Monday, April 17, 2017

Some Thoughts on Unwired Planet v. Huawei

A few commentators have already published their thoughts on Unwired Planet v. Huawei, some of which I mentioned in previous blog posts (here and here).  (Jorge Contreras's is the most thorough I've seen so far.)  Another recent commentary, available on the Kluwer Patent Blog, is available here.  And there's sure to be a ton of additional commentary on this case in the months to come.  What follows are some of my initial thoughts on the case.  This is not intended to be comprehensive, though; and given the complexity and length of the of the opinion, it's possible I've erred somewhere in describing it, so if anyone finds any errors, please let me know.

1.  Early in the opinion, Mr. Justice Birss describes the overall purpose of a FRAND commitment as “to secure a proper reward for innovation whilst avoiding 'hold up', i.e. the ability of the owner of a SEP to hold implementers to ransom by reason of the incorporation of the invention into the standard by declining to grant them a licence at all or only granting one on unfair, unreasonable or discriminatory terms.  The idea is to strike a fair balance” (para. 92).  In addition, Mr. Justice Birss devotes a fair amount of attention to “holdout” or “reverse holdup,” and states that “[i]n order to arrive at fair, reasonable and non-discriminatory licence terms the patentee must not engage in hold up nor must the licensee engage in hold out” (para. 96).  He then goes on to say:

97.  When talking about FRAND economists refer to the idea that the FRAND rate represents the rate which would be agreed “ex ante”, in other words before the patented invention is adopted into the standard.  This is another way of saying that the rate seeks to eliminate hold up and to that extent is uncontroversial.  In the concurrent evidence session Prof Neven explained that he did not regard FRAND as a scheme which meant the patentee could not appropriate some of the value that is associated with the inclusion of his technology into the standard and the value of the products that are using those standards.  Dr Niels agreed with that.  Neither side disputed this and to the extent it is a matter for the economists, I accept their evidence.  The economists’ opinions show that it is not necessary to deprive the patentee of its fair share of those two sources of value in order to eliminate hold up and fulfil the purpose of FRAND.  To that extent I may be differing from certain parts of the decisions in Innovatio IP Ventures and Ericsson v D-Link in the US but it is not necessary to look into that any further since neither side before me took the point.

This is interesting, in that Norman Siebrasse and I also have argued that the SEP owner should recover some portion of the value of standardization, insofar as standardization is part of what benefits the user of the patented invention.  (See our paper The Value of the Standard, here.)  As Mr. Justice Birss also notes, however, this position at present seems contrary to the views of the U.S. courts that have weighed in on the matter.  Nevertheless, the resolution of these theoretical issues ultimately don’t appear to be all that relevant to Mr. Justice Birss’s methodology, as described below. 
2.  At some point during the proceedings Mr. Justice Birss employed a concurrent evidence or “hot-tubbing” procedure to “address certain general questions which I would otherwise have asked the experts during their oral evidence” (para. 58).  I’ve mentioned the hot-tubbing procedure, which judges in Australia, the U.K., and Canada sometimes use to evaluate expert testimony, here and here.  I’d like to see more experimentation with this procedure generally, though it might be difficult to integrate it into traditional U.S. practice.

3.  Mr. Justice Birss discusses at length the evidence on whether FRAND commitments constitute contracts for the benefit of third parties under French law, before concluding:

146.     Standing back I recognise that the enforceability of the FRAND undertaking in French law is not a clear cut question.  Prof Libchaber stated that there remains widespread uncertainty about the issue of whether the doctrine of “stipulation pour autrui” can be applied to ETSI.  In my judgment it can be applied in that way and should be.  The reason it should be applied is because the FRAND undertaking is an important aspect of technology standardisation.  Holders of essential IPR are not compelled to give a FRAND undertaking but it serves the public interest that they make it clear whether or not they are doing so, and it serves the public interest that if they do, the undertaking is public, irrevocable and enforceable.  To avoid hold up, implementers need to know that they can hold SEP owners to a FRAND obligation.

As Jorge Contreras notes in his paper, in the U.S. decisions to date we haven’t seen this sort of thoroughness in trying to understand non-U.S. law on this issue.

