Litigation is pending before the courts in the UK in which guidance is expected on how a fair, reasonable and non-discriminatory (FRAND) rate in standards-based industries, such as the mobile telecommunications market, is to be determined. It is likely that the court will determine royalties with reference to real-life, comparable portfolio licences, although some in the industry are advocating alternative approaches such as "smallest saleable practising unit", despite little or no legal basis for such an approach.
Either way, the relief trial in Vringo v ZTE could offer crucial guidance to standards-essential patent (SEP) owners seeking to license - or to enforce - their SEPs in Europe. We have summarised these and other issues, from basic principles, in the context of Vringo v ZTE - an ongoing case in the UK and elsewhere, the relief trial of which is scheduled to be heard by the Patents Court in January 2016.
In November 2014, Mr Justice Birss held that Vringo Infrastructure Inc's European patent number EP (UK) 1 212 919 was valid (as proposed to be amended) and infringed by ZTE. The patent concerned a method used in a communication system for relocating a protocol termination point.
The usual course, following a finding that a patent is valid and has been infringed, is for the court to award injunctive relief to restrain further infringement. However, the award of an injunction is always a discretionary remedy and so it is not always automatic. Vringo v ZTE may help further to define the nature of the relief available to the owner of a SEP, as well as the payment and other obligations of those using such patented technology. September 2015 saw the latest case management hearing with respect to the relief trial, which gave further insight to the cases the parties will argue at trial.
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 a SEP, injunctive relief is available from the courts.
In July 2015, the Court of Justice of the European Union ruled in Huawei Technologies v ZTE, making clear that it is not, per se, anticompetitive for a SEP owner to seek injunctive relief to restrain infringement. It all depends upon the facts, which include whether the terms of any licence offered are in fact FRAND.
So what terms are FRAND? And, if there is more than one set of FRAND terms, where a patent owner and an implementer fail to agree a licence, how will the court go about determining FRAND terms, the refusal of which terms would entitle the patentee to injunctive relief?
These questions are currently being explored in litigation before the High Court (Patents Court) of England and Wales in two cases: Vringo v ZTE and Unwired Planet v Huawei & Others.
Background on Vringo v ZTE
Initially, Vringo asserted six of its patents against ZTE, all of which were notified by Nokia, the previous owner of them, as essential to standards produced by the European Telecommunications Standards Institute (ETSI). Nokia also undertook to license the patents on FRAND terms, an undertaking that Vringo said it would honour as Nokia's successor in title.
Vringo's position was that it had complied with its FRAND obligations by offering ZTE a FRAND licence to all SEPs in its global patent portfolio. In particular, Vringo argued that ZTE was not entitled to an individual licence under any of the patents in suit but, rather, ZTE would be required to accept Vringo's portfolio offer in the event that the offer was FRAND and the patents in suit were valid and infringed by ZTE.
On that basis, in June 2013 Vringo asked the court to schedule a preliminary trial to determine whether Vringo had indeed made ZTE an offer on FRAND terms. The 'FRAND trial', Vringo said, should take place before the technical trial on validity and infringement because (as summarised by Birss J):
"It will not be a trivial question to try, but it will be less costly and time consuming than patent cases on the merits which will need to be tried instead. Once the FRAND trial is done, the patent trials can be scheduled after that. In any event the FRAND trial is likely to bring the case to an end because the parties are likely to settle afterwards".
However, Birss J refused to schedule a FRAND trial at that stage, stating that in circumstances where a defendant is only willing to take a licence to patents found to be valid and infringed (as was ZTE's position), "there is no basis on which the court could compel defendants to accept a licence arrived at by approaching the matter as if the licensee was willing to take a licence without having a judicial determination of validity and/or infringement".
Thus, the technical trials of the six SEPs were scheduled to be heard first, with the FRAND issues to follow.
It is often said that hindsight is a wonderful thing, and in this case it must appear rather rosy for Mr Justice Birss. Only one patent - the '919 Patent - made it to trial. Subsequently, and no doubt encouraged to do so by Birss J's comments in Unwired Planet v Huawei & Others  EWHC 1029 (Pat) (24 April 2015) (see below), Vringo offered an individual licence to the '919 Patent, limited to the UK only (without accepting that it was under an obligation to offer single patent licences in circumstances where it says it has offered a global portfolio licence on FRAND terms).
The FRAND issues that remain in contention in Vringo v ZTE
With Vringo's renewed offer, many of the wider FRAND-related issues in the case have fallen away. Notably, the court will not be required to decide whether a patentee can discharge its FRAND obligations in relation to an individual SEP by offering a portfolio licence on FRAND terms.
However, recent submissions in the case suggest that guidance may well be given by the courts on the following issues:
Vringo argues that it is entitled to 2.5% of revenue from any infringing eNodeB infrastructure sold by ZTE. For the purpose of drawing a comparison to "real-life" licences, this is said by Vringo to equate to approximately 1% of ZTE's overall turnover on UMTS/LTE infrastructure equipment (which results in approximately £3,000 per eNodeB box).
Vringo's case is that there is a going rate for licences under 3G and 4G SEPs of 1% or 2%, and that the licensing exercise is conducted on the basis of the existence of one, two or (at most) three key SEPs, notwithstanding to which technology the key SEPs relate. Clearly, if this argument was to succeed it would be suggestive that a portfolio licence should not be incapable of being FRAND where only one, two or three SEPs have been found to infringe.
