSC, OJ 1953 L6/11, as amended by Decision 72/440/ECSC,
OJ 1972 L 293/39). Unwired Planet referred to Article 3 of Decision
72/440 which sets out the three-part test for transactions to be
considered comparable which is summarised above.
487.
Stated at this level these principles are not controversial. Both sides
approached this issue on the basis that concepts such as similarly situated
parties, equivalent/comparable transactions, and objective justification, were
the same under the non-discrimination limb of FRAND as they are in competition
law. Mind you, none of those concepts are mentioned expressly in the ETSI
FRAND undertaking either.
488.
I will say now that I find Samsung and Huawei are “similarly situated”
on any view. Huawei do have a far larger focus on infrastructure than Samsung but
this does not justify a finding that Huawei and Samsung are not similarly
situated. Since this case is concerned with a worldwide benchmark rate it is
appropriate to consider the worldwide position of the two undertakings. They
are both very large multinational telecoms manufacturers active in the same
handset and RAN infrastructure markets. They are both in the top three handset
vendors worldwide (the other is Apple) and while Huawei is the top 4G RAN
infrastructure maker, Samsung is another major supplier in that market.
489.
Unwired Planet’s approach was to argue that the factors in Mr Ware’s
evidence which made the Samsung licence not a reliable comparable in the
context of setting a FRAND rate were also relevant to non-discrimination.
Huawei’s argument was the same albeit from the other direction, in other words
its case was that the Samsung licence was a reliable comparable for both
purposes for the same reasons. Both sides effectively equated the concept of
an equivalent/comparable transaction in the context of non-discrimination with
a comparable licence used in the analysis of royalty rates. Clearly the
concepts overlap but in my judgment the two are not identical and the
distinction is acute in the context of the Samsung licence. Used in an
assessment of an appropriate rate in accordance with the ETSI FRAND obligation,
comparable licences act as evidence of the value of the property being
licensed. A FRAND rate could still be set even if no licences existed at all
and even if there was no licence from Unwired Planet to Samsung. Using that
kind of evidence inevitably takes into account the general non-discrimination
aspect of the ETSI FRAND obligation mentioned already. But a hard-edged
non-discrimination obligation, if it means anything, arises as a consequence of
entering into particular transactions with particular licensees. The issue is
what effect in law arises from the fact that Unwired Planet have granted a licence
to Samsung under the same portfolio. The effect of this grant is that a major
competitor of Huawei, one who is otherwise “similarly situated” to Huawei, has
licensed the same portfolio.
490.
Mr Ware’s evidence explains the motives leading to the 2016 Unwired
Planet-Samsung licence and explains why it was entered into on the terms it
contains. I have accepted that this shows why the terms are not reliable
evidence of the value of the portfolio but none of this alters the fact that
Unwired Planet have entered into the transaction and must take the consequences
in terms of anti-discrimination rules, whatever they may be. Unwired Planet
say that Mr Ware’s evidence shows that the transaction has “other relevant
commercial features” applying limb (c) of the three part test for a comparable
transaction derived from the ECSC decision above.
491.
Mr Ware’s evidence is sufficient to show that the weight to be attached
to the pricing in this licence is low, as a result of the other benefits PanOptis
perceived would flow from it and the circumstances Unwired Planet were in at
the time, however those benefits and circumstances do not derive from any
objective characteristics of the transaction itself. It is in the end nothing
more than a patent licence (with the associated assignment). Unwired Planet’s
or PanOptis’s motives for selling this licence cheaply on that occasion do not
change the fact that they did sell the licence cheaply. The consequence of the
licence is that PanOptis has been able to enhance its general relationship with
Samsung and therefore to have a relationship with Samsung which it does not
have with Huawei, but I reject the suggestion that this means that the
transaction has features vis a vis Samsung which make it different in any
objective sense relevant in this context from the licence Huawei is entitled
to.
492.
Unwired Planet repeatedly emphasised that one has to take a realistic
common sense view and that non-discrimination cannot mean that businesses have
to charge all customers the same price for their goods or services, citing Purple
Parking v Heathrow Airport [2011] EWHC 987 (Ch) (Mann J), and Attheraces
Ltd v The British Horseracing Board Ltd [2007] ECC 7 (Court of
Appeal), as well as two textbooks: O’Donoghue & Padilla, The Law and
Economics of Article 102 TFEU, 2nd Edition (2013) at 5.3.1 and Bellamy &
Child, European Union Law of Competition, 7th Edition (2013) at 10.087.
Unwired Planet drew particular attention to a passage in O’Donoghue &
Padilla at 15.1 which referred to Art 102(c) explaining that outside the three
principal scenarios (discrimination on the basis of nationality, unlawful
exclusion of rivals resulting in ancillary discrimination between customers and
discrimination in favour of downstream operations), the application of Article
102(c) to condemn different prices or terms has been “relatively rare”. Unwired
Planet also note O’Donoghue & Padilla’s explanation that this makes sense,
because inter alia “different prices and terms are ubiquitous in real-world
markets, which means that the practical scope of a strict non-discrimination
rule would be enormous” and “the impracticality of rules that would insist on
uniform prices and terms is obvious.”
493.
I accept these broad statements, however the circumstances in this case
are striking. The licensee (Samsung) is, at best, one of a handful of major licensees.
The licence is for the same portfolio and relates to the same acts. It is contemporaneous.
I find that for the purposes of considering hard edged non-discrimination, the
Unwired Planet-Samsung 2016 licence is an equivalent or comparable transaction
to the putative licence under consideration in this case, the one between Unwired
Planet and Huawei.
494.
So given these findings, in terms of competition law and assuming abuse
of dominance, that would leave the issues of distortion of competition and
objective justification to be considered. Before going further however it is
worth reflecting on the position which has been reached. Unwired Planet’s
counsel described the discrepancy in pricing in the Attheraces
case as a very striking discrepancy. That was a three-fold difference (£361 vs
£900). The difference between the benchmark rate and the Samsung rate is much
larger than that. On one view it is a […] difference. Moreover the
discrepancy between the Samsung rate and the rates claimed by Unwired Planet
(0.13% now and 0.2% in 2014) are even larger. 0.2% is more than […] times
larger than […] and the difference between the rate of 0.13% which
(unlike 0.2%) was offered after the Samsung licence had been concluded is still
[…]. These discrepancies favour Huawei’s argument. However there is a
major difference between this case and a case like Attheraces,
because at this point in the argument the discrepancy is with respect to a
benchmark rate which represents what has been determined to reflect the true
value for the portfolio under licence. The discrimination is not that Huawei
is being required to pay a rate higher than that, the issue is that Huawei’s
competitor has been given a much lower rate.
495.
I turn to consider whether distortion of competition is part of the
non-discrimination limb of FRAND. Huawei’s simple case was that it was not
mentioned in the words of the undertaking. However as I have already noted,
none of the concepts which both sides agree need to be considered to address
non-discrimination are mentioned in the undertaking either so that simple point
is not as strong as it might seem at first sight. Conversely beyond submitting
that it should be included, Unwired Planet’s argument did not give reasons
why.
496.
In terms of authority, there is no case on the point. In terms of the
economics literature Prof Carlton’s paper “An Economic Interpretation of FRAND”
contains the following passage:
“The “non-discriminatory” principle of FRAND, however, is not
widely agreed upon. The standard economic definition would mean that all users
pay the same royalty – i.e., there is literally no discrimination on price or
any other terms. Some economists have proposed that it means only that all
firms which use the standard be able to obtain a license, with no constraint as
to the terms of the license. That of course allows different firms to pay
different royalties but still have access to use of the patent.
[…]
‘Non-discriminatory’ in the context of an SSO setting
standards for competing firms can be interpreted to mean that all implementers
of the standard should be offered licenses to the technology and all ‘similarly
situated’ firms should pay the same royalty rate.”
Carlton and Shampine, Journal of Competition Law and
Economics (2013) 9(3): 531-552
497.
Prof Neven had exhibited the paper and referred to it as influential
(albeit in another context). I infer from the paper that there is no wide
agreement amongst economists about how the non-discrimination limb of FRAND
applies. In the passage quoted the paper proposes three possible
interpretations. First, the “standard economic definition”. That is one in
which all licensees pay identical rates on identical terms. It is not
supported by either party before me. I am not surprised. If that is what the
ETSI undertaking was supposed to mean it could readily have been written in that
way. While such an approach has the virtue of simplicity it would be
impractical in practice. It would be highly restrictive. Many licences
contain most favoured licensee clauses but they are not generally as onerous as
this would be. There is no reason to interpret the ETSI FRAND undertaking in
such a strict way.
498.
The second version of non-discrimination referred to is one which “some
economists” have proposed. It is very weak. Since the ETSI FRAND undertaking
already obliges licensors to offer licences to everyone, it does not add
anything to that. It is also weaker than the benchmark FRAND rate approach,
which at least applies to all licensees with licences of the same type. The
benchmark approach does not mean that all licensees must pay exactly that rate
but it provides a benchmark against which such a rate can be judged. In
practice it will stop licensees having to pay much more than the benchmark set
by reference to the value of the portfolio. Competition law can intervene to
penalise the imposition of excessive prices much higher than the benchmark
FRAND rate. Neither side supported this weak second version of
non-discrimination.
499.
The third interpretation proposed by Prof Carlton is based on similarly
situated firms paying the same rate. It is based on the same concepts as
competition law. In effect this is the one Huawei contend for although one
cannot take that too far. The paper is not purporting to set out a fully
worked out proposal on the correct approach in law to interpret the FRAND
undertaking. It is not focussed on the distinction between the arguments of
Huawei and Unwired Planet.
500.
The final text from the economics literature to refer to is Dr Niels’
textbook Economics for Competition Lawyers (2nd Ed, Oxford 2016).
At paragraph 8.51 he states that the non-discriminatory condition in FRAND “is
usually interpreted in the same manner as the general criteria for
anti-competitive price discrimination under the abuse of dominance rules”.
Although Dr Niels does not cite a reference for that, it may be that he had in
mind the kind of thing proposed by Prof Carlton. As with Prof Carlton’s paper,
Dr Niels’ paragraph is not focussed on the distinction between the arguments of
Huawei and Unwired Planet.
501.
In my judgment the ETSI FRAND undertaking should not be interpreted so
as to introduce the kind of hard-edged non-discrimination obligation supported
by Huawei without also including consideration of the distortion of
competition. Competition law does not seek to prohibit different prices being
charged to different customers. An important aspect of the way that result is
assured in competition law is by the requirement that only terms which are
sufficiently dissimilar to distort competition are prohibited. In other words,
the various elements of the competition law applicable discriminatory pricing
operate as a whole to achieve a fair balance. Splitting off some parts without
the others is unbalanced and risks unfairness.
502.
Having got this far it seems to me that it is not necessary to read this
hard-edged non-discrimination obligation into the ETSI FRAND undertaking at all
provided one takes a benchmark rate approach to assessing a royalty under the
ETSI FRAND undertaking. That approach is itself non-discriminatory and gives
effect to the “ND” limb of FRAND. It is a more stringent non-discrimination
obligation than the weakest one proposed in Prof Carlton’s paper but much
simpler to apply in practice than the first proposed obligation or the one
based on all the competition law concepts. Competition law will always be
available in an appropriate case.
503.
Therefore I conclude that the true interpretation of the ETSI FRAND
undertaking from the point of view of non-discrimination is that a benchmark
FRAND rate should be derived which is applicable to all licensees seeking the
same kind of licence. That is what I have called general non-discrimination.
If, contrary to this view, the FRAND undertaking also includes a specific
non-discrimination obligation whereby a licensee has the right to demand the
very same rate as has been granted to another licensee which is lower than the
benchmark rate, then that obligation only applies if the difference would
distort competition between the two licensees.
504.
I turn to the point in British Airways. Huawei
made clear that they had not attempted to conduct the kind of economic analysis
which would be required to establish that the dissimilarity between the rates
in the Samsung licence and the rates demanded by Unwired Planet distort
competition. They contend it is not necessary in this case and rely on British
Airways as authority for the proposition that such an analysis is
not always necessary. The case was about travel agents’ commissions and a reward
scheme practised by BA. The CFI had held that the competition between them had
“naturally” been affected by the discriminatory payment conditions in BA’s
reward scheme. On appeal BA submitted this was not sufficient to justify a
finding of breach of what is now Art 102(c) and what was needed was concrete
evidence of competitive disadvantage. This is recorded at paragraph 142. The
CJEU rejected that submission in paragraphs 143 to 149.
505.
The CJEU’s analysis starts by reaffirming the prohibition on
discrimination in what is now Art 102(c) and emphasising the requirement that a
distortion of competition is required:
“144 Therefore, in order for the conditions for applying
subparagraph (c) of the second paragraph of Article 82 EC [now Art 102]
to be met, there must be a finding not only that the behaviour of an
undertaking in a dominant market position is discriminatory, but also that it
tends to distort that competitive relationship, in other words to hinder the
competitive position of some of the business partners of that undertaking in
relation to the others (see, to that effect, Suiker Unie, paragraphs 523
and 524).
145 In that respect, there is nothing to prevent
discrimination between business partners who are in a relationship of
competition from being regarded as being abusive as soon as the behaviour of
the undertaking in a dominant position tends, having regard to the whole of the
circumstances of the case, to lead to a distortion of competition between those
business partners. In such a situation, it cannot be required in addition that
proof be adduced of an actual quantifiable deterioration in the competitive
position of the business partners taken individually.”
506.
Then the CJEU turned to the CFI’s decision on the facts, as follows:
“146 In paragraphs 237 and 238 of the judgment under appeal,
the Court of First Instance found that travel agents in the United Kingdom
compete intensely with each other, and that that ability to compete depended on
two factors, namely 'their ability to provide seats on flights suited to
travellers' wishes, at a reasonable cost' and, secondly, their individual
financial resources.
147 Moreover, in the part of the judgment under appeal
relating to the examination of the fidelity-building effect of the bonus
schemes at issue, the Court of First Instance found that the latter could lead
to exponential changes in the revenue of travel agents.”
507.
In this context the CJEU then rejected BA’s submission that concrete evidence
of competitive disadvantage was needed:
“148 Given that factual situation, the Court of First
Instance could, in the context of its examination of the bonus schemes at issue
having regard to subparagraph (c) of the second paragraph of Article 82 EC,
move directly, without any detailed intermediate stage, to the conclusion that
the possibilities for those agents to compete with each other had been affected
by the discriminatory conditions for remuneration implemented by BA.
149 The Court of First Instance cannot therefore be accused
of an error of law in not verifying, or in verifying only briefly, whether and
to what extent those conditions had affected the competitive position of BA's
commercial partners. The Court of First Instance was therefore entitled to take
the view that the bonus schemes at issue gave rise to a discriminatory effect
for the purposes of subparagraph (c) of the second paragraph of Article 82 EC.
The second part of the fifth plea is therefore unfounded.”
508.
The CJEU’s judgment therefore is that on the facts of that case the CFI
were entitled to infer that the ability of the travel agents to compete with
one another had been affected by BA’s discriminatory payment terms without “any
detailed intermediate stage”. The court explained (at paragraph 145) that
additional proof of actual quantifiable deterioration in the competitive
position of the victims taken individually was not needed in a case in which
the behaviour complained of tends, having regard to the whole of the
circumstances of the case, to lead to a distortion of competition between those
victims.
509.
As Unwired Planet pointed out, in that case the court had had evidence
of the competitive position in the downstream market (i.e. between travel
agents). It was able to find in paragraph 146 that they compete intensely with
each other and that their ability to do so depended on two factors, one of
which was their individual financial resources. It was also able to find in
paragraph 147 that the BA payment scheme could lead to exponential changes in
the revenues of travel agents. As Unwired Planet also pointed out, there has
been no analysis in this case of the extent of competition in the phone or
infrastructure market, nor has there been any analysis of the factors necessary
to compete in that market to justify a finding like the one referred to in
paragraph 146, nor has there been any effects-based analysis here like the one
referred to in paragraph 147.
510.
The principle to be derived from the British Airways
judgment is that there must be some evidential basis from which an inference
can be drawn that the behaviour complained of tends to distort the relevant
competitive relationship, but if such an inference can properly be drawn then
it is not necessary to prove the existence of a quantifiable impact on the
competitive position of the victims.
511.
What evidence is there in this case? Huawei rely on two strands of
evidence: first, Ericsson’s intentions and the genesis of Unwired Planet, and
second, direct financial evidence.
512.
On the first issue Huawei rely on internal Ericsson emails and other
documents. They relate to “Project Cluster”, which was the project whereby a
subset of Ericsson’s patents was created and assigned, ultimately, to Unwired
Planet under the MSA. […]:
[…]
513.
Although in the original configuration of the trial both Ericsson and
Samsung would have been there and called witnesses, following the Samsung
settlement and the consequential rearrangements neither of those parties
appeared or called witnesses. So these documents have not been put to a
witness nor, as far as I am aware, were they subject to a Civil Evidence Act
Notice. In their closing Huawei referred to a number of disclosure documents.
Unwired Planet did not submit that the various disclosure documents were
inadmissible (given CPR PD32 paragraph 27.2) but cautioned as to the weight to
be attached to disclosure documents put in this way. I accept the submission
in relation to other documents Huawei referred to, but the two documents
referred to above really just illustrate a point which has never been seriously
disputed, that Ericsson’s purpose in transferring the patent portfolio was to
make more money. In paragraph 16 of the judgment on the competition law strike
out application [2015] EWHC 2097 (Pat) Ericsson’s case about its motives was
summarised this way:
“16. Ericsson describes its motive in transferring part of
its portfolio to Unwired Planet as being to enable it fairly to earn more
revenue. Its concern is that while the patents remain within Ericsson’s very
large portfolio, its ability to earn a fair revenue in respect of those
inventions is hindered. Once the patents are transferred, Unwired Planet will
be able to obtain fairer and therefore greater remuneration for them than
Ericsson was able to obtain while still ensuring that any royalties collected
in respect of essential patents are FRAND.”
514.
Since greater remuneration from the patents has to come from the rest of
the industry, I accept Huawei’s submission that part of the purpose of all this
was to cause higher costs to Ericsson’s competitors. However while this
supports the inference that the total licence fees to be paid by Huawei or
Samsung will be higher post-MSA than pre-MSA, it does not tell one anything
about the effect of those increases on competition between Huawei and Samsung.
That depends on Huawei’s second point.
515.
In financial terms Huawei’s complaint is presented by reference to two
pie charts which are intended to illustrate the disparity between Samsung and
Huawei comparing the July 2016 Unwired Planet proposal against the Samsung
licence (using Mr Lasinski’s figures) and taking into account the difference in
revenue which would be licensed between the two undertakings. The figures are
annual and in dollars. They are for 2G, 3G and 4G together and reflect
estimates of the sales mix relating to these standards. The resulting
calculations are that under the Samsung licence Samsung will pay Unwired Planet
[…] on its annual worldwide sales of relevant goods, which one can take
as being worth $73 billion; whereas at the rates claimed by Unwired Planet,
Huawei would be required to pay $34 million pa on its annual global sales,
which are worth $30.2 billion. The pie charts are these:
516.
I include the pie charts because Huawei put them forward with some
prominence but just like Unwired Planet’s chart of rates included in this
judgment and like any visual presentation, care needs to be taken with them.
Unwired Planet’s chart presents far too many rates from the same licence as if
they were independent data points. In Huawei’s pie chart here the area of the
left circle is about $103 billion whereas the area of the right circle is $48
million and so, scaled with the left circle, the right circle should be tiny.
There is no question that the rates applied to Samsung under the Samsung
licence are far lower than the benchmark rates derived above and lower still
than the rates claimed by Unwired Planet in July 2016. I will take it that the
value of Huawei’s annual licensed revenues is likely to be about half
Samsung’s.
517.
In cross-examination counsel put figures to Dr Niels. The rate for
Samsung was put as in effect […] per device for Samsung (assuming a sale
price of […] per device, […] is about […]). The
equivalent rate for Huawei was put at about 50 to 75 cents per device. These
are reasonable assumptions, which if anything favour Unwired Planet. A figure
for Huawei’s profit margin was taken from public information as being between
about $6 and $19 per device. Counsel put to Dr Niels that in that context the
difference in rates ([…] vs 75 cents) would appreciably distort
competition. Dr Niels did not agree. He was prepared to assume the figures
were correct but explained that one could not draw the conclusion that
competition would be distorted because given the average selling price of the
products (for Huawei assuming $164 to 185) the rate is very, very low. He
acknowledged the rate was a higher percentage of the profit margin but that did
not change his view. He said that no-one had done a detailed analysis of
distortion of competition and to do that you would have to look at how the market
works downstream and how operators set prices. In his opinion one still has to
ask what ultimately happens to the small price differential, is it passed to
end consumers, mobile operators or is it absorbed by Huawei? Even assume some
or all of it was passed on you would have to look at whether customers switch
significantly given this is such a small share of the market price. Counsel then
put the pie charts to Dr Niels but he questioned whether grossing up the
difference in this way was meaningful and maintained that what mattered was the
differential between Huawei and Samsung as a percentage of total margin and
those struck him as low “or at least so low that they are again unlikely to
really distort competition significantly” [Day 16/43/15-17].
518.
I accept Dr Niels’ evidence on this. Although the relative difference
in royalty rates is large, to be considered in the context of possible distortion
of competition they must be expressed relative to the margins on the relevant
products. Expressed that way they are very small percentages. The available
evidence does not support an inference that the behaviour complained of tends
to distort the competitive relationship between Huawei and Samsung.
519.
In giving his answers Dr Niels at one stage said that he was referring
to conducting a full analysis “under the competition law rules” and was “not
commenting here on the ND in FRAND”. What the witness meant was that he was
alive to the point that there was a debate whether distortion of competition
was relevant to the ND in FRAND. Since I have held that it is, Dr Niels’
evidence is germane.
520.
Finally I should mention that Huawei were entitled at one stage to think
that Unwired Planet were conceding that distortion of competition was not a
necessary part of hard-edged non-discrimination. Huawei did not suggest that
they did not call further evidence on this topic because they thought Unwired
Planet had conceded the issue. If Unwired Planet did change their stance, the
change did not prejudice Huawei.