4.  Mr. Justice Birss also considers whether there is one set of terms that are FRAND, or whether FRAND is a range, before concluding that (at least for purposes of litigation) only one set of terms ultimately can be considered FRAND (paras. 148, 156).  I’m less sure about this myself—and some of the European commentators, if I’m remembering what I’ve read correctly, seem to take precisely the opposite view, namely that FRAND is a range—though I recognize that if and when courts have to award a FRAND or reasonable royalty, they have to give a number, not just a range; and that this can give rise to complications, if both parties have made FRAND offers/ counteroffers but the judge ultimately has to make an award (paras. 149, 150, 158-61).  As a result, Mr. Justice Birss concludes:

166.     A patentee who refuses to accept those terms would be in breach of its FRAND undertaking.  Even if a court cannot go as far as directly enforcing the FRAND undertaking by compelling a patentee to make an offer in those terms (see the section on French law), I think an English court would at least refuse to grant a patentee an injunction if it refused to accept FRAND terms.  That would be a proper exercise of the court’s equitable jurisdiction to grant or refuse an injunction.

167.     A defendant who had already been found to infringe a valid patent cannot be compelled to accept an offer of a licence but a defendant with no licence, who had refused to accept terms on offer which had been found to be FRAND, would not be entitled to the protection from injunctions provided for by the patentee’s FRAND undertaking.  An injunction would follow and to grant it would be a proper exercise of the court’s equitable jurisdiction.  The only coercion in that case would be to enter into a licence on FRAND terms.  It would apply to both sides with equal force.

Following this conclusion, Mr. Justice Birss reasons that an English court can set a FRAND royalty, which is “not different conceptually from assessing what a reasonable royalty would be in a patent damages inquiry albeit the particular factors applicable in setting a FRAND royalty for a licence to be FRAND and their application may differ from assessing damages” (para. 169).  Thus, “[a]sking what a willing licensor and a willing licensee in the relevant circumstances acting without holding out or holding up would agree upon is likely to help decide” what a fair, reasonable, and nondiscriminatory royalty would be (para. 170).  This is an interesting development as well; some of the German case law, if I understand correctly, appears to take the position that a FRAND royalty is less than a reasonable royalty that would be awarded for the infringement of a patent.  I hope to return to this particular issue in a future post.  

4.  To aid in this inquiry, Mr. Justice Birss’s principal source consists of comparables comprising other licenses that Ericsson (the original owner of these patents) had granted.  To summarize, using the comparable licenses Mr. Justice Birss determines the rate E for the Ericsson portfolio, and then he estimates the relative value R of Unwired Planet’s portfolio to Ericsson's.  “R” is determined based on the number of “Relevant SEPs” (defined below) belonging to Unwired Planet, which involves patent counting.  Then, as a check, Mr. Justice Birss uses a “top-down” approach that requires an estimate of the implementer’s aggregate royalty burden (T), and the portion of that burden that is due to Unwired Planet (S).  (For what it’s worth, in my view Mr. Justice Birss’s top-down methodology is an improvement over Judge Holderman’s in Innovatio, because unlike Judge Holderman Mr. Justice Birss uses the revenue (not the profit margin) from the royalty base as his starting point.  For critique of some aspects of Judge Holderman’s approach, see The Value of the Standard, noted above.)  I’ll let Mr. Justice Birss explain the details below, but let me say here that I’m inclined to think that his methodology makes sense as a practical matter.  To be sure, I've argued before that, from a purely economic perspective, a FRAND or reasonable royalty ideally would be the share, as it would have been negotiated by the parties ex ante, of the incremental benefit of the invention to the user (that is, the benefit the user derived from the use of the invention over the next-best available noninfringing alternative).  If we have no idea what share they would have negotiated, I'd award 50%; and given the theoretical problems with the use of comparables as flagged by Masur and Hovenkamp, like Durie & Lemley I'd resort to comparables as more of a check than as a primary source.  All of that very logical (to me, at least) analysis nevertheless may have to go by the wayside when we're dealing with complex products such as smartphones which may incorporate thousands of patents, because it's just not possible or practical to isolate the value of a single patent or handful of patents in the manner described above.  In such cases, therefore, judges likely have no choice but to rely on comparables, if they are available, or on some sort of "top-down" approach.  Anyway, here are some of the relevant passages where Mr. Justice Birss explains his approach:   

182. There was ample evidence before me that . . . parties negotiating SEP licences in fact use methods which are based on patent counting.  That is evidence which supports a finding that a FRAND approach to assessing a royalty rate is to engage in some kind of patent counting.  Indeed when one thinks about it some sort of patent counting is the only practical approach at least for a portfolio of any size.  Trying to evaluate the importance of individual inventions becomes disproportionate very quickly.  