ZTE, on the other hand, contends that the royalty should be calculated by reference to the smallest saleable compliant part ("SSCP") of the relevant ZTE products that practises the claims of the '919 patent in the UK. On this basis, ZTE argues that the royalty rate should be 0.002% of ZTE's relevant turnover with reference to the SSCP.
The concept of the SSCP, otherwise known as the "smallest saleable patent practising unit", has been proposed by some users of patented technology in the US as an evidentiary principle, despite bearing no relation to real world licensing negotiations. In March 2015, the IEEE (a standards setting organisation) changed its patents policy to provide that determination of the "Reasonable Rate" should include, but need not be limited to, the consideration of inter alia the value that the SEP contributes to the smallest saleable "Compliant Implementation" that practises the infringed claim. A "Compliant Implementation" is defined as "any product (e.g. component, sub-assembly, or end-product) or service that conforms to any mandatory or optional portion of a normative clause of an IEEE Standard".
However, the question arises of what is meant by "saleable". Must the defendant (ZTE in this case) show that it has made actual sales of the compliant part for it to be deemed saleable, or would an offer for the sale of that part suffice? Could the sales or offers for sale include the sale of spare or replacement parts, and must they be made within the UK?
Understandably, given its aim to drive down the royalty as low as possible, ZTE is trying to cast a wide net, catching any compliant parts (ZTE has identified more than one SSCP) that have been offered for sale anywhere in the world as "saleable", and therefore relevant to form the basis of the royalty calculation.
Vringo, on the other hand, appears to be arguing that those parts identified by ZTE are not saleable in the UK, and thus regardless of whether they comprise the smallest compliant part, they are not the smallest saleable compliant part, and therefore these individual components should not form the basis of the royalty calculation.
Relationship between FRAND proposals and injunctions
Vringo v ZTE is not the only case passing through the UK courts in which Mr Justice Birss has been asked to consider the extent of a SEP holder's obligations.
In Unwired Planet v Huawei & Others  EWHC 1029 (Pat) (24 April 2015), Birss J noted that "the question of whether any given licence terms are FRAND is not simply a freestanding issue. It is closely connected to the question of injunctions". Birss J opined (in the context of a strike out application in that case) that there are three legally relevant ways of considering whether licence terms are FRAND: (1) are they FRAND insofar as competition law is concerned, (2) are they FRAND within the contractual meaning of the ETSI IPR Policy, and (3) are they "equitably refusable"?
Birss J explained that the category of "equitably refusable" offers is "directed to granting and refusing injunctions…In other words are the terms of the offer such that an injunction would be granted if the defendant refused to accept them? Conversely, are terms proposed by the defendant such that an injunction would be refused if a patentee, obliged to license on FRAND terms, refused to accept them? The third context is not necessarily only concerned with the first two contexts since it will also relate to the exercise of the court's discretionary power to grant injunctive remedies. Even if a patentee is not contractually obliged by the ETSI IPR Policy to accept FRAND terms offered by a defendant, perhaps a court might refuse to grant an injunction in such a case".
In Vringo v ZTE, a twist on this subject - how many proposals are capable of being FRAND - has reared its head, in the context of a case management conference where Birss J was asked to consider "who should go first?"
In June 2015, having willingly decided to offer an individual licence to the '919 Patent in the UK, Vringo proposed heads of terms to ZTE which, it says, are put forward on the basis that they are not "equitably refusable" as envisaged by Birss J in the passage quoted above. Therefore, Vringo says that if ZTE refuses a licence on Vringo's proposed terms, Vringo should be entitled to injunctive relief. Alternatively, if the court considers Vringo's terms not to be FRAND, Vringo will modify them such that they are FRAND and ZTE will be compelled to accept them.
Vringo asked the court to start by looking at Vringo's terms and consider whether those terms are FRAND. If they are FRAND, Vringo says, that is that - ZTE will be bound by the terms and no other terms will come into consideration. This, Vringo says, is the "quid pro quo" for Vringo agreeing to forego injunctive relief and instead enter into a FRAND licence under the '919 Patent'.
In contrast, ZTE contends that both parties should put forward the terms that they consider to be FRAND, rather than using Vringo's terms as a starting point. This argument would seem premised on there being more than one relevant set of terms than those put forward by the patentee.
It remains to be seen whether, and to what extent, competing FRAND terms will be factored into consideration. Birss J ordered both parties to exchange licence proposals and then to respond to their opponent's proposals. However, he noted that if the terms have not been agreed by trial "the court has to start somewhere and I rather think it will start with the patentee's offer, but I do not know".
Birss J has also ordered disclosure of a seemingly broad range of comparable licences for the purposes of calculating the royalty rate. The disclosure will not be limited to those under the control of Vringo and ZTE UK (the defendant company), but will also extend to licences under the control of Nokia (the former owner of the '919 Patent) and ZTE Corporation (the defendant company's parent). This is more evidence, it seems, that the UK courts will expect parties arguing royalty rates in the UK to subject their licences to scrutiny, albeit under the terms of a confidentiality regime.
While the issues in dispute in the Vringo v ZTE case have narrowed, it remains expected that the court will, in the course of the litigation, issue valuable guidance on both (i) what terms are FRAND, and (ii) the parameters for negotiation - in which context a failure to reach agreement on terms will render the infringer liable to injunctive relief.