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SEPs and FRAND licensing: Landmark win for Xiaomi in the UK Court of Appeal
SEPs and FRAND licensing: Landmark win for Xiaomi in the UK Court of Appeal
1 November 2024
Series
Blogs
1 November 2024
In a landmark decision relating to the fair, reasonable and non-discriminatory (FRAND) licensing of standard essential patents (SEPs),1 the UK Court of Appeal found that Panasonic was an unwilling licensor for pursuing claims for injunctions in foreign courts despite having undertaken to enter into a licence on terms determined by the English High Court to be FRAND. The Court of Appeal also declared (by a majority) that a willing licensor in Panasonic’s position would enter into an interim FRAND licence with Xiaomi, pending the final determination of the FRAND rate by the High Court, and set the terms of that interim licence.
SEPs and FRAND
Technology standards are set by standard setting organisations (SSOs) like ETSI, the European Telecommunications Standards Institute. A patent is essential to a standard if the implementation of the standard would inevitably infringe the patent. To ensure a fair balance between patentees and implementers, SSOs typically require SEP holders to give irrevocable undertakings to grant licences of their SEPs on FRAND terms. FRAND licensing policies aim to avoid two potential evils: “hold-up”, where the patentee uses the threat of injunction to force an implementer to accept licensing terms that exceed market value; and “hold-out”, where the implementer implements the technology without paying a reasonable market value. The FRAND undertaking is designed to help prevent hold-up by giving the implementer a defence to an infringement claim, while the patentee’s ability to obtain an injunction to restrain an implementer that is an unwilling licensee should assist in preventing hold-out.
While patents are territorial, the English courts have, since 2017, held that they have jurisdiction to determine the terms of a global FRAND licence of SEPs. In addition to FRAND licensing terms, courts are often tasked with determining the national validity, essentiality and infringement of the SEPs. Until recently, the practice in the UK has been to split the claim into separate trials: first, technical trials to determine validity, essentiality and infringement, then, a trial to determine the FRAND terms. However, in the interests of efficient and effective use of court time, it is becoming increasingly common for the English courts to hear the FRAND trial first. Moreover, in recent cases, the terms determined by the English courts to be FRAND have been significantly closer to those offered by implementers than those sought by SEP holders, leading to a recent trend of implementers commencing UK proceedings for a declaration of FRAND terms rather than waiting to be sued for infringement by the SEP holder.
Some SEP holders have responded by a more aggressive pursuit of injunctions in parallel proceedings in other jurisdictions, with the apparent aim of exerting pressure on the implementer to accept the SEP holder’s licensing terms rather than waiting for the FRAND determination by the English courts.
Panasonic v Xiaomi
These proceedings were part of a global dispute between Panasonic and Xiaomi relating to Panasonic’s SEPs covering 3G and 4G technology. In addition to the English proceedings, Panasonic had pursued infringement claims against Xiaomi before the German national courts and the UPC, where it was seeking injunctions.
In November of last year, during a case management hearing before the English High Court, both parties gave unconditional undertakings to enter into a licence of Panasonic’s portfolio on the terms determined by that court to be FRAND. Panasonic also initially appeared willing in principle to give an undertaking not to enforce any injunctions obtained in parallel proceedings in Germany or the UPC until the English FRAND trial concluded, but ultimately changed its position stating that it was unwilling to give such an undertaking.
Xiaomi subsequently applied to the English High Court for a declaration that a willing licensor in the position of Panasonic would enter into an “interim” FRAND licence pending the FRAND determination and a declaration that if Panasonic did not do so it would be an unwilling licensor. At first instance, the court rejected the application, concluding that Panasonic’s FRAND commitment did not require it to enter into an interim licence, and the only real purpose of the requested declarations would be to influence the outcome of the proceedings in Germany and the UPC, which would contradict the principles of comity towards these courts. Xiaomi appealed.
All three judges criticised Panasonic’s conduct, questioning the rationale behind pursuing legal battles in Germany and the UPC when it was assured of receiving FRAND terms through the English High Court’s determination. Arnold LJ suggested that Panasonic must have believed there was some prospect of achieving supra-FRAND royalty rates by utilising injunctions granted by the German and/or UPC courts, as, otherwise, it wouldn't have wasted time and money on those proceedings. Ultimately, the court held that Panasonic was in breach of its obligations of good faith under ETSI’s IPR policy by pursuing claims for injunctions in foreign courts despite having invoked the jurisdiction of the English courts to determine FRAND terms for a global licence and despite both parties having undertaken to enter a licence on the terms determined by the English Court to be FRAND.
In another unprecedented move, the majority (comprising Arnold LJ and Moylan LJ) held that a willing licensor in Panasonic’s position would enter into an interim licence with Xiaomi. The declarations sought by Xiaomi would serve a useful purpose in forcing Panasonic to reconsider its strategy regarding the proceedings in Germany and the UPC and in safeguarding the integrity of the English proceedings. The Court of Appeal also set the terms for that interim licence, including a licence period from 2011 until the FRAND licence determined by the English court took effect (to be assumed for the purposes of royalty calculation to be 31 December 2024), and a royalty midway between the parties’ respective proposals (subject to adjustment up or down upon determination of the terms of the final licence). Phillips LJ agreed that Panasonic had breached its good faith obligation. However, in his dissenting judgment, he deemed an antisuit injunction to be a more suitable and conventional remedy which would directly address and prevent Panasonic’s "indefensible conduct".
Phillips LJ expressed concerns that an interim licence's impact would only be transitory and primarily aimed at influencing the outcomes of foreign court proceedings.
This landmark decision highlights the continued willingness of UK courts to set global FRAND rates and, for the first time, to seek to oblige parties to enter into an interim licence prior to the FRAND determination. That said, it remains to be seen whether declarations relating to interim licences would be deemed to serve a useful purpose in other cases, for example if there were no conflicting foreign proceedings.
The related FRAND hearing at the UPC was called off at the last moment in the light of this decision, and Xiaomi and Panasonic have now entered into a global settlement, resolving all outstanding proceedings.
1 Panasonic Holdings Corporation v Xiaomi Technology UK Limited and ors [2024] EWCA Civ 1143