521.
So I reject Huawei’s hard-edged non-discrimination point. There is no
need to consider objective justification.
(ix) Rates -
conclusions
522.
Since the hard-edged non-discrimination point has been rejected, I find
that the benchmark FRAND rates for the Unwired Planet portfolio are as set out
in the table above. It follows that none of the offers made by Unwired Planet
in 2014, 2015 or 2016 involved rates which were FRAND. They were too high. It
also follows that the benchmark rates on which Huawei’s offers have been based
were not FRAND either. They were too low.
(x) The Other Disputed Terms
523.
Aside from a rate, the parties do not agree about other terms. The
major disagreement is about scope (UK or worldwide) then there are
disagreements about a few of the terms of a UK licence. Since Huawei did not
engage with Unwired Planet on the terms of a worldwide licence, I only have
Unwired Planet’s position on that.
(a) What licence scope is FRAND – UK or worldwide?
524.
Aside from the rate, the question of scope is the most significant point
in the case. The parties are diametrically opposed. Huawei are willing to
take a licence under Unwired Planet’s UK patent portfolio, but only the UK
portfolio. Unwired Planet wish to grant a worldwide licence and contend that
they are entitled to insist on it. A summary of the parties’ positions was set
out in the introduction section above.
525.
The same topic arises under the ETSI FRAND undertaking and in
competition law. It makes more sense to consider it once. The answer to the
scope question has a bearing on the question of an injunction and equitable
refusability but those issues are best addressed separately. For the purposes
of the competition law aspect I will assume Unwired Planet is in a dominant
position.
526.
Huawei submitted that it is a fundamental principle of EU competition
law that a dominant undertaking cannot tie or bundle together, with a product
or service in respect of which it holds a dominant position, some other product
or service which does not fall within the same market. They relied on Case
T-201/04 Microsoft Corp [2007] ECR II-3619, in which the
Court of First Instance approved a fourfold test which had been used by the
Commission in that case (see paras 842, 859, 862) as follows:
“- first, the tying and tied products are two separate
products;
- second, the undertaking concerned is dominant in the market
for the tying product;
- third, the undertaking concerned does not give customers a
choice to obtain the tying product without the tied product; and
- fourth, the practice in question forecloses competition.”
527.
The first three points are fairly self-explanatory. The parties did not
agree about the fourth point. Huawei submitted that the fourth test is simply
whether the conduct is “capable of restricting competition” (Microsoft
at paragraphs 866-867) and that this is consistent with the overall position
under Art 102, which requires proof only of potential effects on competition.
Huawei referred to paragraphs 868, 977 and 1035 and submitted that in these
paragraphs the CFI observed that it is ordinarily presumed in tying cases, in
the absence of specific circumstances suggesting otherwise. Huawei submitted
that Unwired Planet had not suggested any such specific circumstances in the
present case and that both the bundling practices in issue, the
multi-jurisdictional bundling and also the bundling of SEPs with non-SEPs which
took place in Unwired Planet’s April 2014 offer, pose an obvious and real
threat of distortions in competition.
528.
Unwired Planet submitted that Prof Neven had not been asked to analyse
bundling in terms of a standalone abuse (which was correct). They submitted
that an appreciable effect on competition always had to be shown (citing Post
Danmark C-209-10 ECLI:EUL2012:172 at paras 24, 39 and 44, as well
as the EU Commission’s Guidance on enforcement priorities in applying Art 102
(24th Feb 2009 OJ EU C45/7) at paragraphs 20-22).
529.
On the issue of principle, Huawei’s submission about the Microsoft
case does not completely capture what happened in it. The point was that the
Commission had not done what it normally does and just made an assumption,
rather the Commission had examined the actual effects on the market. In
paragraph 868, the CFI explains the Commission had decided that in the
circumstances of the case “it could not merely assume as it normally does in
cases of abusive tying, that the tying of a specific product and a dominant
product has by its nature a foreclosure effect”. Therefore the Commission had
examined “more closely the actual effects which the bundling had already had on
the [relevant] market and also the way in which that market was likely
to evolve.” Paragraphs 977 and 1035 make the same point.
530.
For abuse to be established there must be a finding that the practice in
question forecloses competition. The legal principle I take from the
authorities is simply that such a finding may be based on inference but the
inference must be justified in all the circumstances. Just because it is
normally assumed, it does not follow that it will always be assumed. The
circumstances may be such that such an assumption cannot be made and a close
analysis of the actual effects is required.
531.
Prof Neven addressed a topic he called “Demanding royalties for acts
which are not within the scope of the patents in suit”. The example he gave,
which he described as odd and without clear economic justification, was of a
patentee with a patent in two jurisdictions which had been upheld in one but
revoked in the other but insisted on being paid in both. Stated that way the
Professor makes an important point but one has to be careful with the example.
As soon as patent portfolios are being licensed it is not straightforward to
say that a demand for payment for a portfolio licence is for payment for a
given patent in the portfolio. In the present case it is common ground that
the licence will be for all declared SEPs even though the royalty is set by
reference to a subset – the Relevant SEPs - and this applies to the UK only
portfolio as much as to the worldwide portfolio. In such a case the licensor
is not really demanding payment for each declared SEP. If one of the declared
but non-Relevant SEPs in a portfolio was revoked, leaving Relevant SEPs behind,
it would not change the benchmark royalty rate.
532.
In any event there are mechanisms which can be agreed in a licence to
cater for the situation described by Prof Neven. For instance one could have a
term which carves out a country completely or reduces the royalty rate if there
is a material change to the number of Relevant SEPs (or declared SEPs). In
other words the problem is not inherent in multijurisdictional portfolio
licensing.
533.
As Prof Neven accepted, portfolio licensing is common industry practice
and has efficiency benefits. It saves transaction costs for both licensors and
licensees and obviates the need to determine a royalty on a patent by patent
basis.
534.
As far as I am aware every patent licence in the trial bundles in this
case is a worldwide portfolio contract. The vast majority are worldwide
licences. There are a few in which a given territory is carved out in such a
way that no licence is granted for sales in that territory whereas the rest of
the world is licensed. The best example is China in the […] licence.
Even with a carve out of some kind the contracts are still worldwide agreements
although it would be inaccurate to call them worldwide licences.
535.
Of course just because everyone is doing something does not mean that
the conduct is necessarily unproblematic. Nevertheless, the inference I draw
from the totality of the evidence is that multijurisdictional portfolio
licences themselves are unlikely to have inherently anti-competitive effects
and that a demand for a worldwide licence is not inherently likely to distort
competition. It may be that a worldwide rate is demanded which is excessive
but that is a matter related to the rate. It may also be that a given
portfolio does not justify a worldwide licence but that is a point on the
facts. Assuming the licensor has a worldwide portfolio of SEPs, in my judgment
asking a licensee to accept a worldwide licence is unlikely to be abusive. Of
course no licensor has a truly “worldwide” portfolio but I will come back to
that. Huawei’s witnesses did refer to a few licences they had encountered
which were national in scope but they were not produced. I accept those exist
but such licences are rare.
536.
There was a suggestion that a worldwide licence might create a disincentive
to challenge the validity of patents in other jurisdictions. A similar
disincentive applies to any portfolio licence. It is a factor to take into
account but not enough on its own to make a portfolio licence (worldwide or
national) inherently anti-competitive.
537.
So far the points have not been specific to the circumstances of Unwired
Planet and Huawei. Turning to the specific circumstances, there are three
aspects. The first is that Unwired Planet’s portfolio does not have patents in
every state of the world. The second is that Unwired Planet is engaged in
litigation in this country. Its stance is that if it is entitled to insist on
a worldwide licence then it will do so and if Huawei refuses, an injunction
should follow. The third is that Unwired Planet is also engaged in litigation
with Huawei in Germany and China on patents within the portfolio but in the
licence Unwired Planet is demanding that Huawei should pay royalties for
Germany and China.
538.
The first aspect of the circumstances sounds more significant than it
is. Just like Unwired Planet, neither Ericsson nor Huawei have patents in
every state. In terms of geographical coverage Unwired Planet’s declared SEP
portfolio covers most of Europe, Russia, Turkey, China, Japan, much but not all
of South East Asia, the USA, Canada, Australia, India, and Mexico. It does not
have much coverage in Africa and limited coverage in South America and Eastern
Europe (but there are some patents in some states). Nevertheless in my
judgment Unwired Planet’s geographical coverage is very wide. Although not
directly relevant, the difference in coverage between Unwired Planet and Huawei
is not so different. Unwired Planet’s coverage today is 42 countries whereas
Huawei’s is 51 on the same basis.
539.
In addition to the well-rehearsed issue on China, there are two further
aspects which Huawei draw attention to. First, Unwired Planet’s coverage of 3G/UMTS
and 2G/GSM is much weaker than for 4G/LTE, as Mr Saru accepted. However, South
America and South East Asia include jurisdictions in which Huawei makes a very
considerable volume of sales, especially of 3G/UMTS and 2G/GSM equipment, in
which Unwired Planet have no relevant coverage. Also for countries where
Huawei sells only single mode handsets rather than multimode, there are no
grounds on Unwired Planet’s case for it to be receiving any royalties going
forward at all. Second, Huawei contend they manufacture handsets in Venezuela,
in which Unwired Planet have no patents.
540.
Unwired Planet’s response was to point out that one needs to consider manufacturing
as well as sales. A handset sold in a country in which there is no patent may
still have been made in a patented country in which a licence was required.
The fee for the licence, which includes licence to manufacture, may well be a
royalty calculated by reference to the sale price, with a royalty bearing event
being sale. That this would apply whether the sale happens to be made in a
patented or non-patented country is not necessarily a problem given that
manufacture needed to be licensed.
541.
In practice, subject to Venezuela, the country of manufacture referred
to is China. Huawei did not challenge the principle but submitted a focus on
China brings back the debate about the ongoing Chinese invalidity proceedings.
As to Venezuela, Unwired Planet pointed out that Mr Zhang’s evidence was that
the manufacturing facility there puts together components made in China.
542.
Where Unwired Planet’s coverage differs from that of Ericsson or Huawei
is in numbers of patents. Unwired Planet have many fewer patents in general
and Mr Zhang and Mr Cheng both referred to the small size of Unwired Planet’s
portfolio. The portfolio is much smaller than that of the biggest players like
Huawei, Samsung and Ericsson, but in my judgment it is not so small as to be a
portfolio which can or would be treated in a different way from some of the
larger portfolios. The portfolio is large enough that it would be impractical
to fight over every patent and neither party is doing this. The explanation of
coverage above has been given by reference to declared SEPs since they
represent the property which would be licensed, even though it is the much
smaller number of Relevant SEPs which determines the royalty rate. The small
size of Unwired Planet’s portfolio and the low number of Relevant SEPs is
reflected in the FRAND royalty rates.
543.
Before turning to the impact of the litigation, this is a convenient
point to ask what sort of licence for Unwired Planet’s portfolio would be FRAND
in terms of its geographical scope when applied to a multinational licensee
like Huawei? I will start by asking what a willing licensor and a willing
licensee with more or less global sales would do. There is only one answer.
Unwired Planet’s portfolio today is (and in 2014 it was) sufficiently large and
has sufficiently wide geographical scope that a licensor and licensee acting
reasonably and on a willing basis would agree on a worldwide licence. They
would regard country by country licensing as madness. A worldwide licence
would be far more efficient. It might well have different rates for different
regions and for different standards but that is another matter. The employment
of different rates would not lead the parties to abandon a worldwide licence
and go for country by country licensing. Assuming the licensee was a Chinese
multinational like Huawei, they might well agree on different rates for China
as for the Rest of the World but again they would not go for country by country
licensing. If the multinational had a significant manufacturing base in
another country in which the portfolio was weak, again that could be taken into
account.
544.
A point arose in the arguments on the terms of the UK only licence which
Huawei called a manoeuvre. Unwired Planet insisted that the UK only licence
should have a term in it precluding entry into the UK of unlicensed Huawei
handsets. This seems to have caught Huawei by surprise but it really should
not have done. It was a manifestation of the point that the UK only licence is
only a licence under the UK patents. It illustrates one reason why country by
country licensing is inefficient for goods like mobile telecommunications
devices which will move across borders but I do not regard this as a major
point in the present context. It would have to be addressed but that could be
done (see below the section on the UK only licence where it is addressed in
context). The real inefficiency of country by country licensing is the effort
required to negotiate and agree so many different licences and then to keep
track of so many different royalty calculations and payments. No rational
business would do this if it could be avoided.
545.
What a willing licensor and willing licensee would do is not the only
question because necessarily if the result would amount to unlawful bundling
then it is not FRAND. I turn to consider the four-part test in Microsoft.
546.
The first part of the four-part test in Microsoft
is that the products are separate. A patent in one state is clearly separate
from a member of the same patent family in another state. They may have an
entirely different scope. However the way in which FRAND royalty rates are
determined in practice treats these two distinct patents as a single thing. It
is common ground that the industry assesses patent families rather than
individual patents within the family. The FRAND obligation actually applies to
patent families, for good reason. It would be wrong to ignore this fact about
how the licences are negotiated and agreed in practice. Assessing portfolios
on a family basis inevitably involves tying in a patent in one state with a
patent in another.
547.
The second part (dominance) is assumed at this stage.
548.
The third part is the choice. Here Unwired Planet wish to give the licensee
no choice but accept the worldwide licence. This insistence is clearly a form
of tying in. However again there is more to be said about this. Take a SEP
with family members in two countries. If a multinational implementer sells in
those two countries and needs a licence in one of them, the implementer
probably needs a licence in both, hence the efficiency of this sort of
licensing. Of course portfolio licensing is more complicated still because
patents in some states may not have counterparts in others, but for this
purpose they are all SEPs.
549.
The fourth part is competitive foreclosure. Take the same example of a
SEP with family members in two countries A and B and a multinational
implementer selling in both. If the implementer does need a licence in both
then the licensor is the only source of that licence. Tying in a licence under
a SEP in state A with a licence under the SEP in the same family in state B
does not preclude a third party from competing with the licensor in state B
because the licensor is the only source of licences for this SEP in state B.
This is an aspect of the dominant position of the licensor. It also helps
explain the efficiency of worldwide portfolio licensing.
550.
Given the prevalence of worldwide licences and the prevalence of
assessment based on patent families, I am not prepared to assume that the tying
of a SEP licence in one country to a SEP licence in another country has by its
nature a competitive foreclosure effect. A close analysis of the actual
effects would be required and that has not been done.
551.
Huawei submit that the Motorola decision of the
European Commission is in their favour. In that case Motorola sued Apple in
Germany for infringement of a SEP for GPRS called “Cudak”. Apple made various
“Orange Book” offers (the case was decided before Huawei
v ZTE – see the analysis of that case below). The Commission
decided that Apple’s second Orange Book offer indicated a
willingness to take a licence on FRAND terms and so after that Motorola’s
actions in pursuing its claims for a patent injunction were abuses of dominance
(see paragraphs 125, 127, 301-303, 419, 423, 433, 434-436 and 440). Huawei
point out that one of the issues was that the second Orange Book
offer was to take a portfolio licence for Germany (para 125(a)) and that one of
Motorola’s complaints was that they (Motorola) wanted a worldwide licence
(127(f)). At paragraph 434 the Commission held as follows:
“434. First, Motorola has not advanced credible
arguments as to why, in view of Apple's Second Orange Book Offer, Motorola’s
seeking and enforcement of an injunction against Apple in Germany on the basis
of the Cudak GPRS SEP was objectively necessary to protect its commercial
interests, in particular its right to obtain appropriate
remuneration for Apple’s use of its telecommunication SEPs in Germany. With
its Second Orange Book Offer, Apple proposed to enter into a licensing
agreement with full judicial review and determination of the proposed FRAND
royalties with retroactive effect by a court. As regards the scope of the
Second Orange Book Offer, as outlined in recitals (125)-(126), it covered all
Apple products infringing the licensed SEPs in Germany. Hence, this offer was a
clear indication of Apple's willingness to enter into a licensing agreement on
FRAND terms and conditions.”
(my emphasis)
552.
I agree with Huawei that here the Commission are rejecting Motorola’s
complaint that the offer was limited to Germany. The Commission’s decision is
firmly in Huawei’s favour. However the decision is premised on the view that a
licence limited to Germany is FRAND. Making the sensible assumption that the
GPRS “Cudak” SEP had counterparts outside Germany, that decision can only be on
one of two bases. Either national portfolio licences are FRAND and worldwide
licences are not FRAND, in which case the majority of real licences are not
FRAND because they are worldwide; or both national and worldwide licences are
FRAND at the same time, in which case FRAND cannot be enforced save by imposing
one kind of FRAND licence even if another more realistic kind is also FRAND. I
have already addressed these issues above and the answer I have arrived at is
that there is only one set of FRAND terms in a given situation. The
Commission’s decision does not look at the matter in that way and, although
they find in clear terms at the end of the quoted paragraph that Apple is
offering to enter into a licensing agreement on FRAND terms, the Commission do
not analyse the national/worldwide scope issue in the manner I believe is
required. I will not follow this aspect of the Commission’s reasoning.
553.
Huawei took a series of eight further points in support of the submission
that Unwired Planet’s insistence on a multijurisdictional bundled licence in
the present case was not FRAND. I will address the first four points and the
sixth point. I have already addressed the fifth and eighth points, about the
true geographical scope of Unwired Planet’s portfolio and the number of
patents. The seventh point is about SEP and non-SEP bundling. That is
addressed below. I do not accept it plays a significant part of the
multijurisdictional argument.
554.
First Huawei submitted that any consideration must start with the
proposition that at least in English law, there is no such thing as a portfolio
right. Citing Lucasfilm Ltd v Ainsworth [2012] 1 AC 208 Huawei submitted that the English Courts have no jurisdiction to entertain an
action in respect of the validity of a foreign patent, and are reluctant to entertain
an action for infringement of a foreign patent even where validity is not in
issue. Therefore, insofar as Unwired Planet wishes to complain that Huawei is
infringing SEPs in other jurisdictions, Huawei contend that such complaints are
in principle for the Courts of those other jurisdictions.
555.
I accept that there is no such thing in law as a portfolio right. At
least from the perspective of English law, Unwired Planet should sue on SEPs in
the countries in which they exist. However this does not preclude a finding
that worldwide licences are FRAND. The first submission is relevant but not
determinative.
556.
Huawei’s second and third points are best addressed together. In the
second point Huawei submitted that it follows that there is a fundamental
difference of principle between the bundling of all rights enjoyed within a
given jurisdiction and the bundling of rights across different jurisdictions.
In the latter case, there is an obvious risk that the threat of a territorial
injunction may function, unfairly and unreasonably, in effect to reverse or at
least negate the impact of foreign proceedings in respect of foreign patent
rights. In the third point, Huawei submit that the facts of the present case
are a practical manifestation of the concerns expressed by me in Vringo,
referring to both [2013] EWHC 1591 (Pat) and [2015] EWHC 214 (Pat). Huawei
reminded me that I said that proper scope of the issues to be adjudicated by
the Court is “…not simply a matter of case management and consideration of
the court’s resources” (para 58), but rather arises from the very “character
of …underlying rights” on which a patent infringement action is based.
Huawei referred to the following passages from the earlier judgment about the position
of ZTE in that case:
“44 … ZTE has said it is willing to
take a FRAND licence on any patent found valid and infringed. In my
judgment, a defendant accused of patent infringement by a patentee who claims
to have a standards essential patent is and must be entitled to say, “I wish to
know if this patent is valid or infringed or not before I take a licence”.
Such a stance cannot fairly be described as unwillingness.
45 So here the defendant is entitled,
in my judgment, to adopt a contingent position. In a contingent case like
this, there is no basis on which the court could compel the defendants to
accept a licence arrived at by approaching the matter as if the licensee was
willing to take a licence without having a judicial determination of validity
and/or infringement.
46 Looking at it the other way, if,
once the patent trials are heard, for example, say Vringo's alleged SEPs were
found invalid, it would be absurd for Vringo to say it still wanted to have a
trial to determine a FRAND royalty rate applicable in the United Kingdom. The
rate would be zero. Equally, say Vringo won all the patent trials hands down
and then conducted a FRAND trial, it would equally be absurd for ZTE at that
trial to say, “Oh but these are weak patents likely to be invalid or not
infringed and the royalty should correspondingly be less”.”
[Huawei’s emphasis]
557.
Huawei then referred to the further decision in which I observed as
follows (at 107-109):
“…I can see that the aggregate of
individual FRAND rates for patents taken alone and on a territorial basis may
well be far more than global portfolio rates and so a rational defendant may
well prefer to take a global portfolio licence rather than a series of
individual ones. Moreover I accept, as Vringo urges on me, that global
portfolio licences are the kinds of licences industry normally enters into.
However this is very different from
saying that somehow the fact that a global licence on a portfolio of patents is
FRAND necessarily means that a defendant in one jurisdiction faced with one
patent is forced to take a global portfolio licence in order to stave off a
national injunction on that one patent.
I could see a very different
circumstance if Vringo had made a FRAND offer for the patent EP 1,212,919 (UK)
itself and that offer had not been accepted. Then an injunction might well
follow. In that sort of case, unlike the one based on the global portfolio
licence, the threat of the injunction, which is after all a territorial remedy,
would not be being used to create some sort of international coercion or
coercion about other patent rights.”
[Huawei’s emphasis]
558.
As Huawei also pointed out, I repeated the same views about “international
coercion or coercion about other patent rights” in my judgment from the
March 2015 CMC in these proceedings (para 23-27). Huawei submit this is
exactly this type of “coercion” which Unwired Planet is seeking to
practise in the present case. It is the same concern which is expressed by the
European Commission in Motorola at paragraph 434.
559.
What I called the Vringo problem has already been
addressed above but I have set out Huawei’s submissions here at length because
the point is important. There are a number of things I wish to say about
this.
560.
