Patents: What exactly does a FRAND Licence look like?

Jane Lambert

A question that I have been asked more than once is "What exactly does a FRAND licence look like?" Before the Supreme Court handed down its decision on 26 Aug 2020 I could say: "Let's wait for the Supreme Court's judgment,"  The Supreme Court did not answer that question in its judgment though it has given some guidance.  I shall discuss this topic in my talk on 3 Sept 2020.  If you want to take part in the conversation, register here.

The starting point is to look at the draft agreement between (1) Unwired Planet Limited Liability Company and (2) Unwired Planet International LimitedandHuawei Technologies Co., Ltd.Huawei Technologies (UK) Co., Ltd. at the end of the judgment of Mr Justice Birss (as he then was) in Unwired Planet International Ltd v Huawei Technologies Co Ltd. and another [2017] RPC 20, [2017] EWHC 1304 (Pat). The judgment of which that draft agreement forms part has been upheld by the Supreme Court in Unwired Planet International Ltd and another v Huawei Technologies (UK) Co Ltd and another [2020] UKSC 37).

However, that draft is not to be regarded as a precedent. The judge settled the agreement after hearing extensive evidence as to what would be "fair", "reasonable" and "non-discriminatory" in the circumstances.  Circumstances change and an agreement between other parties or even between the same ones at a different time might well be on different terms and yet still be FRAND.  This was actually confirmed by the judgment.   One of the points that Huawei argued was that the judge's agreement was not non-discriminatory because his royalty rate was less favourable than the rate that Unwired Planet had agreed with Samsung on 28 July 2016.  The Supreme Court flatly rejected that argument at  paragraph [113]:

"The choice between regarding the non-discrimination obligation as “general” or “hard-edged” is a matter of interpretation of the FRAND undertaking in clause 6.1 of the IPR Policy. The obligation set out in that provision is that licences should be available “on fair, reasonable and non-discriminatory … terms and conditions”. In our view, the undertaking imports a single unitary obligation. Licence terms should be made available which are “fair, reasonable and non-discriminatory”, reading that phrase as a composite whole. There are not two distinct obligations, that the licence terms should be fair and reasonable and also, separately, that they should be non-discriminatory. Still less are there three distinct obligations, that the licence terms should be fair and, separately, reasonable and, separately, non-discriminatory."

Having said that, the rules to be applied do not change, In the case of ETSI licences, they are to be found in its IPR Policy.

The Supreme Court discussed ETSI's IPR Policy between paragraphs [8] and [14] of its judgment. It noted at paragraph [8] that the Policy is a contractual document governed by French law. Clause 3.1 sets out the Policy's objectives:

"It is ETSI's objective to create STANDARDS and TECHNICAL SPECIFICATIONS that are based on solutions which best meet the technical objectives of the European telecommunications sector, as defined by the General Assembly. In order to further this objective the ETSI IPR POLICY seeks to reduce the risk to ETSI, MEMBERS, and others applying ETSI STANDARDS and TECHNICAL SPECIFICATIONS, that investment in the preparation, adoption and application of STANDARDS could be wasted as a result of an ESSENTIAL IPR for a STANDARD or TECHNICAL SPECIFICATION being unavailable. In achieving this objective, the ETSI IPR POLICY seeks a balance between the needs of standardization for public use in the field of telecommunications and the rights of the owners of IPRs."

Those objectives are implemented by clause 6.1:

"When an ESSENTIAL IPR relating to a particular STANDARD or TECHNICAL SPECIFICATION is brought to the attention of ETSI, the Director-General of ETSI shall immediately request the owner to give within three months an irrevocable undertaking in writing that it is prepared to grant irrevocable licences on fair, reasonable and non-discriminatory (“FRAND”) terms and conditions ETSI IPR POLICY under such IPR to at least the following extent: -

MANUFACTURE, including the right to make or have made customized components and sub-systems to the licensee's own design for use in MANUFACTURE; - sell, lease, or otherwise dispose of EQUIPMENT so MANUFACTURED; - repair, use, or operate EQUIPMENT; and - use METHODS.

The above undertaking may be made subject to the condition that those who seek licences agree to reciprocate."

The Supreme Court concluded that the Policy envisages that patent owners and implementers will negotiate licences on FRAND terms.   As both are likely to hold vast patent portfolios it would be in the interests of neither party to negotiate separate licences for each country.  The justices explained their reasoning at paragraph [60] of their judgment:

"Operators in the telecommunications industry or their assignees may hold portfolios of hundreds or thousands of patents which may be relevant to a standard. The parties accept that SEP owners and implementers cannot feasibly test the validity and infringement of all of the patents involved in a standard which are in a sizeable portfolio. An implementer has an interest in taking its product to the market as soon as reasonably possible after a standard has been established and to do so needs authorisation to use all patented technology which is comprised in the standard. The implementer does not know which patents are valid and infringed by using the standard but needs authority from the outset to use the technology covered by such patents. Similarly, the owner who declares a SEP or SEPs does not know at this time which, if any, of its alleged SEPs are valid and are or will be infringed by use pursuant to the developing standard. The practical solution therefore is for the SEP owner to offer to license its portfolio of declared SEPs. That is why it is common practice in the telecommunications industry for operators to agree global licences of a portfolio of patents, without knowing precisely how many of the licensed patents are valid or infringed. It is a sensible way of dealing with unavoidable uncertainty. It ought to be possible for operators in an industry to make allowance for the likelihood that any of the licensed patents are either invalid or not infringed, at least in calculating the total aggregate royalty burden in the 'top down' method. By taking out a licence of an international portfolio of generally untested patents the implementer buys access to the new standard. It does so at a price which ought to reflect the untested nature of many patents in the portfolio; in so doing it purchases certainty. The IPR Policy was agreed against that background and the undertaking required from the SEP owner likewise needs to be interpreted against that background."

Of course, every FRAND licence will resemble Mr Justice Birss's to the extent that it contains:

• recitals
• an interpretation clause
• representations and warranties
• a licence grant (usually non-exclusive and non-transferable)
• a provision releasing the implementor from liability for patent infringement for so long as he or she pays the royalties
• provisions for determining the royalty
• a payment clause
• a provision for auditing the implementer's accounts
• term
• termination provisions
• non-waiver
• force majeure
• notices and notifications
• dispute resolution
• choice of law, and
• a schedule listing the patents to be licensed.

Anybody wishing to discuss this article or FRAND generally may call me on +44 (0)20 7404 5252 during office hours or send me a message through my contact form.