Arbitration of FRAND disputes

EU, UK

UK Court of Appeal gives strongest steer yet for settling FRAND disputes via arbitration

Last week, the Court of Appeal handed down its judgement in Optis, in which it was asked to opine on the availability of injunctive relief in the case of standard essential patents (“SEPs”), taking into account the “willingness” of the respective licensee and licensor.

This is the latest judgment in the long-running dispute between the parties in which patent infringement, antitrust issues and FRAND licence terms have all been considered by courts around the globe.

The Court of Appeal was asked to consider whether a SEP owner, who has undertaken that it shall grant licences for the patent on fair, reasonable and non-discriminatory (“FRAND”) terms, is entitled to an immediate injunction once it has been decided by the court that the patent is valid, essential and has been infringed – save for where the implementing (or “infringing”) party has undertaken to licence the patent on court-determined FRAND terms.

In such circumstances, the patentee typically argues that an injunction should be granted as soon as the patent is declared valid and infringed. In contrast, the implementing party generally argues that the patentee is not entitled to any such injunction until (i) the court has determined what terms are FRAND, and (ii) the party has decided whether or not to take a licence on those terms.

Here, the lower court ruled that neither of these positions is correct: instead, the patentee is entitled to an injunction unless and until the other party undertakes to licence the patent on the court-determined FRAND terms. The Court of Appeal agreed with Mr Justice Meade’s judgment and dismissed both parties’ appeals. Of particular note is the postscript included at [115] of the judgment (agreed by all three judges), which (1) criticises the lack of alternative methods of dispute resolution available to SEP/FRAND disputes, and (2) encourages standards-development organisations (“SDOs”) to requires such disputes to be submitted to arbitration:

“These appeals illustrate yet again the dysfunctional state of the current system for determining SEP/FRAND disputes… Each side has adopted its position in an attempt to game the system in its favour. The only way to put a stop to such behaviour is for [standards-development organisations] like [the European Telecommunications Standards Institute] to make legally-enforceable arbitration of such disputes part of their IPR policies.”

Holders of patents that are declared standard-essential are required to provide undertakings SDOs, such as the European Telecommunications Standards Institute (“ETSI”), as part of their IPR policies that they will grant licences to the SEP on FRAND terms. This is beneficial to both the patentee and implementing parties who will, respectively, receive and pay a fair price for the invention. The Court of Appeal considered that a “well-functioning dispute resolution system” was necessary to make the licensing of SEPs on FRAND terms “fully succeed” and that such provisions should be included in SDOs’ IPR policies. Where this is not in place, either party will attempt to “game the system in its favour”; the patentee will wish to “hold up” the implementer’s use of the SEP with the threat of an injunction, and the implementing party will wish to “hold out” by implementing the invention without paying market value for the licence.

The Court of Appeal’s dicta is an explicit call for a change to the current system and a move away from prolonged and expensive SEP/FRAND trials in national courts.

Whilst arbitration could provide an avenue for a consolidated, global determination of these issues, it is rarely used to resolve SEP disputes. This is because party consent is required to submit SEP disputes to arbitration and many parties have avoided arbitration due to the perceived lack of transparency in a FRAND context and the uncertainty over how arbitrators might approach (unappealable) issues.

The commencement of the Unified Patent Court next year brings with it the Unified Patent Court Arbitration and Mediation Centre. Given that the UPC Arbitration centre is in its infancy (beyond some administrative rules of operation, no formal arbitration rules exist), there is scope to design a set of arbitration rules that are specifically tailored for the SEP and FRAND context. Plainly this would require consensus from the IP community as to high level principles that should be applicable to a SEP and FRAND arbitration. Given that there is certainly scope for streamlining the time-consuming and expensive court procedures that are currently in resolving SEP and FRAND disputes via the UPC Arbitration Centre is an option worth exploring.