Earlier this year, the High Court handed down its judgment in Unwired Planet v Huawei. This decision set the FRAND (Fair Reasonable and Non-Discriminatory) royalty rate Huawei must pay for a licence to Unwired Planet’s portfolio of standard essential mobile telecoms patents.
The judgment contains a detailed analysis of what constitutes FRAND and how a FRAND royalty may be established. The level of detail and clear reasoning has meant that this judgment has generally been well received by the owners of standard essential patent portfolios. As a result, much has been written about the judgment’s implications since it was handed down (see Bird & Bird’s summary of the judgment). Although very little has been written about how this judgment may apply to the automotive industry, the increasing importance of connected technology to the industry means it is likely to become much more relevant than it may appear at first sight.
Most mobile telecoms and other connectivity standards contain a commitment by the owners of patents essential to operate these standards to make the patents available to license on FRAND terms (the so called FRAND commitment). Therefore, FRAND is likely to become a major consideration for companies involved in the automotive industry, which are likely to find themselves in negotiations with the owners of standard essential patent portfolios in the near future. For these companies, the following key findings in the Unwired Planet judgment may be particularly important:
- The English Court has the competence to decide a worldwide FRAND royalty rate.
This finding has the potential to make litigation in the High Court of England and Wales the forum of choice for resolving disputes relating to FRAND licences. Traditionally, most FRAND disputes have been resolved by litigating patent by patent, country by country, trying to obtain injunctions to force a party’s hand in negotiations. More recently, (for example Nokia v Samsung and Nokia v LG) these disputes have been resolved by portfolio rate arbitration. Although this gives a level of privacy and confidentiality to the dispute, it does require that the parties agree to submit to the arbitration and also means no injunction will be available. The fact that the High Court decided that it was able to set a worldwide royalty rate in Unwired Planet, rather than just a UK rate, has the potential to significantly simplify and reduce of the cost of pursing litigation to resolve FRAND disputes.
- The English Court is prepared to grant an injunction against unwilling licensees.
This may have significant implications for the automotive industry, where OEMs traditionally believe that suppliers should obtain any licence that may be needed to implement their components in end user products. However, owners of standard essential patents have long held that it is for the manufacturer of the end user products, and not their suppliers, to obtain a licence to their patents, believing this to be not only more efficient than trying to licence every supplier, but also that it is the correct place to licence as it is the end user products that implement the technology in the standards. Likewise, the suppliers of connective modules might consider that they do not work the standards, meaning they do not require a licence to sell their products, with the obligation to licence being at the end product stage. In any event, suppliers will often operate at such tight margins that they cannot afford to take a licence. The issue of connectivity brings together two industries with very different backgrounds and agreeing the point in the production chain that should be licenced may be a major stumbling block to agreeing licencing terms. However, on the basis of Unwired Planet, any party (be that OEM or supplier) who refuses to accept that it may need to take a licence itself faces a risk of being considered to be an unwilling licensee and, as a result, may be at risk of an injunction being awarded against it. Such an injunction will be a modified version of the normal (and therefore broad) English patent infringement injunction to not infringe the asserted patents, which would prohibit the marketing, sale, production, importation or storage in the UK of any connective modules (if the action was against a supplier) or vehicle using connective technology (where the action was against an OEM).
- The only way to avoid an injunction is for a licensee to give an unqualified agreement to enter into a licence on whatever terms the Court determine to the FRAND.
As the Court in Unwired Planet found that it has the competence to decide on the terms of a worldwide licence, it means that any potential licensee that refuses to accept the English courts have jurisdiction to decide worldwide terms risks an injunction. This finding is likely to make the UK an even more attractive forum for patentees, as it will mean that potential licensees have a strong incentive to submit to the jurisdiction of the English Court or face the risk of an injunction. This should give patentees some certainty of the global dispute being resolved within a reasonable timeframe.
- Seeking an injunction is not the same as refusing to licence, which is contrary to the FRAND commitment.
The result of this finding is that a patentee can start proceedings seeking an injunction at a relatively early stage of the negotiation procedure. While it seems unlikely that a patentee would be able to get away with starting proceedings without some discussions with a potential licensee, the patentee certainly would not need to wait until every avenue had been unsuccessfully pursued in negotiations before commencing proceedings against a potential licensee.
