In an exclusive guest analysis for Sisvel, Gowling WLG partner Alexandra Brodie unpacks what licensing pros need to know about the recent SEP decisions out of UK courts

By Alexandra Brodie

Until very recently there has been a dearth of FRAND valuation judgments from the courts, globally. This isn't a surprise – the goal for both patentees and implementers is to negotiate a licence; no-one ever set out to spend time and money on the uncertainty of litigation. And, to the industry's credit, the vast majority of negotiations do end in a licence and never reach litigation.

Another reason for the lack of judgments is that to date, only the UKⁱ and Chinaⁱⁱ have settled FRAND rates and terms for a global licence absent mutual consent of the parties. It remains to be seen what the UPC will doⁱⁱⁱ – will it maintain the German approach, embark on detailed rate and term determinations, or perhaps try to steer parties to its Patent Mediation and Arbitration Centre?

In the last 12 months the UK's Court of Appeal has delivered two thorough and highly detailed FRAND valuation judgments in InterDigital v Lenovo and Optis v Apple. The judgments stem from complex cases with lengthy negotiation and litigation histories involving multiple disputes in different territories. As such, they are the product of hundreds of decisions and strategic choices made by the parties over a considerable period.

The good news for patentees considering the UK as a jurisdiction is that there is a growing body of FRAND principles that have been affirmed at the appellate level which can help guide licensing and litigation strategies.

FRAND principles – common ground in the judgments

When considering the UK jurisdiction it is important to remember three things – (1) the UK approaches the FRAND undertaking as a question of contract, not of anti-trust or competition law unlike Germany or the UPC; (2) the UK is a common law jurisdiction which gives the judges considerable discretion; (3) the resulting FRAND licence will reflect the detailed evidence and arguments run by the parties at trial. Accordingly, if a party hasn't run an argument then the judgment won't reflect it. The Courts are there to determine the dispute as it is presented to them, not to run an investigation as to what is FRAND.

That said, there is now a growing body of FRAND principles that the UK Courts are adopting across their judgments. These principles (not all of which will be applicable to all cases, of course) provide some useful and timely guidance when crafting licensing and litigation strategies:

• A FRAND licence is the licence that a hypothetical willing licensor and willing licensee would enter into – the Courts are not engaging in punishing or rewarding behaviours in the terms of the licence terms and rates that are settled.

• FRAND injunctions – if an implementer has been held to infringe a valid and essential patent then the Court will grant a FRAND injunction under which the implementer will be enjoined unless it commits to enter into and does enter into the FRAND licence eventually determined by the Courts.

• Licence structure – a FRAND licence may be running royalty or lump sum. A running royalty licence can be ad valorem or dollar-per-unit. There is no one structure that is FRAND or even 'more FRAND' than another.

• Territorial scope – a FRAND licence settled by the UK Court will reflect the territory shown in the evidence to be FRAND for a licence between the parties. Typically, that will be global.

• The past – all past use of another's patents must be paid for. The length of the future term of the licence will depend on the evidence in the case.

• The value of the past – the FRAND royalty applies to past use as it does to future use. Simply because use took place in the past does not merit a discount.

• Interest – interest is payable on all unpaid royalties until the patentee is in receipt of the same. To date the judgments have awarded interest on a per annum basis compounding periodically.

• Valuation methods – comparable licences concerning a licence to the patentee's portfolio are the best place to start when determining the royalty payable under the FRAND licence. Licences to the implementer from other patentees to their other portfolios may also be of use. Top-down methodologies are useful as a cross-check to the analysis of the comparable licences where they exist but otherwise will be the primary source of evidence for setting the FRAND terms.

• Comparable licences – not all of the available licences will be comparable to the licence in dispute. The Court will consider the 'basket' of licences available and will look to determine which are the most comparable to the current dispute. The Court will then consider the reliability of the data available upon unpacking, it being understood that a licence may be highly comparable regarding the parties, technology being licensed, sales mix, geographical distribution of sales, timespan etc but that depending on its structure, other terms, and contextual factors surrounding the negotiation it may not provide the most reliable data once unpacked.

