Unwired Planet v Huawei & Samsung: Samsung given permission to appeal strike out

04 November 2015


The Court of Appeal has given Samsung permission to appeal a decision by Mr Justice Birss to strike out a part of its defence to Unwired Planet's claim for patent infringement.

Summary

Unwired Planet asserts that Samsung and Huawei have infringed several 'standard essential patents' (SEPs) relevant to mobile telecommunications standards. Samsung and Huawei have defended the claims based (in part) upon allegations that Unwired Planet has breached competition law.

In July 2015, Birss J allowed an application by Ericsson (aligned with Unwired Planet) to strike out Samsung's allegation that in transferring patents from Ericsson to Unwired Planet, there was a failure to ensure the complete, proper and effective transfer of an enforceable FRAND obligation. Birss J's decision in Unwired Planet International Ltd v Huawei Technologies Co Ltd & Ors [2015] EWHC 2097 (Pat) (21 July 2015) is available here. In Birss J's view, this part of Samsung's defence was 'hopeless'.

Background on SEPs and FRAND

Standards setting organisations seek to create valuable standards in technology. By enabling interoperability and compatibility, follow-on innovation and new product development are encouraged. However, by encompassing solutions to technical issues, technology which is the subject of patent protection may be incorporated into a standard. Therefore, in order to operate in accordance with the standard, operators have little choice but to implement the patented technology and, in doing so, to infringe the essential claims of the patents.

Where patent owners participate in standard setting negotiations, the policy of the organisation will typically require patent owners to notify any patents that they consider are, may be, or may become essential to a standard. Patent owners will often undertake to grant irrevocable licences for their SEPs on FRAND terms, with such terms frequently being agreed through bilateral negotiation. Should an implementer unreasonably refuse to negotiate or agree a licence upon FRAND terms, and nevertheless infringe or threaten to infringe an SEP, injunctive relief is available from the courts.

As discussed in our alert titled Vringo v ZTE: FRAND terms and injunctive relief for infringement of standards essential patents questions concerning what terms constitute FRAND, and the interaction between FRAND offers and the availability of injunctive relief to restrain patent infringement, remain to be resolved.

Background on Unwired Planet v Huawei & Samsung

In March 2014 Unwired Planet brought a claim for patent infringement against Google, Samsung and Huawei. The claim was brought for infringement of six of Unwired Planet's patents, five of which are said to be essential to standards produced by the European Telecommunications Standards Institute (ETSI). All these asserted SEPs were transferred to Unwired Planet from Ericsson (along with over 2,800 other patents) under a Master Sales Agreement ("MSA"), in January 2013.

The defendants responded that Unwired Planet's patents are invalid and not infringed. They also put forward a number of defences based on 'FRAND' principles and competition law, some of which were based on the provisions of the MSA. As a result of the MSA-related defences Ericsson was joined to the proceedings. Since then Google has settled its dispute with Unwired Planet and is consequently no longer involved in the action.

Following a number of case management hearings the court has listed five "technical trials" to hear the validity and infringement issues in relation to each of the six patents in suit, followed by a thirteen week "non-technical" trial to hear the FRAND and competition law issues. The first of the technical trials was heard in October 2015 and Birss J's judgment will be handed down later this month.

The FRAND case

The FRAND case remains at a relatively early stage, with the final technical trial not due to take place until July 2016.

As part of their defence, the defendants have pleaded the following breaches by Ericsson:

  1. In transferring patents to Unwired Planet, there was a failure to ensure the complete, proper and effective transfer of an enforceable FRAND obligation (the first alleged breach).
  2. By dividing its portfolio in the way that it did, Ericsson has caused unfair higher royalties to be earned, thus restricting or distorting competition (the second alleged breach).
  3. Certain terms of the MSA are stand-alone "price fixing" infringements of Article 101 of the Treaty on the Functioning of the European Union (TFEU) (the third alleged breach).

Application to strike out pleaded defence

Ericsson, which stands to gain from the successful licensing of the patents in suit, applied to strike out all three of the defendants' allegations as having no real prospect of succeeding at trial, and before Birss J they were partially successful:

First alleged breach - transfer of FRAND obligation

The MSA requires the parties to acknowledge that the SEPs are subject to existing encumbrances (including FRAND commitments), which would continue after assignment. It also expressly requires Unwired Planet to make a FRAND commitment in accordance with the ETSI Intellectual Property Rights (ETSI IPR) Policy, which was made accordingly on 14 June 2013.

Despite the above, Samsung argued that the FRAND obligation was not transferred to Unwired Planet for the following reasons, each of which was rejected by Birss J:

  1. First, Samsung contended that the MSA does not compel Unwired Planet to give a FRAND undertaking. This was dismissed by the judge as "hopeless".
  2. Second, Samsung contended that even if the MSA does compel Unwired Planet to give a FRAND undertaking, the obligation under the MSA is expressly only enforceable by Ericsson and not by third parties. However, the judge agreed with Ericsson that once a party has made a FRAND declaration to ETSI, that commitment will be enforceable by a third party.
  3. Third, Samsung contended that the MSA should transfer Ericsson's FRAND obligation, not simply compel Unwired Planet to offer a FRAND undertaking of its own. Focusing on the "non-discriminatory" element of "fair, reasonable and non-discriminatory", Samsung argued that Ericsson's FRAND obligation needed to be considered at the time it was made, when the SEPs were part of Ericsson's much larger portfolio. Now, as part of a separate and smaller portfolio, the obligation does not take account of the SEPs remaining in Ericsson's portfolio and therefore higher royalties could be earned on the SEPs.

