A Critique of the Decision in Unwired Planet v. Huawei

On April 5, 2017, the UK High Court of Justice (Patents), Mr. Justice Colin Birss issued a detailed opinion [Unwired Planet v. Huawei ([2017] EWHC 711 (Pat), 5 Apr. 2017] in a matter involving SEPs and FRAND.  The Unwired Planet v. Huawei (hereafter “Unwired”) decision is extremely contentious and this posts covers only the issues that I believe need further consideration.

Disclaimer: I advise several clients in matters involving SEPs and FRAND.  These are my views only. Long post follows.

Background:  Unwired Planet (Unwired) have a worldwide patent portfolio which they bought from Telefonaktiebolaget LM Ericsson.  The portfolio includes patents which are declared essential to various telecommunications standards (2G / GSM, 3G  / UMTS or WCDMA, and 4G  / LTE).

Unwired’s business is licensing those patents to companies who make and sell telecommunications equipment such as mobile phones and infrastructure.  Shortly after the purchase from Ericsson LM, in March 2014, Unwired sued Huawei, Samsung and Google for infringement of six UK patents from their portfolio. Notably, this came quickly after the settlement of the litigation between Ericsson LM and Samsung.  It is not clear whether Unwired’s portfolio included some / any of the patents that were involved in the litigation with Samsung.

Unwired, claimed that five of its patents were SEPs.  And accordingly, Unwired contended their patents were infringed. The judge conducted separate trials on technical and non-technical / competition law and other issues.  The patents are: Trial A – patent EP (UK) 2 229 744 ;  Trial B – Divisionals EP (UK) 2 119 287 and EP (UK) 2 485 514;  Trial C – EP (UK) 1 230 818;  Trial D – EP (UK) 1 105 991; and  Trial E – EP (UK) 0 989 712 (this was a non-SEP).  Soon after trial started (April 2014), Unwired made an open offer to the Defendants to license its entire global portfolio (SEPs and non-SEPs).  As expected, the Defendants denied infringement / essentiality and contended the patents were invalid, and counterclaimed for revocation.

The Defendants stated that no licence was needed and contended that Unwired’s offer was not FRAND.  Huawei and Samsung raised additional 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 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.

After the April 2014 offer, Unwired made another offer in July 2014.  That offer related only to Unwired’s SEPs.   The Defendants also stated this offer to be not FRAND.

Rates offered by Unwired in July 2014:

The judge notes (in Para 6) that “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.”

However, I disagree – the distinction is important as SEPs may be relevant to 2G and not to 3G or may be important for 2G / 3G / 4G.  It is hard to specify the value of each SEP to a standard but not impossible.  In Microsoft v. Motorola, or In Re: Innovatio, J. Robart and J. Holderman respectively, did exactly that – determine the value of the patents vis-a-vis the standards.

In para 7, the judge notes that in June 2015, Unwired made separate offers in terms of a global portfolio and a (higher) per patent rate for UK.  Huawei counter offered – its proposal was for a per-patent licence limited to the UK SEPs in suit.  The rates for all SEPs together were 0.034% for LTE, 0.015% for UMTS and zero for GSM.

Before trial started, Google settled as regards the SEPs.

By April 2016 three technical trials had been completed and the parties agreed to postpone any further technical trials indefinitely.  By that stage, Unwired 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.

In 2016, Samsung settled with Unwired 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.  Similarly, Huawei, discontinued significant parts of its counterclaim, including all their counterclaims against Ericsson and Unwired.

Because of the settlement by Huawei and Samsung, certain terms that Huawei and Samsung contended to be anti-competitive, were removed from the MSA.  One of these was a term that had a floor (lowest possible rate that could be offered) on the royalty rate which Unwired could offer.

On August 1, 2016 both sides made new offers:

Global Rates offered by Unwired in August 2016:

UK Only Rates offered by Unwired in August 2016:

Huawei rates offered in August 2016:  On a per-patent basis

However, in October 2016 Huawei made a new licensing proposal:  They amended their per-patent licensing offer to a license under the whole of Unwired’s UK SEP portfolio.  The UK portfolio rates were:

Huawei’s October 2016 offer: on whole of Unwired’s UK patent portfolio

The judge termed the August 2016 Unwired proposals and October 2016 Huawei proposals as “hard-edged non-discrimination proposals”.

Despite the efforts put by the judge to identify all areas at dispute in the settlement agreement, Huawei discussed only terms of a UK  portfolio license with Unwired and not terms of a global license.

Issues

1. Huawei wanted a UK SEP portfolio license, but Unwired wanted a global portfolio license. This was a fundamental point of disagreement between the parties.
2. Unwired wanted the court to declare Huawei as an unwilling licensee as they had won two of the technical trials on validity and essentiality, and Huawei had rejected both their offers. Also, Unwired preferred a global license as global licensees are FRAND with Unwired willing to abide by the courts decision on rates.  Hence court should grant an injunction.  Unwired further contented that if the court determined that Unwired is not entitled to a global license, then Unwired have offered a UK portfolio licence and will accept such a licence at a rate and on terms set by the court.
3. Huawei, contended that Unwired’s 2014 offers were not FRAND., and that Unwired’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).  Huawei, submitted that they had a complete defence to any claim for an injunction.  Per Huawei, a global licence would not be FRAND, and only a UK portfolio licence would be FRAND.  Huawei also agreed to accept any rate for the UK portfolio that the court would determine.

Decision

I focus on the aspect of global portfolio licensing, valuations of patents, and am extracting the only those conclusions from the decision that have a bearing on these issues.

(a) What licence scope is FRAND – UK or worldwide?