183.  It may be that other technology standards are different but I am not surprised that patent counting is the approach taken for GSM, UMTS and LTE telecommunications standards.  Each standard defines a system with a large number of different parts all of which have to interact with each other.  The interactions and interdependencies are complicated.  To make a coherent system which works at all, let alone one which delivers the performance demanded of these systems, is difficult and demands insight and creativity on the part of the engineers involved.  It is unsurprising that many inventions (and therefore many patents and SEPs) will be involved.  Short of the disproportionate task of evaluating every single patent thoroughly in order to compare each one with all the others, one can only ever hope to analyse SEPs in broad categories and it is not meaningful to attempt to weigh the value of individual patents within these categories against one another.  

184.  I suppose in some cases it may be possible to identify a patent as an exceptional sort of keystone invention underpinning the entire technical approach on which a standard is based but that is not this case.  There was unchallenged evidence that Unwired Planet’s patents made an “average” contribution to the standards.  I am satisfied that none of the Unwired Planet patents are in the exceptional keystone category. . . .

186.     The patent counting approach works in the following way.  Starting from a portfolio of declared SEPs the first task is to derive a number representing the Relevant SEPs.  “Relevant SEPs” is my term, coined after the trial had finished and intended to avoid language used in the case which can be confusing such as “truly essential patents” or “deemed”.  Both sides’ approaches require making an assessment of the Relevant SEPs somehow.  The parties do not agree how it should be done but one way or another a number is produced.  Armed with that information it is possible to scale one company’s rates relative to another to derive the factor R or to find the share of the total and derive S. . . .

197.     In order to determine what the values E, R and S are in this case two tasks need to be performed.  To determine S (Unwired Planet’s share of the total) and R (the relative value of Unwired Planet’s portfolio to Ericsson’s) it is necessary to count Relevant SEPs.   To determine E (the rate for Ericsson’s portfolio) it is necessary to consider the comparable licences.  At the same time the Unwired Planet comparables and other evidence on rates can be addressed.

Mr. Justice Birss then goes through an exhaustive analysis (some of it redacted) of the proposed comparables; the parties’ competing estimates of R, S, and T; and appropriate adjustments for overdeclaration.  (As Jorge Contreras notes, Mr. Justice Birss was fortunate to have the Ericsson licenses to consider, just as Judge Robart was fortunate to have pool rates to consider in Microsoft v. Motorola).  

5.  Mr. Justice Birss also concludes that the “nondiscriminatory” aspect of FRAND doesn’t mean nondiscriminatory in a strict (“hard-edged”) sense—that is, a SEP owner can charge somewhat different rates to different users, as long as in doing so the owner isn’t distorting competition in a way that would run afoul of competition law.  I think this makes sense from an economic perspective, though as Professor Contreras points out whether this is what SSO members expect when they enter into FRAND commitments is another matter (to which I don’t know the answer).

6.  Mr. Justice Birss winds up awarding a worldwide license, on the ground that this is what willing parties generally would do; it would be too burdensome to expect a SEP owner and an implementer to negotiate country-by-country royalties.  (See, e.g., para. 543: “They would regard country by country licensing as madness.”)  He makes adjustments, however, for “major markets” and for “other markets” including China, where the rates would be lower.  The rates he derives are set out in tables found at paras. 586 and 591, and again at paras. 770 and 771.  I’m inclined to think the worldwide approach is a sensible one, though of course it implies that the first court to determine a FRAND rate for a given set of patents gets to call the shots for the rest of the world.

7.  On the competition law issues, Mr. Justice Birss concludes that the five steps set forth in the CJEU’s judgment in Huawei v. ZTE, for evaluating whether a SEP owner’s request for injunctive relief violates competition law, don’t have to be strictly complied with in the sense that the initial offer and the counteroffer don’t necessarily have to be FRAND, the initial offer doesn’t necessarily have to precede the filing of the complaint, and so on (contrary, I think, to the conclusion of some of the German courts).  (See Mr. Justice Birss’s summary of these points at para. 744.)  On the other hand, he finds that each SEP (at least in this case) defines its own market, and that Unwired Planet holds a dominant position in each such market.  Mr. Justice Birss also finds no violation of competition law based on tying or excessive pricing.  Finally, he will award an injunction (terms of which are not yet set) in the event that Huawei doesn’t agree to a license on the terms the judge has concluded are FRAND, which seems reasonable to me (though I wonder if Huawei can agree to this while reserving the right to appeal?).

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