The earlier Vringo judgment is not dealing with the
same problem which confronts the court now. Today the CJEU’s judgment in Huawei
v ZTE, makes clear that an implementer can challenge a patent even
after a licence has been concluded. What is more I can only say that having
heard this trial, what seemed clear to me then does not seem to me now to be as
clear cut. I remain of the view however that UK court’s power to grant an
injunction against an implementer will only arise once at least two conditions
are satisfied - there must be a FRAND licence available for the licensee to
accept (or subject to case management some proper means of settling one) and
there must be a SEP held by the court to be valid and essential. Only an
implementer who refuses to take a FRAND licence will be at risk of an
injunction.
561.
The second Vringo judgment raises the Vringo
problem which has been addressed already. The essential difficulty is that if it
is possible that both kinds of licence – UK only and worldwide – are FRAND in
the circumstances of this case then FRAND cannot be enforced at all. Unwired
Planet submitted that a counterpart to the international coercion identified in
Vringo was a similar kind of international coercion which
was taking place in this case because the act of granting an injunction is no
more an act of ‘coercion’ than the act of not granting an injunction. The FRAND
commitment is a restriction on a patentee’s exercise of its patent rights and
if, properly construed, it is a restriction that only requires a worldwide
offer, and Huawei refuses or frustrates that, then not granting an injunction
has the effect of compelling the patentee to either give up payment in other
jurisdictions or accept a much lower rate because it cannot practically sue
separately around the world.
562.
I do not entirely accept Unwired Planet’s submission, since in the end
the only rights a patentee has are national patent rights and the only places
in which they can be enforced are the relevant countries. However Unwired
Planet’s argument is useful in that it draws attention to the fact that it is
necessary to identify the premise correctly. If a worldwide licence is not
FRAND then a putative licensee should not be coerced into accepting it by the
threat of an injunction in one state. However, if a worldwide licence is FRAND
then the situation changes. The logic of the FRAND undertaking applied in the
context of patent rights is that the remedy of an injunction to restrain
infringement, granted in respect of a patent found valid and
infringed/essential, should present the licensee with a simple choice either to
take a FRAND licence or stop dealing in the products. Whatever the FRAND terms
are, the remedy operates in the same way. That is why the remedy is coercive.
563.
Any licence involves elements of risk. A licence for a period of years
with an unchanging rate involves a risk to one side or the other as the market
changes over time. Similar kinds of potential risk exist in a licence for a
whole national portfolio as opposed to a single patent and the same applies
again for a worldwide portfolio. There is necessarily a difference in scope
and therefore risk between a national injunction on a single patent, possibly
directed to a single release of a standard, on the one hand and a licence under
a portfolio whether it is national or international on the other hand. There
may be differences in risk and scope for other reasons too. However all these
distinctions are differences in degree, not differences in kind.
564.
Huawei referred to evidence of Mr Zhang on this but his evidence was
directed at a global blended royalty rate, which is a different point. Also
since his evidence was given I am told Huawei’s challenge to one Unwired Planet
patent in China has been rejected although Huawei have appealed.
565.
The fourth point taken by Huawei is this approach is contrary to the
Brussels I Regulation (Art 22(4)) as would amount to the grant of a UK
injunction because a defendant had not taken a licence under a different
national instance of an EP patent in a different Member State of the EU,
contrary to the CJEU in Case C-4/03 GAT v LUK [2006] ECR I-6509, Case C-539/03 Roche v Primus [2006] ECR I-6535 and
Case C-616/10 Solvay v Honeywell (12 July 2012, Grand
Chamber). There are existing infringement and validity actions in, for
example, Germany and Huawei submit that the English court should not make a
final determination that they are required to take and pay for a licence in
Germany and issue injunctive relief if Huawei do not do so, when that issue is
currently before the German courts. To do so, Huawei say, would amount to
circumventing the jurisdictional rules laid down by Art 22(4).
566.
Art 22(4) provides that in proceedings concerning the registration or
validity of patents, the courts of the Member State in which the registration
has been applied for shall have exclusive jurisdiction. In GAT v LUK,
the CJEU held that Art 22(4)’s predecessor, Art 16(4) Brussels Convention,
applied whatever the form of proceedings in which the issue of a patent’s
validity is raised, including, for example, if it were challenged as a defence
or counterclaim to a claim for infringement. The CJEU’s reasoning had three
parts: (a) first, it held that to decide otherwise would undermine the binding
nature of Art 16(4) by allowing a party to circumvent the rules and have
questions of validity determined in the wrong jurisdiction (b) second, this would
undermine the predictability and certainty of the rules of jurisdiction laid
down by the Convention and (c) third, it considered that to allow courts other
than those of a State in which a particular patent is issued to rule indirectly
on the validity of a patent would multiply the risk of conflicting decisions across
jurisdictions. This reasoning was followed in the two other cases that Huawei rely
on: Roche v Primus and Solvay v
Honeywell.
567.
In my judgment, the Brussels I Regulation and the CJEU case law cited
has nothing to do with what the terms of a FRAND licence should be. If a
worldwide licence is FRAND then requiring Huawei to take and pay for one would
not amount to determining questions of validity in relation to which courts of
other Member States have exclusive jurisdiction under Art 22(4). Taking
Huawei’s example of the on-going German proceedings, the German courts would
remain free to determine the relevant patents’ validity. A FRAND licence
should not prevent a licensee from challenging validity or essentiality of
licensed patents and should have provisions dealing with sales in non-patent
countries. So if the German courts decide all the relevant patents are invalid
(or not essential), that would simply result in whatever consequences the
worldwide licence provided for. Since the licence is a FRAND licence those
consequences are FRAND too. The binding nature and clarity of Art 22(4) are
not thereby undermined and, most importantly, there is no risk of the decisions
in England and Germany conflicting. I reject Huawei’s fourth point.
568.
The sixth point is about the conduct of the litigation. The key issue is
a complaint that UK only licensing was not offered (on an open basis) by
Unwired Planet for a year after the litigation began. However this rings
hollow since Huawei have never (on an open basis) offered to take a worldwide
licence at all.
569.
Does the litigation in this jurisdiction make any difference to that
conclusion? In my judgment it does not. A different question is whether,
following Huawei v ZTE, Unwired Planet’s approach to the
litigation and injunctive relief is premature and an abuse of dominance. At
this stage I am only concerned with the mere fact that Unwired Planet and
Huawei are engaged in patent litigation and insisting on a worldwide licence.
Given that a worldwide licence is FRAND, the fact that litigation is in existence
does not seem to me to make an insistence on it abusive or not FRAND.
570.
The final point is to assess the impact of the outcomes of the
litigation in Germany and China. In Germany the proceedings are bifurcated.
Unwired Planet have sued Huawei for infringement in the local courts while
Huawei have brought invalidity proceedings in the Federal Patent Court. In
China Huawei have brought invalidity proceedings. So far there have been wins,
losses and appeals on both sides and no final outcome, in the sense of final
without appeals.
571.
In my judgment this other litigation does not make any difference to the
analysis. As I have already said in the context of Huawei’s Brussels I and GAT
v LUK argument a worldwide FRAND licence should include an
appropriate mechanism to deal with countries which become effectively
non-patent countries.
572.
I conclude that a worldwide licence would not be contrary to competition
law. Willing and reasonable parties would agree on a worldwide licence. It
is the FRAND licence for a portfolio like Unwired Planet’s and an implementer
like Huawei. Therefore, Unwired Planet are entitled to insist on it. It
follows that an insistence by Huawei on a licence with a UK only scope is not
FRAND.
(b) Should the court settle the FRAND terms of a
worldwide licence?
573.
All of Unwired Planet’s worldwide offers since 2014 have been put as
licences with single global blended royalty rates. That needs to be addressed
along with any other relevant terms.
574.
Huawei did not engage with Unwired Planet’s proposed terms of a
worldwide licence because they contended it was not open to Unwired Planet to
insist on it both in principle (i.e. the FRAND and competition law bundling
points I have rejected) and from a procedural point of view. Huawei’s case on
the procedure is that a UK only licence is the inevitable and mandatory outcome
of this case as a consequence of an earlier case management ruling and certain
subsequent procedural steps.
575.
In summary Huawei’s procedural point is this. During these proceedings
Unwired Planet have offered licences with three different scopes – individual
patents, UK portfolio and worldwide. In the summer of 2016 Huawei informed
Unwired Planet that they would accept a UK portfolio licence and would accept
whatever rate the court decides is FRAND for such a licence. Subject to the
manoeuvre, Huawei would also accept whatever terms the court thinks fit for a
UK only licence. Since a UK portfolio licence is one of Unwired Planet’s
offers and since Huawei have accepted any rate the court thinks fit for that
licence, the only licence which the court can settle is a UK portfolio licence.
576.
I am not impressed with the procedural submission, for the following
reasons.
577.
From the beginning Huawei have contended that Unwired Planet’s offers
such as the 2014 offer were not FRAND and contrary to competition law and
sought certain remedies accordingly, such as refusal of an injunction. In one
sense such an issue is narrow in that one could simply decide whether an offer
is or is not FRAND etc., and if it is not, go no further. A difficulty could
be that the offers concerned were never put together with fully worked out
contract terms but that might not matter in practice since no doubt the big
issue of the rate could be addressed and, on Huawei’s case, certain terms such
as bundling SEPs and non-SEPs together were such that they could never be
FRAND.
578.
Unwired Planet applied to amend to seek certain declaratory relief.
This came before me at the case management conference on 19th-20th
March 2015 (judgment on 24th April 2015 [2015] EWHC 1029 (Pat)).
Unwired Planet sought leave to amend its Statement of Case to include as relief
declarations about the FRAND status of their offers to date. I allowed one
declaration but refused the other. The declaration which was refused was a
device to simply ask the question – what would be FRAND? It was not anchored
to anything. In refusing this wide declaration I referred to the court not
having the sort of open ended jurisdiction available in the Copyright
Tribunal. I allowed Unwired Planet to claim a declaration in narrower form
which referred expressly to specific offers already made. In allowing this
amended claim I held that the court could declare that a given set of terms
were or were not FRAND and also that the court could, within the framework of a
concrete proposal, find that a set of terms which differed in some respect from
the concrete proposal was also FRAND even if the terms as proposed were not. I
also rejected the objection to allowing this amendment that it would require
the court to value Unwired Planet’s global patent portfolio. That was because
that issue was going to be in the case anyway.
579.
Huawei rely on this judgment, but it is against them. A key step in
Huawei’s reasoning is the idea that it is only because Huawei have agreed to
accept whatever rate the court thinks fit that the court has jurisdiction to
set a rate rather than just adjudicate in a black and white fashion on rates
suggested by the parties. I doubt such a thing was ever appropriate but in any
event the case management judgment made clear that in dealing with the
declaratory relief permitted by the amendment, the court would not be
constrained in that way. It is not Huawei’s acceptance that it will take whatever
rate the court thinks fit which gives the court jurisdiction to decide what the
FRAND rate should be. The amendment permitted in April 2015 does that.
580.
Huawei have always known that Unwired Planet ranked their offers in the
sense that their first preference was for a worldwide licence. Huawei do not
suggest that Unwired Planet ever indicated that if Huawei said they would take
a UK portfolio licence then the issue of scope was resolved. The case is not
put on that basis. Huawei referred to the odd aspect of Mr Bezant’s evidence
but it does not bear out the argument. The oddity of Mr Bezant’s approach is
that it applies just as much as setting a UK only rate as anything else.
581.
It is true that fully worked out terms were only put forward openly after
the start of the trial, as a result of me asking the parties to produce and
engage with them. That cannot make a material difference. If Huawei thought
they were prejudiced by the absence of such terms earlier in the action they
could have asked. But I am left with a set of worldwide terms proposed by
Unwired Planet and no engagement with Huawei. In other circumstances it might
have been appropriate to hand down a judgment dealing with the big issues, such
as rates, and then leave it to the parties to agree the smaller points or
isolate the differences down to a few points. That is often done in the
Copyright Tribunal. However this issue was discussed extensively during the
trial. This trial is meant to be the point at which the court decides whether
to grant or refuse a final injunction against Huawei following findings of
infringement of valid claims over a year ago. The only way that can be done
fairly is if at the point the injunction would bite a fully worked out licence
is available in relation to which the court has decided FRAND, competition law,
and equitably refusability. These proceedings have gone on long enough.
There is no justification in allowing yet another round of evidence and
argument and so I will do the best I can with the material.
(c) FRAND rates
in a worldwide licence
582.
The evidence before me is clear that willing parties would agree that a
worldwide licence in this case would have a different rate for sales in China.
They would not have a carve out which left China unlicensed ([…])
because Unwired Planet’s portfolio of declared SEPs clearly includes China.
The rate is determined by the number of Relevant SEPs but a licence is a
licence on declared SEPs.
583.
The appropriate rate for China is not complicated to arrive at. The
comparable licences show that rates are often lower in China than for the rest
of the world. The relative factor varies. I find that a FRAND licence would
use a factor of 50%.
584.
However that is not the end of the story. Unwired Planet’s portfolio is
smaller in China than in elsewhere and Unwired Planet have fewer Relevant SEPs
there than the numbers used to set the benchmark rates above. However this can
readily be catered for. A fair and reasonable approach consistent with
everything which has gone before would be to scale the rate with an additional
factor determined by the number of Relevant SEPs in China identified by Dr
Cooper. For multimode the fair approach is to scale the multimode rates by
reference to the Relevant SEP numbers in the highest relevant standard rather
than recalculate the weighting.
585.
There is an issue about whether the Relevant SEP for 2G for China covers
handsets rather than just infrastructure. However given that the licence
itself is a licence on declared SEPs and given the lack of development of the
argument about this, a FRAND approach in this situation would be to include 2G
handsets in the licence and treat the number of Relevant 2G SEPs as one. There
is also a question based on whether to count pending applications (which makes
a difference for 4G in China). A FRAND approach would be to include pending
applications for Relevant SEPs in the scaling exercise. Another point specific
to China was the possibility of single mode handsets. Given the way the
multimode figures come out (see the table below) the FRAND approach would be to
treat single mode handsets as the same as the relevant multimode (so a single
mode 3G handset would be the same as a 2G/3G multimode handset).
586.
All these points together produce the following table:
Unwired Planet FRAND rates for China
|
Handsets
(3G and 4G are multimode)
|
|
Benchmark rate
|
China benchmark
(50%)
|
SEP families used to derive benchmark
|
Relevant SEP families in China
|
Rate for China
|
2G
|
0.064%
|
0.032%
|
2
|
1
|
0.016%
|
2G/3G
|
0.032%
|
0.016%
|
1
|
1
|
0.016%
|
2G/3G/4G
|
0.062%
|
0.031%
|
6
|
5
|
0.026%
|
|
Infrastructure
(not multimode)
|
2G
|
0.064%
|
0.032%
|
1
|
1
|
0.032%
|
3G
|
0.016%
|
0.008%
|
2
|
1
|
0.004%
|
4G
|
0.072%
|
0.036%
|
7
|
5
|
0.026%
|
587.
The question turns to whether any other regions of the world should have
lower rates than the benchmark rate. Parties negotiating in a FRAND way would
not try to divide up the world into too many categories since it risks being
unworkable but there is at least one comparable licence in which the contract
treats three regions of the world differently and that is a fair and reasonable
approach. Outside China, a FRAND approach would be to divide the rest of the
world into major markets (MM) and other markets (OM) by reference to the number
of declared SEPs in force held by Unwired Planet in that country. The three
standards 2G, 3G or 4G would be treated individually. A table setting out the
numbers of declared SEPs held by Unwired Planet around the world is at Annex
1. Bearing in mind that table, a FRAND approach would be to set MM countries
for a given standard as those with more than a certain number of declared SEPs
for that standard. In my judgment a fair threshold for 2G or 3G would be 2 or
more declared SEPs and for 4G would be 3 or more declared SEPs. Any country
below the threshold would be OM for that standard. Based on the figures in
Annex 1 this produces the following table of MM countries. The remaining
countries in Annex 1 are OM states for all standards as is the rest of the
world.
MM all
standards
|
MM 4G and 3G
|
MM 4G only
|
MM 3G only
|
France
|
Canada
|
Ireland
|
Argentina
|
Germany
|
Italy
|
Netherlands
|
Australia
|
India
|
Spain
|
New Zealand
|
South Korea
|
Japan
|
Taiwan
|
Switzerland
|
|
UK
|
|
|
|
US
|
|
|
|
588.
Any declared SEP in a country which is determined by a relevant court to
be invalid or not essential would cease to count as a declared SEP. This is a
simple way of ensuring that the licensee can, if they wish, challenge validity
(etc.) while the agreement is in force. If further declared SEPs are added
then again appropriate adjustments can be made. The necessary adjustments to
the designations of countries as MM or OM should be done on an annual basis.
589.
The rate of OM countries would be the China rate on the basis that the
products are made in China under licence. That will also apply to products in
which the components are made in China but the products are assembled in an OM
country. Venezuela is an OM country for all standards.
590.
For multimode handsets the royalty will be the higher of the possible
applicable rates. So a 2G/3G multimode handset in a country which is an MM for
3G, the MM 3G rate is due. For a 2G/3G/4G handset in a country which is MM for
4G, the 4G rate is due; while such a handset sold in a country which is MM for
3G only, attracts the 3G MM rate rather than the 4G OM rate. That is fair.
591.
The starting point to arrive at the FRAND rate for the MM countries
would be the benchmark rate. However the benchmark rate was set by reference
to a number for Relevant SEPs focussed on the United Kingdom. Applying that to
all MM countries is too generous to Unwired Planet because the UK has more
Relevant SEPs for 4G handsets than any other country. The most any other 4G MM
countries have (including applications) is 5 and they are the USA, France,
Germany, India and Spain. Of the other 4G MM states: Italy, Japan and the
Netherlands have 4 Relevant 4G SEPs, Canada and Ireland have 3, New Zealand and
Switzerland have 2, and Taiwan has 1. The FRAND approach in the circumstances
would be to set the MM rate as a single rate, for all countries including the
UK. In my judgment the FRAND approach would be to use a factor based on taking
5 as the number of Relevant SEPs for LTE. The markets in which the number is 5
or more are some of the most valuable markets in the world. The scaling for
multimode will use the same approach as taken for China. There is no need to
make a similar adjustment to the benchmark for 2G nor for 3G. This produces
the following table:
Unwired Planet FRAND rates for Major
Markets (MM)
|
Handsets
(3G and 4G are multimode)
|
|
Benchmark rate
|
SEP families used to derive benchmark
|
Relevant MM SEP families
|
Rate for MM
|
2G
|
0.064%
|
2
|
2
|
0.064%
|
2G/3G
|
0.032%
|
1
|
1
|
0.032%
|
2G/3G/4G
|
0.062%
|
6
|
5
|
0.052%
|
|
Infrastructure
(not multimode)
|
2G
|
0.064%
|
1
|
1
|
0.064%
|
3G
|
0.016%
|
2
|
2
|
0.016%
|
4G
|
0.072%
|
7
|
5
|
0.051%
|
592.
That deals with rates.
(d) Other terms in a worldwide licence
593.
The parties narrowed the issues very considerably in relation to a draft
UK licence. The points they were able to agree upon as FRAND are just as
applicable to a worldwide licence. So a FRAND worldwide licence would license
all acts which would otherwise infringe any of the relevant patents. It would
be for a seven year term from the effective date of 1st January 2013
(when the 2009 Huawei-Ericsson licence ended) and therefore would expire on 31st
December 2020. It would contain a release for back damages on the basis that
royalties were paid at the contract rate for the past period. The royalty
would be calculated as a share of a defined net selling price of defined end
user equipment or infrastructure equipment. The royalty would be payable on
sale. In the worldwide licence the rate will be determined by the territory in
which the goods are sold, i.e. China, an OM country or an MM country for the
relevant standard. The licence would contain conventional reporting
provisions, record keeping and audit. The reporting would be quarterly with
payment due a specified period after the report (there is a typo in clause 4.5
which should refer to report clause 4.7 not 4.6). As a contract settled by the
court its terms would not be confidential.
594.
The parties were prepared to agree to the UK licence having an England
and Wales choice of law clause and an exclusive jurisdiction clause in favour
of the High Court of England and Wales. Since the worldwide licence is being
found to be FRAND by an English court it seems to me that a FRAND approach is
to have a choice of law clause in favour of England and Wales law. However as
a worldwide licence I think a jurisdiction clause purporting to oust the
jurisdiction of foreign courts would not be appropriate.
595.
In addition to incorporating the terms I have addressed already, the
worldwide licence draft provided by Unwired Planet must be amended where
appropriate to conform (a) to the agreed terms of the UK draft and (b) to the
rulings I will make below on the disputed terms of the UK draft. With those
amendments the worldwide licence document would be the FRAND licence between
these parties.
(e) The terms of a UK only portfolio licence
596.
Since I have decided a worldwide licence is FRAND and Unwired Planet are
entitled to insist on it, the question of terms of the UK only licence does not
arise but in order to settle the worldwide terms, I will decide the issues.
UK only - rate
597.
Both sides agree that if the licence is a UK only SEP licence then the
rate should be higher. The degree of uplift is in dispute. It is clear that
if the licence was to be only for one territory, such as the UK, then the rate
should be higher than the benchmark rate. That is because there are plainly
significant efficiencies in global licensing. Huawei refer to Mr Lasinski’s
evidence in favour of an uplift of 50% (48.51%) which he derived from the
differential between the US/EU and the rest of the world in a […]
licence. Unwired Planet contend the uplift should be much bigger but one needs
to be careful to compare like with like. Unwired Planet referred to two
uplifts based on two different assumptions. The first is the UK only uplift.
Unwired Planet contend this uplift should be 150% for handsets and 100% for
infrastructure. The second is on the assumption that all the SEPs in suit are
valid and infringed. It arises in this context because the SEPs in suit are UK
patents.
598.
The second assumption about validity and infringement/essentiality can
be somewhat confusing but, to be fair, it harks back to the way some open
offers had been expressed for most of the proceedings, which in turn arose from
one aspect of Huawei’s stance, that they were only prepared to take a licence
under a patent found by the court to be valid and infringed and were not
prepared to take a licence under any other patent. They were entitled to do
that but it is a different basis from the basis under consideration.
599.
Unwired Planet contended that on that second assumption the rates should
be higher than they would otherwise have been. I agree with the principle.
