Last week, the UK Supreme Court ruled that it was legally permissible for UK courts to set worldwide license rates for patents that are subject to fair, reasonable, and non-discriminatory license (FRAND) obligations. The decision is likely to have worldwide ramifications—and create worldwide chaos in SEP licensing.
The Unwired Planet Decision
In 2014, Unwired Planet—a company with “16 employees and no products” that describes itself as a company “where what’s left is a patent portfolio”—brought patent infringement lawsuits in the UK against Huawei. (There were also parallel proceedings in Germany.) Although a number of the patents asserted were found to be either invalid or not essential to the relevant standard, there was at least one patent that was both valid and essential. Based on this, Unwired Planet asked the UK court to set a worldwide SEP license rate for its patents or in the alternative asked for a UK injunction if Huawei didn’t accept the rate. Huawei, in contrast, asked for the court to set a UK-only SEP license rate and denied that an injunction was an appropriate remedy.
Ultimately, the UK Supreme Court decided that it was permissible for a UK court to force a company to take a global license using a UK injunction as the backstop against refusal.
A Whole Lot Of Suing Going To Go On
This approach creates a host of problems likely to lead to a chaotic licensing environment. First and foremost, the UK has set out a system where different jurisdictions can each independently set global license rates. Patentees will likely seek to file cases in jurisdictions where they can obtain favorable conditions for licensors, while innovative manufacturers will ask for rates to be set in jurisdictions with favorable conditions for licensees. All of the existing problems with global patent litigation—anti-suit injunctions, anti-anti-suit injunctions, and even anti-anti-anti-suit injunctions, not to mention contradictory results and increased cost—will only be magnified.
Setting aside whether it’s appropriate as a matter of comity and extraterritoriality for a UK court to set a rate for the licensing of an American or Chinese patent, when you have multiple jurisdictions setting rates, you’re going to wind up with different results. Even across U.S. courts applying the exact same legal standards, you can get inconsistent results, much less when you’re talking about different legal systems applying their own legal standards for what is or is not FRAND. And that will lead to increased cost and complexity, the opposite of what the UK Supreme Court was aiming to do.
Imagine a situation in which a U.S. court instructs a licensor to charge a 0.5% royalty rate for a worldwide license, while a UK court instructs the licensee to pay a 2% royalty rate. As the licensor, you would presumably try to enforce the 2% royalty rate, but the licensee would likely ask the U.S. court to force the licensor to only take the 0.5% rate or be ruled in breach of its FRAND obligation and subject to penalties in the U.S. courts. Rather than avoiding country-by-country litigation, one of the rationales the UK court gave for its decision, a worldwide rate-setting approach will likely fuel additional litigation by both sides to try to find the most favorable jurisdiction and leverage whatever rate they can obtain there on other countries. The whole system will wind up less predictable and more expensive than a system in which courts set rates for their own jurisdictions.
A Different Kind Of Brexit
There’s another issue that Unwired Planet raises, this one somewhat more specific to the UK. It’s just not that big of a market for many companies. The Unwired Planet decision even notes that the UK market is only 1% of Huawei’s worldwide sales for the relevant products. (In the companion ZTE case, that number was even lower—only 0.07% of its revenue was from the UK.) There’s nothing stopping Huawei or ZTE from simply saying “fine, we won’t sell our products in the UK.” This sort of an abandonment of unfavorable jurisdictions has happened on a somewhat smaller scale in the U.S., where some companies have eliminated stores in the Eastern District of Texas rather than deal with E.D. Tex. patent trials.
Abandonment would practically protect companies against worldwide licenses issued by courts in the UK and other small markets. But there are a few places where that’s effective—particularly in larger markets like the U.S., the EU, and China. Most companies can’t practically afford to abandon sales to these markets, and in the case of China, may not be able to move their manufacturing out of the market either. That means that, in practice, the judgments of those jurisdictions are going to have a significantly higher impact on SEP licensing rates, and it effectively gives Chinese courts an override on SEP license rates. An injunction in the U.S. or EU might cut off access to a major market; an injunction in China could shut down your entire manufacturing chain, effectively cutting off your access to all of your markets. And if a Chinese court sets a lower rate, they could order the patent owner to pay penalties to the licensee to offset any higher amounts the patent owner collects in other markets. And all of this doesn’t even include the potential for WTO adjudication of these issues.
No one wins—licensors and licensees alike face more litigation, less certainty, and more delay. So what’s the alternative?
Option 1: Country-by-Country Licensing
The first option (and in some ways the simplest option) is for courts to acknowledge that their authority over a patent license extends only to patents granted by that country’s patent office. It’s a general truism in U.S. law that, unless Congress has specifically authorized it, U.S. courts do not have authority over extraterritorial conduct. There’s even a patent case that applies that presumption to a specific aspect of the Patent Act that authorizes limited extraterritorial reach.
This option is simple—litigants go to each country and get a rate set by those courts. It still multiplies the number of lawsuits, but there’s no worry over inconsistent decisions or patent families that are valid in some parts of the world but not others, etc. And the likely outcome is that litigants will go to two or three key jurisdictions, get rates from those, and negotiate a worldwide rate. While still expensive, it’s likely to be less chaotic and uncertain than having multiple courts set worldwide rates.
The downside is that the potential for multiple lawsuits remains and that licensees might be incentivized to hold out until a case is filed in each jurisdiction—though in practice, under the country-by-country system predating Unwired Planet, licensees have generally negotiated worldwide licenses rather than forcing country-by-country litigation. This option also leaves China in a preeminent position due to the fact that an injunction against manufacturing in China would shut down many companies’ entire worldwide supply chain.
Option 2: Worldwide Licenses From Everybody!
This is Unwired Planet. This creates chaos and multiples expense unnecessarily, while not actually providing much of a benefit over country-by-country licensing, because instead of potentially requiring licensors to go to additional countries to enforce their patents, it incentivizes licensees to go to additional countries to enforce the FRAND obligation.
This is worse than option 1.
Option 3: Rate-Setting Boards
Option 3 is the introduction of a global rate-setting tribunal, either via international agreement a la WIPO/WTO or via a separate, new agreement among members of standard-setting organizations. As proposed in detail by Prof. Jorge Contreras, this approach—modeled after the Copyright Royalty Board in the U.S. and similar agencies—would provide a single, agreed upon point for determination of worldwide royalties. Licensees or licensors could ask the Board to set a worldwide rate. And, over time, the Board would develop a body of law about who can obtain a license, what a FRAND rate is, how to avoid royalty-stacking, and other such areas of discussion in FRAND/SEP patents.
This isn’t a perfect solution either—there would be concerns about how the rate-setting judges would be selected, what interpretation of FRAND the new tribunal would apply (one big question, for example, would be whether the obligation to license extends to anyone who requests a license or whether licensors can pick and choose), whether there’d be any potential for challenges to the tribunal’s decisions, and whether the relevant stakeholders would be likely to agree to such a tribunal. But it’d be the solution most likely to lead to a system in which litigation doesn’t multiply.