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The decision of the Supreme Court of England and Wales on August 26 2020 in the matter of Huawei and ZTE vs Unwired Planet and Conversant, respectively, can have significant effects on the ICT sector and beyond.
The Court’s take in this matter may set a precedent for the determination of FRAND royalty rates. After all, Unwired Planet vs Huawei is the first European judgment pronounced on the grounds of the valuation of standard essential patents.
Significant damage awards have been awarded as the smart phone eco system remains highly contentious. Coming to grips with the valuation of FRAND rates has at times occurred as a stumbling block in such disputes.
Tough competition prevails between key stakeholders. The patent disputes between them, have made headlines under the tag line ‘patent wars.’ Tech firms around the world have been drawn into litigation. The chart below offers a schematic overview of some of these disputes.
Overview of Patent Wars — arrows indicate who has sued whom in the Telecom Space:
What is the FRAND Commitment?
Standard essential patents can be subject to anti-competitive behaviour. Adverse behaviour can arise when combining a patent with a standard. Antagonistic principles underly standards and patents. Patent law is based on the concept of excluding others. Standardisation processes again are hinged on widespread dissemination.
Against the complex dynamics that prevail between standard and patents, the FRAND commitment was introduced. FRAND is short for ‘fair, reasonable and non-discriminatory.’ The IPR policies of standard setting organizations often set out the conditions for patents that read on standards created under their auspices. This was the case in these disputes, where the IPR policy of ETSI played an important role in the ruling. However, many other standard setting organizations have not established an IPR policy, leaving a governance gap.
Core Elements of FRAND valuation
In the Unwired Planet vs Huawei decision, Justice Birss, who was recently promoted to the Court of Appeal, recognized that the licensing of standard essential patents can be subject to opportunistic behaviour. Licensors can make supra FRAND licensing requests and licensees can delay payment. Also, downstream innovators can face the burden of cumulative royalty rates, as expressed in the royalty stacking argument. Many different SEPs owners may request a licensing rate, which may render a payment difficult. These issues were recognized in the judgement.
To come to grips with the determination of a FRAND royalty rate, the judge recognized the ex-ante approach, the comparable licenses approach and the top down approach as methods. The Judge acknowledged that the value of standard essential patents can be determined with reference to the next best alternative technology. The method was not further developed as the parties to the case did not make use of the approach. He also recognized the comparable licenses approach as a valuation tool. This method seeks to determine the value of a license with respect to other licensing contracts that were concluded. The Top Down Approach was also applied. The merit of this method is that it assures licensing payments are commensurate with a standard essential patent owner’s contribution. The Top Down Approach, as applied in the case, did not differentiate between different verticals. The case made use of the patent counting technique to determine how many patents read on a standard. The judge found that additional steps risk introducing an element of uncertainty to the valuation.
Based on these insights, FRAND rates were determined. The valuation established through this exercise was central to the case and formed a cornerstone of the decision. Interesting to note is that the approach taken in this case is not so very different from the methods that were recognized in TCL vs Ericsson, another FRAND case from the United States. Also there, the Court recognized the top down approach and the comparable licenses approach as means to determine a FRAND rate. The concept of the ex-ante approach was also put forward. In TCL vs Ericsson however, the Court applied a different approach to arrive at the aggregate rate needed for the top down approach. While the Unwired Planet vs Huawei Court started off with comparable licensing rates, the TCL vs Ericsson Court derived the aggregate rates for the top down approach from public statements. TCL vs Ericsson was vacated, however not on the grounds of its IP valuation; leaving the case as a resource to tap into from a valuation perspective.
Why is this a Landmark Decision?
The case offers insights on FRAND royalty rate determination. There are certainly issues that one can debate. For example, the matter whether a FRAND rate should be global. One can also discuss whether other aspects in this decision can be sustained from a policy perspective. My list of issues is not exhaustive. For sure, there is further work needed to advance the valuation of IP. Such endeavours will hopefully help to come to grips with the monetary aspects of the ‘patent wars.’