That is because I infer that all the comparable licences in issue would have
been negotiated on a less stringent basis and therefore the rates would inevitably
be reduced somewhat to price in some uncertainty about the issues of validity
and infringement/essentiality. However since the UK only licence is not put on
that basis now, it is not necessary to arrive at a figure for that uplift.
600.
Turning to the first uplift, the problem with Huawei’s submission is
that Mr Lasinski’s evidence is based on a different kind of licence from the
one under consideration. The […] licence is a global licence with
differential rates for different territories, in a similar way to other
licences addressed above. But the question at issue is what would the rate be
for a licence which is territorially limited to the UK only. The territorial
uplifts such as the one in the […] licence do not exist for that
reason. They will derive from differences in the markets and portfolio
strength in the various territories. The UK only uplift in issue is
different. It is a way of pricing the efficiencies of global licensing as
opposed to the inefficiency and inconvenience of state by state licensing.
601.
Mr Bezant’s evidence was that Unwired Planet’s approach to this uplift
made sense but he did not advance any specific points on the size of this
particular uplift.
602.
I believe the inefficiency and inconvenience of state by state licensing
is very substantial. Scores or even hundreds of licences would be required.
A FRAND rate for state by state licensing would include a larger uplift than
the one proposed by Mr Lasinski. Unwired Planet proposed a higher uplift for
handsets than for infrastructure but did not draw my attention to any reason
why there should be a difference. I find that a FRAND uplift for state by
state licensing is 100% for all rates. In other words the rates would be
double.
UK only – other
terms
603.
The parties engaged with each other on this and substantially narrowed
the issues. There were other issues outstanding at the end of the trial (such
as intermediate/car telematics products but they were resolved). The
outstanding points are:
i)
Royalty base issues:
a)
Infrastructure revenues;
b)
End user device revenues;
c)
Packing, insurance and transport discount;
ii)
Unlicensed products in the UK;
iii)
Records and audit;
iv)
Licensor indemnities.
Royalty base
604.
The first debate is about the definition of the royalty base in the
context of infrastructure revenues. The royalty base is the sum to which the
percentage is applied to give the royalty due. It will largely correspond to
the price paid for goods and the definition is largely agreed in the draft
contract as something called “Selling Price” for “End User Devices” (i.e.
handsets) and “Infrastructure Revenue” for infrastructure. The question is
whether Infrastructure Revenue should include income from managed services,
operation and/or maintenance. Huawei contend it should not. They point out
that these services are not included in the corresponding definition in the […]
licence and the […] licence.
605.
Unwired Planet submit that the problem arises from the opacity of
Huawei’s business. There is no readily available public information and Huawei
have not provided any in this case. Unwired Planet suspect that Huawei derive
a substantial portion of their infrastructure revenue not from sale of
equipment but from convoyed services and contend that a fair royalty should
take that into account. Their proposed clause provides that the royalty base
will include all revenues “directly or indirectly derived from the sales of
infrastructure equipment” including “any revenues derived from maintenance or
operation”. As a comparable Unwired Planet refer to a licence between Huawei
and […] which includes services within the royalty base.
606.
I prefer Huawei’s case to Unwired Planet’s. The risk that a licensee
will sell at an undervalue and earn income through convoyed services is real
enough but Unwired Planet’s solution is too extreme. The fact that no
information has been provided is not such a weighty point since, unless yet
more anti-avoidance clauses were put in the licence, a licensee could always
change its practices in future. Although we do not know whether […] exchanged
any details about this, the absence of services from that licence is a relevant
comparable.
607.
I am not persuaded by Huawei’s point that there is evidence the […] licence
is workable. […]. […] is not a good comparable as they are a
land-mobile-radio manufacturer concerned with private networks used for public
safety and security. The wording (clause 1.10) will be Huawei’s proposal.
608.
The argument on end user revenues is related to the previous point. The
issue is what to do if products are sold at an undervalue because they are part
of a combination. Notwithstanding possible difficulties of interpretation, the
parties agree that the proper royalty base should be the price at which
substantial quantities of equivalent or substantially equivalent products have
been sold.
609.
The dispute lies in the alternative royalty base for the situation in
which there are no substantial sales of equivalent or substantially equivalent
products. In these circumstances, Huawei contend for the royalty base to be
calculated on cost +20%. Unwired Planet do not agree because they say there is
every reason to believe: (a) costs on Huawei products are very low and (b) Huawei’s
mark-up is considerably greater than 20%. Unwired Planet contend that an appropriate
fall back royalty base is the ASP assigned to Huawei by category of device by a
nominated industry tracking agency (e.g. Strategy Analytics).
610.
I prefer Huawei’s wording for clause 1.14. It is simpler and links the
royalty base to the actual numbers.
611.
The dispute on packaging, insurance and transport discount is how to
take them into account in defining the Net Selling Price to which the
percentage is applied. Huawei proposes a fixed 5% deduction, Unwired Planet
contend to deduct actual packing, insurance and transport up to a ceiling of 5%
with no trade discounts to be included. Huawei point out that the equivalent
discount is 8% in the […] licence (including trade discounts), while the
[…] licence has a 5% discount for packing and allows the usual trade
discounts actually given to “unrelated buyers on a regular basis” to be
deducted. Unwired Planet submit that a flat rate 5% is unreasonably large for
high end handsets. The price difference between a single mode 2G device and a
high end multimode device will be very large and there is no reason to think
the costs will scale with those prices. They argue that the deduction should
either be the actuals or if set on a flat rate, a lower flat rate of 2%. I
think a flat rate is better as it is more certain. It should be 4% and will be
defined to represent trade discounts as well. In other words I prefer Huawei’s
wording but with a 4% figure.
Unlicensed products in the UK
612.
The argument about how to deal with unlicensed products in the UK was
what Huawei called Unwired Planet’s manoeuvre. Agreed clause 2.5 provided that
Huawei acknowledged that the rights and licences granted in the UK only pertain
to the territory. Unwired Planet contend that the clause should continue with
two further provisions: (a) that all “licensed products” not intended for
importation into or sale in the UK should be marked “not for sale or use in the
United Kingdom” and (b) technical measures should be implemented to ensure that
all “licensed products” not intended for importation into or sale in the UK
could not be used for roaming in the UK. Note that “licensed products” does
not mean products which have a licence but is a definition of the kind of
products which would need a licence. Huawei had made a rival proposal to deal
with parallel trade which provided that imports by third parties of Huawei
goods sold outside the UK would attract a UK royalty to be paid by Huawei. But
Huawei had not addressed roaming.
613.
Huawei argued that Unwired Planet’s clause was just an attempt to make a
UK only licence unworkable. The idea that all Huawei (relevant) products sold
worldwide should be marked “not for use in the UK” was absurd. They doubted
the technical measures referred to were even possible and also doubted if they
were lawful under European trade law.
614.
Unwired Planet did not have a difficulty with the concept of a clause
dealing with parallel trade but they did not believe the Huawei proposal was
workable since there was no effective mechanism for detecting it. Huawei
proposed a revised clause which allowed for adjustment to be made if a regular
volume of parallel goods is identified after reasonable enquiries. There is a
similar but not identical clause in the […]. I think Huawei’s proposal
is sufficient and deals with parallel trade.
615.
The real problem was roaming. Unwired Planet argued that Huawei was not
facing up to the problems inherent in Huawei’s insistence on a UK only patent
licence in a world in which their handsets are designed to and do cross borders
on a large scale. A Huawei handset made and sold outside the UK would have no
licence under this entirely territorial licence. Using such an unlicensed
product in the UK would be an act of patent infringement.
616.
Mr Cheng for Huawei had suggested this roaming problem was not Huawei’s
responsibility but I am not satisfied it was as simple as that. Huawei had
ample time to show that the effect of the various exclusions from infringement
(such as s60(5)(a) of the 1977 Act excluding acts done privately and for
purposes which are not commercial) would completely eliminate the problem but
they did not do so. They mentioned consumers but that does not cover every
case. The example mentioned briefly was what would be the position when a
foreign business person brought into the UK a Huawei phone purchased elsewhere
and uses it here for their business.
617.
Unwired Planet are right that Huawei’s stance illuminates an
unattractive aspect of Huawei’s stance in this dispute. As Unwired Planet
submitted, when it comes to the products Huawei wants to make and sell, they
want to take full advantage of the international nature of the market that is
developed by the international standard setting so as to sell products without
restriction on wherever they can be sold and used. But when it comes to taking
a FRAND licence offered by the patentee they say they are entitled to take a
licence just for the UK despite knowing that some products not sold in the UK
will find their way here, by parallel trade and by the international movement
of the consumers using their products. As Unwired Planet submit not only is international
movement foreseeable, it is intended because as it is the point of an LTE
phone. Of course a worldwide licence solves this problem at a stroke.
618.
On the other hand Huawei are right that Unwired Planet’s approach is
absurd and unattractive. It is calculated to make the licence impossible for a
licensee to accept. That is not FRAND. The assumed premise on which I am
settling terms of this UK only licence is that contrary to my earlier finding
such a licence is FRAND (or at least that the two parties have agreed to have a
licence of that scope).
619.
A FRAND licence in these circumstances has to license every act of
patent infringement which the licensee would otherwise be liable for, absent
the licence. So the licence must render lawful the roaming use of a Huawei
product bought overseas and brought into the UK. Parties taking a FRAND
approach to this problem would not embark on trying to decide the legal issue
posed by roaming if they could avoid it. Both parties would see that the other
had a point. Something has to be done about it in order to ensure the licensee
is fully licensed but a clause like Unwired Planet’s is not sensible. Absent
any other way of dealing with it the parties would agree a modest uplift on the
royalty base to take roaming into account. There is no evidence of how many
international handsets enter the UK every day, whether for business purposes or
carried by consumers, nor how long they stay here. Absent any other figures,
the parties would agree a simple percentage uplift on the total handset royalty
to take it into account. I think a fair, reasonable uplift is 4%.
Records and
audit
620.
Two arguments remain about the clauses on record keeping and audit. A
provision for audit is a standard and important aspect of intellectual property
licensing. Standard problems with these clauses are confidentiality of the
information and how to structure the costs shifting aspect (if the audit shows
the licensee has been underpaying by more than a margin, the licensee pays the
costs of the audit). These are the two problems here.
621.
Huawei suggest the correct error margin should be 8% and refer to the […]
licence. Unwired Planet contend for 5% and refer to the […licences]. I
find the tighter 5% margin is FRAND.
622.
The other issue is about the licensor’s access to the licensee’s
information in the event an audit identifies an underpayment. The independent
auditor will have full access. If an underpayment is identified the parties
can meet to discuss it. The licensor needs to be allowed access to relevant
information as long as the licensor keeps it confidential. Huawei’s final proposal
was to accept access by the licensor on that basis but to allow the licensee to
limit what is provided to what the licensee considers reasonably necessary. I
think that is fair given that the independent auditor will have access to all
information and could raise a problem if they thought the licensee had not
given enough information to the licensor to address the underpayment. So I
accept Huawei’s wording.
Licensor
indemnities
623.
This is a debate about what indemnity Unwired Planet should provide
Huawei upon the divesture of any licensed patent. Huawei have requested that
in the event the Licensed Patents are transferred to a third party (either by
assignment or transfer of the business) then Unwired Planet should indemnify
Huawei against claims made by that third party in respect of acts covered by
the licence.
624.
Huawei contend this has been a real problem in the past. The fact the
2009 Ericsson-Huawei licence covered patents which were then assigned to
Unwired Planet did not stop Unwired Planet making claims in this litigation which
included licensed acts. The pleadings were amended but only after considerable
correspondence and costs were awarded against Unwired Planet on this at the
first CMC in July 2014. An example clause can be found in the […]
Licence at clause 7.3.
625.
Unwired Planet’s position is that they should be responsible for
notifying any purchaser of the patents that Huawei are licensed, imposing upon
an assignee an obligation to respect that licence, and taking appropriate
measures to ensure that the transferred encumbrance is observed. Unwired
Planet submit this is a typical and proportionate approach to running
encumbrances upon the assignment of patents and argue that Huawei’s approach is
much more onerous. They say it imposes on Unwired Planet “a burden that
engenders uncontrollable, unpredictable and potentially ruinous costs hanging
over them” and that Huawei “have provided no compelling reason to do it”. They
ask whether this is something Huawei would be willing to accept as a licensor.
In the […] licence Huawei is a licensee.
626.
I agree with Huawei. But for the experience of this litigation Unwired
Planet would be in a better position to dispute this. The experience in this
litigation bears out the problem. The indemnity will encourage Unwired Planet
to make assurance double sure that a transferee respects the licence.
Competition law
627.
Huawei contend that Unwired Planet have abused their dominant position by
reason of its conduct relating to this dispute and argue that if Unwired
Planet’s actions do amount to an abuse then Unwired Planet is not entitled to
an injunction. Unwired Planet deny these allegations. The relevant law is Art
102 TFEU for which the UK equivalent is s18 of the Competition Act 1998.
628.
Art 102 TFEU is in these terms:
“Any abuse by one or more
undertakings of a dominant position within the internal market or in a
substantial part of it shall be prohibited as incompatible with the internal
market in so far as it may affect trade between Member States.
Such abuse may, in particular,
consist in:
(a) directly or indirectly imposing unfair purchase or
selling prices or other unfair trading conditions;
(b) limiting production, markets or technical development to
the prejudice of consumers;
(c) applying dissimilar conditions to equivalent transactions
with other trading parties, thereby placing them at a competitive disadvantage;
(d) making the conclusion of contracts subject to acceptance
by the other parties of supplementary obligations which, by their nature or
according to commercial usage, have no connection with the subject of such
contracts.”
629.
It is not in dispute that Unwired Planet is an undertaking nor that a
failure to comply with FRAND would affect relevant trade. The issues are
whether Unwired Planet enjoy a dominant position and if so then whether they
have abused that dominant position.
(i) Dominant position
630.
The concept of a dominant position was defined by the European Court of
Justice in Case 27/76 United Brands v Commission [1978] ECR 207 as being:
“…a position of economic strength
enjoyed by an undertaking which enables it to prevent effective competition
being maintained on the relevant market by giving it the power to behave to an
appreciable extent independently of its competitors, customers and ultimately
of its consumers.”
631.
The starting point therefore is to define the relevant market. It was
common ground that the relevant market for the purpose of assessing dominance
in the present case is a distinct market for licensing each SEP individually.
Defining the relevant market in this way is in line with the European
Commission’s decision in Motorola. With the market
defined in that way a patentee obviously has a 100% market share and Huawei
submitted that therefore there was a presumption that such a party was
dominant, since even a 50% market share will be regarded as proof of dominance
save in exceptional circumstances – citing AstraZeneca AB v Commission
(6 December 2012) Case C-457/10 at para 176 and AKZO Chemie BV v
Commission Case C-62/86 [1991] ECR I-3359 at para 60.
632.
On the pleadings Unwired Planet did not admit that they were in a
dominant position and in closing submitted that although Huawei had alleged a
dominant position, all Huawei had done was rely on presumptions. Huawei’s
expert Prof Neven had simply expressed the view that there was a strong
presumption of dominance. Unwired Planet submitted that this was similar to
the situation addressed by Advocate General Wathelet in Huawei v ZTE.
There the AG specifically emphasised the point that the fact an undertaking
owns a SEP does not necessarily mean that it holds a dominant position (see
paragraphs 53-58). In particular the AG said:
“57. However, it should be noted that the referring court
did not state in the order for reference that it had arrived at its finding
that the SEP-holder in the present case unquestionably holds a dominant
position after it had examined all the circumstances and the specific context
of the case. I share the view expressed by the Netherlands Government that the
fact that an undertaking owns an SEP does not necessarily mean that it holds a
dominant position within the meaning of Article 102 TFEU, and that it is for
the national court to determine, on a case-by-case basis, whether that is
indeed the situation.
58. Given that a finding that an undertaking has a dominant
position imposes on the undertaking concerned a special responsibility not to
allow its conduct to impair genuine competition, that finding cannot be based
on hypotheses. If the fact that anyone who uses a standard set by a
standardisation body must necessarily make use of the teaching of an SEP, thus
requiring a licence from the owner of that patent, could give rise to a rebuttable
presumption that the owner of that patent holds a dominant position, it must,
in my view, be possible to rebut that presumption with specific, detailed
evidence.”
633.
Unwired Planet submitted that the presence of the FRAND undertaking and
the countervailing buyer power held by potential licensees amount to sufficient
grounds to rebut the presumption in this case.
634.
In fairness to Huawei, since Unwired Planet’s pleaded position was
merely a non-admission of dominance rather than a denial coupled with a positive
case to the contrary, I do not believe Unwired Planet can level much criticism
at Huawei for relying on a presumption. The European case law, including the
opinion of the AG referred to above, indicates that there can be a presumption
but it can be rebutted. Unwired Planet should have advanced a positive case if
they wanted to rebut such a presumption and if that is what they wanted to do
they should not have met Huawei’s allegation with a mere non-admission.
Nevertheless, Huawei engaged directly with two particular points which Unwired
Planet advanced at trial and I will consider them.
635.
The first point is the expert evidence. Dr Niels left the issue of
dominance open rather than reaching a concluded view while Prof Neven noted
that given the agreed market definition, there was a strong presumption that Unwired
Planet were dominant and that he had seen nothing to rebut that presumption.
This is not a promising start for Unwired Planet.
636.
For the second point (countervailing buyer power) Unwired Planet rely on
two arguments to suggest they cannot be in a dominant position. They are the
effect of the FRAND undertaking and the potential for hold-out by putative
licensees. They are advanced as species of the general genus of countervailing
buyer power. Huawei submitted that in his oral evidence Dr Niels stressed that
he had not reached a conclusion one way or another on dominance while Prof
Neven disagreed with the suggestion that these constraints would alleviate dominance.
These stated conclusions are not a complete summary of the expert evidence. As
with all expert evidence, what counts are the reasons an expert has for their
conclusive opinion and not just the opinion itself. These need to be examined.
637.
Before getting into the two arguments in particular, Huawei took six
points on countervailing market power in general. (In fact, the closing lists
seven but the seventh is to address the detail of the FRAND undertaking and
hold out). First is that Unwired Planet’s arguments, if accepted, are generic
and do not apply to Unwired Planet and Huawei specifically. They would mean
that no SEP owner is in a dominant position. I do not accept that because the
points on hold out derive in part from the specific experience of Unwired
Planet themselves. As has been addressed above, their portfolio is much
smaller than the portfolios of the major players.
638.
The second point is that the arguments are not species of countervailing
buyer power because they are general in nature and the Commission in Motorola
explained that general bargaining power is a different thing. True
“countervailing buyer power” is concerned with the ability to switch to
competing suppliers. This submission does not help. If either of the factors
operates in fact to constrain Unwired Planet’s market power so that they are
not in a dominant position then it does not matter what you call it. In this
judgment I refer to the points as countervailing buyer power simply as a
convenient label.
639.
The third point is that both constraints were present in Motorola
and were considered and rejected. Motorola had given a FRAND commitment and
alleged Apple had held out for seven years. Nevertheless the Commission found
Motorola to be in a dominant position in relation to the Cudak patent which was
essential to the GPRS standard. That is true but it also does not help. The
facts are not the same, notably the case was concerned mostly with conduct in
2011 and 2012, before the time when Mr Lasinski’s evidence indicates a change
in market behaviour vis a vis FRAND.
640.
The fourth point was that there was no reason to think the SEPs in this
case were different in terms of indispensability from the SEP in Motorola.
I agree. The SEPs which have been litigated and found to be essential are
essential to 2G/GSM, 3G/UMTS and 4G/LTE. Today the industry is locked into
those standards.
641.
The fifth point is the allegation that there is insufficient evidence to
accept the plea of countervailing buyer power because it must be assessed
against the whole market of potential licensees (citing Motorola
paragraph 240; and Commission Guidelines on Enforcement Priorities at para 18).
Such an analysis would ordinarily entail an analysis of the shape, size and
concentration of the market of potential licensees for Unwired Planet’s SEPs (citing
O’Donoghue and Padilla, The Law and Economics of Article 102 TFEU (2nd
Ed’n, Oxford 2013) at pp167-8) and no such analysis has been conducted.
642.
Paragraphs 239 and 240 of Motorola decision are as
follows:
“239 As noted, the dominant position referred to in Article
102 TFEU relates to a position of economic strength enjoyed by an undertaking
which enables it to prevent effective competition being maintained on the
relevant market by affording it the power to behave to an appreciable extent
independently of its competitors, its customers and ultimately of consumers.
240 Moreover, the General Court has previously held that in a
situation where a supplier controls over 90% of a market, the presence of one
or more large customers is not capable of affecting the dominant position of
the supplier where the demand side is composed of a number of customers that
are not equally strong and which cannot be aggregated.”
643.
Paragraph 239 is an unexceptional explanation of what a dominant
position is. The point of paragraph 240 is in effect that even if one customer
(such as Apple there or Huawei here) is very strong and can resist the market
power of the SEP owner, that may not mean the SEP owner avoids being in a
dominant position because its power may well be sufficient to act with impunity
vis a vis other customers in the relevant market.
644.
The point in the Commission Guidelines is similar. The end of paragraph
18 provides:
“Buyer power may not, however, be considered a sufficiently
effective constraint if it only ensures that a particular or limited segment of
customers is shielded from the market power of the dominant undertaking.”
645.
Huawei said that Dr Niels did not agree with the European Commission’s
views but that ultimately the court should give precedence to the European
Commission, at least insofar as the case was considered under the Competition
Act because of section 60 of that Act. (Unwired Planet did not agree that
Huawei was right about the implications of the Competition Act but I do not
have to get into that.) I do not believe Dr Niels was directly disagreeing
with the Commission. His point was that if one was considering market wide
abuse then Motorola para 240 and Guidelines paragraph 18
make sense. But in a case where the abuse alleged is specific as between the
alleged dominant undertaking and a particular customer it made sense to focus
on that customer and in the end the distinction did not make any practical
difference in this case.
646.
