Court of Appeal overrules High Court FRAND decision on non-discrimination

On 27 May 2016, the Court of Appeal handed down its judgment on an appeal brought by Samsung against a decision of the Patents Court to strike out one of its competition law defences in the landmark patent infringement proceedings brought by Unwired Planet against Samsung and others alleging that they have infringed a number of Unwired Planet’s standard essential telecommunications patents. The Court of Appeal granted the appeal in part on the grounds that it was arguable in the circumstances that the agreements entered into between Ericsson and Unwired Planet fell short of a full assignment of the non-discrimination aspect of Ericsson's FRAND obligation in breach of Article 101 TFEU.

Background Facts

In January 2013, Unwired Planet, a patent assertion company (i.e. a company which makes its income from the royalties on patents it owns rather than from manufacturing products), acquired various patents and patent applications from Ericsson under a master sale agreement (MSAETSISEPs) which gave Ericsson a right to royalties based on the royalty income obtained by Unwired Planet and an obligation to assign further patents to Unwired Planet in the future to be selected at Ericsson’s sole discretion. In March 2014, Unwired Planet brought a claim for patent infringement against Samsung and various others, asserting infringement of six of Unwired Planet’s patents, five of which were declared to the European Telecommunication Standards Institute () as standard essential patents (). Ericsson has been joined to the proceedings and is aligned with Unwired Planet.

Samsung has raised various competition law defences under Article 101 TFEU in its defence against the claims for patent infringement. In July 2015[1], following an application by Ericsson to strike out Samsung’s competition law defences, Birss J struck out one of the defences on the grounds that there was no real prospect of the defence succeeding. The defence in question related to the assignment of an undertaking given by Ericsson to ETSI (under ETSI technical standards rules) to offer its SEPs to all on fair, reasonable and non-discriminatory (FRAND) terms.

Samsung appealed Birss J’s decision on the grounds that this was a developing area of the law and that the defence depended upon the factual issues that the judge could not resolve upon a summary application. Samsung maintained that the agreements entered intro between Ericsson and Unwired Planet failed fully to assign to Unwired Planet the FRAND undertakings given by Ericsson to ETSI in the following two respects:

• the provisions of the agreements concerning the FRAND obligations were not enforceable by third parties; and
• the agreements fell short of fully assigning Ericsson’s FRAND obligation (focusing on the non-discrimination aspect of FRAND) by not limiting Unwired Planet to obtaining licence terms that were no more favourable than those that Ericsson could itself secure.

Appeal Decision

Turning to the first of Samsung’s contentions - the enforceability of the FRAND obligation by third parties - Samsung alleged first that Birss J failed to grapple with an important difference between a FRAND undertaking given by an entity which is a member of ETSI, such as Ericsson, and one given by an entity which is not, such as Unwired Planet.

In reviewing past decisions of the European Commission, Lord Justice Kitchin concluded that the Commission has not sought to draw a distinction between rights holders that are members of ETSI and those that are not. Moreover, the Commission’s competition Guidelines on Horizontal Agreements (such as this) state simply that there needs to be a requirement on all participating intellectual property rights (IPR) holders who provide a FRAND commitment to ensure that any company to which that IPR is transferred is bound by that commitment, for example through a contractual clause between buyer and seller. This is now reflected in the ETSI IPR Policy.

Drawing the threads together, Lord Justice Kitchin concluded that there was nothing to suggest that the Commission attached any importance to whether the transferee was a member of ETSI or not. Birss J’s decision on this issue was therefore “unimpeachable”. Unwired Planet was not a member of ETSI but it was just as constrained by the FRAND undertaking it had given as it would be if it were such a member. As a practical matter, any third party could require Unwired Planet to grant it a licence under the SEPs on FRAND terms.

Samsung also alleged that the MSA failed to ensure the full and effective assignment of Ericsson’s original FRAND obligations because third party rights were excluded under the MSA. Lord Justice Kitchin rejected that contention and upheld the decision of Birss J by finding that there was no basis for suggesting that there was ever any real prospect of Unwired Planet ignoring their obligations under the agreements to give a FRAND declaration.

Turning to the second contention – the failure to assign the non-discrimination obligation - Samsung claimed that the MSA fell short of ensuring that Unwired Planet would respect the non-discrimination aspect of Ericsson’s FRAND obligation. Put another way, if an owner of SEPs sells them on, then it should do so on terms which avoid discrimination occurring between, on the one hand, commercial undertakings which have taken licences from the seller, and, on the other hand, commercial undertakings which in future take licences from the purchaser. Such discrimination could damage the process of competition downstream and so harm consumer interests.

Birss J held that such an allegation was hopeless and unarguable. Lord Justice Kitchin, however, disagreed and held that it was arguable that the arrangement between Ericsson and Unwired Planet conferred upon Unwired Planet the ability to charge licence fees which were significantly higher than those which Ericsson itself charged and which would have been discriminatory having regard to Ericsson’s existing licensees had Ericsson sought to charge them directly. Moreover, it was arguable that the effect of these higher licence fees will be to distort or restrict competition in downstream markets to the detriment of consumers.

Comments

Lord Justice Kitchin granted the appeal on the basis that it was arguable that, in breach of Article 101 TFEU, the agreements entered into between Ericsson and Unwired Planet fell short of a full assignment of the non-discrimination aspect of Ericsson's FRAND obligation and that the anti-competitive nature of this breach rendered the agreements as a whole anti-competitive and void.

This decision is potentially an important step in levelling the playing field as between entities who rely for their patent revenues on the manufacture of products and those entities whose revenues are instead primarily derived from the simple assertion of patent rights. The Ericsson transfer to Unwired Planet arguably creates a two-track royalty calculation into the deal which would add much complexity to the already contentious area of determining the appropriate level of FRAND payments.

It is recognised in the judgment that this is a developing area of the law. It is hoped that the non-technical trial on FRAND and competition law issues, which is due to commence in October 2016, will provide further clarity on the competition law issues relating to the assignment of FRAND commitments.

Link to the judgment - http://www.bailii.org/ew/cases/EWCA/Civ/2016/489.html