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UNITARY PATENT

In 2012 Member States and the European Parliament agreed on the "patent package" - a legislative initiative consisting of two...

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UK Court sets FRAND Rate for 4G SEPs

by Hugh Dunlop


The eagerly-awaited judgement on licensing of standards essential patents (SEPs) for 4G (and earlier) mobile radio standards in the case Unwired Planet v Huawei issued on 5 April. This is the judgement on the “non-technical” trial following three technical trials on individual patents (of which UP won two out of three).  The judgement from Mr Justice Colin Birss runs to 166 pages and rigorously analyses issues such as royalty stacking, hold-up by SEP owners and hold-out by manufacturers as well as non-discrimination and abuse of dominance.

The patentee, Unwired Planet, won on most points, and a royalty rate was set that was a little more than half the rate they were seeking and 50% more than the rate Huawei were offering.  Unwired Planet will get an injunction if the license is not now executed on the adjudicated terms.

Huawei’s worldwide sales were said to be $30bn per year.  The royalty to UP (for its 6 essential patents) is of the order of $18m per year. (1)

The suit started in March 2014 when Unwired Planet (once a member of the WAP Forum but never a member of ETSI), having acquired certain SEPs from Ericsson, and having failed to engage with various companies over license terms, sued Google, Samsung and Huawei for infringement of six of the patents.  Google settled in 2015 and Samsung settled in 2016 but Huawei held out to trial.

Going into trial, the positions of the parties over royalty rates for 4G/LTE handsets in the UK were a factor of 10 apart:

  • Unwired Planet: 0.55%
  • Huawei:              0.059%       

UP were offering lower rates for a global license, but Huawei wanted to negotiate for the UK only.   A key finding of the Court was that the market was a global one and the dispute was a global dispute, so it was Fair, Reasonable and Non-Discriminatory (FRAND) for UP to offer and expect a worldwide licence.

For a global license, the parties’ respective positions were not quite so far apart (paragraph numbers are from the published decision):

  • Unwired Planet: 0.13% (¶ 233)
  • Huawei:              0.04% (¶ 232)

The Court concluded that a FRAND royalty is not a range.  There is a royalty rate that is FRAND, but this is not to say that a rate higher than the FRAND rate is anti-competitive (¶ 153) nor that every rate for a licensee must be the same.  There does not have to be hard-edged non-discrimination (¶ 501).

How should a FRAND rate be determined?  One approach is the top-down approach (¶ 178) by which a reasonable total royalty is set and is carved up amongst all the holders of SEPs.  The better approach is a comparables approach (¶ 180) finding the nearest comparable existing license and multiplying the rate for that license by a factor (“R”) representing the relative value of the UP portfolio relative to the most comparable portfolio.   In this case the closest comparison was an earlier Ericsson license for which the royalty rate was designated as “E”.  So the task was to find E x R.

SEP licensing is all about patent counting (¶ 182).  It is the only practical approach, given the vast numbers of patents declared as SEPs (e.g. 7,077 families for LTE handsets alone).  An independent study indicated that only 28% of declared IPRs are actually essential.  Birss J. accepted this evidence. 

UP had 6 handset patents and 7 infrastructure patents (¶ 207).  According to UP this equated to 1.69% of the total, whereas according to Huawei, it was only 0.33%.  This difference – i.e. how to count the total number of SEPs applicable to the standard in question – represented a major part of the difference between the positions of the parties. 

Much of the evidence towards resolving this difference was confidential and (for the present) redacted from the decision, but it led to a total aggregate royalty burden of 13.3% according to Huawei and 10.4% according to UP.  Birss J. used this as a cross-check of the calculations.  (Other approaches arrived at totally royalty burdens of 8%, which he considered too low and 43% which was “far too high” – ¶ 272.)

At this point in the judgement, Birss J. noted the high numbers of patent applications filed by Chinese companies in China only that are declared as essential, and declined to include these in the total.  He said “a serious player in the telecommunications market, including a major Chinese company, would likely file SEPs in the US and/or Europe” (¶ 307).  For this and other redacted reasons, the royalty rate for China should be half the rate for the rest of the world (¶ 467).

He also said “taking a cut-off of patents with a pre-2009 priority date is a FRAND approach to licensing Release 8 [but] 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.” (¶¶ 319 & 320).  “A method which gives equal weight to any patent essential to anything in Releases 9 to 11 will inevitably overstate that value.  Release 8 is still the fundamental technology to LTE” [subject to mentioning the importance of carrier aggregation in later releases].

For 4G multi-mode handsets, UP’s share of the total pool of SEPS was 0.70% (¶ 381).  This meant that the relative value (“R”) vis-à-vis the Ericsson portfolio was 7.69% and (after more redacted evidence) the value “E” of the Ericsson license was 0.8% (¶ 477).  This led to a rate for the UP license of E X R = 0.062% (¶ 475) for 4G multimode handsets (and 0.072% for infrastructure).

This rate determined by the Court was about half that sought by UP and about 50% more than Huawei had offered.  It pointed towards a total royalty burden of just 5.6% for3G multimode handsets, which was “not far out of line with the judgement of the internationally respected IP High Court of Japan”. The total for 4G multimode handsets would be 8.8%.  Other data for other types of equipment is set out in a table in paragraph 478 of the judgement:

Handsets

No. of UP SEPs (2)

FRAND rate for UP portfolio

Implied total burden

2G

2

0.064%

4.9%

2G/3G multimode

1

0.032%

5.6%

2G/3G/4G multimode

6

0.062%

8.8%

Infrastructure

No. of UP SEPs

FRAND rate for UP portfolio

Implied total burden

2G

1

0.064%

8.5%

3G

2

0.016%

3.1%

4G

7

0,072%

7.0%


Competition Law

Huawei contended that UP were in a dominant position and abused that position by precipitously bringing the infringement action without giving Huawei adequate time to negotiate a licence.

The Court held that UP, as a holder of a SEPs, had a 100% market share in the market for licenses under those SEPs and was therefore in a dominant position, but that it did not abuse that position notwithstanding evidence that it had been UP that had dragged their heels in license negotiations and not Huawei.  (UP first approached Huawei in June 2013; in November 2015 UP agreed to give Huawei claim charts under NDA; in January 2016 Huawei proposed different NDA terms but they received no further reply until the lawsuit was filed two months later.)  However a particular feature of the case was that Huawei had previously been licensed under the Ericsson patents (a license which expired in 2012). So Huawei were already aware they needed a license and the evidence pointed more to holding out by Huawei rather than holding up by UP.

The Court also held that it would be an abuse for a holder of SEPs under a FRAND obligation to insist on bundling of non-essential patents in a license for essential patents, but this does not mean it is contrary to competition law to make a first offer that bundles SEPs and non-SEPs together.  “Everything will depend on the circumstances” (¶ 787).

Back Damages

It is not uncommon for a license agreement to set a higher royalty rate for past damages than for forward royalties.  This encourages quicker settlement.  But under UK law the loss to the patentee is exactly that which he would have received under FRAND terms (¶ 800) and it is irrelevant that such a finding gives defendants no incentive to settle (¶ 802). 


(1) Based on 4G handset figures.  Huawei also have 7 patents essential to infrastructure.

(2) Using UP’s figures from ¶205.  Note that the total numbers of SEPs in the later standards were higher, leading to higher denominators, thereby diluting the value of each.



Monday, April 10, 2017