I accept Dr Niels’ view that this argument makes no practical difference
in this case. The point of the cited passages from Motorola
and the Guidelines is methodological: even if the alleged dominant entity
cannot act independently vis a vis one particular large customer, if that
entity can act independently of the customers in the market in general to the
relevant degree, then it should be characterised as being in a dominant
position and amenable to the obligations which flow from that. It may turn out
that at the stage of analysing the alleged abusive conduct with respect to the
particular large customer, the power of that customer means there was no abuse,
but that takes place at a different step in the analysis.
647.
In fact the evidence in this case is not as narrow as Huawei’s argument
suggests. The alleged hold out by Huawei is specific, but the FRAND
undertaking is applicable across the whole market as are some of the points in
evidence on hold out. The way I will take this fifth point into account is by
keeping the distinction described by Dr Niels in mind when I have completed the
analysis of the arguments on dominant position so as to see which way to go.
648.
Huawei’s sixth point was that Unwired Planet’s argument if accepted
would leave a highly undesirable doubt as to whether the FRAND commitment is
enforceable by any legal means at all. This lack of clarity could not be authoritatively
resolved by the English court but only by a French court. I do not follow
this. The SEP owner does not have to be in a dominant position for the FRAND
undertaking to bite. The FRAND undertaking is not imposed by competition law
it is imposed by giving the undertaking to ETSI and arises from the standard
setting. The French courts are in a much better position than this court to
rule on French law but having to rule on foreign law is not unusual. This
court has held that FRAND is enforceable in an English court. The other FRAND
decisions from other courts around the world show that other courts have
enforced FRAND too.
649.
So these six points do not obviate consideration of the effect of the
FRAND undertaking and hold out.
The FRAND undertaking
650.
There is no question now that Unwired Planet is subject to a FRAND undertaking.
Dr Niels’ view was that one needed to ask to what extent the FRAND undertaking
was, in practice, a constraint on behaviour of a SEP owner. Part of his point
was that uncertainties about the enforceability of the FRAND undertaking, which
I have addressed above and which undoubtedly existed, do not mean the
undertaking has no effect in practice. Dr Niels pointed out that the
undertaking means that the SEP owner cannot refuse to grant a licence. He also
thought that the FRAND undertaking was “almost literally” a restriction on the
market power of a SEP owner to set the price because the price could be set by
a court if the parties did not agree.
651.
Prof Neven agreed that the FRAND commitment does in practice constrain
the conduct of SEP holders but his view was that it could not be assumed that
the existence of a FRAND obligation would in fact preclude a SEP holder from
acting contrary to FRAND. That was due to weaknesses in enforcement and a lack
of clarity as to the meaning of FRAND. Unwired Planet submitted this view was
wrong in law because it was based on a point about circularity which arises
from the Commission’s Decision DE/2005/0144 RegTP at
para 22, cited by the Court of Appeal in Hutchison 3G UK Ltd v Ofcom
[2009] EWCA Civ 683.
652.
In opening Huawei had submitted that taking the FRAND undertaking into
account when assessing market power was circular and contrary to something
called the “modified Greenfield” approach based on RegTP, Hutchison
and BT v Ofcom [2016] CAT 3. Prof Neven summarised the
point neatly as being that when assessing market power constraints which have
been imposed precisely because the firm would otherwise enjoy such power, such
as a FRAND undertaking, have to be ignored in order to avoid circularity.
However, putting the matter that way is too broad. The problem some of these
cases were concerned with was whether to lift the constraint in question based
on an argument that, with the constraint in place, an undertaking was not
dominant. So if it is not dominant, why have the constraint? But that is not a
reason to lift the constraint if the undertaking would be dominant without it,
and that kind of reasoning is indeed circular.
653.
The Commission’s approach, explained in paragraph 22 of RegTP,
is that it is not appropriate to exclude a regulatory obligation which can have
an impact on a finding of a SMP (“significant market power”) for the market in
issue if that regulatory obligation “exists independently of a SMP finding on
the market under consideration”. The Commission then state:
“From a methodological viewpoint obligations flowing from
existing regulation, other than the specific regulation imposed on the basis of
SMP status in the analysed market, must be taken into consideration when
assessing the ability of an undertaking to behave independently of its
competitors and customers on that market. In the Commission’s view, this could
only be otherwise where it is uncertain whether the regulation concerned will
continue to exist throughout the period of the forward-looking assessment.”
654.
I prefer not to get into the debate about how to distinguish between an
obligation which exists independently as opposed to one “imposed on the basis
of SMP status in the analysed market”. In this case the origin of the FRAND
obligation is precisely the potential market power of SEP holders in general
given by standardisation but it is also an obligation which will continue to
exist for all material times. Irrespective of its “independence”, it seems to
me that when considering the specific position of an individual SEP owner’s
conduct the only appropriate way to assess whether that SEP owner is in a
dominant position as a matter of fact is to take the practical effect of the
FRAND obligation into account.
655.
Unwired Planet suggested that the fact the Commission did not qualify
its ruling by reference to the ease of enforcement of the obligation was
relevant. That may be so but is not a significant point. In my judgment, the
assessment must always be a practical one based on the reality of the specific
circumstances of the market. It is no use pretending the obligation is
perfectly enforceable and rigidly adhered to if that is not correct. What
matters here is how the SEP owners actually behave. I accept Prof Neven’s
point that one cannot assume the FRAND obligation works perfectly. How easy
FRAND is to enforce in practice and its clarity are relevant factors.
656.
Based on all the evidence, including the witnesses from Unwired Planet
and Huawei, the economists, the valuation experts and the French law experts, I
find the position is this. SEP owners and putative licensees are both well
aware that the FRAND undertaking obliges the owner to grant licences. Mr
Lasinski’s evidence about the reduction in royalty rates before and after 2013
is evidence that the perception that FRAND is enforceable has increased
significantly. Behaviour has changed at least to some degree as a result of
perceptions of the power of the FRAND undertaking. For the period from 2013 to
today, in my judgment the FRAND undertaking does operate as a practical
constraint on a SEP owner’s market power, which is what it was intended to do.
In the relevant market FRAND does give buyers a form of market power they would
not otherwise have which they can and do wield.
Hold-out
657.
The other issue is the potential for hold-out by putative licensees.
Hold-out is also called reverse hold-up. There is no difference. Hold out can
be considered from two perspectives: the potential for hold out in theory, and
the evidence for it in practice.
658.
Considering the potential for hold out, during the concurrent evidence
session I raised with the economists the question whether thinking about this
market as a market for licences did not present a complete picture. Perhaps an
appropriate way to look at it is as a market for inventions. The implementers
can and do implement the inventions the subject of SEPs simply by making
standards compliant equipment. Unlike a market for goods or services, what the
implementer actually wants is something it has ready access to, namely
information, all of which is freely available in the standards. Normally a
seller of a product can restrict practical access to his or her goods without
payment just by refusing to sell them. The holder of an intellectual property
right like a SEP cannot do that. That is of course why the right to exclude
given by the injunction plays such a significant part of intellectual property
disputes, because it is the means by which the law seeks to put the
intellectual property owner into the analogous position to an owner of tangible
property such as a product or land. It is sometimes said that a SEP owner is
selling technology but this analysis shows that that is not accurate.
659.
Both experts recognised that this was a relevant consideration
nevertheless they maintained that the market to consider is the market for
licences since it is licences that the SEP owner is offering and a licence is
the thing which protects the implementer from the risk of exclusion. As Prof
Neven said, if, despite the FRAND commitment, the ability to exclude was
available as a matter of course “you would expect to have hold up very, very
systematically” and that would deprive FRAND of any meaning. I agree.
660.
Ultimately the determining factor is that what is being made available
for sale is a licence. The market should be defined in that way.
Nevertheless, this is an unusual sort of market. What the customers
(implementers) really want is access to the standard, which they can obtain
without paying SEP owners in advance. If they have to pay licence fees then
they will of course do so, but the idea that implementers are all rushing to
pay licence fees is fanciful. The structure of the market inevitably gives
rise to the possibility of licensees holding out.
661.
Huawei recognised that the technology covered by SEPs is frequently
implemented before a licence is obtained and suggested that this was
specifically ratified by the CJEU in two cases. The first was Huawei
v ZTE at paragraph 61-62 where the court said:
“…in view of the large number of SEPs composing a standard
such as that at issue in the main proceedings, it is not certain that the
infringer of one of those SEPs will necessarily be aware that it is using the
teaching of an SEP that is both valid and essential to a standard”
662.
That is a slightly different point based on the large number of SEPs but
in any event it is also not a statement that implementers have some kind of
legal right to infringe SEPs. A notable factor on the facts of this case is
that the patents in Unwired Planet’s portfolio were patents Huawei had
previously licensed (from Ericsson). I will address that in the section on
premature litigation.
663.
The second case said to support the proposition that implementing
patented technology before a licence is obtained is lawful is Case T-472/13 Lundbeck
v Commission (8 September 2016). Huawei contend that at paragraph 121-122
the CJEU had held that an “at risk” entry to a market is “not unlawful in
itself”, and it is therefore for a patentee to “prove before the national
courts” that there is actually an infringement. Those paragraphs were
concerned with a very different context from the present case. Lundbeck
was about generic entry at risk into a patented market and agreements between
the innovator and the generic supplier. Paragraph 121 is about the effect of a
presumption of validity. Leaving aside the question of whether the Patents
Court recognises any such presumption at all, the point in the paragraph is
that just because there may be a presumption of validity that cannot be turned
into a presumption of illegality of the generic products launched at risk.
That is unsurprising and not relevant. The relevant part of paragraph 122 is
concerned with the point that launching at risk as a type of conduct is not
unlawful. It is not suggesting that an implementer would not have been
committing the tort of patent infringement from the outset if they did so, albeit
that might only be established after the event. It is a very long way from the
question of holding out by the implementer of patents declared as essential to
telecommunications standards.
664.
Unwired Planet pointed out that in the experts’ joint memorandum Prof
Neven accepted that there are circumstances in principle in which implementers
can exercise bargaining power by holding out, but suggested that bargaining
power must be assessed in the context of the court procedure that would be
triggered in the case of disagreement. Unwired Planet referred to Prof Neven’s
“Justice is not blind” paper cited above which indicated
that in the context of the court procedures adopted in key jurisdictions in
Europe, including the United Kingdom, licensee hold-out is a very real
possibility. The paper includes a conclusion that “serious consideration
should be given in the policy debate to the risk of reverse hold up by the
licensees” and that while concerns of hold-up by SEP holders may not be
well-founded, “In fact, it would appear that the licensee may often engage in a
reverse hold-up.” The paper was put to Prof Neven in
cross-examination. He emphasised that the modelling in the paper was
theoretical and that the case law had moved on since then due to Huawei
v ZTE. These points are both true as far as they go but in my
judgment the Professor’s paper can properly be taken to recognise that hold-out
by licensees is something which can occur and can be an economically rational
approach for a licensee to take.
665.
Overall I find that there is clear potential on theoretical grounds for
hold-out to occur.
666.
Turning to the evidence, Unwired Planet relied on Mr Robbins’ testimony
that prior to commencement of the present proceedings, Unwired Planet had not
been able to convince a single manufacturer (aside from Lenovo) to discuss the
commercial terms of a licence with them at any reasonable level of specificity
or fair negotiation. He explained:
“It was obvious to me that we were being kept in limbo, by
design or by inefficient process, by all of the potential licensees we were
attempting to negotiate with. They did not want us to litigate, and so they did
not refuse to negotiate altogether, but they also did not want to take a
license and were deploying every tool available to ensure that no license would
be concluded. …
Many potential licensees (some more than others) were
seemingly engaging in delay tactics and we realized that it would be very
difficult if not impossible to progress beyond technical discussions and to
start negotiating the terms of a license without litigation. Where
conversations did move beyond technology and into pricing, we were expected to
bid against ourselves, receiving very few counter-offers. Those we did receive
were derisory and the parties remained poles apart with respect to the rates
each thought were FRAND. …”
667.
I have no reason not to accept that testimony. In it, the evidence of
holding out which I can rely on is the evidence of delays before discussions of
pricing took place. The reason for drawing that distinction is because once
pricing is discussed, the issue of delay becomes tied up with the question of
what a proper rate should be. Once prices are discussed a delay may just be
due to a licensor asking for too much money.
668.
Unwired Planet also referred to the fact that Huawei have not paid
anything for the SEPs they formerly licensed from Ericsson since that licence
expired at the end of 2012, although Huawei rightly pointed out that Unwired
Planet had never sought to have Huawei put royalties in an escrow account in
advance. This point does not help. Finally, Unwired Planet referred to its
distressed financial state at the time of the purchase by PanOptis. That has
the same qualified relevance as Mr Robbins’ evidence.
669.
Overall there is evidence of holding out in practice but it is less
strong than Unwired Planet submit.
Conclusion – dominant position
670.
Standing back, the question I have to decide is whether Unwired Planet
is in a dominant position in the relevant market. The relevant market is a
market for licences under the SEPs. It is a market in which the SEP owner has
100% market share. The market is covered by the FRAND undertaking which does
weaken the SEP owner’s position. It is a market in which licensees can engage
in holding out and there is some evidence that they do, particularly given the
relative weakness of Unwired Planet. If a proper economic analysis had been
done into this market then the issue might be more finely balanced but as it
stands, and without that analysis, I am not satisfied either of these points
alone or together is sufficient to justify not drawing the inference that the
holder of a 100% market share is likely to be dominant. I hold that as the
owner of SEPs, Unwired Planet is in a dominant position in the market for
licences under those SEPs.
(ii) Abuse of
dominance
671.
Huawei submitted that there is no single touchstone to what may
constitute an abuse and pointed out that Art 102 itself gives specific examples
of abuses, which include “…directly or indirectly imposing unfair
purchase or selling prices or other unfair trading conditions” (Art 102(a)) and
“…applying dissimilar conditions to equivalent transactions with other trading
parties, thereby placing them at a competitive disadvantage” (Art
102(c)).
672.
The particular abuses alleged by Huawei are:
i)
Premature litigation: Huawei v ZTE;
ii)
Unfair excessive pricing (Art 102(a));
iii)
Bundling / tying in SEPs and non-SEPS;
iv)
Multi-jurisdictional bundling.
673.
Taking the four topics in turn:
(a) Premature
litigation: Huawei v ZTE
674.
Huawei submit that in Huawei v ZTE the CJEU laid
down a set of entirely mandatory conditions with which a SEP owner must comply
before starting an action seeking injunctive relief in order to avoid affording
the defendant a defence under Art 102 TFEU. The conditions are that before
bringing proceedings against Huawei seeking a prohibitory injunction Unwired
Planet was required in the present case to:
i)
alert Huawei to “the infringement complained about by designating that patent
and specifying the way in which it has been infringed”;
ii)
present to Huawei a “specific, written offer” for “a licensing agreement
on FRAND terms”; and
iii)
afford Huawei sufficient time diligently to respond to that offer, “in
accordance with recognised commercial practices in the field and in good
faith”.
675.
In support of its submission that failure to comply with these
conditions meant that Unwired Planet had necessarily abused their dominant
position Huawei refer to paragraph 60 of the judgment which includes the
following:
“…the proprietor of an SEP which considers that that SEP is
the subject of an infringement cannot, without infringing article 102 TFEU,
bring an action for a prohibitory injunction or for the recall of products
against the alleged infringer without notice or prior consultation with the
alleged infringer, even if the SEP has already been used by the alleged
infringer.”
(Huawei’s emphasis)
676.
Since the 2014 offer was made to Huawei after the proceedings commenced,
there is no doubt that Unwired Planet did not comply with these conditions.
Unwired Planet contend that the true principle to derive from Huawei v
ZTE is not as rigid as Huawei submit. The arguments shade into
points which distinguish Huawei v ZTE on the facts, and in
that context each side also criticises the other’s conduct. In substance the
parties are arguing about the degree to which what happened departs from the
framework described in Huawei v ZTE and the significance
of that departure.
677.
In the end the points of principle resolve down to two questions, one
about the content of the individual conditions and the other about how the
conditions work.
678.
Before going further, a recap of the relevant factual background is
worthwhile. In summary:
i)
Huawei had a licence from Ericsson from 2009 which expired at the end of
2012. That licence included the SEPs which were assigned to Unwired Planet in
2013.
ii)
In June-August 2013 there was a brief two-way dialogue between Huawei
and Unwired Planet (or its proxy Evercore) about Huawei buying some of the
SEPs. Huawei said no thank you.
iii)
After 2013 Huawei knew all they needed to know to appreciate that
certain SEPs which they had formerly licensed were now held by a different
company and, if and to the extent a licence was required, it would have to come
from Unwired Planet or its successors.
iv)
Unwired Planet wrote to Huawei in September 2013. The letter was to the
Board rather than the IP or Licensing Dept. and nothing came of it. Huawei do
not deny the letter was received but conversely Unwired Planet made no effort
to follow it up.
v)
In November 2013 contact was established and some correspondence began.
By the end of January 2014 Huawei could reasonably expect the next step in the
correspondence to be a letter from Unwired Planet dealing with NDA terms to be
followed, after an NDA was agreed, by claim charts.
vi)
On 10th March 2014 Unwired Planet sued Huawei for patent
infringement on five SEPs in the UK and Germany.
vii)
In April 2014 Unwired Planet made it first offer of terms.
679.
Unwired Planet contend that an important point is that the UK
proceedings are not an “action for a prohibitory injunction or for the recall
of products” as described by the CJEU because the relevant relief claimed for
infringement was more subtle. As is conventional in English pleadings, the
remedies claimed are set out in the part of the Particulars of Claim known as
the “Prayer for relief”. The relevant part is:
“AND THE CLAIMANT CLAIMS:
(1) [a declaration that infringement has taken place]
…
(5) Save insofar as the Defendants and each of them 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:
a. an injunction to restrain the
Defendants and each of them (whether acting by their directors, officers,
servants, agents or any of them otherwise howsoever) from infringing the
Declared Essential Patents;
b. an order that the Defendants
take all steps as are in their power to retrieve from the channels of
distribution all products the sale, disposal or keeping of which would infringe
the Declared Essential Patents or any of them; and
c. an order for delivery up or
destruction upon oath of all articles and materials in the possession, custody
or control of the Defendants (or each of them) which infringe the Declared
Essential Patents or any of them.
(6) [dissemination of the judgment]
(7) [a damages enquiry]
(10) [costs]
680.
Unwired Planet rely on the opening words in paragraph (5) as showing
that the claim for an injunction is qualified so as only to apply in limited
circumstances which amount to the defendant (Huawei) only being at risk of an
injunction if it is an unwilling licensee and that, say Unwired Planet, is what
the court in Huawei v ZTE specifically permitted. Huawei
would only be at risk of an injunction if it refuses to take a FRAND licence
and Unwired Planet must be entitled to ask for an injunction to be granted if
that is what has happened.
681.
Huawei disagree on three grounds. The third ground is the most
significant. The point is that if one could avoid Huawei v ZTE
with a form of words amounting to “I don’t want an injunction if I can’t have
one” then that would deprive the decision of any effect. I agree. It would be
a recipe for avoidance and would fail to grapple with the economic concerns
underpinning the decision.
682.
Nevertheless there is an aspect of the decision of the CJEU which counts
against that logic. It is the distinction the court draws between starting
proceedings which only claim damages (or an account) but no injunction and
starting proceedings which include an injunction claim. The latter can be an
abuse in the relevant circumstances but the former is not (see the judgment on
the 5th question, paragraphs 72-76). The judgment is quite clear on
this but the distinction is not an easy one since, at least in English civil
practice, a claimant can, with the court’s permission, amend a claim after
issue and before trial (or even sometimes after trial and before judgment). It
may be that in other European countries with different approaches to civil
procedure such an amendment is more difficult but the judgment does not address
this. Prof Neven did not really agree with the CJEU on this. His view was
that even if the commencement of litigation did not involve the threat of an
injunction, “by commencing proceedings before attempting to engage in the good
faith negotiation that Huawei could have legitimately expected, Unwired
Planet’s behaviour can, from that perspective, be seen as amounting to an abuse”.
Leaving aside whether that is what Unwired Planet did, the point is that Prof
Neven’s approach would cover starting a claim for damages only. The line drawn
by the Professor here is much clearer but it is not in the same place as the
line drawn by the CJEU. I must follow the CJEU. Although the distinction they
have drawn is rather narrow and could lend support to a technical argument of
the kind run by Unwired Planet here, in my judgment the point does not go far
enough to do that.
683.
Huawei’s other points on the qualified injunction claim are these.
First, on its own terms the Particulars of Claim does seek an injunction and
the words of the qualification are against Unwired Planet because they do not
squarely accept that Unwired Planet is under a licensing obligation at all. I
accept that submission too. Unwired Planet’s characterisation of the
qualification as simply one which only applied if Huawei is an unwilling
licensee is not accurate. The words “insofar as the Claimant is and
remains required to grant such a licence” introduce a widely stated
contingency about Unwired Planet’s position, irrespective of the status of the
defendant, unwilling or otherwise. If a form of words could have done the
trick at all, this form of words did not achieve it.
684.
Huawei’s third point is about what happened during the litigation. They
say Unwired Planet continued to seek injunctive relief even after Huawei made
it clear they were willing to enter into a FRAND licence. That is a quite
different point from the previous two and I do not accept it is that simple.
To deal with it, the whole course of the litigation needs to be examined in a
little detail.
685.
In the weeks after the proceedings had started there was correspondence
between Mr Saru of Unwired Planet and Mr Kreuz of Huawei. Unwired Planet
contend there were delaying tactics from Mr Kruez and, amongst other things
rely on a reply from Mr Kruez which they characterise as either a thinly veiled
threat or extremely unprofessional. It included the following:
“Regarding the litigation suits I welcome you in my
playgrounds, certainly hoping it will not be necessary to waste too much effort
but also looking forward to have clearly defined valued of some of your assets,
when required”.
686.
In closing Unwired Planet pointed out that Mr Kreuz was not called as a
witness and submitted that this email was a plain suggestion by one of Huawei’s
senior lawyers that they intend “to swat Unwired Planet aside without having to
‘waste too much effort’ with the result that Unwired Planet’s assets are deemed
worthless.” Mr Zhang dealt with this for Huawei. He put the tone of the
email down to Mr Kreuz’s sense of humour.
687.
