FRAND

Jane Lambert











FRAND stands for "fair, reasonable and non-discriminatory". It refers to the terms upon which the owner of a patent for an invention that is essential to a standard ("standard essential patent" or "SEP") should license its use.

In Unwired Planet International Ltd v Huawei Technologies Co. Ltd and another [2017] EWHC 711 (Pat) (5 April 2017), the first and so far only case on FRAND in the United Kingdom, Mr Justice Birss explained what is meant by FRAND at para [83] of his judgment:

"The point of FRAND in standard setting is fairly easy to understand. Standards exist so that different manufacturers can produce equipment which is interoperable with the result that the manufacturers compete with one another. So the phone makers compete in the market for phones and the public can select a phone from any supplier and be sure (for example) that if it is a 4G phone, it will work with any 4G network. As a society we want the best, most up to date technology to be incorporated into the latest standards and that will involve incorporating patented inventions. While the inventor must be entitled to a fair return for the use of their invention, in order for the standard to permit interoperability the inventor must not be able to prevent others from using the patented invention incorporated in the standard as long as implementers take an appropriate licence and pay a fair royalty. In this way a balance is struck, in the public interest, between the inventor and the implementers. The appropriate licence is one which is fair, reasonable and non-discriminatory. That way a standard can safely incorporate the invention claimed in a patent without giving the inventor or his successors in title unwarranted power over those who implement the standard. Thus the public interest is served because telecommunication standards can be set using the best and most up-to-date technical expedients available and the inventor’s private interest is served because the FRAND undertaking ensures they or their successors will obtain a fair reward for their invention."

The term is relatively new but the balancing of those interests goes back to the Statute of Monopolies 1623. Jorge L Contreras traces more recent antecedents of, and developments in relation to, FRAND in A Brief History of FRAND: Analyzing Current Debates in Standard Setting and Antitrust Through a Historical Lens 80 Antitrust Law Journal 39 (2015).

Competition Law

In Europe, FRAND turns is discussed in the framework of art 102 of the Treaty on the Functioning of the European Union ("TFEU") and equivalent provisions in national law:

"Any abuse by one or more undertakings of a dominant position within the internal market or in a substantial part of it shall be prohibited as incompatible with the internal market in so far as it may affect trade between Member States.
Such abuse may, in particular, consist in:
(a) directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions;
(b) limiting production, markets or technical development to the prejudice of consumers;
(c) applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;
(d) making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts."

There is a parallel provision in s.18 of the Competition Act 1998:

"(1)   Subject to section 19, any conduct on the part of one or more undertakings which amounts to the abuse of a dominant position in a market is prohibited if it may affect trade within the United Kingdom.
(2)   Conduct may, in particular, constitute such an abuse if it consists in—
(a) directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions;
(b) limiting production, markets or technical development to the prejudice of consumers;
(c) applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;
(d) making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of the contracts.
(3) In this section—
'dominant position' means a dominant position within the United Kingdom; and
'the United Kingdom; means the United Kingdom or any part of it.
(4) The prohibition imposed by subsection (1) is referred to in this Act as “the Chapter II prohibition”.

Other EU countries, including Germany, have similar provisions in their competition laws.

Orange Book Standard

The first court to consider the compatibility with such provisions of a licence for a SEP was the Bundesgerichthof (German Federal Supreme Court). In the Orange Book Standard Az. KZR 39/06 (6 May 2009), the Court held that the refusal of a patentee to grant a licence on non-discriminatory and non-restrictive terms gave rise to a defence to an action for patent infringement. However, the defence arises only where the defendant undertakes to take a licence on such terms and abides by them. Such an undertaking should enable the patentee to set the royalty rate within reasonable bounds.

Huawei

A similar issue came before the Court of Justice of the European Union ("CJEU") in Case C‑170/13 Huawei Technologies Co. Ltd. v ZTE Corp and another [2015] Bus LR 1261 (16 July 2015).  The claimant, Huawei Technologies Co. Ltd. ("Huawei"), was the proprietor of a patent that was essential to a standard set by the European Telecommunications Standards Institute ("ETSI"which was known as the "long-term evolution standard". It indicated willingness to grant a licence on FRAND terms to users of the standard. The ZTE Corporation and its German subsidiary ZTE Deutschland GmbH ("ZTE") undertook to take a FRAND licence but argued over the royalty rate and certain other terms. ZTE started to supply goods that complied with the standard before it had reached agreement with,  or indeed paid anything to, Huawei.

