There are currently two cases before the UK High Court concerning standard-essential patents (SEPs) and FRAND1 licences. Although these cases do not directly follow from the Court of Justice of the European Union Decision in Huawei Technologies v ZTE2 in July 2015, they raise some interesting points with regard to FRAND defences and royalty rates payable under FRAND licences.
Vringo v ZTE
The first case under consideration is that of Vringo v ZTE. It is hoped that this will provide some guidance to the owners of SEPs as to the level of royalty which they may be entitled to receive from a licensee.
The case concerned European patent number EP (UK) 1212919 which was held in November 2014 to be valid and infringed by ZTE. This was one of six patents originally asserted against ZTE which had previously been notified to the European Telecommunications Standards Institute (ETSI) as being essential. Vringo had offered ZTE a FRAND licence under all the SEPs it owned but ZTE chose to challenge validity and to question infringement on six patents. Only one of these patents was in fact tried and it was held to be valid and infringed.
A FRAND trial to set royalty rates is now scheduled for early 2016. Vringo has submitted that it believes it is entitled to a royalty rate of 2.5% of revenue from sales of infringing infrastructure. ZTE has countered by arguing that royalty rates should be calculated by reference to the smallest saleable compliant part (SSCP) of the relevant product. On this basis ZTE argues that the royalty rate should be 0.002% of ZTE’s relevant turnover.
The concept of the SSCP has come out of a number of cases in the US. There is no basis in UK case law to support this approach. There is conjecture as to whether or not saleable means that the defendant has to show that it actually sells the SSCP as a separate item rather than part of a finished product. It is clear that the intention in raising this issue is to try to force down the royalty rate payable. Vringo is arguing the opposite and that the parts are not saleable in the UK and therefore this approach should not be considered.
In order to assess the position in relation to royalty rates the judge in this trial has ordered disclosure of a much broader range of comparable licenses than we would usually expect to be the case. Thus, the disclosure will include licences granted by the former patent owner (Nokia). It is therefore expected that the judge will try to give some proper guidance as to the approach to take when determining royalty rates under SEPs. Such guidance will be most welcome.
Unwired Planet v Huawei & Others
This case relates to a claim for infringement against a number of defendants including Huawei under six Unwired Planet patents, five of which are said to be SEPs notified to ETSI. Unwired Planet acquired these SEPs from Ericsson along with many other patents under a sales agreement in January 2013. The interesting issues to come out of this case are the FRAND ones. Of most note are defences pleaded by Huawei concerning the transfer of the patents from Ericsson to Unwired Planet. These are as follows:
- Huawei argues that the FRAND obligation was not properly transferred.
- Huawei argues that the division of the portfolio causes an infringer / licensees to have to pay higher royalties than would otherwise have been the case and that this therefore distorts competition.
- Huawei has argued that the sales agreement from Ericsson to Unwired Planet contains terms which could constitute price fixing infringements of Article 101 of the Treaty on the Functioning of the European Union.
In a pre-trial hearing the first of the defences was dismissed by the judge as “hopeless”. The judge held that the FRAND obligations were properly transferred to Unwired Planet and Unwired Planet therefore needs to comply with these.
On the second defence the judge commented on this position and it is clear that he is sceptical as to its chances of success. Nevertheless, he held that it was a sufficiently complex point for it to merit going to full trial.
On the third defence the judge held that there was a point worth trying in that the master sales agreement included a provision to give Ericsson a minimum royalty under the patent. This point will therefore go to full trial.
Therefore, the first of the defences was struck out. Huawei has an opportunity to appeal against this decision.
We will continue to monitor these cases and will keep you updated as to developments.
- Fair, reasonable and non-discriminatory.
- Huawei Technologies Co Ltd v ZTE Corp & ZTE Deutschland GmbH, CJEU 16 July 2015; C?170/13.
This article is for general information only. Its content is not a statement of the law on any subject and does not constitute advice. Please contact Reddie & Grose LLP for advice before taking any action in reliance on it.