The tone of this email quoted above was ill judged (as was another email
from Mr Kreuz shortly afterwards) but no more than that. By June 2014 Mr Zhang
had taken over responsibility for dealing with Unwired Planet and an NDA was
entered into on 18th June. I reject the suggestion that there was
any material delay on Huawei’s part between April and June 2014.
688.
Huawei (and Samsung) made comments on the April 2014 licensing proposals
and then Unwired Planet addressed them in their July 2014 proposals. One point
was to remove non-SEPs (although Unwired Planet say that was always available
in the April offer anyway). In the same period Huawei’s Defence and
Counterclaim was served. In this document and amongst other things Huawei
denied infringement and counterclaimed for revocation of all the SEPs,
contended that Unwired Planet had acted in breach of Art 102 by commencing the
litigation prematurely, stated (paragraph 54) that if contrary to its case any
of the SEPs are valid and infringed then the patentee was not entitled to an injunction
and its only remedy is damages equivalent to a FRAND licence fee, and stated
(paragraph 56) that in relation to any SEP which is found to be valid and
infringed Huawei will undertake to enter into a licence on terms found by the
court or agreed between the parties to be FRAND.
689.
So Huawei’s willingness to take a FRAND licence at that stage was
qualified by the requirement that for any given SEP Unwired Planet had to
establish infringement and the SEP had to be found valid. The licence Huawei
was therefore prepared to accept was a UK patent by patent licence. Although
in Vringo I expressed the view that a defendant was
entitled to do this, the approach presupposed that a territorial patent by
patent licence would be FRAND.
690.
I now need to turn to the without prejudice negotiations. This has
created a tangle. Starting with the principles, the concept of without
prejudice negotiation is a well-established and useful aspect of civil
litigation in the common law (one leading case is Rush & Tomplins
v GLC [1989] AC 1280; the basis for it is examined in Muller
v Linsley & Mortimer [1996] PNLR 74 CA and Cutts v
Head [1984] Ch 290 (CA); exceptions are considered in Oceanbulk
v TMT [2011] 1 AC 662 and Unilever v P&G
[200] 1 WLR 2436).
691.
Without prejudice provides a channel for frank negotiations. An ability
to be frank is likely to aid settlement. In order to facilitate such
frankness, what is said without prejudice is generally inadmissible before the
court. At the same time parties can also make open offers to each other which
are admissible, assuming they are relevant. If an open offer would be a good
idea, the fact one is negotiating without prejudice is not a reason not to make
it. I am not aware if Chinese law recognises a similar rule but Huawei have
always had the benefit of legal advisers in this jurisdiction of the highest
calibre.
692.
I know, because I have been told, that the parties have both made
without prejudice offers to each other since the action began. For example, Unwired
Planet’s July 2014 offer was first made without prejudice and then made open
and Huawei made a without prejudice offer to Unwired Planet in August 2014.
This is not surprising. However by March 2015 the only open offers which had
been made and which therefore could be admitted in court were Unwired Planet’s
two offers of April and July 2014. Huawei had made no open offers. There was
a brewing dispute about without prejudice but I will return to that.
693.
An alleged infringer who wishes to show they are a willing licensee
would do well to make an open offer of the FRAND terms it would be prepared to
accept. I do not say that is a mandatory requirement and neither does Huawei
v ZTE but referring to the fact that without prejudice negotiations
are taking place or that offers have been made without prejudice does not
materially advance the issue. In my judgment without prejudice offers are not
admissible to establish that the alleged infringer is a willing licensee. An
alleged infringer making an offer without prejudice makes it knowing it is not
admissible in court and intending that to be the result. The party making such
an offer always has the option of making it open either at the same time or
sometime afterwards if they wish the offer to be admissible.
694.
In this case Huawei complain that Unwired Planet insisted on negotiating
without prejudice. However to the extent Huawei seek to use that as a
justification for not making an open offer at any given stage, it does not
work. Huawei were always free to make an open offer if they saw fit and they
knew or ought to have known that. It is also true that at the March 2015 CMC
Unwired Planet changed their tune and submitted that the without prejudice rule
did not apply to any licensing negotiations, but the point was not pursued. It
is part of what led the court to direct that the parties should all put open
offers forward, since they all said they were willing to enter into a licence.
695.
The parties exchanged open offers in June/July 2015. Huawei’s open offer
at that stage (made on 2nd July 2015) advanced a royalty rate that
it would accept but was limited to being an offer to accept a licence only on a
patent by patent basis for any SEP found valid and infringed. There is no
basis to criticise Huawei that it made an offer in those terms since that is
what I directed all the parties to do, because they said they were willing to
do so. There is however a point to be made that that was the only open offer
Huawei was willing to make at that stage. In cross-examination Mr Zhang sought
to justify the position on the basis that that is what the court order provided
for. That will not do. Huawei were always free to make open offers on a wider
basis and always knew or ought to have known that. The court order did not
impose a restriction at all.
696.
In February 2016 some open correspondence did occur. In passing: this
demonstrates that both parties were perfectly capable of making open offers and
stating open positions if they thought it would advance their interests. On 25th
February 2016 Unwired Planet’s General Counsel, Noah Mesel, wrote directly to
Mr Zhang at Huawei (Mr Zhang is Deputy Director of IP Litigation). At that
stage Unwired Planet had won the first UK Technical trial and I think had had
some success in Germany. The letter is not good natured and makes a number of
tendentious points, but it does reiterate Unwired Planet’s willingness to
negotiate a FRAND licence. Mr Mesel proposes that the worldwide dispute be
resolved by an arbitration to settle the terms of a FRAND licence.
697.
Huawei’s reply is dated 29th February 2016. As a reply it is
just as tendentious as Unwired Planet’s letter but no more so. It reiterates
Huawei’s willingness to negotiate a FRAND licence. As for arbitration, the
letter explains that Huawei regards the suggestion as “utterly disingenuous”
owing to the relatively late stage in the proceedings that the offer was made
and makes the point that it could not work without Samsung being involved given
the state of the UK litigation. The letter ends stating that “we suspect that
Unwired Planet’s true motivation for making this suggestion is to try and set
up an argument that Huawei is not a willing licensee because it has not agreed
to arbitrate the dispute. Huawei will vehemently oppose any such suggestion.”
698.
I am quite sure Huawei’s instinct was correct and one of Unwired
Planet’s motives was exactly that. Huawei was also right that arbitration at
that stage would have to have taken Samsung into account somehow and Unwired
Planet’s submissions at trial seeking to downplay that problem were not
convincing. Nevertheless, the fact remains that as at February 2016 the only
offer Huawei had been prepared to articulate in terms which Huawei was prepared
to put before this court (i.e. on an open basis) was the one made pursuant to
the court’s direction the previous year. The proposed arbitration would have
resolved the worldwide dispute whereas part of Huawei’s stance was that it was
only prepared to finish the UK proceedings with a UK patent by patent licence.
699.
Following the Samsung settlement in August 2016 the parties exchanged
further offers. The rates moved somewhat closer together but Huawei’s open
stance remained that it insisted on a UK only patent by patent licence.
700.
On 11th October 2016, days before the trial, Huawei made an
open offer that it would take a UK only portfolio licence. In opening Unwired
Planet submitted that Huawei was an “unwilling licensee” and that the October
offer was the first time Unwired Planet had been prepared to countenance a UK
only portfolio licence. Huawei submitted in closing (Annex N paragraph 14 et
seq) that there was an obvious unfairness in Unwired Planet seeking to
advance this criticism whilst insisting on maintenance of without prejudice.
The hint of course is that a UK only portfolio offer had been made sometime
before that but on a without prejudice basis. For what it is worth there is
also a reference to such an offer in Huawei’s open 29th February
2016 letter. Although the question of scope is very important, the rates in
that offer or offers and any other terms are still covered by without prejudice
privilege.
701.
In cross-examination Mr Zhang had difficulty with this issue because he
wanted to answer criticisms that Huawei had not made offers and was an
unwilling licensee by referring to offers made without prejudice by Huawei. I
sympathise with Mr Zhang’s personal position on this but not with the position
of Huawei. As I have said above Huawei were always free to make an open offer
if they saw fit and they knew or ought to have known that.
702.
I will take what has been made open into account but no more. 11th
October 2016 was the first time Huawei made an open offer that it would take a
UK only portfolio licence which included a stated rate. There obviously were
previous offers, including an offer or offers with the same territorial scope,
but the details are not admissible.
703.
The relevant developments during the trial have been referred to
already. All the open offers made so far had been just focussed on major terms
– rate and scope. I directed the parties to liaise about detailed terms. They
did so for a UK portfolio licence but Huawei did not engage with the worldwide
draft.
704.
That concludes the detailed run through of the course of the
proceedings. This run through started in order to address Huawei’s third
answer to Unwired Planet’s submission the UK proceedings are not an action for
a prohibitory injunction. The answer was said to be that Unwired Planet
continued to seek injunctive relief even after Huawei made it clear they were
willing to enter into a FRAND licence.
705.
It is plainly correct that Unwired Planet have maintained their claim
for injunctive relief throughout the proceedings, subject to what I have found
to be an irrelevant qualification. But it is not accurate to say that the
claim has been maintained even after Huawei made it clear they were willing to
enter into a FRAND licence.
706.
In the only forum which is admissible before this court Huawei have
never made an unqualified commitment to enter into a FRAND licence. Having
reviewed the conduct of the proceedings in detail, Huawei’s stance has always
been that they are willing to enter into what Huawei contend is a FRAND
licence. Until a few days before trial that was and was only a patent by
patent licence for any patent found valid and infringed. After the 11th
October it was a UK portfolio licence. Huawei have always reserved to
themselves the right to determine what was FRAND at least in respect of the
scope of the licence.
707.
That kind of stance always has been a risk. Leaving to one side the Art
102 defence itself, in other words Huawei’s case that Unwired Planet have
abused their dominant position such that the appropriate remedy would be
refusal of an injunction in any event even if no licence is in place, the
insistence on a particular scope of licence depends on the court finding or the
claimant agreeing that such a licence was indeed FRAND. Insistence on a patent
by patent licence derived some support from my Vringo
judgments which refer to that sort of licence but on any view once Huawei
v ZTE had been decided, it was clear that Vringo
was not the whole story. In any event Huawei’s stance shifted beyond that
before trial.
708.
I will address Huawei v ZTE in detail below but at
this stage I can say that when the CJEU in Huawei v ZTE
refers to a licensee expressing a willingness to conclude a licence agreement
on FRAND terms, in my judgment they are referring to a willingness which is
unqualified. In other words, a willing licensee must be one willing to take a
FRAND licence on whatever terms are in fact FRAND. Those terms might be
settled by negotiation, by a court or by an arbitrator but to insist on any
particular term runs the risk that that term is not FRAND. At best it could
only amount to a form of contingent willingness.
709.
The position of Unwired Planet in these proceedings involves trying to
insist on certain terms (a worldwide licence) but that insistence is not of the
same kind as Huawei’s insistence on a UK portfolio licence because Unwired
Planet’s approach takes account of the possibility that they may not be
entitled to demand what they ask for, whereas Huawei’s stance does not. Unlike
Unwired Planet, Huawei’s approach had no fall-back position.
710.
The issues about royalty rates or other terms does not add anything to
this analysis. The parties’ offers on rates were far apart but by the trial
both sides were prepared for the court to decide what the FRAND rate was
(subject the scope issue). Other terms were not discussed at all until the
court initiated the discussion.
711.
In reality of course it is and has always been obvious that both sides
would be prepared to enter into a licence if only agreement could be reached.
Unwired Planet never wanted an injunction, they wanted a licence if the terms
could be agreed. Huawei did not want to be injuncted, they too wanted a
licence if the terms could be agreed. And both parties have known that
perfectly well from the very beginning. To the extent they have each accused
the other of intransigence, the only basis on which the court can operate is
the open stances adopted by each side.
712.
So this is an action for a prohibitory injunction, but it is not one in
which the patentee has persisted in seeking such an injunction when the
defendant has given an unqualified commitment to take whatever licence is
FRAND.
Huawei v ZTE
713.
In order to decide if bringing or maintaining these proceedings is an
abuse I need to apply Huawei v ZTE to the facts. The
first step is to derive principles from the CJEU’s judgment. In the judgment
the CJEU addressed both injunctions and orders for delivery up (recall of
products) together. That made sense and reflected the arguments before the
court. In this judgment I will just refer to the injunction.
714.
The CJEU’s judgment arises from a reference from the Landgericht
Düsseldorf. This is relevant because, as Floyd J explained in HTC v
Apple [2012] EWHC 2037 under German civil procedure:
“…Validity and infringement are tried separately in Germany
but an injunction can be granted at the end of the infringement trial. The
injunction will not normally be stayed unless the Court considers that there is
a high probability that the patent will be held invalid, although it is
possible for other measures such as appeal to be taken to avoid an immediate
injunction.”
715.
This procedural bifurcation was also identified in Prof Neven’s article
which I have referred to above. It matters because it works in favour of SEP
owners and makes the risk of an injunction higher. Unwired Planet submitted
that in the case from which the referral was made there would have been a very
real prospect that Huawei might obtain a final injunction against ZTE on the
basis of infringement absent any determination of the question of validity. I
agree.
716.
The CJEU’s judgment reviews the legal context (paragraphs 3-20)
including patent law derived from the EPC (noting it is national law (i.e. not
EU law)), EU law including the Enforcement Directive 2004/48/EC, German
procedural law and the ETSI rules including the ETSI IPR policy. Next the
court summarised the dispute (paragraphs 21-38). In this section it refers to
tension between the German “Orange Book Standard” (KZR
39/06) decision and a Press Release from the European Commission.
717.
Orange Book Standard was a well known 2009 decision
in which the Bundesgerichtshof (BGH) had laid down guidelines for dealing with
injunction claims under standards essential patents in Germany. From an
English point of view the guidelines in the Orange Book Standard
case were in part driven by the effect of the bifurcated litigation system in
Germany and used Art 102 as a tool to achieve that end. In any case, as the
CJEU and AG Wathelet explain in paragraphs 30-33 and 31 respectively, under the
principles laid down, a patentee would be able to obtain an injunction for a
standards essential patent in the infringement court in effect as long as the
defendant had not made the right sort of unqualified offer to conclude a
licence and had not given security for payment of the royalty.
718.
On the other hand the Commission’s Press Release suggested that bringing
such an action was always contrary to Art 102 if the SEP owner had given a
FRAND undertaking and the defendant had said it was willing to negotiate. Under
that scheme, the CJEU explains in paragraph 34, it may be irrelevant that the
parties cannot agree on the content of certain clauses or on the amount of
royalty to be paid.
719.
So following Orange Book Standard in the instant
case Huawei should have been able to get an injunction because ZTE’s offer was
not unconditional and ZTE had not paid to Huawei the amount ZTE’s figures said
was due (paragraph 33) whereas following the Press Release, Huawei’s claim
should have been dismissed because it was common ground the parties are willing
to negotiate (paragraph 35). The referred questions were designed to resolve
that inconsistency.
720.
The CJEU explained that the question was whether an action for
infringement of a SEP subject to a FRAND undertaking, which included a claim
for an injunction and damages, against a defendant who requested the conclusion
of a licence agreement, was an abuse within Art 102 (paragraph 41). The court
emphasised that a balance had to be struck between maintaining free competition
and safeguarding intellectual property and noted that dominant position had not
been contested (42-43).
721.
In answering the main questions, about an action including a claim for
an injunction, the court deals with general competition law issues and the
relationship with IP (para 45-48), noting that the facts of the present case
are different from what had gone before. The distinctions are the essential
nature of the SEP (para 50) and the irrevocable nature of the FRAND undertaking
(para 51). The court holds at paragraphs 52-53 that these two features mean
that despite the exclusionary nature of the patentee’s right, implementers have
a legitimate expectation that the SEP owner will grant licences on FRAND terms
so that refusal to grant such a licence may in principle constitute abuse.
722.
Two things flow from this. First, the abuse identified at this stage is
refusal to grant a FRAND licence. Second, the existence of the legitimate
expectation justifies the CJEU’s conclusion without having to enter into an
argument about the enforceability of the FRAND undertaking. The CJEU has
identified that implementers have such a legitimate expectation without having
to decide that the undertaking can be enforced at the suit of an implementer.
723.
It is common ground before me, but I have also satisfied myself, that
the FRAND undertaking is justiciable and enforceable in court irrespective of
competition law. That gives implementers legal rights and obligations which
the CJEU’s decision was not able to recognise. The FRAND undertaking gives an
implementer who is prepared to accept whatever terms are FRAND a right which
amounts to a defence to the claim for an injunction. That is because the
implementer is entitled as a matter of law to be granted a FRAND licence and
the wording can be settled by the court (or by an arbitrator). Since the
injunction relates to future activity, no injunction is ever likely to be
warranted. Therefore the legal landscape which the CJEU were presented with in
Huawei v ZTE was incomplete in a material way.
724.
Returning to the CJEU’s judgment, at paragraph 54 the court holds that
it follows from the legitimate expectations that the abusive nature of the
refusal to grant a licence is a defence to the claim for an injunction which
may be raised by the implementer. The conclusion follows if an abuse has
occurred, but if the FRAND undertaking is enforceable anyway and is a defence
to future infringements then one does not need Art 102 to achieve this result.
Paragraph 54 also includes the statement that under Art 102 the patentee is
obliged to grant a licence on FRAND terms. As I have explained, in my judgment
such a patentee is obliged to do that anyway irrespective of Art 102.
725.
In paragraph 55 the court holds that in “such a situation” (i.e. the
parties cannot agree on what is required by FRAND) in order to prevent an
action for an injunction from being abusive the patentee must comply with
conditions to ensure a fair balance and turns to consider the conditions. At
this stage the reference to conditions is general.
726.
Paragraphs 54 and 55 are a revealing aspect of the reasoning of the
CJEU. The court is drawing an analogy between a recognised kind of abuse, that
is a refusal to licence, and the bringing of a claim for an injunction. I can
see that this analogy makes sense in the context of Huawei v ZTE
but it does not follow that starting legal proceedings which include an
injunction claim will always and necessarily be the same as refusing to
licence.
727.
Then in paragraphs 56-58 the court notes that IP rights are accorded a
high level of protection in EU law and so the patentee may not be deprived of a
right to bring legal proceedings and the user of the IP must obtain a licence
“prior to any use”. All the same (para 59) the irrevocable FRAND undertaking
does justify imposing conditions on bringing injunction claims without negating
the substance of the right.
728.
The first condition is a prior alert to the implementer “even when the
SEP has already been used by the alleged infringer” (paragraphs 60-62). This
notice is the first of Huawei’s three conditions set out at the start of this
section of my judgment. The logic of the condition is that, as AG Wathelet
explained, given the large number of SEPs, the implementer may not necessarily
be aware that it is using the teaching of a SEP which is valid and essential.
In this judgment I will continue to refer to the implementer although the CJEU
refer to the “alleged infringer”. There is no difference.
729.
Huawei put an extract from paragraph 60 at the forefront on their case
on the mandatory nature of the conditions. They are entitled to emphasise it
because the paragraph is drafted in a wide sense: stating positively that a SEP
owner will infringe Art 102 if they bring an action for an injunction without
notice or prior consultation. I will return to this below.
730.
The second condition (paragraphs 63-64) is that after the implementer
has said they will take a FRAND licence, the patentee must provide a specific
written offer. It must at least include a royalty rate and show how it is
calculated. This second condition is also expressed accurately in Huawei’s
distillation of three conditions. The CJEU notes the general secrecy about
licences in this industry and points out that the patentee will be best placed
to make an offer which is non-discriminatory, since the patentee will know what
other licences it has concluded. The CJEU’s point is just as apposite to the
general non-discrimination obligation as the hard-edged version I have rejected.
731.
At paragraph 65 the CJEU explains that it is for the implementer to
respond diligently to these terms and not indulge in delaying tactics. This is
a recognition of the potential for hold-out. The third condition expressed in
Huawei’s distillation relates to this point. Huawei’s version adds to the
CJEU’s analysis the idea that the implementer should have a sufficient time to
respond. That makes obvious general sense. Nevertheless Huawei’s argument
seeks to mechanically insert that time into a period before the SEP owner is
entitled to bring proceedings at all without being abusive. The CJEU did not
say that in terms although a SEP owner who brought the claim before the
implementer had any chance to respond sensibly would not be complying with the
letter of the CJEU’s scheme.
732.
At paragraph 66 the CJEU addresses the next step: an implementer who
does not accept the SEP owner’s offer must make a specific counter proposal on
FRAND terms and it must be made promptly. Only if the implementer does that
can they rely on the Art 102 abuse defence. This condition is not mentioned in
Huawei’s distillation. It should be. I presume it was not included because
Huawei’s position is that Unwired Planet never gave them a chance to do this
before the proceedings were commenced. That is understandable as far as it
goes but putting it that way presupposes a narrow view of the CJEU’s decision
that the whole scheme is a form of mandatory protocol which must precede
issuance of a claim form, which has nothing to do with what happens once
proceedings have been issued, and if proceedings are started without complying
with the scheme to the letter, the scheme is no longer relevant at all. That
is not the only way to read the CJEU’s judgment.
733.
At paragraph 67 the CJEU deals with the case in which the implementer is
using the SEP before a licence agreement has been concluded. From the point
when the counter proposal is rejected the implementer must give appropriate
security such as a bank guarantee or deposit. This further step is not in
Huawei’s distillation, I presume for the same reason as before, i.e. Huawei’s
case that it was sued too soon.
734.
At paragraph 68, the CJEU makes the point that if no agreement has been
reached the parties may by agreement request the rate be settled by an
independent third party without delay. This could obviously be an arbitrator
and at least as a matter of English law the court could declare a FRAND rate as
long as it was starting from concrete proposals. The concept covers all terms.
The CJEU will have referred to the rate because that is usually the major
dispute.
735.
At paragraph 69 the CJEU explains that the implementer cannot be
criticised for challenging validity and essentiality of the SEP and the
implementer is entitled to reserve the right to do so in future. Therefore a
licence on FRAND terms may not contain a no-challenge clause (the contrary has
not been suggested anyway given normal competition law principles). It also
means that reserving that right to challenge cannot be taken against an
implementer. Importantly the CJEU also states that instead of just reserving
the right to challenge, the challenge can be brought “in parallel to the
negotiations relating to the grant of licences”. In other words starting a
legal action is not the same as a refusal to take a licence on the part of the
implementer.