- The concept of licensee ‘hold out’ was recognised as a potential cause of distortion to competition.
Traditionally, most of the focus on anti-competitive behaviour in SEP licencing disputes has related to so called ‘hold up’, where the patentee is accused of holding up the market by refusing to licence or offering to licence on terms which are not FRAND. However, in Unwired Planet, the Court recognised that the concept of licensees ‘holding out’ from taking a licence could potentially distort competition. Hold out will invariably be more of an issue the higher up the supply chain licensing takes place as, for a given royalty figure, the rate will be always be significantly higher proportion of the sale cost of a component compared to the sale cost of the end product. As a result, if the correct licencing point for the automotive industry was found to be at the supplier level, a supplier which holds out from entering into licences could obtain a significant advantage over suppliers which do enter into licences.
- The previous guidance on how to conduct FRAND licencing negotiations should be interpreted widely.
In 2015, the CJEU gave detailed guidance, in Huawei v ZTE C‑170/13, on how it believed parties should conduct themselves in FRAND licencing negotiations. The Unwired Planet decision held that this guidance should be interpreted broadly, with the steps outlined in Huawei v ZTE showing what conduct would definitely NOT be an abuse of a dominant position. However, the Court held that it did not clearly define what would be abusive behaviour. Therefore, if the Huawei v ZTE steps are not followed, the assessment of whether a party has abused a dominant position comes down to the facts. In such a situation, the Court considered the question to essentially amount to whether the parties have demonstrated by their conduct that they are willing to enter into a licence on FRAND terms.
What the Unwired Planet judgment does not give any direct guidance on is how FRAND rates may be established outside of the telecoms industry, where there may be no comparable licences to use as benchmarks. However, the guidance on the relative essentiality rates of major portfolios, as well as the relative value of the different generations and releases of ETSI standards, are likely to be of some assistance. In addition, in Unwired Planet the Court appeared to accept the concept that a high single figure percentage of retail price should represent the aggregate royalty burden for smartphones using the telecoms standards. Given the significantly higher average retail price, and lower relative importance of connectivity standards to the end user products, of a connected vehicle compared to a smartphone, the total royalty burden as percentages of retail price are clearly not comparable. However, given that a connected vehicle may typically contain several transmitting and receiving modules, it seems unlikely that the total royalty burden for connected vehicles as a monetary amount will be lower than for smartphones, suggesting that an aggregate royalty burden in the tens of dollars per vehicle range is likely to be FRAND. The question of valuation is likely to be contentious and highly complex, with many OEMs not having the sufficient in house knowledge of the technology to allow them to properly engage with the issue and suppliers, who understand the technology, being less likely to find common ground with patentees on the royalty basis. Indeed Avanci, the licensing entity which aims to be the ‘one stop shop’ for licensing standard essential patents to the IoT is yet to release its licencing rates, appreciates the challenges involved with licensing on FRAND terms to different industries with different needs.
However, assuming that the aggregate royalty burden for connected vehicles is in the tens of dollars per vehicle range, this could lead to significant issues for the automotive industry if OEMs and suppliers follow their traditional approach to licensing, with suppliers warranting that their products do not infringe any IP rights and indemnifying the OEMs against any claims of IP infringement by the components they have supplied. Given the competitive nature of the market and the tight margins that suppliers operate under, it is unlikely that many unlicensed suppliers of the connective modules will have a margin of the tens of dollar level built into their sales prices. This will cause issues regardless of the chosen licence point. If a licence is granted to the suppliers, it will increase their costs for each module supplied and may mean that it will be unable to satisfy its contract at a profit. However, if the licence is agreed with the OEM, the OEM will inevitably seek to recover the licence costs from its suppliers on the basis of the indemnities it has been given. Should an OEM be successful in such a claim, it would have the same impact on profitability for suppliers as taking a licence directly. As a result, regardless of the where in the supply chain licensing takes place, it seems likely that there will need to be a significant rethink of the traditional approach the automotive industry takes to component supplies when it comes to connective technology and an appropriate margin will need to be built into the supply chain at the licence point.
As a result, FRAND seems likely to become a significantly more important issue for the automotive industry as connectivity is further rolled out and it becomes more and more the technology that enables the ‘must have’ features that differentiate between products. With this increased importance, the Unwired Planet judgment is likely to have a substantial impact to the automotive industry.