• Unpacking a comparable – any items which either party wishes to argue have impacted the value to be unpacked from a comparable, for example discounts applied to the FRAND royalty or the impact of bargaining strength or other contextual factors, will need to be evidenced, ideally by reference to what the parties thought they were negotiating at the time of the licence (although that is not always possible). An example of such a discount and how best to account for it and unpack it which runs through all the judgments is the value attributed to past sales in comparable licences.

• Behaviour – willingness – hold up/hold out – the Courts do not, of course, condone poor behaviour, but the licence that will be settled is a FRAND licence between a hypothetical willing licensee and licensor. The Courts recognise that in the real world everyone negotiates as hard as they possibly can and therefore the degrees of hold out or hold up that may have occurred might impact the reliability of the data to be unpacked from a comparable.

FRAND principles – other items

The following items have been picked up in some, but not all, of the UK FRAND judgments and are worth noting when considering a licensing approach:

• SSPPU – during the High Court hearing Apple had advanced a case based on SSPPU licensing. That case was roundly rejected by the Court, and to such an extent that Apple did not even include this argument in its appeal.

• Portfolio quality/strength – in the Optis v Apple dispute the case proceeded on an agreement that for the purposes of the dispute the Optis portfolio was of average strength/quality. This issue was noted in the Court of Appeal judgment. As such it hints that the quality/strength of a portfolio may not always be average and that, presumably, a high-quality portfolio may be capable of commanding higher FRAND rates. In other words, value isn't necessarily to be confined to the number of patents in a portfolio.

• Valuation methods – in InterDigital v Lenovo the Court rejected 'hedonic regression' as a cross-check on valuation. But this was in the context of a case with many comparable licences available. The valuation method which is widely used by econometricists should be borne in mind for situations where there aren't many comparables available to the courts.

• Abuse of a dominant position – the anti-trust argument was only run in the Optis v Apple case and was roundly dismissed with the Courts noting the impact of the binding FRAND undertaking given by the patentee.

The big picture

The picture for patentees regarding FRAND valuation in the UK is looking positive. The Courts will settle a FRAND licence, it will be global, and it will command a FRAND royalty for each and every use made of the patentee's portfolio by the implementer no matter how far back in time such use was made. Interest will be payable to compensate the patentee for any delay in receipt of payment of royalties from day one of the implementer's use. Further, whilst it has previously been said that the UK Courts award low FRAND royalty values, in InterDigital the Court of Appeal increased the royalty rate payable by circa 30% and in Optis the Court of Appeal multiplied the royalty payable by circa 900%.

What about 'interim licence declarations'?

In a spate of recent judgments (Panasonic v Xiaomi, Huawei v MediaTek, Lenovo v Ericsson, Alcatel v Amazon) the Courts have granted declarations stating that patentees and implementers who have invoked the FRAND jurisdiction of the UK Court would enter into an interim licence pending the determination of the FRAND licence by the Court at which point the interim licence could be trued up or trued down as needed.

At the time of writing, another interim licence decision is expected soon in the Samsung v ZTE case.

Key to the licence being contemplated is that the implementer would pay a licence fee. Clearly were the parties to enter into an interim licence then all other litigation across the world would cease and the parties would be committed to the UK jurisdiction (or settlement).

There is no precedent for interim licences in any of the evidence of real-world FRAND licensing programs that any of the parties have been able to adduce nor is such a concept addressed in the ETSI IPR Policy or elsewhere in its guidance. The genesis for the declaratory relief appears to be the Courts attempting to 'sort out' the global litigation. Of course, it is always open to a party to go before a court and ask for a stay of proceedings or that they be struck out or for an anti-suit injunction if the party believed that the litigation was in some way improper.

Interim licence declarations are not an order. The UK Courts have not (and could not) ordered a party to enter into an interim licence. And the parties remain free to ignore a declaration as Ericsson did.

Alexandra Brodie is a London-based partner at Gowling WLG

The opinions expressed within this article are the author’s own and do not necessarily reflect the views of Sisvel. The content is for informational purposes and should not be taken as legal advice.

i Unwired Planet v Huawei, IDG v Lenovo, Optis v Apple

ii Nokia v OPPO, ACT v OPPO

iii Philips v Belkin, Panasonic v Oppo, Huawei v NETGEAR