736.
The point is also relevant to the temporal nature of the CJEU scheme.
Challenges to validity and essentiality (infringement) are brought by bringing
legal proceedings for revocation or a declaration of non-infringement. So if
the whole scheme from paragraph 60 onwards was intended to be mandatory before
the commencement of legal proceedings by the SEP owner, the clear statement by
the court that an implementer may bring the challenges in parallel to the
negotiations would not be consistent with it. Otherwise the scheme would have
the effect that the SEP owner may not even issue a claim until the negotiation
process leading to a counter offer had got that far, but the implementer could
issue a claim for revocation and a declaration of non-infringement at any
time.
737.
Finally at paragraph 70 the CJEU explains that it is for the referring
court to decide if the criteria are satisfied in the proceedings before them.
738.
The relevant referred questions are answered in paragraph 71, which in
effect summarises the conditions discussed above. In this paragraph and
elsewhere the judgment does state that the implementer must express a
willingness to conclude a licence “on FRAND terms” and the patentee must make
an offer on such (i.e. FRAND) terms. However the judgment does not suggest
anywhere that the national court needs to examine whether the terms offered
actually were FRAND or not. What I believe the CJEU is getting at is that each
side must make clear they are willing to conclude a licence on FRAND terms,
since that is what matters. The commitment to FRAND licensing is what counts.
And then the relevant party should put forward concrete proposals. Whether a
particular concrete proposal is actually FRAND is not what the CJEU is
focussing on. No doubt a prejudicial demand or a sham proposal may itself be
abusive (that issue arises below) but that is another matter.
739.
Notably in the first bullet point of paragraph 71 the CJEU expressly locates
the SEP owner’s alert and FRAND offer to the implementer as being “prior to
bringing that action”. This supports Huawei’s strict submission about timing.
However it is also notable that paragraph 71 is expressed in clear terms as a
statement that the SEP owner does not abuse its dominant position if it
complies with what is stated. The referred questions did not have to be
answered that way round. Having been through the court’s reasoning above it
seems to me that, as one might expect, the CJEU has sought to express itself
with care. By answering the referred questions in a manner which states what
is not an abuse, the court has deliberately not decided that any deviation from
the scheme described of any kind will necessarily make it abusive to issue an
infringement claim which includes an injunction claim.
740.
However, as mentioned above, paragraph 60 of the judgment is written the
other way round, holding that a SEP owner will breach Art 102 unless they give
notice before bringing a claim. I have given careful thought to what this
means for my interpretation of the judgment as a whole. I cannot read the
judgment including paragraph 60 as drawing a bright line whereby any deviation
from the conditions set out in any circumstances is necessarily an abuse of
dominant position. That is just not what the judgment as a whole says.
Moreover paragraph 60 is not expressed by reference to the detailed
conditions. The paragraph simply provides that bringing an injunction claim “without
notice or prior consultation with the alleged infringer, even if the SEP has
already been used by the alleged infringer” is an abuse. The paragraph does
not mention offers for FRAND terms, they come in paragraph 63. So the most
the CJEU is saying in paragraph 60 is that an action brought without some kind
of prior notice will be abusive. What amounts to a sufficient notice in a
given case ought to depend on the circumstances.
741.
More broadly, I am not persuaded that the CJEU in Huawei v ZTE
sought to set out a series of rigid predefined rules, compliance with which is
never abusive whereas deviation from which is always abusive, all regardless of
the circumstances. Abuse of dominance is a serious matter and the court will
have had well in mind that circumstances can vary.
742.
Before concluding I should mention paragraphs 72-76. These decide that
bringing a claim for damages only is not abusive. That has been addressed
above already.
743.
Having considered the judgment as a whole, it is notable that the court
is focussed on the question of whether bringing the injunction claim is itself
abusive and does not focus on the considerations which may apply at the end of
an infringement action once validity and infringement are established. In the
case before me it is now nearly three years since the claim was issued and over
a year since one of Unwired Planet’s patents has been found to be valid and
infringed/essential, yet the parties are still arguing and no licence has been
agreed.
744.
The principles I derive from Huawei v ZTE are
these:
i)
In the judgment the CJEU has set out a scheme which both the patentee
and implementer can be expected to follow in the context of a dispute about a
patent declared essential to a standard and subject to a FRAND undertaking.
ii)
In stating that the implementer and patentee must express a willingness
to conclude a licence on FRAND terms, the CJEU is referring to a willingness in
general terms. The fact that concrete proposals are also required does not
mean it is relevant to ask if those proposals are actually FRAND or not.
iii)
If the patentee complies with the scheme prior to starting a claim for
infringement of that patent which includes a claim for an injunction, then
bringing such a claim will not be abusive under Art 102. That is the ratio
of the CJEU’s decision.
iv)
In the circumstances contemplated by the CJEU, bringing a claim for
infringement of a SEP which includes a claim for an injunction without prior
notice of any kind will necessarily be an abuse of dominant position. Insofar
as the decision identifies what is abusive rather than what is not, the
decision does not go further than that.
v)
Bringing a claim for infringement which includes a claim for an
injunction even with sufficient notice is capable of being an abuse of dominant
position. However the judgment does not hold that if the circumstances diverge
from the scheme set out in any way then a patentee will necessarily abuse their
dominant position by starting such a claim. In those circumstances the
patentee’s conduct may or may not be abusive. The scheme sets out standard of
behaviour against which both parties behaviour can be measured to decide in all
the circumstances if an abuse has taken place.
vi)
Nor does it follow that if the patentee complies with the scheme such
that bringing the action is not per se abusive, the patentee can behave
with impunity after issue. Again, the scheme sets out standards of behaviour
against which both parties’ behaviour can be measured to decide if an abuse has
taken place.
vii)
If the patentee does abuse its dominant position in bringing the claim
or in its conduct after issue, that affords a defence to the claim for an
injunction. In other words the proper remedy is likely to be refusal of an
injunction even though a patent has been found to be valid and infringed and
the implementer has no licence.
viii)
The legal circumstances of this case differ from the circumstances
assumed by the CJEU in a crucial respect. FRAND is justiciable and the
undertaking can be effectively enforced at the suit of the defendant
irrespective of Art 102. The defendant does not need Art 102 to have a defence
to the injunction claim.
745.
Before leaving the analysis of Huawei v ZTE, I
should refer to the German decisions in infringement cases which follow on from
it. There are 12 in the authorities bundles dating from March 2015 (after the
AG’s opinion but before the CJEU) until May 2016. They include decisions of
the first instance courts and on appeal to the Oberlandesgericht in Mannheim
(and Karlsruhe on appeal) and in Düsseldorf. These are well known and well
respected courts dealing with patent infringement but it is impossible to
summarise the effect of all these decisions and I will not attempt to do so.
What can be acknowledged is that the German courts are grappling with similar
issues to the ones arising in this case, including:
i)
How to satisfy the CJEU’s first condition of notice to the alleged
infringer and at what time. (Judgment 7 O 66/15 (NTT
DoCoMo v HTC) Mannheim Landesgericht, and Judgment 4a O 73/14
(St Lawrence v Deutsche Telecom, HTC and Huawei) in the Düsseldorf
Landesgericht).
ii)
Whether the court has to rule on whether the patentee’s offer has to
actually be FRAND. (Judgment 7 O 66/15 (NTT DoCoMo v HTC)
Mannheim Landesgericht).
iii)
What happens when the defendant makes a national portfolio offer but the
patentee wants a worldwide licence. (Judgment 7 O 96/14
(Pioneer v Acer) Mannheim Landesgericht; injunction suspended pending appeal by
the Karlsruhe Oberlandesgericht 6 U 55/16 and see also Judgment
4a O 73/14).
iv)
The use of comparable licence terms (Judgment 4a O 73/14).
v)
Whether taking 5 months to respond is reasonable (Judgment 4a O
73/14.
746.
The German decision which received closest attention was Judgment
4a O 73/14 and that is reflected in the list above. It was also
relied on by Unwired Planet because in that case the court decided that an
injunction could be granted even though the notice was late relative to Huawei
v ZTE on the basis that the case was a “transition case”, in other
words the claim had been issued before the CJEU’s decision. Unwired Planet
relied on that and submitted that the same followed in this case. Huawei
submitted the approach was wrong as a matter of EU law because the CJEU
judgment declares what the law has always been and while the CJEU can and in
some circumstances does lay down what are in effect transitional provisions, it
had not done so in this case. I do not need to decide whether Judgment
4a O 73/14 is correct in law. I suspect my approach to Huawei
v ZTE would allow the court to reach the same conclusion as was
reached in that case if it thought it right.
Has Unwired
Planet abused its dominant position by bringing this claim?
747.
Unwired Planet had not provided its FRAND terms to Huawei before issuing
the claim form which included a claim for an injunction. However since there
was prior contact to some degree before the proceedings were issued Unwired
Planet’s action cannot automatically amount to abuse regardless of the
circumstances. On the other hand, since Unwired Planet’s approach did not
comply with every aspect of the scheme of Huawei v ZTE,
their conduct cannot automatically be immune from an allegation of abuse. The
question has to be decided looking at all the circumstances.
748.
Considering the first condition: prior notice to the implementer. The
relevant circumstances start in 2009 with the fact that Huawei was then a
licensee under what are now Unwired Planet’s SEPs. The expiry of that 2009
Ericsson-Huawei licence is relevant too. Also relevant was the offer by
Unwired Planet of some of those SEPs for sale to Huawei in 2013. I reject
Huawei’s attempt to dismiss these contacts as immaterial. Also relevant are
the discussions with the Huawei IP department which started in November 2013.
Although the discussions had not reached the stage of claim charts being
provided, because the NDA had not been agreed, Huawei knew that claim charts
would be coming. The evidence was that negotiating parties wished to discuss
the merits of the licensor’s claims before getting down to discussing money.
That is relevant because it shows that not discussing financial terms at that
early stage was normal. Also relevant is that throughout the period from the
end of 2012 Huawei were making and selling 2G, 3G and 4G phones and
infrastructure and they were not paying any royalty for patents they had
previously licensed.
749.
Unwired Planet’s motive in starting these proceedings was to support their
FRAND licensing programme. The proceedings were intended to apply pressure to
the defendant companies who were using the technology covered by their SEPs.
Unwired Planet’s primary focus at the time was Samsung and the evidence shows
that Unwired Planet had already been engaged in lengthy and fruitless
negotiations with that company. Dealings with Samsung were what drove Unwired
Planet’s timing. Nevertheless it made sense to include Huawei and Google in
the UK in one set of proceedings. If an action against Samsung had started in
the Patents Court and some months later Unwired Planet had issued another
action in the Patents Court on the same patents against another company such as
Huawei, the proceedings would in all probability have been dealt with together
at a single trial anyway.
750.
Huawei were and are a sophisticated organisation well versed in
technology and patenting. They knew that FRAND ought to limit the patentee’s
rights and they knew that post 2013, as Mr Lasinski explained, the legal landscape
relating to FRAND had shifted in favour of licensees. They did not need to be
treated by Unwired Planet as naïve. From Huawei’s point of view, at the moment
just before Unwired Planet issued proceedings against them in April 2014,
Huawei had sufficient notice that Unwired Planet held particular SEPs and they
knew or ought to have known that if the declared SEPs held by Unwired Planet
were indeed valid and essential, then a licence was required. They did not yet
have claim charts. All the same, for Huawei, the only realistic and
foreseeable ways in which the existing contact with Unwired Planet was going to
conclude would be by Huawei persuading Unwired Planet that they had no good
SEPs or proving it in court or by Huawei taking a licence. Huawei also knew
that Unwired Planet wanted to license Huawei. In these circumstances the
information Huawei had by March 2014 was quite sufficient for Huawei to
understand that issuing proceedings including an injunction claim did not
represent a refusal to license. Quite the reverse.
751.
I have little doubt Huawei took great exception to being sued. I doubt
it helped Unwired Planet’s cause with them at all, but that is another matter.
752.
As one might expect, for a sophisticated organisation like Huawei, the
fact that an injunction was being claimed in the legal proceedings did not
prevent the parties from negotiating and Mr Zhang accepted as much.
753.
Considering the second condition, Unwired Planet did provide the key
terms of a licence offer to Huawei a few weeks after commencing proceedings.
Those terms included the royalty rate. That is outside the letter of the
CJEU’s scheme but only by a relatively short time. It reinforces what was
obvious in any case that the issuing of proceedings did not indicate that the SEP
owner did not wish to license its SEPs to Huawei.
754.
At this early stage Huawei’s response was appropriate in asking for
further details, and Unwired Planet’s response in July 2014 was also
appropriate in providing further details. I have been through the course of
this litigation already. A relevant point for this analysis is that in terms
which are admissible in court, Huawei never subsequently made an unqualified
offer to accept whatever were FRAND terms. Huawei always reserved for
themselves the right to say that a licence of worldwide scope was not FRAND.
Indeed, part of Huawei’s case was that a worldwide offer was contrary to Art
102.
755.
Huawei’s stance before the court throughout this claim has been that
because they were sued before FRAND terms were offered they have a defence to
the injunction claim. That stance is founded on a narrow interpretation of
Huawei v ZTE which I have rejected. I am satisfied that the
commencement of this action, including the claim for an injunction, was not an
abuse of Unwired Planet’s dominant position. The same goes for Unwired
Planet’s conduct during the proceedings. I reject the “premature litigation”
head of abuse.
(b) Unfair
excessive pricing (Art 102(a))
756.
There is no mathematical benchmark which defines unfair or excessive pricing.
It is a value judgment based on all the facts. I will take the words used by
Mummery LJ in Attheraces Ltd v BHB Ltd in the Court of
Appeal as a summary of the difference between a fair price and an unfair or
excessive price. He said:
“…a fair price is one which represents or reflects the
economic value of the product supplied. A price which significantly exceeds
that will be prima facie excessive and unfair..”
(paragraph 204)
757.
It was common ground between the economists but I hold as a matter of
law that the boundary of what is and is not a FRAND rate is different from the
boundary of what is and is not an unfair price contrary to Art 102(a). If the
rate imposed is FRAND then it cannot be abusive. But a rate can be higher than
the FRAND rate without being abusive too.
758.
Huawei’s case is that every one of Unwired Planet’s proposals from April
2014 to August 2016 exceeded FRAND by a long way and thus involved an attempt
to impose an unfair selling price. They say that at a UK portfolio level the
offers were ten times the level they contend would be even a generous estimate
of FRAND. Huawei submit:
“These are plainly abusive levels, which would pose a genuine
threat to Huawei’s profitability and competitiveness [referring to evidence
from Mr Zhang and Mr Lasinski], advantaging Ericsson not merely (a) from
its share of the inflated royalties but also (b) from the adverse impact on
Huawei as a competitor in the downstream infrastructure markets; and
advantaging Samsung for the reasons explained above. A significantly
supra-FRAND rate, if charged by UWP, would stand to distort competition to the
benefit of Ericsson. Given the low rate which Samsung is now known to be
paying, competition would also be distorted in favour of Samsung”
759.
Unwired Planet’s case is that all its offers were FRAND. Even if they
are not FRAND Unwired Planet’s case is that they are not abusive for three
reasons: (1) they were made in the context of good faith negotiations, (2) they
are not significantly above FRAND, and (3) there has been no analysis of
distortion of competition. Unwired Planet also rely on the state of the
information available to them at the time the offers were made and say that
from their point of view at the time in 2014 based on what they reasonably were
aware of, the offers were not abusive.
760.
The evidence of Mr Zhang and Mr Lasinski does not persuade me that the
rates under consideration would distort competition. No detailed economic
analysis has been carried out. I rejected Huawei’s case that the competitive
relationship between Huawei and Samsung would be distorted by charging Huawei
the rates arrived at above. Although the rates demanded are higher, the point
is the same here. So if an economic analysis is needed, this argument will fail.
761.
Before turning to the detail, it is useful to address the good faith
negotiations point in principle. Huawei submitted Unwired Planet’s argument
was wrong in principle but that submission was based on an extreme
characterisation of Unwired Planet’s submission (that unfair pricing only
applied to prices which a vendor could impose) which they disavowed.
762.
It is possible to distinguish between three kinds of price: there is a
price which has been agreed upon or paid, a price demanded by a vendor backed
by a refusal to supply and a price advanced in a negotiation. In the real
world, the distinctions may not always be clear cut but they exist all the
same. I agree with Huawei that in principle all three are capable of being
abusive but that does not mean they are the same kind of thing or must be
judged in the same way. Both the maker and the receiver of an offer made at
the start of a negotiation are well aware that the final deal is likely to
converge on a lower price.
763.
Both Prof Neven and Dr Niels distinguished between a good faith
negotiation and offers made in that context on the one hand and a price that
was imposed on the other. In cross-examination Prof Neven referred to the idea
of making an offer in the context of a negotiation which is so outrageous that
you cannot expect there to be a process of convergence in the negotiation.
Such an outrageous offer would disrupt the negotiation rather than help it.
764.
The negotiation of a SEP licence also has special characteristics of its
own. If the SEPs are good then to act lawfully the buyer must buy a licence if
they want to work the standard. The buyer cannot walk away. But the FRAND
framework means the seller cannot walk away either. And all this applies
before one starts to consider the uncertainties concerning the quality of the
SEPs, the enforceability of FRAND, and the cost and simplicity of patent
enforcement in multiple jurisdictions.
765.
In the context of SEPs and FRAND, as long as the recipient of the offer
can see it is made in that context, then it seems to me that only an offer
which is so far above FRAND as to act to disrupt or prejudice the negotiations
themselves in the manner described by Prof Neven above will fall foul of Art
102(a). That is a high standard to reach but otherwise it would be too easy
for the recipient of an offer to throw up their hands and refuse to negotiate
at all. This does not contradict Huawei v ZTE because the
abuse in that case is not the demand of a non-FRAND rate, the abuse is to bring
injunctive patent infringement proceedings prematurely.
766.
If injunctive patent infringement proceedings are issued at or around
the same time as a rate is demanded, then that will be relevant since it will
increase the pressure on a licensee but the licensee can retaliate by denying
essentiality and challenging validity. However the offeror should be willing
to negotiate even though proceedings have been issued (and the offeree
likewise). Moreover as I have addressed at length above, in a FRAND case the
patentee will only get an injunction in this jurisdiction if the defendant
refuses to take a FRAND licence.
767.
I turn to consider the facts. The starting point must be to compare the
offers with the FRAND rates.
768.
Unwired Planet offered one rate for LTE/4G and another for GSM/2G-UMTS/3G.
In the April 2014, July 2014 and June 2015 offers the worldwide rates were 0.2%
for 4G and 0.1% for 2G/3G. The August 2016 offer was 0.13% for 4G and 0.065%
for 2G/3G.
769.
In order to compare these proposals with the FRAND rates determined
above it is convenient to summarise the FRAND rates into appropriate spans
comprising all the relevant rates for the relevant standards and equipment. It
is also convenient to include some of the other offers made during the
proceedings. The tables below include Huawei’s UK SEP patent by patent offer
from 2015 and its October 2016 UK portfolio offer. The table includes Unwired
Planet’s 2014/5 and 2016 UK patent by patent offers.
770.
The table for 2G-3G is:
2G – 3G rates
|
Basis
|
|
FRAND
Benchmark
|
0.016% - 0.064%
|
FRAND
Major Markets in a ww licence
|
0.016% - 0.064%
|
FRAND
China and OM rate in a ww licence
|
0.004% - 0.032%
|
FRAND
UK portfolio only (100% uplift)
|
0.032% - 0.13%
|
|
|
Unwired
Planet 2014-2015 ww
|
0.1%
|
Unwired
Planet 2016 ww
|
0.065%
|
|
|
Unwired
Planet 2014-2015 UK portfolio
|
0.325% - 0.425%
|
Unwired
Planet 2016 UK portfolio
|
0.21% - 0.28%
|
|
|
Huawei
2015 UK SEP
|
Zero – 0.015%
|
Huawei
Oct 2016 UK SEP portfolio
|
0.045% - 0.046%
|
|
|
771.
The table for 4G is:
4G rates
|
Basis
|
|
FRAND
Benchmark
|
0.062% - 0.072%
|
FRAND
Major Markets in a ww licence
|
0.051% - 0.052%
|
FRAND
China and OM rate in a ww licence
|
0.026%
|
FRAND
UK portfolio only (100% uplift)
|
0.12% - 0.14%
|
|
|
Unwired
Planet 2014-2015 ww
|
0.2%
|
Unwired
Planet 2016 ww
|
0.13%
|
|
|
Unwired
Planet 2014-2015 UK portfolio
|
0.65% - 0.85%
|
Unwired
Planet 2016 UK portfolio
|
0.42% - 0.55%
|
|
|
Huawei
2015 UK SEP
|
0.034%
|
Huawei
Oct 2016 UK SEP portfolio
|
0.059% - 0.061%
|
772.
The starting point is to look at the differences between the offered
rates and the FRAND benchmark rates. None of the worldwide rates offered by
Unwired Planet in 2014-15 are FRAND. They are all higher than the benchmark
FRAND rate and higher than all the rates in a worldwide licence. The offers in
2016 were not FRAND either although the 2G/3G offer (0.065%) was to all intents
and purposes the same as the 2G rate (0.064%) but not the 3G rate.
773.
The question is whether these rates are so much higher than FRAND as to
contravene Art 102(a). For 4G the rate offered in 2014 (0.2%) was about three
times the FRAND benchmark rate. The spans of rates used to compare with the
worldwide rates offered for 2G and 3G are wider than for 4G. The 2014 2G/3G
offer (0.1%) is between about one and half (1½) times and six times the FRAND
benchmark.
774.
These 2014 offers were made as the starting offers in what both sides
knew would be a process of negotiation and that position is not altered by the
fact that legal proceedings had commenced. This is not a case in which the
offers were being made to a small company unable to look after itself. Huawei
are a large and sophisticated organisation, used to negotiating
telecommunications licences and not unfamiliar with patent litigation. To make
an opening offer to Huawei which is between about 1½ and 3 times the upper
level of the FRAND benchmark rate is not an abuse contrary to Art 102(a). In
no sense could an offer like that prejudice the inevitable negotiations.