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.

(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.

The judgment does not discuss the SSPPU approach on a principle level, which therefore remains an open question.

Digress:  Last year, the DIPP had issued a call for response to its questionnaire on SEPs and FRAND and had asked several important questions relating to SEPs, FRAND, jurisidiction of courts, competition authorities, etc.  Although the DIPP has not made public the responses even after an year, I am providing my own submissions made to the DIPP in my individual capacity.  [Download my submissions from here].  In these submissions, I had highlighted the various problems that occur in the domain.  Most of the issues highlighted here in the critique are covered in detail in my submissions to the DIPP.

Analysis of the judgment 

Portfolio based licensing is not compatible with a FRAND approach: I believe that the Unwired decision is flawed as it ignores the fundamental issue about portfolio licensing.  It is misplaced because it legitimizes portfolio based licensing.  In my view, this is a no-no.  A patent is a jurisdictional right, and differently judged.  For example, the US does not have Sections 3(k), 3(m), etc. but India has these sections.  Both US and India do not have the same set of claims at the time of the grant for the same application / claims.  It is possible that the US claim may be essential and not India or vice versa.

Taking a portfolio based approach to licensing, equates apples to oranges and the result is severely distorted.  A patent portfolio also includes patent applications and as such it is not even clear whether the patent will be issued or not.  This also distorts the result.  Finally, the patent owner for business reasons, or cost constraints may exclude a jurisdiction altogether for patent filing.

It does not stand to reason that the patent owner be rewarded in the jurisdiction where it does not have patents.  Another interesting question here is : On what basis can an entity sue another in a jurisdiction where it has limited set of patents.  The answer is a patent portfolio and a clear example is the Ericsson matters at the Delhi High Court.

Another issue is the value of the portfolio may be in patents that are older.  What happens to the value of the portfolio when the older patents expire?  Why should a patent owner get the same royalty for expired patents?  How is the value of the portfolio constant when uneven variables at both ends are at play.  See my post here on these issues.

The judgement legitimizes extracting royalty for patents have expired.  GSM patents have expired and as such no royalty is payable for them.  Taking a portfolio approach, legitimizes this illegal gain to the patent owner.

The judgement cites that Huawei is a sophisticated organization and well versed in technology and patenting. This is no reason to reject their claim re bundling.

A SEP Owner Is Not Entitled to A Higher Legal Pedestal:  The Unwired decision does exactly that – it gives the patent owner a higher legal pedestal than it is entitled to.  For example, the traditional burden of proof of validity and infringement is shifted to the defendant as being one of invalidity and non-infringement.  In Unwired, even though the judge decides that certain patents are not applicable, even then it holds that a portfolio wide rate is applicable.  Shouldn’t the portfolio value be reduced appropriately – i.e. in Unwired two patents were found to be invalid / not infringed – not essential. Shouldn’t this reflect on the value of the portfolio?

The five litigated patents are linked and readers can see their respective claims: I find it incredulous that despite having two of them knocked out, the judge still accepted the patent owner’s assertions.  Further, the claims are system claims (distributed infringement scenario), i.e. are performed at the backend / base – station.  It is apparent that the role a handset / mobile device plays in each is different, and most of the actions are taken at the system end.  Hence, to club patents together as a portfolio does not make sense.

A Blind eye is turned towards privateering:  In this case, it was clear that Ericsson had sold part of its portfolio to Unwired.  Unwired surprisingly holds a simple formulaic approach at one end only: if one has a portfolio of 100 patents for which rate is x, and sells 25, then acquirer can claim only 25%x.   The equation is left unbalanced – how about reduction of the rates for the remaining 75% – they still remain x.

FRAND royalties.  It is extremely interesting to note that the judge holds that initial offers made by Unwired were not FRAND: “None of Unwired Planet’s offers (April 2014, June 2014, June 2015 or August 2016) were FRAND”.   Contrast this with comments that damages for past infringements “would be at the same rate as the appropriate FRAND rate.” 

Methodology of determining FRAND royalties.  “A FRAND rate can be determined by using comparable licences if they are available.”

• Incorrect focus on Ericsson & Unwired Planet’s license:  The judge focuses on Ericsson’s and Unwired Planet’s license agreements as comparators. This is not a true arms length license – Ericsson stood to gain from the licenses that Unwired Planet entered into even after it had sold part of its portfolio.  This severley limits the scope of comparable licenses.  Ericsson’s licenses are known to be at the other end of the spectrum and limiting comparable licenses limits the scope to the far end.
• It is incorrectly assumed that all SEPs are valuable, although the judgment leaves open the possibility to prove that some “keystone” patents are more valuable than others.  As discussed earlier, the nature of claim scope determines the key patents.   Hence to assign all SEPs as equal over simplifies the approach to the advantage of the patent owner.
• It is not necessary to find all patents valid and infringed before setting a rate, although it is wise to allow adjustment of the royalty if a relatively substantial number of SEPs is found invalid or not infringed.  This ignores several studies cited that the more than 80% of patents claimed as essential end up either being invalid, not essential or both. At least some attempt should have been made to know the value of the patent to standard and other patents.  For example, there is variation in value of the five patents asserted in Unwired.   In this case, two patents were found to be invalid and not infringed.  Despite this – the judge plods on to hold portfolio based licensing as being FRAND.

The decision is very similar to the one issued in the Intex (Civil Suit) matter by the Delhi High Court.  However, that decision has since been stayed by a division bench of the Court.  Only time will tell what happens to the appeals filed by Huawei in UK.  In any case, the UK decision and its appeals are bound to be cited before the Delhi High Court in various courts.