This argument was also dismissed. Birss J noted that a transferee of a SEP which is subject to an ETSI declaration should plainly be obliged to grant FRAND licences, but it would be commercially unworkable to require the transferor's own FRAND obligation to be transferred, which would mean looking back at the position of the transferor in order to decide what FRAND terms should be given by the transferee today (when the patent is potentially in an entirely different portfolio).

Second alleged breach - the division of Ericsson's portfolio

Samsung's second allegation is that the division of Ericsson's portfolio is of itself, in the circumstances, a breach of Article 101 TFEU. In support of this allegation Samsung cites two main reasons:

  1. First, Ericsson retains the right under the MSA to a "substantial share" in the licensing revenue generated by Unwired Planet and can transfer a further 500 patents to Unwired Planet under the MSA between 2014 and 2019 for no further consideration.
  2. Second, Samsung cites Unwired Planet's existence as a 'patent assertion' or 'non-practising' entity. Samsung argues that, unlike Ericsson, which competes in the downstream market and would probably need to enter into cross-licences with its competitors (e.g. Samsung), an NPE such as Unwired Planet is not interested in cross-licences and can therefore act "aggressively" without fear of adverse consequences.

Ericsson, on the other hand, submitted that if Samsung was correct, it would lead to the "astonishing proposition that Ericsson can never sell part of its portfolio of essential patents but would be forced to increase its patent portfolio year on year". Ericsson further argued that Art 6.1 of the ETSI IPR Policy and the Commission's Guidelines on Technology Transfer Agreements expressly contemplate the transfer of patents. Ericsson argued that what really matters for competition law is the FRAND obligation, which is secure in circumstances where Unwired Planet has given an undertaking to ETSI.

The judge appeared to be in broad agreement with Ericsson. He stated:

"I am troubled by the following aspects of the second alleged breach. Although it denies it, at times Samsung's argument does appear to cut across the idea that a subset of patents from a portfolio could ever be transferred out of a larger portfolio. That must be wrong. Moreover the transfer obviously takes the patents out of Ericsson's portfolio and so out of the ambit of Ericsson's FRAND commitment. I cannot see how that alone could be contrary to Art 101. Also there is real force in Ericsson's point that the commitment of both transferor and transferee to license on FRAND terms is all that the law, including competition law, ought to require when transferring standards essential patents between undertakings. There is much to be said for the submission that a FRAND commitment is or ought to be the way in which the rights of the holder of a patent which is essential to a standard are to be constrained by law. In my judgment if the holder abuses a dominant position then that is a matter for Art 102 TFEU. The fact that a transferee might abuse a dominant position which they are in as a result of the transfer cannot make the transfer contrary to Art 101. I am also sceptical about the breadth of Samsung's complaint that Ericsson is trying to earn more money from its patents, as if that is a sin. It is not."

However, despite these comments the judge was not able to find that there was no prospect of Samsung's allegation succeeding at trial and thus Ericsson's application to strike out the second alleged breach was, for the time being at least, rejected.

Third alleged breach - specific terms in the MSA

Thirdly, Samsung and Huawei rely on the terms of two clauses in the MSA, which they say are examples of 'hardcore' restrictions on competition in breach of Art 101 TFEU.

First clause

Clause 3.4 operates to set a minimum payment to Ericsson by Unwired Planet in respect of any licence to a patent transferred from Ericsson to Unwired Planet. The payment to Ericsson is set as a minimum percentage of the net sales of the relevant licensee, irrespective of the royalty paid by the licensee to Unwired Planet.

Ericsson submitted that this is no different to a normal commercial situation; clearly Unwired Planet will try to operate at a profit but it may choose, in a given case, to sell at a reduced price and make its profits on other sales. Samsung submitted that clause 3.4 creates "a powerful incentive" on Unwired Planet to charge rates beyond the minimum rates it must pay to Ericsson, which is the type of price fixing Art 101 intends to prohibit. Samsung referred to paragraphs 99 and 118 of the Guidelines on Technology Transfer Agreements in this respect, although Ericsson noted that paragraph 99 expressly provides that a minimum royalty obligation does not in itself amount to price fixing.

The judge stated that, when considered in conjunction with the second alleged breach, he could see it was arguable that the clause could contribute to an anti-competitive incentive to charge higher royalties. He therefore refused Ericsson's application to strike out the clause 3.4 defence from Samsung's and Huawei's respective pleadings.

Second clause

Clause 6.1(aa) provides that Unwired Planet cannot license the patents other than on terms in which the royalty due is a percentage of the aggregate net sales revenue of the licensee. Ericsson argued that this doesn't prevent Unwired Planet from licensing on a capped percentage basis, or from obtaining consent from Ericsson to agree to other licensing terms. The judge stated that he thought this was a weaker case of the defendants' than that regarding clause 3.4, but he did not allow Ericsson's application to strike it out on the basis that the clause would need to be considered at trial in conjunction with the second breach.

Partial success at first instance, but now for the appeal

So Ericsson succeeded in striking out the first alleged breach, the judge agreeing with Ericsson that Samsung had no real prospect of success of showing that there was a failure to ensure the complete, proper and effective transfer of an enforceable FRAND obligation given that Unwired Planet had given an ETSI undertaking itself. Samsung now has permission to appeal this decision in the Court of Appeal.

Comment

The question of what terms are FRAND, the impact of FRAND negotiations on the availability of injunctive relief to restrain infringement of SEPs, and the interplay between patent law and competition law all remain to be clarified.

It is hoped that guidance on the law will be provided in the context of the Unwired Planet v Huawei & Samsung case and the Vringo v ZTE case, both of which are progressing through the Patents Court, and also now the Court of Appeal, of England and Wales.


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