775.
I reject the case on infringement of Art 102(a) relating to the
worldwide offers in 2014. If the 2014 offers were not contrary to Art 102(a),
neither were the lower offers in 2016.
776.
There was a detailed point on the numerators as at 2014 for 2G and 3G
but I am not satisfied it would have made enough of a difference to alter these
conclusions.
777.
I reach the same conclusions comparing the 2014 offers with the rates
for Major Markets in a worldwide licence. The rate for 4G is about four times
the MM FRAND rate. The comparison for 2G/3G rate range again ranges from 1½
times at the top end of the major markets rate. These differences do not
indicate that the offers would prejudice negotiations.
778.
The largest differences are between the offered rates in 2014 and the
FRAND rate for China and OM countries in a worldwide licence. The most extreme
difference is for 3G - the 0.004% China rate vs 0.1% offer is 25 times lower.
The 4G rates differ by a factor of eight. I can see that an offer at 25 times
the FRAND rate might well be prejudicial but taking these figures in isolation
would not be appropriate. These China rates are regional rates in a worldwide
licence which includes higher rates in other regions, but Huawei have never
accepted a worldwide licence in these proceedings. On Huawei’s case this court
should not be considering any rates in the worldwide licence at all.
779.
There is no need to resolve the argument about the legal relevance of
the state of knowledge of Unwired Planet at the time the offers were made. I
will briefly state my findings on the facts:
i)
As at April and July 2014 the
information available to Unwired Planet consisted of: the public statements by
various companies in the industry such as the ones summarised elsewhere in this
judgment, the terms of the MSA, Lenovo, and their own assessments of the value
of their patents. The rates a reasonable person would derive based on that
information are much higher than the rates to be derived from the close
analysis of the comparable licences which has been done in these proceedings.
It was reasonable for Unwired Planet to set its offered rates by reference to
that information. From their subjective point of view, as opening offers in a
negotiation in a FRAND framework 0.1% for 2G/3G and 0.2% for 4G were close to what
they might reasonably take the view a FRAND rate might be for their SEPs.
ii)
By June 2015 more information was available to Unwired Planet. That
information allowed one to estimate what the rates in the […] licence
were and I am sure a company in Unwired Planet’s position would perform that
analysis. That information does indicate that rates in the industry were lower
than one would have thought in April 2014 based on the public statements etc..
So by June 2015 the information available to Unwired Planet showed the 0.1% for
2G/3G and 0.2% for 4G were likely to be well above the FRAND rate by factors
similar to the differences I have determined above.
780.
If my conclusion that Unwired Planet’s offers are not contrary to Art
102(a) is wrong, and if it is the case that the information available to
Unwired Planet at the time an offer is made is relevant, then I would have held
that Unwired Planet had the benefit of that state of the information available
in 2014 but that benefit had gone by June 2015.
781.
So far I have not addressed the UK offers. Since a UK only licence is
not FRAND they are not relevant. Considering the 4G rates offered by Unwired
Planet, the 2014/15 rates for the UK portfolio were about 5 to 6 times the
FRAND benchmark applied to a UK only portfolio licence and the 2016 offers were
about 4 times the benchmark. As before with 2G/3G the ranges and the factors
are wider than for 4G. The factors range from about double to ten times.
Considering these rates and factors takes me to the same conclusions as I have
reached for the worldwide offers.
782.
Considering the UK offers, it is possible to compare Huawei’s UK offers
to the benchmarks in a similar manner. This includes comparing the offer in
2015 which was for the five SEPs in suit with a benchmark for the larger UK
portfolio but that is a minor issue. For 4G the UK FRAND benchmark rate was
about four times Huawei’s 2015 UK patent by patent offer and double Huawei’s
2016 UK portfolio offer. For 2G and 3G the FRAND benchmark span is 0.032% -
0.13% and Huawei’s offers in 2015 ranged from zero to a rate 9 times less than
the benchmark. Huawei’s 2016 portfolio offer overlaps the benchmark at the
lower end and is about three times less at the upper rate.
783.
These factors are evidence of how parties negotiate in this industry. I
do not believe Huawei have the slightest intention to prejudice the
negotiations with Unwired Planet by making these offers. That is an indication
that an offer a number of times lower than the relevant FRAND benchmark does
not prejudice the negotiations and corroborates the finding that an offer a
number of times higher than the benchmark does not do so either.
784.
I reject the competition law case on unfair pricing. The finding is not
that the imposition of a rate three, five or ten times the FRAND rate would be
acceptable. Far from it. The flaw in Huawei’s case is these offers were
obviously made as a step in negotiation and did not prejudice or disrupt it.
(c) Bundling /
tying in SEPs and non-SEPS
785.
I have dealt with the law on bundling in the section above on the scope
of the licence. The outstanding issue relates to Unwired Planet’s 2014 offer
which was for a licence under its whole portfolio, SEPs and non-SEPs. Huawei
say that to bundle the SEPs with non-SEPs was unlawful bundling or tying.
Huawei say the bundling of SEPs and non-SEPs poses two threats. One is that
one cannot tell in such a licence whether the SEP owner is complying with a
FRAND commitment. The other is that the practice can eliminate competition on
the merits between non-SEP technologies. I accept the second point, which is
much stronger than the first. I do not need to decide if the first point on
its own is enough. Licences can be drafted that way (cf Lenovo) but they do
not have to be.
786.
In this context Unwired Planet also made the same points about a lack of
detailed economic evidence as were made for multi-jurisdictional bundling but
as before, that submission does not go far enough to mean that the issue does
not need to be addressed. In the context of SEPs and non-SEPs it does not need
detailed economic analysis to infer that Huawei’s second point is a likely
consequence of that bundling.
787.
Having heard the evidence in this case I am in no doubt that a patentee
subject to a FRAND undertaking cannot insist on a licence which bundles SEPs
and non-SEPs together. But it does not follow from this that it is contrary to
competition law to make a first offer which puts SEPs and non-SEPs together.
There is clear evidence that in some cases the parties agree to a licence which
includes both SEPs and non-SEPs together. The mere fact a licence includes
both does not take it out of FRAND nor does it indicate that a patentee has
used the market power given by the SEPs to secure a licence under the non-SEPs.
Everything will depend on the circumstances.
788.
Unwired Planet’s main submission is that in making the 2014 offer they
made it clear that they were willing to discuss alternatives such as separating
SEPs from non-SEPs. The 2014 document is a series of what look like Powerpoint
slides. Page 2 has the rates on it and as footnote 1 states:
“This is an indivisible worldwide arrangement. The royalty
rates sought reflect a blend of the strength, technical diversity and size of
the portfolio across the world. It is not an offer for individual country or
technology licenses. However, Unwired Planet is willing to discuss any such
arrangement upon request.”
789.
A discussion focussed on SEPs as opposed to non-SEPs is exactly the kind
of thing a reasonable recipient of this offer would understand the offeror was
willing to contemplate as a result of this text. I reject Huawei’s case that
Unwired Planet behaved in a manner contrary to Art 102 by making the April 2014
offer on the basis of SEPs and non-SEPs together.
790.
Huawei immediately asked Unwired Planet to separate out the SEPs from
the non-SEPs and Unwired Planet did so by July 2015. Those are not the actions
of a party trying to use its market power given by patents essential to a
standard to tie in a further licence under its non-SEP portfolio. If Unwired
Planet had insisted on putting the two together after that then the conclusion
might well have been different.
791.
I reject the SEP/non-SEP bundling argument.
REMEDIES
792.
The three remedies sought are an injunction, damages and declarations.
(i) Should an
injunction be granted?
793.
The relevant patents have been found valid and infringed. Unwired
Planet wish to enter into a worldwide licence. Huawei is willing to enter into
a UK portfolio licence but refuses to enter into a worldwide licence. However
a worldwide licence is FRAND and Unwired Planet are entitled to insist on it.
In this case a UK only licence would not be FRAND. An injunction ought to be
granted because Huawei stand before the court without a licence but have the
means to become licensed open to them.
794.
Were it not for the fact that Huawei did not engage with the terms of
the worldwide draft, I would have been able to hand down this judgment with the
worldwide terms fully settled. That has not proved possible. So in the
exercise of my discretion I will not grant the injunction on the day this
judgment is handed down in public. Normally when a judgment in a case of this
complexity is handed down a date some few weeks afterwards is found for the consequential
orders. I will deal with the injunction at that later hearing. It should be
sometime after the Easter holidays. Unwired Planet’s legal team will be able
to produce a clean copy of the worldwide licence in the form I have approved.
They should file it at court and serve it on Huawei well in advance of the
later hearing. I do not expect to hear any further argument about the terms
since the time for that has passed. I will discuss the directions for this on
the day the judgment is handed down.
795.
In case this matter goes further I will address the question of what if
I had found that Unwired Planet’s commencement of these proceedings had
amounted to an abuse of dominant position. I am far from being convinced that
a refusal of an injunction in 2017 would have been a proportionate remedy for
Unwired Planet’s abuse on that assumption. A single patent normally takes
about one year to come to trial on validity and infringement in the Patents
Court. The abusive commencement of this action in April 2014 would have
justified refusal of an injunction in April 2015 and no doubt for a good time
after that but we are now two years on from that time, a year on from the
finding of infringement and three years overall from the start of the
proceedings. Any prejudice to Huawei from the commencement of the proceedings
has been outweighed by time and by Huawei’s stance in relation to a FRAND
licence. An appropriate alternative remedy might have been to refuse to award
any damages to Unwired Planet for the proven infringements in the intervening
period (and remove a corresponding term from the licence). However I do not
have to resolve those issues.
(ii) Damages
796.
I have found that the FRAND licence would include a term providing for
back royalties and an effective date of 1st January 2013. This
applies whether the licence is a UK licence or worldwide. However since Huawei
refuse to enter into the worldwide FRAND licence which Unwired Planet are
entitled to insist upon, the question of damages arises.
797.
The principles are clear. Damages for patent infringement are
compensatory. I do not propose to get into the interesting questions which may
arise under the Enforcement Directive 2004/48/EC about whether patent damages
might have other aspects. Unwired Planet floated this point in opening by
reference to the infringer’s state of mind but this is not the case to decide
those questions.
798.
Huawei relied on General Tire & Rubber Co v Firestone Tyre
& Rubber Co Ltd [1975] 1 WLR 819 and submitted that since the
patentee was a licensor, “the measure of damages [the defendant] must pay will
be the sums which he would have paid by way of royalty if, instead of acting
illegally, he had acted legally” (at 824–825 per Lord Wilberforce). So for a
SEP owner, this means a FRAND royalty for the patents in suit.
799.
Unwired Planet submitted that the correct royalty rate to use to assess
damages was a per patent rate because the damages for infringement of a
particular patent should not be affected by the discounts available in FRAND licences
from taking a licence on several patents at once. In my judgment that
submission is wrong in principle as a matter of ordinary patent law regardless
of whether, as Huawei contended, it leads to non-FRAND damages.
800.
The relevant legal question is to ask what, in fact, has the patentee
lost? For a patentee who licences their rights the answer is the amount of
money the patentee would have earned in licensing, and the way to work that out
is to decide what a willing licensor and willing licensee would have agreed
upon as a matter of fact in all the circumstances. A willing licensor and
willing licensee would have agreed on the very same licence I have found to be
FRAND. So the patentee’s loss is the sum they would have earned under that
licence from the infringing acts. In this case that is the MM royalty rate on
UK sales.
801.
I recognise that this licence would have been a portfolio licence but
that just means that if, for the sake of argument, Unwired Planet sued Huawei
in future under a different SEP but for the same phones sold in the same year,
the loss would be nil because damages had already been paid which covered it.
In principle this result is no different from the now well established point
that losses for convoyed goods or services are recoverable in principle
provided they can be proved.
802.
At one stage I think Unwired Planet sought to suggest that a result
which set the damages at the same level as the overall FRAND rate gave
defendants no incentive to settle. That is not a relevant consideration.
(iv) Declarations
803.
Unwired Planet seeks declarations that its offers were FRAND. They
included worldwide, UK portfolio, and patent by patent offers, with various
rates. I have held that none of them were FRAND in the terms advanced, but the
worldwide offer with the rates and licence terms I have settled in this
judgment is FRAND. I will make a formal declaration to that effect and if
Huawei wish me to I will make a declaration that each of the original offers
were not FRAND.
804.
Huawei sought a declaration that Unwired Planet had abused their dominant
position. That will be refused.
Summary of
conclusions
805.
This is a very long judgment. Mind you it has only somewhat over half
the total number of words in the written closing submissions. Since the
conclusions I have reached are distributed throughout the judgment, I will
summarise them below.
806.
In summary, my conclusions on the law are:
(1)
As a matter of French law the FRAND undertaking to ETSI is a legally
enforceable obligation which any implementer can rely on against the patentee.
FRAND is justiciable in an English court and enforceable in that court.
(2)
It is not necessary to rely on competition law to enforce the FRAND
undertaking.
(3)
The boundaries of FRAND and competition law are not the same. A rate
may be above the FRAND rate but not contrary to competition law.
(4)
There is only one set of licence terms which are FRAND in a given set of
circumstances. The problem identified in Vringo v ZTE
does not exist because there cannot be two sets of terms which are both FRAND
in a given set of circumstances. That way the FRAND undertaking can be
enforced.
(5)
The legal effect of the FRAND undertaking relating to a SEP is not that
the implementer is already licensed. Its effect is that an implementer who
makes an unqualified commitment to take a licence on FRAND terms (settled in an
appropriate way) cannot be the subject of a final injunction to restrain patent
infringement. Whereas an implementer who refuses to take a licence on terms
found by the court to be FRAND has chosen to have no licence, and so if they
have been found to infringe a valid patent an injunction can be granted against
them.
(6)
FRAND characterises the terms of a licence but also refers to the
process by which a licence is negotiated. Although an implementer does not owe
a FRAND obligation to ETSI, an implementer who wishes to take advantage of the
patentee’s FRAND obligation, must themselves negotiate in a FRAND manner.
(7)
Offers in negotiation which involves rates higher or lower than the
FRAND rate but do not disrupt or prejudice the negotiation are legitimate.
(8)
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.
That will be fair, reasonable and generally non-discriminatory. The 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.
(9)
The non-discrimination limb of FRAND does not consist of a further “hard
edged” component which would justify a licensee demanding a lower rate than the
benchmark rate because that lower rate had in fact been given to a different
but similarly situated licensee. If FRAND does include such a component, then
that obligation would only apply if the difference would distort competition
between the two licensees.
(10)
A FRAND rate can be determined by using comparable licences if they are
available. Freely negotiated licences are relevant evidence of what may be
FRAND. A top down approach can also be used in which the rate is set by
determining the patentee’s share of Relevant SEPs and applying that to the
total aggregate royalty for a standard but this may be more useful as a
cross-check.
(11)
In assessing a FRAND rate counting patents is inevitable.
(12)
In assessing the dominant position of a SEP holder, the practical effect
of the FRAND undertaking and the potential for hold out by an implementer are
relevant factors and may lead to the conclusion that a SEP holder is not in a
dominant position.
(13)
The principles to be derived from the decision of the CJEU in Huawei
v ZTE are summarised at paragraph 744 above.
807.
In summary, my conclusions on the facts are:
(1)
None of Unwired Planet’s offers (April 2014, June 2014, June 2015 or
August 2016) were FRAND.
(2)
None of Huawei’s offers (June 2015, August or October 2016) were FRAND.
(3)
The Revised MNPA overstates the value of Unwired Planet’s SEP portfolio.
The HPA understates the value of that portfolio.
(4)
The value R for the relative strength of Unwired Planet’s portfolio as
compared to Ericsson’s for 4G is 7.69%. The values of R for 2G, 3G, and 4G
range from 2.38% to 9.52%.
(5)
The value S for Unwired Planet’s share of all SEPs relevant to 4G
handsets is 0.70%. The values of S for 2G, 3G, and 4G for infrastructure and
handsets range from 0.21% to 1.30%. Here and below handsets refers to
multimode.
(6)
None of: the 2014 Unwired Planet-Lenovo licence, the 2016 Unwired
Planet-Samsung licence, or the 2016 Ericsson-Huawei licence, are good
comparables. The Ericsson-Samsung 2014 licence is the best place to start but
other Ericsson licences are relevant.
(7)
The right number E to use as a royalty rate which measures the value of
Ericsson’s 4G SEPs in order to scale against Unwired Planet is 0.80% for 4G.
The value E for Ericsson’s 2G and 3G SEPs is 0.67%.
(8)
The benchmark FRAND rates for Unwired Planet’s portfolio are:
a)
4G/LTE: 0.062% for handsets, and 0.072% for infrastructure;
b)
3G/UMTS: 0.032% for handsets, and 0.016% for infrastructure;
c)
2G/GSM: 0.064% for handsets, and 0.064% for infrastructure;
(9)
As a cross-check, the value T for the total aggregate royalty burden
implied by these rates for 4G handsets is 8.8%. The values of T for 2G, 3G,
and 4G for infrastructure and handsets range from 3.1% to 8.8%.
(10)
The fact the 2016 Unwired Planet-Samsung licence is not a good
comparable does not mean it is irrelevant for hard-edged non-discrimination if
that concept is applicable to FRAND. However applying the non-discrimination
aspect of FRAND to that licence does not justify setting a lower rate for
Huawei than the benchmark rates because a distortion of competition between
Huawei and Samsung was not established.
(11)
A UK portfolio licence is not FRAND. The FRAND licence between Unwired
Planet and Huawei is a worldwide licence.
(12)
In a FRAND worldwide licence the rates for China would be substantially
lower than the benchmark rates. The rest of the world outside China would be
divided into Major Markets (MM) and Other Markets (OM). The OM rates would be
the same as the China rates because that is where the goods are made.
(13)
The rates in a worldwide licence would be:
|
Major Markets
|
China and Other Markets
|
|
Handsets
|
Infrastructure
|
Handsets
|
Infrastructure
|
2G/GSM
|
0.064%
|
0.064%
|
0.016%
|
0.032%
|
3G/UMTS
|
0.032%
|
0.016%
|
0.016%
|
0.004%
|
4G/LTE
|
0.052%
|
0.051%
|
0.026%
|
0.026%
|
(14)
The detailed terms of a worldwide licence have been settled. They are
FRAND.
(15)
In a UK portfolio licence the uplift on the rates relative to the
benchmark would be 100%.
(16)
If a proper economic analysis had been done the answer might be
different but in this case, as the holder of SEPs, Unwired Planet is in a
dominant position.
(17)
Unwired Planet did not abuse their dominant position by issuing these
proceedings for an injunction prematurely, by maintaining a claim for an
injunction in these proceedings, by seeking to insist on a worldwide licence,
by attempting to impose unfair prices or by bundling SEPs and non-SEPs.
(18)
Since Unwired Planet have established that Huawei have infringed valid
patents EP (UK) 2 229 744 and EP (UK) 1 230 818, and since Huawei have not been
prepared to take a licence on the terms I have found to be FRAND, and since
Unwired Planet are not in breach of competition law, a final injunction to
restrain infringement of these two patents by Huawei should be granted.
(19)
If Unwired Planet had issued these proceedings prematurely, in the
circumstances as they now are, refusal of an injunction would have been
disproportionate.
(20)
The final injunction will be considered at a hearing in a few weeks’
time once Unwired Planet have drawn up a full set of the terms of the worldwide
licence incorporating the decisions made in this judgment.
(21)
To the extent damages should be awarded, they would be at the same rate
as the appropriate FRAND rate.
Annex 1 - Unwired Planet’s
declared SEPs today
Country
|
2G
|
3G
|
4G
|
TOTAL
|
Argentina
|
1
|
3
|
1
|
3
|
Australia
|
1
|
2
|
0
|
3
|
Austria
|
0
|
0
|
1
|
1
|
Belgium
|
0
|
0
|
2
|
2
|
Brazil
|
0
|
1
|
1
|
2
|
Canada
|
1
|
4
|
6
|
10
|
Chile
|
0
|
0
|
1
|
1
|
China
|
2
|
6
|
9
|
15
|
Colombia
|
0
|
0
|
2
|
2
|
Czech Republic
|
0
|
1
|
2
|
3
|
Egypt
|
0
|
0
|
1
|
1
|
Finland
|
0
|
0
|
2
|
2
|
France
|
2
|
3
|
9
|
12
|
Germany
|
2
|
5
|
12
|
17
|
Hong Kong
|
0
|
0
|
2
|
2
|
Hungary
|
0
|
1
|
0
|
1
|
India
|
2
|
2
|
8
|
9
|
Indonesia
|
0
|
0
|
1
|
1
|
Ireland
|
0
|
0
|
5
|
5
|
Israel
|
0
|
0
|
1
|
1
|
Italy
|
1
|
2
|
4
|
7
|
Japan
|
2
|
6
|
10
|
16
|
Malaysia
|
0
|
1
|
0
|
1
|
Mexico
|
0
|
1
|
1
|
2
|
Netherlands
|
1
|
1
|
6
|
8
|
New Zealand
|
0
|
0
|
3
|
3
|
Philippines
|
0
|
0
|
1
|
1
|
Poland
|
0
|
1
|
2
|
3
|
Portugal
|
1
|
1
|
1
|
3
|
Russia
|
0
|
1
|
2
|
3
|
Singapore
|
0
|
1
|
1
|
2
|
South Africa
|
0
|
1
|
1
|
2
|
South Korea
|
1
|
3
|
2
|
5
|
Spain
|
1
|
2
|
7
|
10
|
Sweden
|
0
|
0
|
2
|
2
|
Switzerland
|
0
|
0
|
3
|
3
|
Taiwan
|
1
|
4
|
3
|
7
|
Thailand
|
0
|
0
|
1
|
1
|
Turkey
|
0
|
0
|
2
|
2
|
UAE
|
0
|
0
|
1
|
1
|
UK
|
2
|
6
|
13
|
19
|
US
|
2
|
10
|
22
|
31
|