Huawei sued ZTE for patent infringement in the Dusseldorf Landgericht seeking injunctions and other relief. As part of its defence. ZTE pleaded the claimant's refusal to grant a licence on terms that were acceptable to it amounted to an abuse of a dominant position. Relying on the Bundesgerichthof's decision in the Orange Book Standard, Huawei contended that such a defence was not available to ZTE for the following reasons:

"[31]      First, the defendant must have made the applicant an unconditional offer to conclude a licensing agreement not limited exclusively to cases of infringement, it being understood that the defendant must consider itself bound by that offer and that the applicant is obliged to accept it where its refusal would unfairly impede the defendant or infringe the principle of non-discrimination.
[32 ] Secondly, where the defendant uses the teachings of the patent before the applicant accepts such an offer, it must comply with the obligations that will be incumbent on it, for use of the patent, under the future licensing agreement, namely to account for acts of use and to pay the sums resulting therefrom."

In Huawei's submission, ZTE had done neither of those things. ZTE argued that a mere willingness to grant a licence to use a standard essential patent ("SEP") was not necessarily enough to exonerate a patentee from its obligations under art 102 or the equivalent provision in national law.

The Landgericht referred the following question to the Court of Justice of the European Union under art 267 of the TFEU:

‘(1)  Does the proprietor of [an SEP] which informs a standardisation body that it is willing to grant any third party a licence on [FRAND] terms abuse its dominant market position if it brings an action for an injunction against a patent infringer even though the infringer has declared that it is willing to negotiate concerning such a licence? or
Is an abuse of the dominant market position to be presumed only where the infringer has submitted to the proprietor of the [SEP] an acceptable, unconditional offer to conclude a licensing agreement which the patentee cannot refuse without unfairly impeding the infringer or breaching the prohibition of discrimination, and the infringer fulfils its contractual obligations for acts of use already performed in anticipation of the licence to be granted?

(2) If abuse of a dominant market position is already to be presumed as a consequence of the infringer’s willingness to negotiate:
Does Article 102 TFEU lay down particular qualitative and/or time requirements in relation to the willingness to negotiate? In particular, can willingness to negotiate be presumed where the patent infringer has merely stated (orally) in a general way that it is prepared to enter into negotiations, or must the infringer already have entered into negotiations by, for example, submitting specific conditions upon which it is prepared to conclude a licensing agreement?

(3) If the submission of an acceptable, unconditional offer to conclude a licensing agreement is a prerequisite for abuse of a dominant market position:
Does Article 102 TFEU lay down particular qualitative and/or time requirements in relation to that offer? Must the offer contain all the provisions which are normally included in licensing agreements in the field of technology in question? In particular, may the offer be made subject to the condition that the [SEP] is actually used and/or is shown to be valid?

(4) If the fulfilment of the infringer’s obligations arising from the licence that is to be granted is a prerequisite for the abuse of a dominant market position:
Does Article 102 TFEU lay down particular requirements with regard to those acts of fulfilment? Is the infringer particularly required to render an account for past acts of use and/or to pay royalties? May an obligation to pay royalties be discharged, if necessary, by depositing a security?

(5) Do the conditions under which the abuse of a dominant position by the proprietor of a[n SEP] is to be presumed apply also to an action on the ground of other claims (for rendering of accounts, recall of products, damages) arising from a patent infringement?"

The CJEU replied as follows:

"1. Article 102 TFEU must be interpreted as meaning that the proprietor of a patent essential to a standard established by a standardisation body, which has given an irrevocable undertaking to that body to grant a licence to third parties on fair, reasonable and non-discriminatory (‘FRAND’) terms, does not abuse its dominant position, within the meaning of that article, by bringing an action for infringement seeking an injunction prohibiting the infringement of its patent or seeking the recall of products for the manufacture of which that patent has been used, as long as:
  • prior to bringing that action, the proprietor has, first, alerted the alleged infringer of the infringement complained about by designating that patent and specifying the way in which it has been infringed, and, secondly, after the alleged infringer has expressed its willingness to conclude a licensing agreement on FRAND terms, presented to that infringer a specific, written offer for a licence on such terms, specifying, in particular, the royalty and the way in which it is to be calculated, and
  • where the alleged infringer continues to use the patent in question, the alleged infringer has not diligently responded to that offer, in accordance with recognised commercial practices in the field and in good faith, this being a matter which must be established on the basis of objective factors and which implies, in particular, that there are no delaying tactics.
2. Article 102 TFEU must be interpreted as not prohibiting, in circumstances such as those in the main proceedings, an undertaking in a dominant position and holding a patent essential to a standard established by a standardisation body, which has given an undertaking to the standardisation body to grant licences for that patent on FRAND terms, from bringing an action for infringement against the alleged infringer of its patent and seeking the rendering of accounts in relation to past acts of use of that patent or an award of damages in respect of those acts of use."

