U.K. Supreme Court’s Landmark Ruling on SEPs: An Imperfect Solution, But Is There a Perfect One? (Part II)

[Disclosure: I represent/have represented clients on related and unrelated issues. Views expressed here are personal.]

In Part I, I had summarised the U.K. Supreme Court’s ruling in the Unwired case. In this Part II, I share my critique of the judgement. While I have several comments, I have restricted myself to the principal ones for the present platform.

Must a FRAND license always be global?

At 1^st glance, the U.K. Supreme Court’s judgment suggests that a FRAND license must always be global. It is permissible, however, to have national carve-outs by which implementers can seek a reduction in, and/or refund of, royalties on a country-by-country basis upon a finding of non-infringement/non-essentially or invalidity.

Although the judgement carries a lengthy discussion on this issue, in my reading, the justification for the Court’s conclusion boils down to the following two points:

1. As an industry practice, parties tend to execute FRAND global licenses because both parties believe that it is practically not feasible to test the essentiality and/or validity of the SEPs, country-by-country;
2. The ETSI IP policy, which is was the legal basis for imposing the FRAND undertaking in this case, has an international effect.

The 2^nd of the two reasons above-noted contradicts with the rest of the judgment. The Court accepts that the ETSI IP policy is a contract governed by French law and must be interpreted and applied as a contract. Clause 6 of the ETSI IP policy does not use the word “worldwide” or, in fact, any other term prescribed or suggesting any territorial scope for the license to be offered by the SEP. On the contrary, clause 9 of the ETS I IPR policy, which concerns a license to software that is essential to the standard, expressly states that the license is “worldwide”. No doubt, the ETSI IP policy is international in its perspective, but to necessarily conclude that the FRAND undertaking in clause 6 must necessarily always result in a “global” license is a far-fetched interpretation of what is admittedly a contract.

Moreover, when it comes to the exact meaning and scope of the “non-discriminatory” aspect of the FRAND undertaking, the Court says that the language in the ETSI IP policy is not specific enough to impute a “hard-edged” or a rigid independent/stand-alone obligation. And yet, where the ETSI IP policy appears to have consciously remained obscure about the territorial scope of implementing the FRAND undertaking through a license, the Court had no difficulty in imputing a global coverage.

As for the 1^st reasoning, it is certainly logical to consider industry practice, but the question is whether this alone can justify the imposition of a global license by a national Court?

The problem, I believe, is more conceptual – because the issue was pegged as a matter of “jurisdiction”, whereas it is not. A suit filed before a national Court claiming infringement of a patent of that country, is definitely within the “jurisdiction” of the Court. A defendant is entitled to defend against an injunction in such a case by invoking the contractual FRAND undertaking. In principle, nothing bars the jurisdiction of the Court to adjudicate this defence either. If the defendant is subject to the jurisdiction of the Court (for whatever reason), the Court has the “jurisdiction” to pass any prohibitory or mandatory orders against the defendant.

If ultimately, the Court finds infringement and validity in favour of the patent holder, the Court will have to decide on relief. Ignoring relief concerning past conduct for the present moment, prospectively, the Court would have to ordinarily issue an injunction. However, the Court retains the discretion to deny an injunction and effectively grant a license. The Court also has to power to determine the terms of such a Court-ordered license. The circumstances in which a court can deny a permanent injunction is prescribed/limited by case law, though one need not enter this discussion at present. In the case of a SEP, the main difference is that the Court-ordered license must also be a FRAND license.

Once it is appreciated that the question is more of propriety or suitability of the Court’s formulation of the relief (injunction or FRAND global license), the traditional principles of the Court’s power to grant relief, kick-in. Since the Court is exercising its inherent power and discretion in formulating relief, the Court wields tremendous power to consider all relevant/logical and equitable factors. In this case, impracticality of negotiating and/or litigating on a country-by-country basis, the industry practice of executing global licenses for SEPs, seem to have tilted in favour of the Court granting/settling a FRAND global license (rather than a local U.K. license). Of course, to be clear, it is not as if the Court ordered the implementers to execute a license because a court cannot issue such a direction (this is equally true under the Indian Specific Relief Act, 1963). The Court did the next best thing – an injunction will operate if the party chooses not to execute the license as settled by the Court.

It bears recollection that there was a finding by the Court that the ECJ’s framework, as laid down in Huawei v. ZTE to prevent abuse of dominance by SEP holders, was fulfilled in this case. The defendant was found to be an unwilling licensee and as having rejected a FRAND license.

The difficulty is that there is enough language in the U.K. Supreme Court judgement for one to argue that a “FRAND” license, by definition, must be global. I believe it would be too far-fetched to consider it as a precedent for such a proposition; there simply isn’t enough legal reasoning for the same.

The Huawei v. ZTE prior notice obligation

I don’t intend to provide any comprehensive views on the U.K. Supreme Court’s interpretation of the ECJ judgement here. However, there is one critical point that I wish to highlight, which is intricately connected to my previous point. What would happen if the SEP holder attempted to fulfil the Huawei v. ZTE framework by offering a FRAND global license and the implementer counter-offered licenses on the same terms, to be decided on a country-by-country basis only? With the implementer then be an unwilling licensee? The ECJ judgement in Huawei v. ZTE does not really answer this, but it may be possible to read the U.K. Supreme Court’s judgement to this effect. I expected a lot more discussion and future case law on this point.

The non-discrimination obligation and equality in royalty rates

Honestly, I found this to be one of the most confusing parts of the judgement, though, possibly that the blame is to be shared equally with the parties. I clarify the outset that I believe the Court permitted differential pricing amongst licenses/implementers, though, as indicated in Part-I, there is at least one sentence that can be used to argue to the contrary.

My opinion is that the judgement is intellectually dishonest on this issue at some level. Yes, the FRAND obligation is a “single unitary undertaking” simply because a party cannot choose to be fair or reasonable but discriminatory. And no doubt, these are cognate terms, and therefore, each aspect of the undertaking gives flavour to the others. For instance, if a particular term is considered “discriminatory” (whatever be the meaning of this term), I doubt anybody will argue that it is nevertheless “fair” or “reasonable”.

That said, I think the obscurity in the language used by the Court could have, and should have, been avoided. The overall general question was whether a SEP holder is bound to offer the identical royalty rates to each implementer. It is inherent in the concept of “non-discrimination” that unequal parties can be treated differently. Whether we pick simple logic or constitutional law or even international law, it has always been an accepted proposition that one cannot treat apples and oranges the same way. Therefore, in the abstract, in principle, FRAND does not necessarily mean identical royalty rates, across-the-board. Instead, differential royalty rates could be justified by objective business justifications. Unfortunately, this also means a case-by-case examination.

Implications for India

At a minimum, this judgement can be used to support the following critical propositions before an Indian court:

• It is possible and even legitimate for equitable relief such as injunctions to be granted in favour of SEP holders, under the right circumstances;
• Courts have a wide amplitude in settling the terms of a FRAND license if the Court was so inclined to do so in lieu of an injunction;
• Among others, Courts could consider a FRAND global license in lieu of an injunction.

In the Indian context, one is also more concerned with interim injunctions. Even if that be the case, interim injunctions are also an equitable remedy, and it would not be illogical to transpose some of the observations of the U.K. Supreme Court, to the context of interim injunctions as well.

In contrast, I don’t believe this judgement necessarily affects the interpretation or application of Section 4 of the Competition Act, 2002. That said, I can certainly see how this judgement can be used favourably by SEPs to suggest that differential royalty rates, in and of itself, do not necessarily amount to illegal price discrimination under Section 4 of the Competition Act, 2002. It would seem anomalous to suggest that the contractual FRAND undertakings are not subsumed within Section 4 of the Competition Act, 2002.

Closing thoughts

While I do have my qualms with the way the judgment is worded/written, I will also acknowledge that the Court was confronted with issues that do not conform to any perfect solution. Under the circumstances, and in the facts of the case, I think the Court took the most optimal approach to decide the matters before it.

Nevertheless, with this judgment, which is likely to have significant persuasive value across the globe, one is seriously risking multi-country litigation, forum shopping, conflicting judgement, and anti-suit injunctions, one a global-scale. The advice from the Court in para 90 of the judgement is the way to go if one is looking at a more long-term and stable solution – it is high time that SSOs amend their respective IPR policies and start having a choice of forum clause.