In other words, the mere offer of a FRAND licence would normally circumvent an art 102 or Chapter II prohibition defence.

Unwired Planet

Huawei was also party to the first British decision on FRAND which also considered an ETSI standard though this time as a defendant. The claimant, Unwired Planet International Ltd. ("Unwired Plant") had acquired from Ericsson and elsewhere a worldwide patent portfolio which included patents that had been declared essential to various telecommunications standards. Its business was to license those patents to companies that made and sold telecommunications equipment such as mobile phones and infrastructure which complied with those standards.  

The action began in March 2014 when Unwired Planet sued Huawei, Samsung and Google for infringement of 6 UK patents from their portfolio 5 of which were claimed to be SEPs.     Shortly after the proceedings had begun, Unwired Planet offered to license its entire global portfolio which included non-SEPs as well as SEPs. The defendants denied that they had infringed the patents and that the patents were essential to any of the ETSI standards. They also contended that the patents were invalid and counterclaimed for their revocation. As to the offer of a licence they argued that no licence was needed but if they were the terms that had been offered were not FRAND. Huawei and Samsung also raised defences and counterclaims based on breaches of competition law. Some involved arguments about art 101 TFEU relating to the agreement whereby Unwired Planet acquired patents from Ericsson while others alleged abuses of a dominant position.

The claim and counterclaim came before Mr Justice Birss who decided to try the infringement and validity questions first and the competition law issues later.  In the ensuing months, most of those issues were settled or decided. The parties had made competing offers and counter-offers of settlement with the result that the main matter to be resolved was whether, and to what extent, various terms on offer were or would have been FRAND. One key battleground was the value of Unwired Planet’s patents to be reflected in the royalty rate. Another was the proper scope of the proposed licences. His lordship also had to decide whether Unwired Planet's offers were FRAND or an abuse of a dominant position contrary to art 102.

Enforceability of FRAND Undertakings

Although it was common ground in Unwired Planet that the claimant was obliged to grant licences on FRAND terms, Mr Justice Birss considered it necessary to consider the enforceability and legal basis of that obligation because a correct identification of its legal basis might inform decisions about the scope and effect of a patentee's undertaking to grant such licences and because uncertainty over the enforceability of such an undertaking could affect the argument over whether such an undertaking automatically circumvents an art 102 or Chapter II prohibition defence.  The first question for his lordship was whether a patentee's undertaking to ETSI to grant a licence on FRAND terms created a contractual obligation. After construing the ETSI agreement in accordance with its proper law, he concluded that it did and that it was intended to be enforced by third-party beneficiaries (that is to say, ETSI users). He seems to have reached that conclusion at [146] for policy reasons:

"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."

Also for policy reasons, the learned judge held at [164] that for a given set of circumstances there will only be one set of FRAND terms and only one FRAND rate. It followed that the question whether a contract term was or was not FRAND was one that a court in England could decide.  In Unwired Planet International Ltd v Huawei Technologies Co Ltd and Another (#2) [2017] EWHC 1304 (Pat) (7 June 2017) Mr Justice Birss actually settled the terms of a FRAND licence agreement between the parties and a copy of his draft appears at para [70] of his judgment in that case.

An interesting consequence of his decision that the obligation to grant a licence on FRAND terms was contractual is that it is not dependent on competition law.  Thus, a royalty rate may be above FRAND but not contrary to art 102 or the Chapter II prohibition. 

Remedies

The usual remedy for patent infringement is an injunction and that remedy remains available even if a defendant agrees to take a FRAND licence. However, the injunction will be suspended if the defendant agrees to take a FRAND licence and negotiates the terms in good faith.  In Unwired Planet #2 the judge ordered Huawei to pay £2.9 million towards Unwired Planet's costs on account. That is a lot of money even for Huawei and it will no doubt have to pay more after a detailed assessment. As FRAND terms and royalty rates depend on circumstances it must surely be in all parties' interests to negotiate early and if necessary seek the good offices of a neutral mediator.

FRAND and Brexit

Our departure from the EU is unlikely to affect the principles expounded by Mr Justice Birss. There may be some divergence between our law and that of our neighbours after Brexit since we shall lose the right to seek preliminary rulings from the CJEU under art 267 TFEU but judgments of the CJEU and the superior courts of the remaining EU member states will continue to have persuasive authority.

Should anybody seek amplification or clarification of any point, he or she should call me on +44 (0)20 7404 5252 during office hours or send me a message through my contact form.

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